WASHINGTON, D. C. 20549
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The aggregate market value of the shares of the registrant's common stock held by non-affiliates (based upon the closing price of these shares on the New York Stock Exchange) as of the last business day of the registrant's most recently completed second fiscal quarter was $10.5$3.4 billion. As of February 20, 2018,12, 2021, there were 221,261,100203,731,259 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the information required by Part III of this Form 10-K are incorporated herein by reference from the registrant's definitive proxy statement for its 20182021 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after the end of the registrant's fiscal year ended December 31, 2017.2020.
TABLE OF CONTENTS
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 Annual Report on Form 10-K (including certain statements in the business description in Item 1, Management's Discussion and Analysis in Item 7, and the consolidated financial statements and related notes in Item 8), 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 Securities and Exchange Commission,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:
•The impact of the COVID-19 pandemic on our business, financial position, results of operations, liquidity and capital resources, and overall business operations.
•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.
Legislative, regulatory,•Changes in, or tax changes, both domesticinterpretations or enforcement of, laws and foreign, including the effect of potential legislation and increased regulationregulations.
•A cyber attack or other security breach could result in the current political environment.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.
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.
•Our ability to develop digital capabilities or execute on our technology systems upgrades or replacements.
•Actual experience in the broad array of our products that deviates from our assumptions used in pricing, underwriting, and reserving.
•Availability of reinsurance in the market and the ability of our reinsurers to meet their obligations to us.
•Ability to generate sufficient internal liquidity and/or obtain external financing.
•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•Recoverability and/or realization of the broad arraycarrying value of our products that deviates from our assumptions used in pricing, underwriting,intangible assets, long-lived assets, and reserving.deferred tax assets.
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.
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.
PART I
ITEM 1. BUSINESS
General
Unum Group, a Delaware general business corporation, and its insurance and non-insurance subsidiaries, which collectively with Unum Group we refer to as the Company, operate in the United States, the United Kingdom, Poland, and, to a limited extent, in certain other countries. The principal operating subsidiaries in the United States are Unum Life Insurance Company of America (Unum America), Provident Life and Accident Insurance Company (Provident), The Paul Revere Life Insurance Company (Paul Revere Life), Colonial Life & Accident Insurance Company, Starmount Life Insurance Company (Starmount Life), and in the United Kingdom, Unum Limited.Limited, and in Poland, Unum Zycie TUiR S.A. (Unum Poland). We are a leading provider of financial protection benefits in the United States and the United Kingdom. Our products include disability, life, accident, critical illness, dental and vision, and other related services. We market our products primarily through the workplace.
We have three principal operating business segments: Unum US, Unum UK,International, and Colonial Life. Our other segments are the Closed Block and Corporate segments. These segments are discussed more fully under "Reporting Segments" included herein in this Item 1.
Business Strategies
The benefits we provide help the working world thrive throughout life's moments and protect people from the financial hardship of illness, injury, or loss of life by providing support when it is needed most. As one of thea leading providersprovider of employee benefits, in the U.S. and the U.K., we offer a broad portfolio of products and services through the workplace.
Specifically, we offer group, individual, voluntary, and voluntary benefits, eitherdental and vision products as well as provide certain fee-based services. These products and services, which can be sold stand-alone products or combined with other coverages, that help employers of all sizes attract and retain a stronger workforce while protecting the incomes and livelihood of their employees. We believe employer-sponsored benefits representare the single most effective way to provide workers with access to the information and options they need to protect their financial stability. Working people and their families, particularly those at lower and middle incomes, are perhaps the most vulnerable in today's economy yet are often overlooked by many providers of financial services and products. For many of these people, employer-sponsored benefits are the primary defense against the potentially catastrophic fallout of death, illness, or injury.
We have established a corporate culture consistent with the social values our products provide. We are committed not only to meeting the needs of our customers who depend on us, but also to operating with integrity and being accountable for our actions. Our sound and consistent business practices, strong internal compliance program, and comprehensive risk management strategy enable us to operate efficiently as well as to identify and address potential areas of risk in our business. We have also applied these same values to our social responsibility efforts. Because we see important links between the obligations we have to all of our stakeholders, we place a strong emphasis on operating with integrity and contributing to positive change in our communities. Accordingly, we are committed not only to meeting the needs of our customers who depend on us, but also to being accountable for our actions through sound and consistent business practices, a strong internal compliance program, a comprehensive risk management strategy, and an engaged employee workforce.
We believe our disciplined approach to providing financial protection products at the workplace puts us in a position of strength as we seek to capitalize on the growing and largely unfilled need for our products and services. We protect people when they need it most, and we believe the need for ourstrength. The products and services remains strong. We intendwe provide have never been more important to continue protecting our solid marginsemployers, employees and returns through our pricing and risk actions. We also continue to invest in our infrastructure and our employees, with a focus on quality and simplificationtheir families, especially given the emergence of processes and offerings.the COVID-19 pandemic. Our strategy isremains centered on market expansion, enhancinggrowing our core businesses through investing and transforming our operations and technology to anticipate and respond to the customer experience, providing an innovative product portfoliochanging needs of financial protection choices,our customers, expand into new adjacent markets through meaningful partnerships and investing in new solutions to further improve productivity. Accordingly, we continue to identify ways to expandeffective deployment of our product offerings, which we believe will allow us to strengthencapital across our brand through both new and existing customer relationships. portfolio.
Although the low interest ratecurrent environment continues to place pressure on our profit margins, and could unfavorably impact the adequacy of our reserves for some products, we continue to analyze and employ strategies that we believe will help us navigate thisthe current environment and allow us to maintain solid operating margins and significant financial flexibility to support the needs of our businesses while also continuingallowing us to return capital to our shareholders. Improvements in the U.S. labor market and consumer confidence levels will have positive impacts on our business. We have substantial leverage to rising interest rates and an improving economy which generates payroll growth and wage inflation. Long-term, we believe that consistent operating results, combined with the implementation of strategic initiatives and the effective deployment of capital, will allow us to meet our long-term financial objectives.
Reporting Segments
Our reporting segments are comprised of the following: Unum US, Unum UK,International, Colonial Life, Closed Block, and Corporate. The percentage of consolidated premium income generated by each reporting segment for the year ended December 31, 20172020 is as follows:
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Unum US | 63.364.2 | % |
Unum UKInternational | 6.07.0 |
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Colonial Life | 17.618.2 |
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Closed Block | 13.110.6 |
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Total | 100.0 | % |
Financial information is provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7 and Note 13 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Unum US Segment
Our Unum US segment is comprised of group disability insurance, which includes groupour long-term and short-term disability insurance,products, our medical stop-loss product, and our fee-based leave management services and administrative services only (ASO) business, group life and accidental death and dismemberment products, and supplemental and voluntary lines of business. The supplemental and voluntary lines of business, are comprised ofwhich include individual disability, voluntary benefits, and dental and vision products. Unum US products are issued primarily by Unum America, Provident, and Starmount Life. Paul Revere Life previously issued products reported in our Unum US segment and continues to service the in-force policies, but Paul Revere Life no longer actively markets new business. These products are marketed through our field sales personnel who work in conjunction with independent brokers and consultants. Our market strategy for Unum US is to effectively deliver an integrated offering of employee benefit products in the group core market segment, which we define for Unum US as employee groups with fewer than 2,000 employees, the group large case market segment, and the supplemental and voluntary market segment.
The percentage of Unum US segment premium income generated by each product line during 20172020 is as follows:
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Group Disability | 43.943.7 | % |
Group Life and Accidental Death & Dismemberment | 29.730.0 |
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Individual Disability | 7.77.6 |
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Voluntary Benefits | 15.614.5 |
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Dental and Vision | 3.14.2 |
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Total | 100.0 | % |
Group Long-term and Short-term Disability
We sell group long-term and short-term disability products to employers for the benefit of employees.
Group long-term disability provides employees with insurance coverage for loss of income in the event of extended work absences due to sickness or injury. We offer services to employers and insureds to encourage and facilitate rehabilitation, retraining, and re-employment. Most policies begin providing benefits following 90 or 180 day waiting periods and continue providing benefits until the employee reaches a certain age, generally between 65 and 70, or recovers from the disability. The benefits are limited to specified maximums as a percentage of income. Also included in our long-term disability product line is our medical stop-loss product, which is designed to protect self-insured employers if their employees' medical claims exceed certain agreed upon thresholds.
Group short-term disability insurance generally provides coverage from loss of income due to injury or sickness for up to 26 weeks, and is limited to specified maximums as a percentage of income. Benefits are effective immediately for accidents and after one week for sickness,sickness.
Our leave management services provide administrative services on behalf of employers to ensure the protected leave eligibility and status for up to 26 weeks, limited to specified maximums as a percentage of income.employees are in accordance with applicable laws and regulations. ASO products provide administrative services
regarding claims processing and billing for self-insured customers for which the responsibility for funding claim payments remain with the customer.
Premiums for group long-term and short-term disability are generally based on expected claims of a pool of similar risks plus provisions for administrative expenses, investment income, and profit. In some cases, coverage for large employers will include retrospective experience rating provisions or will be underwritten on an experience-rated basis. Premiums for experience-rated group long-term and short-term disability business are based on the expected experience of the client given its demographics, industry group, and location, adjusted for the credibility of the specific claim experience of the client. Both group long-term and short-term disability are sold primarily on a basis permitting periodic repricing to address the underlying claims experience. We also offer fee-based administrativeFees for our leave management services only (ASO) products, whereand ASO business are generally based on the responsibilitynumber of covered employees and an agreed-upon per-employee, per-month rate. Premiums for funding
claim payments remains with the customer, and fee-based family medical leave products. In addition, effective January 1, 2018, coverage will begin on our medical stop-loss product which is designed to protectare generally based on the number of covered employees in self-insured employers ifemployer groups and their employees' medical claims exceed certain thresholds.estimated overall health risk plus provisions for administrative expenses, and profit.
We have defined underwriting practices and procedures. If the coverage amount for our disability policies exceeds certain prescribed age and amount limits, we may require a prospective insured to submit evidence of insurability. PoliciesOur disability policies are typically issued, both at inception and renewal, with rate guarantees. For new group policyholders, the usual rate guarantee is one to three years. For group policies being renewed, the rate guarantee is generally one year, but may be longer. The profitability of the policy depends on the adequacy of the rate during the rate guarantee period. The contracts provide for certain circumstances in which the rate guarantees can be overridden. Our medical stop loss contracts are renewable on an annual basis and rates are not guaranteed beyond one year. There is no requirement for prospective insureds to submit evidence of insurability because coverage levels are determined for the group as a whole.
Profitability of group long-term and short-term disability insurance and our medical stop-loss product is affected by sales, persistency, investment returns, claims experience, and the level of administrative expenses. Morbidity is an important factor in disability claims experience, and many economic and societal factors can affect claim incidence for disability insurance. We routinely make pricing adjustments on our group long-term and short-term disability insurance products, when contractually permitted, which take into account emerging experience and external factors.
Group Life and Accidental Death and Dismemberment
Group life and accidental death and dismemberment products are sold to employers as employee benefit products. Group life consists primarily of renewable term life insurance with the coverages frequently linked to employees' wages and includes a provision for waiver of premium, if disabled. Accidental death and dismemberment consists primarily of an additional benefit amount payable if death or severe injury is attributable to an accident.
Premiums are generally based on expected claims of a pool of similar risks plus provisions for administrative expenses, investment income, and profit. Underwriting practices and rate guarantees are similar to those used for group disability products, and evidence of insurability is required for benefits in excess of a specified limit.
Profitability of group life and accidental death and dismemberment insurance is affected by persistency, investment returns, mortality and other claims experience, and the level of administrative expenses.
Individual Disability
Individual disability products are offered primarily to multi-life employer groups to supplement their group disability plans and may be funded by the employer, but the policy is owned by the employee and is portable. Individual disability insurance provides the insured with a portion of earned income lost as a result of sickness or injury. The benefits, including the underlying group disability coverage, typically range from 30 percent to 75 percent of the insured's monthly earned income. We provide various options with respect to length of benefit periods, product features, and waiting periods before benefit payments begin, which permit tailoring of the multi-life plan to a specific employer's needs. We also market individual disability policies which include payments for the transfer of business ownership between partners and payments for business overhead expenses, also on a multi-life basis. Individual disability products do not provide for the accumulation of cash values.
Premium rates for individual disability products vary by age, product features, and occupation based on assumptions concerning morbidity, mortality, persistency, administrative expenses, investment income, and profit. We develop our assumptions based on our own experience. Our underwriting rules, issue limits, and plan designs reflect risk and the financial circumstances of prospective insureds. Individuals in multi-life groups may be subject to limited medical underwriting. The majority of our
individual disability policies are written on a noncancelable basis. Under a noncancelable policy, as long as the insured continues to pay the fixed annual premium for the policy's duration, we cannot cancel the policy or change the premium.
Profitability of individual disability insurance is affected by persistency, investment returns, claims experience, and the level of administrative expenses.
Voluntary Benefits
Voluntary benefits products are primarily sold to groups of employees through payroll deduction at the workplace and include life, disability, accident, hospital indemnity, cancer, and critical illness offered on both a group and individual basis.
Premium rates for voluntary benefits products are based on assumptions concerning morbidity, mortality, persistency, administrative expenses, investment income, and profit. We develop our assumptions based on our own claims and persistency experience and published industry tables. Our underwriters evaluate the medical condition of prospective policyholders prior to the issuance of a policy on a simplified basis. Underwriting requirements may be waived for cases that meet certain criteria, including participation levels. Individual voluntary benefits products other than life insurance are offered on a guaranteed renewable basis which allows us to re-price in-force policies, subject to regulatory approval. Group voluntary benefits products are offered primarily on an optionally renewable basis which allows us to re-price or terminate in-force policies.
Profitability of voluntary benefits products is affected by the level of employee participation, persistency, investment returns, mortality and other claims experience, and the level of administrative expenses.
Dental and Vision
Group dental and vision products are sold to employers as employee benefit products. Individual dental and vision products are offered to individuals through independent agents and direct-to-consumer channels. Our group dental products include a variety of insured and self-insured dental care plans including preferred provider organizations and scheduled reimbursement plans.
Group Our group vision products provide coverage that includes a range of both in-network and out-of-network benefits for routine vision services offered either in conjunction with our dental product offerings or as stand-alone coverage. Individual vision products are currently sold exclusively as an optional rider to our individual dental policies.
Premiums for small case group dental and vision products are generally based on expected claims of a pool of similar risks plus a provision for administrative expenses, investment income, and profit. Premiums for large employer groups are underwritten on an experience-rated basis. Premiums for individual dental and vision products are generally guaranteed issue with standard industry rates that vary by age and region.
Profitability of our dental and vision products is affected by persistency, investment returns, claims experience, and the level of administrative expenses.expenses, and to a lesser extent, investment returns.
Unum UKInternational Segment
OurThe Unum UKInternational segment includes our operations in the United Kingdom and Poland. Unum UK's business includes insurance for group long-term disability, group life, and supplemental lines of business which include dental, individual disability, and critical illness products. Unum Poland's business primarily includes insurance for individual and group life with accident and health riders. Both Unum UK's and Unum Poland's products are issuedsold primarily by Unum Limited and are sold in the United Kingdom through field sales personnel and independent brokers and consultants. OurThe market strategy for Unum UKthe segment is to offer benefits to employers and employees through the workplace, with a focus on the expansion of the number of employers and employees covered in our Unum UK core market segment, which we define for Unum UK as employee groups with fewer than 500 employees.employees, and the growth of the existing Unum Poland business through the incorporation of our benefits and distribution expertise.
The percentage of Unum UKInternational segment premium income generated by each product line during 20172020 is as follows:
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Unum UK | |
Group Long-term Disability | 66.355.9 | % |
Group Life | 20.116.6 |
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Supplemental | 13.615.3 |
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TotalUnum Poland | 100.012.2 | |
Total | 100.0 | % |
Unum UK Group Long-term Disability
Group long-term disability products are sold to employers for the benefit of employees. Group long-term disability provides employees with insurance coverage for loss of income in the event of extended work absences due to sickness or injury. Services are offered to employers and insureds to encourage and facilitate rehabilitation, retraining, and re-employment. Most policies begin providing benefits following 90 or 180 day waiting periods and continue providing benefits until the employee reaches a certain age generally between 60 and 67.or reaches the end of the limited period specified in the policy terms. The benefits are limited to specified maximums as a percentage of income.
Premiums for group long-term disability are generally based on expected claims of a pool of similar risks plus provisions for administrative expenses, investment income, and profit. Some cases carry experience rating provisions. Premiums for experience-rated group long-term disability business are based on the expected experience of the client given its demographics, industry group, and location, adjusted for the credibility of the specific claim experience of the client. Policies are sold primarily on a basis permitting periodic repricing to address the underlying claims experience.
We have defined underwriting practices and procedures. If the coverage amount exceeds certain prescribed age and amount limits, we may require a prospective insured to submit evidence of insurability. Policies are typically issued, both at inception and renewal, with rate guarantees. The usual rate guarantee is two years but may vary depending on circumstances. The profitability of the policy is dependent upon the adequacy of the rate during the rate guarantee period. The contracts provide for certain circumstances in which the rate guarantees can be overridden.
Profitability of group long-term disability insurance is affected by persistency, investment returns, claims experience, and the level of administrative expenses. Morbidity is an important factor in disability claims experience. We routinely make pricing adjustments on our group insurance products, when contractually permitted, which take into account emerging experience and external factors.
Unum UK Group Life
Group life products are sold to employers as employee benefit products. Group life consists of two types of products, a renewable term life insurance product and a group dependent life product. The renewable term life product provides a lump sum benefit to the beneficiary on death of an employee. The group dependent life product, which we discontinued offering to new customers in 2012, provides an annuity to the beneficiary upon the death of an employee. Both coverages are frequently linked to employees' wages. Premiums for group life are generally based on expected claims of a pool of similar risks plus provisions for administrative expenses, investment income, and profit. Underwriting and rate guarantees are similar to those utilized for group long-term disability products.
Profitability of group life is affected by persistency, investment returns, mortality and other claims experience, and the level of administrative expenses.
Unum UK Supplemental
Supplemental products are sold to individual retail customers as well as groups of employees and include individual disability, group and individual critical illness, and group dental. Individual disability products provide the insured with a portion of earned income lost as a result of sickness or injury. Critical illness products provide a lump-sum benefit on the occurrence of a covered critical illness event. Group dental products generally provide fixed benefits based on specified treatments or a portion of the cost of the treatment.
Premiums for our individual products vary by age and are based on assumptions concerning morbidity, mortality, persistency, administrative expenses, investment income, and profit. We develop our assumptions based on our own claims and persistency experience and published industry tables. Approximately one halftwo thirds of our individual disability policies are written on a noncancelable basis. The remainder of our individual disability policies and all of our individual critical illness products are offered on a guaranteed renewable basis which allows us to re-price in-force policies. Our underwriters evaluate the medical and financial condition of prospective policyholders prior to the issuance of a policy.
Premiums for group critical illness products are generally based on expected claims of a pool of similar risks plus provisions for administrative expenses, investment income, and profit. Underwriting and rate guarantees are similar to those utilized for group long-term disability products. Premiums for group dental products are generally based on standard industry rates that vary by age, with minor pricing variation based on the number of covered employees in the group.
Profitability of our supplemental products is affected by persistency, investment returns, claims experience, and the level of administrative expenses.
Unum Poland products, which include both individual and group life products, provide renewable term and whole life insurance with accident and health riders. Premiums are based on expected claims of a pool of similar risks plus provisions for administrative expenses, investment income, and profit. Profitability of our Unum Poland products is affected by persistency, investment returns, mortality and other claims experience, and the level of administrative expenses.
Colonial Life Segment
Our Colonial Life segment includes insurance for accident, sickness, and disability products, which includes our dental and vision products, life products, and cancer and critical illness products. These products are issued primarily by Colonial Life & Accident Insurance Company and marketed to employees, on both a group and an individual basis, at the workplace through an independent contractor agency sales force and brokers. Our market strategy for Colonial Life is to effectively deliver a broad set of voluntary products and services in the public sector market and in the commercial market, with a particular focus on the core commercial market segment, which we define for Colonial Life as accounts with fewer than 1,000 employees.
We have defined underwriting practices and procedures for eachOur underwriters evaluate the medical condition of our products. Most policies are issuedprospective policyholders prior to the issuance of a policy on a simplified issue basis, based on answers to simple health and employment questions. If the amount applied for exceeds certain levels, the applicantbasis.Underwriting requirements may be asked to answer additional health questions or submit to additional medical examinations.waived for cases that meet certain criteria, including participation levels.
The percentage of Colonial Life segment premium income generated by each product line during 20172020 is as follows:
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Accident, Sickness, and Disability | 58.558.1 | % |
Life | 19.921.4 |
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Cancer and Critical Illness | 21.620.5 |
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Total | 100.0 | % |
Accident, Sickness, and Disability
The accident, sickness, and disability product line consists of short-term disability plans, as well as accident-only plans providing benefits for injuries on a specified loss basis.basis, and our dental and vision products. It also includes accident health, and dentalhealth plans covering hospital admissions, confinement, surgeries, and dental services on an indemnity basis. Beginning in 2018, Colonial Life will offer expanded dental products and will also begin to offer vision products similar to those products offered in our Unum US segment.surgeries.
Premiums for accident, sickness, and disability products are generally based on assumptions for morbidity, mortality, persistency, administrative expenses, investment income, and profit. We develop our assumptions based on our own experience.experience and published industry tables. Premiums are primarily individual guaranteed renewable for which we have the ability to change premiums on a state by state basis. A small percentage of the policies are written on a group basis which are offered primarily on an optionally renewable basis which allows us to re-price or terminate in-force policies. Premiums for which we retain the right to change premiums at the individual account level.our dental and vision products are guaranteed renewable with standard industry rates that vary by age and region.
Profitability is affected by the level of employee participation, persistency, investment returns, claims experience, and the level of administrative expenses.
The accident, health and dental products qualify as fringe benefits that can be purchased with pre-tax employee dollars under flexible benefits programs. Flexible benefits programs assist employers in managing benefit and compensation packages and provide policyholders the ability to choose benefits that best meet their needs. Laws could be changed to limit or eliminate fringe benefits available on a pre-tax basis, eliminating our ability to continue marketing our products this way. However, we believe our products provide value to our policyholders that will remain even if the tax advantages offered by flexible benefits programs are modified or eliminated.
Life
Life products are primarily comprised of universal life, whole life, and term life policies.
Premium rates vary by age and are based on assumptions concerning mortality, persistency, administrative expenses, investment income, and profit. We develop our assumptions based on our own experience and published industry tables. Premiums for the whole life and level term products are guaranteed for the life of the contract. Premiums for the universal life products are flexible and may vary at the individual policyholder level. For the group term life products, we retain the right to change premiums at the account level based on the experience of the account.
Profitability is affected by the level of employee participation, persistency, investment returns, mortality and other claims experience, and the level of administrative expenses.
Cancer and Critical Illness
Cancer policies provide various benefits for the treatment of cancer including hospitalization, surgery, radiation, and chemotherapy. Critical illness policies provide a lump-sum benefit and/or fixed payments on the occurrence of a covered critical illness event.
Premiums are generally based on assumptions for morbidity, mortality, persistency, administrative expenses, investment income, and profit. We develop our assumptions based on our own experience.experience and published industry tables. Premiums are primarily individual guaranteed renewable wherein we have the ability to change premiums on a state by state basis.
Profitability of these products is affected by the level of employee participation, persistency, investment returns, claims experience, and the level of administrative expenses.
Closed Block Segment
Our Closed Block segment consists of individual disability, group and individual long-term care, individual disability, and other insurance products no longer actively marketed. Closed Block segment premium income for 20172020 was comprised of approximately 42 percent individual disability and 5868 percent group and individual long-term care.care and 32 percent individual disability.
Individual Disability
We began limiting sales of the types of individual disability policies reported in our Closed Block segment subsequent to the mid-1990s after substantial changes in product design were implemented to improve the overall risk profile of our offerings of individual disability products. We entirely discontinued issuing new policies in this closed block of business in 2004, other than through update features contractually allowable on existing policies. The majority of the policies were written on a noncancelable basis and were marketed on a single-life customer basis. Profitability is affected by persistency, investment returns, claims experience, and the level of administrative expenses.
Group and Individual Long-term Care
We discontinued offering individual long-term care in 2009 and group long-term care in 2012, other than features contractually allowable on existing group policies.2012. Group long-term care was previously offered to employers for the benefit of employees. Individual long-term care was previously marketed on a single-life customer basis.
Long-term care insurance pays a benefit upon the loss of two or more activities of daily living and the insured's requirement of standby assistance or cognitive impairment. Payment is generally made on an indemnity basis, regardless of expenses incurred, up to a lifetime maximum. Benefits begin after a waiting period, usually 90 days or less, and are generally paid for a period of three years, six years, or lifetime.
Our long-term care insurance was sold on a guaranteed renewable basis which allows us to re-price in-force policies, subject to regulatory approval. Premium rates for long-term care vary by age and are based on assumptions concerning morbidity, mortality, persistency, administrative expenses, investment income, and profit. Premium rate increases continue to be implemented where needed and where approved by state regulators. We develop our assumptions based on our own claims and persistency experience and published industry tables.
Profitability is affected by premium rate increases, persistency, investment returns, mortality and other claims experience, and the level of administrative expenses.
Individual Disability
We began limiting sales of the types of individual disability policies reported in our Closed Block segment subsequent to the mid-1990s after substantial changes in product design were implemented to improve the overall risk profile of our offerings of individual disability products. We entirely discontinued issuing new policies in this closed block of business in 2004. The majority of the policies were written on a noncancelable basis and were marketed on a single-life customer basis. Profitability is affected by persistency, investment returns, claims experience, and the level of administrative expenses. In December 2020, we entered into a reinsurance agreement to reinsure the majority of our Closed Block individual disability products to a third party. For further discussion on this reinsurance agreement, refer to "Reinsurance" herein this Item 1, "Executive Summary" and "Segment Results" contained herein in Item 7, and Note 12 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Other
Other insurance products not actively marketed include group pension, individual life and corporate-owned life insurance, reinsurance pools and management operations, and other miscellaneous product lines. The majority of these products have been reinsured, with approximately 80 percent of reserves at December 31, 20172020 ceded to other insurance companies.
Corporate Segment
Our Corporate segment includes investment income on corporate assets not specifically allocated to a line of business, interest expense on corporate debt other than non-recourse debt, and certain other corporate income and expenseexpenses not allocated to a line of business.
Reinsurance
In the normal course of business, we assume reinsurance from and cede reinsurance to other insurance companies. In a reinsurance transaction, a reinsurer agrees to indemnify another insurer for part or all of its liability under a policy or policies it has issued for an agreed upon premium.premium or fee. We undertake reinsurance transactions for both risk management and capital management. If the assuming reinsurer in a reinsurance agreement is unable to meet its obligations, we remain contingently liable. In the event that reinsurers do not meet their obligations under the terms of the reinsurance agreement, reinsurance recoverable balances could become uncollectible. We evaluate the financial condition of reinsurers to whom we cede business
and monitor concentration of credit risk to minimize our exposure. We may also require assets to be held in trust, letters of credit, or other acceptable collateral to support reinsurance recoverable balances. The collectibility of our reinsurance recoverable is primarily a function of the solvency of the individual reinsurers. Although we have controls to minimize our exposure, the insolvency of a reinsurer or the inability or unwillingness of a reinsurer to comply with the terms of a reinsurance contract could have a material adverse effect on our results of operations.
In general, the maximum amount of life insurance risk retained by our U.S. insurance subsidiaries under group or individual life or group or individual accidental death and dismemberment policies during 20172020 was $1 million per covered life per policy. The retention amount remains at $1 million for 2018.2021. For Unum Limited life insurance risk, during 20172020 we had reinsurance agreements which provided 75 percent quota share coverage up to £500 thousand per covered life for group dependent life benefits and 25 percent quota share coverage for most of our group lump sum benefits, as well as 100 percent coverage per covered life above that amount. These agreements wereIn April 2020, we increased the quota share coverage for group lump sum benefits with one of our reinsurers to 75 percent, which resulted in an aggregate quota share coverage for our lump sum benefits of approximately 36 percent. The same structures, including the increased aggregate group lump sum quota share, will be maintained for coverage during 2021 for Unum Limited.
In December 2020, Provident, Paul Revere Life, and Unum America, collectively referred to as "the ceding companies", entered into a series of agreements (collectively referred to as the 2018 renewal.
We have reinsurance agreements"reinsurance agreement") with Commonwealth Annuity and Life Insurance Company (Commonwealth) a subsidiary of Global Atlantic Financial Group, to reinsure on a coinsurance basis effective as of July 1, 2020 approximately 7775 percent of ourthe Closed Block individual disability business.insurance business, primarily direct business written by the ceding companies. Commonwealth has established and will maintain collateralized trust accounts for the benefit of the ceding companies to secure its obligations under the reinsurance agreement. As part of the reinsurance agreement, additional Closed Block individual disability business consisting of direct business not ceded in December 31, 2017,2020 and business assumed by the ceding companies from third parties, is expected to be reinsured in the first quarter of 2021, subject to receipt of required consents and regulatory approvals and the satisfaction or waiver of other customary closing conditions and is considered the second phase of this transaction.
Also in December 2020, prior to entering into this reinsurance coversagreement with Commonwealth, the ceding companies recaptured their respective reinsurance agreements with Northwind Reinsurance Company (Northwind Re) where substantially all of the ceding companies' Closed Block individual disability business had previously been fully ceded to Northwind Re. Northwind Re is an affiliated captive reinsurance subsidiary domiciled in the United States, with Unum Group as the ultimate parent.
In December 2020, Provident Life and Casualty Insurance Company (PLC), also a wholly-owned domestic insurance subsidiary of Unum Group, entered into an agreement with Commonwealth whereby PLC will provide a 12-year volatility cover to Commonwealth for the active life cohort (ALR cohort), which represents approximately 67five percent of that portionthe reserves ceded to Commonwealth. PLC will provide similar coverage to Commonwealth related to additional business ceded as part of the consolidatedsecond phase of the transaction. At the end of the 12-year coverage period, Commonwealth will retain the risk above a $4.9 billion retention limit. The risk limit for the reinsurer grows over timeremaining incidence and claims risk on the ALR cohort of the ceded business. Under this volatility cover, annual settlements will be made equal to the difference between the actual and estimated cash flows and reserve changes during the year. Upon expiration of the 12-year period, a maximumterminal settlement will be made based on the final disabled life reserves. Due to the nature of $2.2 billion, after which any further lossesthe volatility cover, the ALR cohort will revert to us.be accounted for under the deposit method on a U.S. generally accepted accounting principles (GAAP) basis.
We have global catastrophic reinsurance coverage which covers all Unum Group insurance companies and includes four layers of coverage to limit our exposure under life, accidental death and dismemberment, long-term care, and disability policies in regard to a catastrophic event. Each layer provides coverage for all catastrophic events, including acts of war and any type of terrorism, up to $1 million of coverage per person per policy for each U.S. and non-U.K. line of covered business, and up to £2 million of coverage for each U.K. covered line of business. For the 2018 renewal, the U.K. retention level was increased from £1 million to £2 million to reflect the underlying retentions after surplus reinsurance. We have the following coverage for 2018,2021, after a $100 million deductible:
| | | | | | | | | | | | | | |
Layer | | Coverage (in millions) | | Percent Coverage |
First | | $ | 50.0 | | | 50.0 | % |
Second | | 55.0 | | | 55.0 | |
Third | | 90.0 | | | 60.0 | |
Fourth | | 180.0 | | | 60.0 | |
Total Catastrophic Coverage | | $ | 375.0 | | | |
In addition to the global catastrophic reinsurance coverage noted above, Unum Limited has additional catastrophic coverage via an arms-length, inter-company reinsurance agreement with Unum America, under similar terms as the global catastrophic treaties. Unum Limited has the following additional coverage for 2018, after a £75 million deductible:deductible for 2021 of £9 million or 12 percent.
|
| | | | | | | |
Layer | | Coverage (in millions) | | Percent Coverage |
First | | £ | 15.0 |
| | 20.0 | % |
Second | | 6.8 |
| | 22.5 |
|
Total Catastrophic Coverage | | £ | 21.8 |
| | |
Unum Poland has additional global catastrophic reinsurance coverage of up to zł70 million with a maximum retention limit of zł0.8 million in 2020. Insurable events include passive war, as well as nuclear, chemical, biological and other forms of terrorism. This agreement was renewed with the same conditions for 2021.
Events may occur which limit or eliminate the availability of catastrophic reinsurance coverage in future years.
We have a quota share reinsurance agreement under which we cede certain blocks of Unum US group long-term disability claims. The agreement is on a combination coinsurance with funds withheld and modified coinsurance basis and provides 8090 percent quota share reinsurance on the ceded claims. We also have fourfive reinsurance agreements that collectively cede approximately 5565 percent of Unum US group life risk up to our per person retention limit for our U.S. insurance subsidiaries. These reinsurance agreements for Unum US group disability and group life allow us to more effectively manage capital in conformity with statutory accounting principles but do not meet insurance risk transfer in accordance with applicable U.S. generally accepted accounting principles (GAAP)GAAP and therefore are not accounted for as reinsurance in our consolidated GAAP financial statements.
We also cede 30 percent of the risk for certain blocks of recently issued Unum US individual disability policies, as well as some related claims development risk for a limited period of time. The agreement is on a non-proportional modified coinsurance basis with a provision for experience refunds.
Certain of our domestic insurance subsidiaries cedeUnum America cedes certain blocks of business to Northwind Reinsurance Company (Northwind Re) and Fairwind Insurance Company (Fairwind), both of which areis an affiliated captive reinsurance subsidiariessubsidiary (captive reinsurers)reinsurer) domiciled in the United States, with Unum Group as the ultimate parent. TheseThis captive reinsurers werereinsurer was established for the limited purpose of reinsuring risks attributable to specified policies issued or reinsured by our insurance subsidiariesUnum America in order to effectively manage risks in connection with certainthese blocks of our business as well as to enhance our capital efficiency. On a consolidated reporting basis for Unum Group, financial statement impacts of our reinsurance arrangements with affiliates are eliminated in accordance with GAAP.
For further discussion of our reinsurance activities, refer to "Risk Factors" contained herein in Item 1A; "Executive Summary," "Consolidated Operating Results," "Segment Results," and "Liquidity and Capital Resources - Cash Available from Subsidiaries" contained herein in Item 7, and Notes 1, 12, and 1516 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Reserves for Policy and Contract Benefits
The applicable insurance laws under which insurance companies operate require that they report, as liabilities, policy reserves to meet future obligations on their outstanding policies. These reserves are the amounts which, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated to be sufficient to meet the various policy and contract obligations as they mature. These laws specify that the reserves shall not be less than reserves calculated using certain specified mortality and morbidity tables, interest rates, and methods of valuation required for statutory accounting.
The reserves reported in our financial statements contained herein are calculated in conformity with GAAP and differ from those specified by the laws of the various states and reported in the statutory financial statements of our life insurance subsidiaries. These differences result from the use of mortality and morbidity tables and interest assumptions which we believe are more representative of the expected experience for these policies than those required for statutory accounting purposes and also result from differences in actuarial reserving methods.
The assumptions we use to calculate our reserves are intended to represent an estimate of experience for the period that policy benefits are payable. If actual experience is equal, or favorable, to our reserve assumptions, then reserves should be adequate to provide for future benefits and expenses. If experience is less favorable than the reserve assumptions, additional reserves may be required. The key experience assumptions include claim incidence rates, claim resolution rates, mortality and morbidity rates, policy persistency, interest rates, premium rate increases, and any applicable policy benefit offsets, including those for social security and other government-based welfare benefits. We periodically review our experience and update our policy reserves for new issues and reserves for all claims incurred, as we believe appropriate.
The consolidated statements of income include the annual change in reserves for future policy and contract benefits. The change reflects a normal accretion for premium payments and interest buildup and decreases for policy terminations such as lapses, deaths, and benefit payments. If policy reserves using best estimate assumptions as of the date of a test for loss recognition are higher than existing policy reserves net of any deferred acquisition costs, the increase in reserves necessary to recognize the deficiency is also included in the change in reserves for future policy and contract benefits.
For further discussion of reserves, refer to "Risk Factors" contained herein in Item 1A, "Critical Accounting Estimates" and the discussion of segment operating results included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, and Notes 1 and 6 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Investments
Investment activities are an integral part of our business, and profitability is significantly affected by investment results. We segment our invested assets into portfolios that support our various product lines. Generally, our investment strategy for our portfolios is to matchmanage the effective asset cash flows and durations with related expected liability cash flows and durations to consistently meet the liability funding requirements of our businesses. We seek to earn investment income while assuming credit risk in a prudent and selective manner, subject to constraints of quality, liquidity, diversification, and regulatory considerations. Our overall investment philosophy is to invest in a portfolio of high quality assets that provide investment returns consistent with that assumed in the pricing of our insurance products. Assets are invested predominately in fixed maturity securities. Changes in interest rates may affect the amount and timing of cash flows.
We actively manage our asset and liability cash flow match and our asset and liability duration match to limitmanage interest rate risk. We may redistribute investments among our different lines of business, when necessary, to adjust the cash flow and/or duration of the asset portfolios to better match the cash flow and duration of the liability portfolios. Asset and liability portfolio modeling is updated on a quarterly basis and is used as part of the overall interest rate risk management strategy. Cash flows from the in-force asset and liability portfolios are projected at current interest rate levels and also at levels reflecting an increase and a decrease in interest rates to obtain a range of projected cash flows under the different interest rate scenarios. These results enable us to assess the impact of projected changes in cash flows and duration resulting from potential changes in interest rates. Testing the asset and liability portfolios under various interest rate scenarios enables us to choose what we believe to be the most appropriate investment strategy, as well as to limit the risk of disadvantageous outcomes. Although we test the asset and liability portfolios under various interest rate scenarios as part of our modeling, the majority of our liabilities related to insurance contracts are not interest rate sensitive, and we therefore have minimal exposure to policy withdrawal risk. Our determination of investment strategy relies on long-term measures such as reserve adequacy analysis and the relationship between the portfolio yields supporting our various product lines and the aggregate discount rate assumptions embedded in the
reserves. We also use this analysis in determining hedging strategies and utilizing derivative financial instruments for managing interest rate risk and the risk related to matching duration for our assets and liabilities. We do not use derivative financial instruments for speculative purposes.
Refer to "Risk Factors" contained herein in Item 1A; "Critical Accounting Estimates" and the discussion of investments in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7; "Quantitative and Qualitative Disclosures About Market Risk" herein in Item 7A; and Notes 1, 2, 3, and 4 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for information on our investments and derivative financial instruments.
Ratings
AM Best, Fitch Ratings (Fitch), Moody's Investors Service (Moody's), and Standard & Poor's Ratings Services (S&P) are among the third parties that assign issuer credit ratings to Unum Group and financial strength ratings to our insurance subsidiaries. Issuer credit ratings reflect an agency's opinion of the overall financial capacity of a company to meet its senior debt obligations. Financial strength ratings are specific to each individual insurance subsidiary and reflect each rating agency's view of the overall financial strength (capital levels, earnings, growth, investments, business mix, operating performance, and market position) of the insuring entity and its ability to meet its obligations to policyholders. Both the issuer credit ratings and financial strength ratings incorporate quantitative and qualitative analyses by rating agencies and are routinely reviewed and updated on an ongoing basis.
Rating agencies assign an outlook statement of "positive," "negative," or "developing" to indicate an intermediate-term trend in credit fundamentals which could lead to a rating change. "Positive" means that a rating may be raised, "negative" means that a rating may be lowered, and "developing" means that a rating may be raised or lowered with equal probability. Alternatively, a rating may have a "stable" outlook to indicate that the rating is not expected to change.
"Credit watch" or "under review" highlights the potential direction of a short-term or long-term rating. It focuses on identifiable events and short-term trends that cause a rating to be placed under heightened surveillance by a rating agency. Events that may trigger this action include mergers, acquisitions, recapitalizations, regulatory actions, criteria changes, or operating developments. Ratings may be placed on credit watch or under review when an event or a change in an expected trend occurs and additional information is needed to evaluate the current rating level. This status does not mean that a rating change is inevitable, and ratings may change without first being placed on a watch list. A rating is not a recommendation to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the rating agency. Each rating should be evaluated independently of any other rating.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Ratings" contained herein in Item 7 for our current outlook, issuer credit, and financial strength ratings. See also further discussion in "Risk Factors" contained herein in Item 1A.
Competition
There is significant competition among insurance companies for the types of products we sell. We are operating in a dynamic competitive environment of both traditional and non-traditional competitors, with changes in product offerings, enrollment services, and technology solutions. We believe that the principal competitive factors affecting our business are price, quality of the customer experience regarding service and claims management, integrated product choices, enrollment capabilities, financial strength ratings, claims-paying ratings, and claims-paying ratings. Ina solution to allow our customers to comply with the individualchanging laws and group disability markets, we compete in the Unitedregulations related to family medical leave benefits.
States with a number of major companies and regionally with other companies offering specialty products. Our principal competitors for our other products including group life and the product offerings sold to groups of employees through payroll deduction, include the largest insurance companies in the United States.industry as well as regional companies offering specialty products. Some of these companies have more competitive pricing or have higher claims-paying ratings. Some may also have greater financial resources with which to compete.
In the United Kingdom and Poland, where we compete for thesell both individual and group products, we sellcompete with a mix of large internationally recognized providers and strong local carriers. We have observed some of these providers aggressively trying to maintain or grow market share in a difficult economic environment, characterized by very low interest rates and expense pressures on employers and individuals.
We believe the need for the types of products we offer is significant. In both the United States and the United Kingdom, individuals and families often live paycheck to paycheck with a considerable chance of being out of work. Pressure is also mounting on governments as to the sustainability of public assistance. Based on current penetration levels, we believe there is substantial upside growth potential.
All areas of the employee benefits markets are highly competitive due to the yearly renewable term nature of the groupour products and the large number of insurance companies offering products in this market. There is a risk that purchasers of employee benefits productsour customers may be able to obtain more favorable terms or improved technology solutions from competitors in lieu of renewing coverage with us. The
effect of competition may, as a result, adversely affect the persistency of these and other products, as well as our ability to sell products in the future.
We must attract and retain independent agents and brokers to actively market our products. Strong competition exists among insurers for agents and brokers. We compete with other insurers for sales agents and brokers primarily on the basis of our product offerings, financial strength, support services, and compensation. Sales of our products could be materially adversely affected if we are unsuccessful in attracting and retaining agents and brokers.
For further discussion, refer to "Risk Factors" contained herein in Item 1A.
Regulation
We and our subsidiaries are subject to extensive and comprehensive supervision and regulation both in the United States, and in the United Kingdom.Kingdom, and Poland. The laws and regulations with which we must comply are complex and subject to change. New or existing laws and regulations may become more restrictive or otherwise adversely affect our operations. As a result of the financial market and economic challenges in recent years, regulation and the cost of compliance with regulation has continued to increase.
Insurance Regulation and Oversight
Our U.S. insurance subsidiaries are subject to regulation and oversight by insurance regulatory authorities in the jurisdictions in which they do business and by the U.S. Department of Labor (DOL) on a national basis, primarily for the protection of policyholders. State insurance regulators in the U.S. generally have broad powers with respect to all aspects of the insurance business, including the power to: license and examine insurance companies; regulate and supervise sales practices and market conduct; license agents and brokers; approve policy forms; approve premium rates and subsequent increases thereon for certain insurance products; establish reserve requirements and solvency standards; place limitations on shareholder dividends; prescribe the form and content of required financial statements and reports; regulate the types and amounts of permitted investments; and regulate reinsurance transactions. Our U.S. insurance subsidiaries are examined periodically by their states of domicile and by other states in which they are licensed to conduct business. The domestic examinations have traditionally emphasized financial matters from the perspective of protection of policyholders, but they can and have covered other subjects that an examining state may be interested in reviewing, such as market conduct issues.issues and reserve adequacy. Examinations in other states more typically focus on market conduct, such as a review of sales practices, including the content and use of advertising materials and the licensing and appointing of agents and brokers, as well as underwriting, claims, and customer service practices, and identification and handling of unclaimed property to determine compliance with state laws. Our U.S. insurance subsidiaries are also subject to assessments by state insurance guaranty associations to cover the proportional cost of insolvent or failed insurers. The DOL enforces a comprehensive federal statute which regulates claims paying fiduciary responsibilities and reporting and disclosure requirements for most employee benefit plans.
Our U.K. insurance subsidiary, Unum Limited, is subject to dual regulation by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The PRA oversees the financial health and stability of financial services firms and is
responsible for the prudential regulation and day-to-day supervision of insurance companies. The FCA seeks to protect consumers and oversees financial services products and practices, including those governing insurance companies in the U.K.
On January 31, 2020, an official bill was passed formalizing the withdrawal of the U.K. from the European Union (EU). A deal was reached on December 24, 2020 on the future trading relationship with the EU. The deal focused primarily on the trading of goods rather than the U.K.’s service sector, which will be subject to further negotiations in 2021 and will focus on financial services and future regulation. In addition, the U.K. government is reviewing the regulatory framework of financial services companies which may result in changes to U.K. regulatory capital or U.K. tax regulations. We do not expect that the underlying operations of our U.K. business, nor the Polish business which is in the EU, will be significantly impacted by the withdrawal, but we may see some continued dampening of growth in the U.K. as well as earnings volatility due to the current disruption and uncertainty in the U.K. economy. We may also experience volatility in the fair values of our investments in U.K. and EU-based issuers, but we do not expect a material increase in credit losses or defaults, nor do we believe this volatility will impact our ability to hold these investments. In addition, the current economic conditions may also cause volatility in our solvency ratios. Our reported consolidated financial results continue to be impacted by fluctuations in the British pound sterling to dollar exchange rate.
Our Polish insurance subsidiary, Unum Zycie TUiR, is subject to regulation by the Komisja Nadzoru Finansowego (KNF) of the Financial Supervision Authority (FSA) in Poland. The KNF oversees the financial health and stability of financial services firms and is responsible for the prudential regulation and day-to-day supervision of insurance companies and other financial institutions.
Capital Requirements
Risk‑basedRisk-based capital (RBC) standards for U.S. life insurance companies are prescribed by the National Association of Insurance Commissioners (NAIC). The domiciliary states of our U.S. insurance subsidiaries have all adopted a version of the NAIC RBC Model Act, which prescribes a system for assessing the adequacy of statutory capital and surplus for all life and health insurers. The basis of the system is a risk-based formula that applies prescribed factors to the various risk elements in a life and health insurer's business to report a minimum capital requirement proportional to the amount of risk assumed by the insurer. The life and health RBC formula is designed to measure annually (i) the risk of loss from asset defaults and asset value fluctuations, (ii) the risk of loss from adverse mortality and morbidity experience, (iii) the risk of loss from mismatching of asset and liability cash flow due to changing interest rates, and (iv) business risks. The formula is used as an early warning tool to identify companies that are potentially inadequately capitalized. The formula is intended to be used as a regulatory tool only and is not intended as a means to rank insurers generally. The Tax Cuts and Jobs Act, which is further discussed herein in "Federal Laws and Regulations" in this Item 1, will have an impact on certain calculations within NAIC RBC formulas that use after-tax factors to calculate required capital. The NAIC is currently deliberating on potential revisions to existing calculations to reflect the recent changes to the U.S. corporate tax rate and these revisions will not take effect until after 2017. The NAIC has also issued a proposal to implementapproved a new and more granular RBC structure for fixed income asset capital charges.charges on April 30, 2020 for 2020 year-end reporting. The proposed structure will expandexpands the fixed income asset designations from six to 20 categories and will revise factor values. We do not anticipate thatcategories. Factor values for the new structure relatedare currently under review by the NAIC, and therefore the only impact of this change for 2020 was to fixed income assetsreport using the new categories. We will be effective before 2019. We are continuingcontinue to monitor the NAIC's activities on both of these issues.this issue.
The NAIC continues to review the state-based solvency regulation framework to identify opportunities to respond to national and international insurance regulatory and solvency developments. The topics of its review include capital requirements, governance and risk management, statutory accounting and financial reporting, and reinsurance. This ongoing review will likely result in significant changes to U.S. insurance regulation and solvency standards, including those for our U.S. insurance subsidiaries. One of the outcomes of the NAIC's review was the adoption of the NAIC Risk Management and Own Risk and Solvency Assessment (ORSA) Model Act which, following enactment at the state level, requires insurers to provide, at least annually, a group-level perspective on the risks of the current and future business plans and the sufficiency of capital to support those risks. All states where our traditional U.S. insurance subsidiaries are domiciled have enacted ORSA requirements, and we file an ORSA summary report annually with the applicable insurance regulators.
During 2016, theThe NAIC has established a working group charged with developing a group capital calculation that can be used by regulators as a baseline quantitative measure in assessing the risks and financial position of insurance groups. The initial recommendation for calculation isNAIC continues to push this initiative forward on an RBC aggregation approachaccelerated timeline, and therefore we continue to closely monitor and assess developments. We are also monitoring developments around the implementation of reforms adopted by the International Association of Insurance Supervisors (IAIS) in November 2019 that would utilize existing regulatory calculations for legal entities within the group. Items still under development include the scope of theestablished similar group of legal entities that would becapital requirements applicable to Internationally Active Insurance Groups (IAIGs). We are not subject to the calculation as well as factorsreforms adopted by the IAIS, however, the requirements are a factor influencing the substance and timeframe of the reforms that will be adopted by the NAIC. We will continue to be used for non-insurance entities and non-U.S. insurance entities withinmonitor the group. ItNAIC's activities on this issue but it is still too early to predictdetermine what, if any, impact thisthese developments will have on our capital requirements.
The NAIC has adopted a valuation manual containing a principles-based approach to life insurance company reserves.reserves for new business. The earliest effective date to begin a three-year implementation period was January 2017 and will apply onlywith a three-year optional period before mandatory adoption by January 2020. The Company elected a staged approach to the implementation of the new business. There will berequirements, with no material impact on our statutory reserves.
TheIn 2012, the NAIC established a subgroup to study the insurance industry's use of captive reinsurers and special purpose vehicles to transfer insurance risk and is considering ways to promote uniformity in both the approval and supervision of such reinsurers. TheMore recently, the NAIC continues to study this issue and most recently adopted a proposal to subject certain captive reinsurers and special purpose vehicles to the same capital requirements as traditional insurers. As the NAIC continuesand state insurance regulators continue to examine the issue,use of captive insurance companies to finance reserves required under current regulations, we cannot predict the ultimate outcome of their work.work, or how long or extensively they will continue to focus on this issue. Although we believe it to be unlikely, a potential outcome of thefuture NAIC studydecisions from its various committees, task forces, and working groups is that companies could be prohibited from using captive reinsurers. No changes in the use or regulation of captive reinsurers have been proposed by the NAIC, and we are unable to predict the extent of any changes that might be made. Accordingly, weAs a result of the recapture of the reinsurance agreements with Northwind Re, as of December 31, 2020, no insurance risk remains in Northwind Re and therefore Fairwind remains the only active captive insurer. We expect to continue our strategy of using captive reinsurers to manage risks and enhance capital efficiency while monitoring the NAIC's study and proposed changes in regulations. See "Reinsurance" contained herein in this Item 1 for further discussion.
The PRA has statutory requirements, including capital adequacy and liquidity requirements and minimum solvency margins, to which Unum Limited must adhere. Asadhere as part of January 1, 2016,the provisions of Solvency II, a European Union (EU)an EU directive that prescribes new capital requirements and risk management standards that are the result of a fundamental review of the capital adequacy
standards for the European insurance industry, replaced the previous capital requirements for Unum Limited.industry. Our European holding company is also subject to the
Solvency II requirements relevant to insurance holding companies, while its subsidiaries, (the Unum European Economic Area (EEA) Group), which includes Unum Limited, are subject to group supervision under Solvency II. The Unum EEAEuropean Economic Area (EEA) Group, which is comprised of the European holding company and its subsidiaries, received approval from the PRA to use its own internal model for calculating regulatory capital and also received approval for certain associated regulatory permissions including transitional relief as the Solvency II capital regime is implemented. As a result, there was no material change to capital requirements or to solvency ratios for the Unum EEA Group. In June 2016, the U.K. held a referendum and voted to leave the EU. The U.K. subsequently invoked Article 50government is reviewing the regulatory framework of the Treaty on the European Union and is duefinancial services companies which may result in changes to leave the EU on March 29, 2019. Although there are currently no indications thatU.K. regulatory capital requirements for ouror U.K. operations will change, it is too early to predict what, if any, impact this may have on existing capital requirements and risk management standards for our U.K. entities, but economic conditions may cause volatility in our solvency ratios.tax regulations.
The International Association of Insurance Supervisors (IAIS) is developing a Common Framework (ComFrame) for the supervision of internationally active insurance groups (IAIGs) that contemplates group-wide supervision across national boundaries, including uniform standards for insurer corporate governance and enterprise risk management, a framework for group capital adequacy assessment that accounts for group-wide risks, and the establishment of ongoing supervisory colleges. We do not qualify as an IAIG under the current criteria for designating an IAIG. However, we monitor the activities of the IAIS for the potential that ComFrame could apply to us in the future. The IAIS expects to implement an Insurance Capital Standard in the form of confidential reporting to supervisory colleges by the end of 2019. At this time, we cannot predict what, if any, additional capital requirements, compliance costs, or other requirements this proposed standard might impose on us, if adopted.
See further discussion in "Risk Factors" contained herein in Item 1A and "Executive Summary," "Liquidity and Capital Resources" contained herein in Item 7 and Note 1516 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Insurance Holding Company Regulation
We and our U.S. insurance subsidiaries (excluding captive reinsurers) are subject to regulation under the insurance holding company laws in the states in which our insurance subsidiaries are domiciled, which currently include Louisiana, Maine, Massachusetts, New York, South Carolina, and Tennessee. These laws generally require each insurance company that is domiciled in the state and a member of an insurance holding company system to register with the insurance department of that state and to furnish at least annually financial and other information about the operations of companies within the holding company system, including information concerning capital structure, ownership, management, financial condition, and certain intercompany transactions. Transactions between an insurer and affiliates in the holding company system generally must be fair and reasonable and, if material, require prior notice and approval by the domiciliary insurance regulator.
In addition, such laws and regulations restrict the amount of dividends that may be paid by our insurance subsidiaries to their respective shareholders, including our Company and certain of our intermediate holding company subsidiaries. See further discussion in "Risk Factors" contained herein in Item 1A and "Liquidity and Capital Resources - Cash Available from Subsidiaries" contained herein in Item 7.
There are a number of proposals to amend state insurance laws and regulations in ways that could affect us and our insurance subsidiaries. The NAIC has adopted or amended model laws on holding company regulation that provide for supervision of insurers at the corporate group level. The various proposals to implement group supervision include uniform standards for insurer corporate governance, group-wide supervision of insurance holding companies, adjustments to RBC calculations to account for group-wide risks, and additional regulatory and disclosure requirements for insurance holding companies, including a requirement that the ultimate controlling person of a U.S. insurer submit to the lead state insurance regulator an annual enterprise risk report, which identifies activities, circumstances, or events involving one or more affiliates of an insurer that, if not remedied properly, are likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole. The NAIC has adopted the Corporate Governance Annual Disclosure Model Act and the Corporate Governance Annual Disclosure Model Regulation, which require U.S. insurers to disclose detailed information regarding their governance practices. The model act and regulation must be adopted by individual state legislatures and insurance regulators in order to be effective in a particular state. All of the states in which our insurance subsidiaries are domiciled have adopted a requirement to file a corporate governance annual disclosure similar to the model act and regulations.
The NAIC has also adopted the Insurance Data Security Model Law, which creates a legal framework that requires insurance companies to establish cybersecurity programs designed to protect the private data of consumers. The law outlines planned cybersecurity testing and the development of incident response plans for breach notification procedures. The model law must be adopted by individual state legislatures and insurance regulators in order to be effective in a particular state. At this time, among the states in which our insurance subsidiaries are domiciled, the model act and regulation arelaw is effective only in LouisianaSouth Carolina. The New York State Department of Financial Services has established similar regulations to this law and Maine.the state of California has enacted the California Consumer Privacy Act of 2018.
The laws of most states, including the states in which our insurance subsidiaries are domiciled (or deemed to be commercially domiciled), require regulatory approval of a change in control of an insurance company or its holding company. Where these laws apply to us, there can be no effective change in control of our Company or of any of our insurance subsidiaries unless the
person seeking to acquire control has filed a statement containing specified information with the appropriate insurance regulators and has obtained their prior approval of the proposed change. The usual measure for a presumptive change of control pursuant to these laws is the acquisition of 10 percent or more of the voting stock of an insurance company or its holding company, although this presumption is rebuttable. Consequently, a person acquiring 10 percent or more of the voting stock of an insurance company or its holding company without the prior approval of the insurance regulators in the state(s) of domicile of the insurance company(ies) sought to be acquired (or whose holding company is sought to be acquired) will be in violation of these laws. Such a person may also be subject to one or more of the following actions: (i) injunctive action requiring the disposition or seizure of those shares by the applicable insurance regulators; (ii) prohibition of voting of such shares; and (iii) other actions determined by the relevant insurance regulators. Further, many states' insurance laws require that prior notification be given to state insurance regulators of a change in control of a non-domiciled insurance company doing business in the state. These pre-notification statutes do not authorize the state insurance regulators to disapprove the change in control; however, they do authorize regulatory action in the affected state if particular conditions exist, such as undue market concentration. Any future transactions that would constitute a change in control of our Company or of any of our insurance subsidiaries may require prior notification in those states that have adopted pre-notification laws.
These laws may discourage potential acquisition proposals and may delay, deter, or prevent a change in control of our Company, including through transactions, and in particular unsolicited transactions, that some or all of our shareholders might consider to be desirable.
Federal Laws and Regulations
Enacted in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) effected comprehensive changes to the regulation of financial services in the United States. Dodd-Frank directed various government agencies and bodies to promulgate regulations implementing the law, many of which remain to be completed. Among other provisions, Dodd-Frank created a new framework for regulation of the over-the-counter derivatives markets, including requirements that certain swaps be executed through a centralized exchange or regulated facility and be cleared through a regulated clearinghouse. It also subjected us and major swap participants to capital and margin (i.e., collateral) requirements, which generally had the effect of increasing the costs of hedging and the credit risk posed by some counterparties.
Dodd-Frank also established the Federal Insurance Office (FIO) within the Department of the Treasury, with powers over most lines of insurance, and the Financial Stability Oversight Council (FSOC). The FIO is authorized to gather data and information to monitor aspects of the insurance industry, identify issues in the regulation of insurers about insurance matters, and preempt state insurance measures under certain circumstances. Although the FIO is prohibited from directly regulating the business of insurance, the FIO may also recommend enhanced regulations to state regulatory authorities or recommend to the FSOC that it designate an insurer as a "systemically important financial institution" (SIFI). An insurer designated as a SIFI could be subject to Federal Reserve supervision and heightened regulatory standards. We have not been designated as a SIFI, and at this time we believe it is unlikely that we would be designated as such. We continue to monitor the political, legislative and regulatory environment, where possible amendments to various provisions of Dodd-Frank are under discussion.
We are subject to the laws and regulations generally applicable to public companies, including the rules and regulations of the Securities and Exchange Commission and the New York Stock Exchange relating to public reporting and disclosure, accounting and financial reporting, corporate governance, and securities trading. Further, the Sarbanes-Oxley Act of 2002, and rules and regulations adopted under this regulation, have increased the requirements for us and other public companies in these and other areas.
The USA PATRIOT Act of 2001 (Patriot Act) contains anti-money laundering and financial transparency laws and mandates the implementation of various regulations applicable to broker-dealers and other financial services companies, including insurance companies. The Patriot Act seeks to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. The National Defense Authorization Act for Fiscal Year 2021 (NDAA) makes the most significant changes to the U.S. anti-money laundering laws since the Patriot Act. The NDAA requires many U.S. companies to report their beneficial owners and establishes a new whistleblower program. We are not subject to the NDAA’s requirements but will monitor any developments resulting from the passage of the NDAA. Anti-money laundering laws outside of the United States contain some similar provisions. Additionally, other federal laws and regulations, including the Foreign Corrupt Practices Act and regulations issued by the Office of Foreign Asset's Controls, as well as the U.K.'s Bribery Act of 2010, have increased requirements relating to identifying customers, prohibiting transactions with certain organizations or individuals, watching for and reporting suspicious transactions, responding to requests for information by regulatory authorities and law enforcement agencies, sharing information with other financial institutions, and requiring the implementation and maintenance of internal practices, procedures, and controls.
We are subject to federal income, employment, excise and other taxes related to both our U.S. and our foreign operations. On December 22, 2017, the U.S. Federal government enacted a 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). The key provisions of the TCJA relevant to us are as follows:
•Establishes a corporate income tax rate of 21 percent;
•Creates a territorial tax system rather than a worldwide system, which will generally allow companies to repatriate future foreign source earnings without incurring additional U.S. taxes by providing a 100 percent exemption for the foreign source portion of dividends from certain foreign subsidiaries;
•Subjects undistributed and previously untaxed foreign earnings and profits to a one-time transition tax also referred to as a deemed repatriation toll charge;
•Creates a U.S. shareholder tax on certain foreign subsidiary income above a routine equity return on tangible depreciable business assets (Global Intangible Low-taxed Income);
•Decreases tax-deductible life and property and casualty insurance reserves;
•Increases the amount and amortization period of acquisition costs capitalized for tax purposes;
•Reduces the maximum deduction for net operating loss (NOL) carryforwards arising in companies other than non-life insurance companies in tax years beginning after 2017 to a percentage of the taxpayer's taxable income. It also allows any NOLs generated in tax years beginning after December 31, 2017 to be carried forward indefinitely and repeals carrybacks. NOL provisions for non-life insurance companies remain unchanged from current law;
•Allows businesses to immediately write off the cost of new investments in certain qualified depreciable assets made after September 27, 2017 subject to phase downs starting in 2023;
•Eliminates or reduces certain deductions (including deductions for certain compensation arrangements, certain payments made to governments for violations of law and certain legal settlements), exclusions and credits and adds other provisions that broaden the tax base; and
•Creates a new base erosion anti-abuse tax (BEAT) that subjects certain payments made by a U.S. company to a related foreign company to additional taxes.
See "Executive Summary" and "Liquidity and Capital Resources" contained herein in Item 7 and Notes 7 and 1516 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for discussion of the impact to our financial position and results of operations as a result of these changes.
Federal tax laws and regulations are subject to change, and any such change could materially impact our federal taxes and reduce profitability as well as capital levels in our insurance subsidiaries. We continually monitor federal tax legislative and regulatory developments to understand their potential impact on our profitability.
For further discussion of regulation, refer to "Risk Factors" contained herein in Item 1A.
Geographic Areas
Adjusted operating revenue, which excludes net realized investment gains and losses, for our Unum UKInternational segment was approximately 6 percent of our consolidated adjusted operating revenue in 20172020, 2019, and 2016 and 7 percent for 2015.2018. As of December 31, 2017,2020, total assets equaled approximately 6 percent of consolidated assets and total liabilities for our Unum UK segment each equaled approximately 5 percent of consolidated assets and liabilities.liabilities for our Unum International segment. Fluctuations in the U.S. dollar relative to the local currencycurrencies of our Unum UKInternational segment will impact our reported operating results. See "Risk Factors" contained herein in Item 1A and "Quantitative and Qualitative Disclosures About Market Risk" contained herein in Item 7A for further discussion of fluctuations in foreign currency exchange rates. See "Reporting Segments" contained herein in this Item 1; "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7; and Note 13 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of Unum UK'sInternational's operating results.
Employees
Human Capital Resources
Human Capital
Unum is built on the promise of helping the working world thrive throughout life’s moments, an inspiring purpose that requires harnessing the creativity and energy of our employees. As of December 31, 2020, the Company employed approximately 10,700 employees, of which, approximately 10,300 are full-time employees. Approximately 89 percent of our employees are in the United States, and the remaining 11 percent are international (United Kingdom, Ireland and Poland). Voluntary employee turnover for 2020 was approximately 9.4 percent, a decrease from the prior year.
During 2020, as the COVID-19 pandemic accelerated across the U.S., we quickly and effectively transitioned the majority of our employees to remote work. We also implemented protocols and precautions for a limited portion of staff to work in the office. A key tenet of our strategy was to ensure employee health and safety, while also maintaining operational readiness and flexible work options. Our international locations each created strategies based on their local environment.
Compensation and Benefits
At DecemberUnum, we provide compensation and benefits programs which support our employees’ health, wealth and life. In addition to competitive pay, other programs (which vary by country/region) include: annual bonus and employee recognition; stock awards and stock purchase; life, medical, pharmacy, telehealth, health reimbursement accounts; dental, vision, voluntary benefits and disability insurance; tuition and fitness reimbursement; 401(k) plan, financial education, and planning support; student debt relief; employee assistance program, family building; paid time off and caregiver leave, paid parental leave; on-site health resource centers and fitness centers and subsidized healthy food choices.
Inclusion and Diversity
The Company strives to create a workplace culture that attracts and retains the great talent needed to deliver for our customers, who represent a cross-section of society and its different communities, ethnic backgrounds, socioeconomic perspectives and physical abilities. Unum believes the best way to meet the needs of its customers and make better decisions is to reflect their diversity in our own workforce. Of our more than 10,700 employees, 66 percent identify as female; and 17 percent of employees (excluding Poland) identify as members of a minority group.
Unum embraces the unique talents of every team member and helps them reach their full potential. Unum’s culture is built on a foundation of workplace values and principles called We Are Unum, a roadmap that outlines what employees bring to work each day and what they get from the Company in return.
In addition, Unum has a dedicated Office of Inclusion & Diversity focused on driving strategies to create a culture where inclusivity is an expectation for every employee and leader. We partner with diverse stakeholders to increase awareness and
provide guidance to help operationalize inclusion through resources, programs and policies that enhance the company's workforce culture.
The Company has five Employee Resource Groups made up of more than 1,400 employee volunteers who seek to:
•ensure inclusion becomes embedded within the Unum culture;
•create an inclusive environment for all diverse employees;
•support employees with disabilities;
•promote thoughtful discussions that advocate for all racially and ethnically diverse people;
•create an inclusive workplace, free of conscious or unconscious bias;
•ensure the workplace is free of discrimination against and harassment of people based on their gender identity, gender expression and sexual orientation;
•help veterans transition to the workplace and develop their careers; and
•increase women in leadership positions through professional and career development.
Unum has established an expectation for all people leaders to embed inclusion and diversity into their performance goals. By embracing shared ownership for inclusion and diversity, leaders help drive inclusion at all levels.
Unum’s ability to proactively attract, develop and retain diverse, top talent is a critical component of our success. Our talent acquisition area utilizes selection technology with AI capability that gives each candidate a customized recruiting experience. We are committed to diverse hiring and have embedded various initiatives within our selection process that allow us to drive positive results. The talent acquisition area actively partners with our office of I&D to ensure they utilize a multi-prong approach to attract and retain diverse talent. Our recruiters are certified diversity recruiters and have received specialized training in unconscious bias; new recruiters complete this process during their first 90 days of employment. Unum actively partners with various national diverse organizations and associations to support diverse hiring at all levels.
Learning and Development
At Unum, we place a strong emphasis on training and professional development for all levels of our workforce, so people of every background have the tools to reach their full potential. All employees have one-to-one coaching sessions with their managers. On a quarterly basis, managers summarize conversations with meaningful documentation on key accomplishments, progress toward goals, and other areas of focus, including career development. Managers and employees also review next steps to help align activities with company goals. We believe continuous coaching conversations help all employees and managers work more effectively.
Here are some examples of our commitment to the growth and development of our employees:
•Career development workshops: For the employees who participated in career development workshops in 2019, approximately 31 2017,percent had a promotion or lateral move either later in 2019 or during 2020, and 100 percent of managers felt prepared to more effectively navigate their career following the workshop.
•Managers as Coaches: We provide all people managers with workshops and development opportunities that focus on building coaching capabilities, with a goal of elevating workforce performance.
•Multicultural Leadership Development Program: This program focuses on championing equity and opportunity by preparing racially diverse employees to advance to higher levels of leadership.
•Actuarial Development Program (ADP), Accounting and Finance Development Program (AFDP) and Professional Development Program (PDP): These are multi-year rotational programs that focus on preparing participants to become future leaders of our company. ADP and AFDP focus on developing both leadership and technical skills, while PDP focuses primarily on developing leadership skills and broad operational experience.
•LinkedIn Learning (LIL): All employees have access to Unum's LIL platform, which provides our employees access to videos, articles and training options in everything from improving technical skills to enhancing leadership abilities.
•Leader Academy: An online program which is available to managers, leaders or any employee interested in moving into a management role. Each quarter, participants learn about interpersonal effectiveness, elevating performance, strategic decision-making and leading change.
We recognize that our employees are an important asset. Therefore, it is imperative that we hadcontinue to focus on the growth and development of our workforce in a meaningful way, and provide them with the necessary support to achieve their career goals.
Employee Engagement
To ensure our employees are engaged and are effectively delivering on our mission and meeting our customers’ needs, we regularly conduct confidential employee surveys to obtain feedback and gain insights from our employees. These surveys are thoughtfully considered and actioned by leadership. We are committed to our employees’ growth and development and embrace the diversity of ideas for improvement. In our employee survey conducted in 2020, a total of 9,910 employees responded and approximately 9,400 full-time employees.84 percent of those employees indicated favorable engagement and would recommend Unum as a great place to work.
Available Information
Our internet website address is www.unum.com. We make available, free of charge, on or through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material with the Securities and Exchange Commission.
Information about our Executive Officers
Our executive officers and persons chosen to become executive officers as of the Registrant
date hereof are listed below. Our executive officers, who are also executive officers of certain of our principal subsidiaries, were appointed by Unum Group's board of directors to serve until their successors are chosen and qualified or until their earlier resignation or removal.
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| | | | | | | |
Name | Age | Position |
Richard P. McKenney | 4952 | President and Chief Executive Officer and a Director |
Timothy G. ArnoldSteven A. Zabel | 5552 | Executive Vice President, Chief Financial Officer |
Michael Q. Simonds | 47 | Executive Vice President, Chief Operating Officer |
Elizabeth A. Ahmed | 46 | Executive Vice President, People and Chief Communications |
Timothy G. Arnold | 58 | Executive Officer,Vice President, Voluntary Benefits and President, Colonial Life |
Breege A. FarrellPuneet Bhasin | 58 | Executive Vice President, Chief Information and Digital Officer |
Lisa G. Iglesias | 55 | Executive Vice President, General Counsel |
Martha D. Leiper | 58 | Executive Vice President, Chief Investment Officer |
LisaPeter G. IglesiasO'Donnell | 5254 | Executive Vice President, General CounselUnum International |
Christopher J. JeromeW. Pyne | 5651 | Executive Vice President, Global ServicesGroup Benefits |
John F. McGarryMark P. Till | 6053 | Executive Vice President and Chief Financial OfficerCEO Designate, Unum International |
Peter G. O'Donnell | 51 | President and Chief Executive Officer, Unum UK |
Michael Q. Simonds | 44 | Executive Vice President, President and Chief Executive Officer, Unum US |
| | |
Mr. McKenney became President in April 2015 and Chief Executive Officer in May 2015. He served as Executive Vice President and Chief Financial Officer from August 2009 until April 2015, having joined the Company in July 2009. Before joining the Company, Mr. McKenney served as Executive Vice President and Chief Financial Officer of Sun Life Financial Inc., an international financial services company, from February 2007, having joined that company as Executive Vice President in September 2006.
Mr. Zabel became Executive Vice President, Chief Financial Officer in July 2019. He previously served as Senior Vice President and President, Closed Block Operations from July 2015 to July 2019 and as Senior Vice President, Chief Risk Officer from August 2013 to July 2015. Prior to joining the Company in August 2013, he served in various senior roles at Genworth Financial, Inc. from 2004, including Senior Vice President of Long-Term Care Insurance, Chief Financial Officer for Insurance Products, and Senior Vice President of Corporate Audit Services. Before that, he was responsible for financial reporting and rating agency relationships at Americo Life, Inc. and managed life and health insurance audit engagements at Ernst & Young LLP.
Mr. Simonds was named Executive Vice President, Chief Operating Officer in February 2020. Prior to that, he served as Executive Vice President, President and Chief Executive Officer, Unum US from July 2013, after having served as Senior Vice President and Chief Operating Officer, Unum US from June 2012. He previously served as Senior Vice President, Growth Operations, Unum US from July 2010, and as Senior Vice President and Chief Marketing Officer, Unum US from March 2008. Mr. Simonds originally joined a Unum Group predecessor company in 1994, left the Company in 2000 to pursue his MBA, and rejoined the Company in 2003 after serving as a consultant with McKinsey & Company, a global management consulting firm.
Ms. Ahmed was named Executive Vice President, People and Communications upon joining the Company in October 2018. She served as Executive Vice President, Chief Human Resources Officer, at AmTrust Financial Officer of Genworth Financial,Services, Inc., a global financial securitymultinational insurance holding company, from May 2004 until2015 to October 2018. Prior to that, she served as Vice President of Human Resources at Equity Trust Company, a financial services company, from May 2012 to May 2015, and as Senior Vice President of Human Resources at PNC Bank, a diversified financial services institution, from August 2006.2008 to May 2012.
Mr. Arnold was named Executive Vice President, Voluntary Benefits and President, Colonial Life in February 2020. Prior to that, he served as Executive Vice President, President and Chief Executive Officer, Colonial Life infrom January 2015, after having servedand before that, as Executive Vice President, President, Colonial Life from July 2014. He previously served as Senior Vice President, Sales and Marketing, Colonial Life from August 2012, as Senior Vice President, Chief Operations Officer, Colonial Life from July 2011, and as Senior Vice President, Integrated Underwriting, Unum US from May 2010. Mr. Arnold originally joined a Unum Group predecessor company in 1985.
Ms. FarrellMr. Bhasin was named Executive Vice President, Chief InvestmentInformation and Digital Officer in August 2013, after having joinedjoining the Company in March 2018. He served as Executive Vice President, Corporate Operations and Recycling at Waste Management, Inc., a waste management environmental services provider, from November 2015 to March 2017. While at Waste Management, he also served as Senior Vice President, Corporate Operations from November 2014, Chief Information Officer and Senior Vice President, Technology, Logistics and Customer Service from August 2012, and Senior Vice President and Chief InvestmentInformation Officer in April 2011. Before joining the Company, she held a number of executive-level investment positions within The Allstate Corporation, a personal lines insurer, including as Senior Managing Director of Allstate Investments, LLC and certain affiliated companies from January 2010 to April 2011, and as Managing Director of these companies from August 2004 to January 2010.December 2009.
Ms. Iglesias was named Executive Vice President, General Counsel upon joining the Company in January 2015.She served as Senior Vice President, General Counsel and Secretary of WellCare Health Plans, Inc., a managed care company, from February 2012 to December 2014, having first joined WellCare in February 2010 as Vice President, Securities and Assistant General Counsel.Prior to that, she served as General Counsel and Corporate Secretary for Nordstrom, Inc., a fashion specialty retailer, from 2007 to 2008, and as General Counsel and Secretary of Spherion Corporation, a recruiting and staffing company, from 1999 to 2007.
Ms. Leiper was appointed Executive Vice President, Chief Investment Officer of the Company in October 2019. She joined the Company from USAA, a provider of financial services to the military community, where she served as Senior Vice President, Corporate Finance and Enterprise Money Movement from October 2016 to October 2019 and, before that, as Senior Vice President, Corporate Finance and Investments from May 2015 to September 2016 and Senior Vice President, Chief Investment Officer from May 2010 to May 2015. Ms. Leiper previously worked at Unum Group (including predecessor companies) beginning in 1985, holding leadership roles of increasing responsibility, including Senior Vice President and Deputy Chief Investment Officer from January 2006 to May 2010.
Mr. JeromeO'Donnell was named Executive Vice President, Global ServicesUnum International in July 2013, after having served as Senior Vice President, Global Services from January 2012. HeFebruary 2020. As previously served as Senior Vice President, Risk Operations from July 2010, as Senior Vice President, Underwriting & Service Operations, Unum US from May 2010, and as Senior Vice President, Group Underwriting Operations from August 2006.announced, Mr. Jerome originally joined a Unum Group predecessor company in 1983. Mr. Jerome has announced his intention to retire fromO'Donnell will be leaving the Company in March 2018.
Mr. McGarry becamefollowing the end of the first quarter of 2021. Prior to his most recent position, he held the position of Executive Vice President and Chief Financial Officer in April 2015. He served as Executive Vice President, President and Chief Executive Officer, Closed Block OperationsUnum International from August 2013 to April 2015, after having served
October 2018 when the reporting segment was previously known as Executive Vice President, Individual Disability and Long-term Care Closed Block Operations from September 2012.Unum UK. He previously served as Executive Vice President, President and Chief Executive Officer, Unum UK, from July 2010, and as Senior Vice President, Benefits, Individual Disability, and National Client Group Business, Unum US from January 2010. Prior to that, he served in various other capacities within Unum US, including as Senior Vice President, Benefits Operations and Risk Management from March 2008 to January 2010, and as Senior Vice President, Benefits Operations from January 2006 to March 2008. Mr. McGarry originally joined a Unum Group predecessor company in 1986.
Mr. O'Donnell was named President and Chief Executive Officer, Unum UK, in September 2012, after having joined the Company as Unum Limited's Chief Financial Officer in 2010. Prior to joining Unum Limited, Mr. O'Donnell served as Director of Group Finance at Prudential plc, an international financial services company, from May 2008 to May 2010. He served as Finance director at Royal & SunAlliance plc, an international financial services company, from May 2005 to May 2008.
Mr. SimondsPyne was named Executive Vice President, President and Chief Executive Officer, Unum USGroup Benefits in July 2013, after having served as Senior Vice President and Chief Operating Officer, Unum US from June 2012. February 2020.He previously served as Senior Vice President, Growth Operations Unum USand Distribution from July 2010,June 2018 to January 2020 and as Senior Vice President, Sales and Chief Marketing Officer, Unum USClient Management from March 2008.June 2011 to June 2018.Before that, Mr. Simonds originallyPyne held positions of increasing responsibility within the Company's U.S. distribution organization, including Vice President, Sales from January 2011 to May 2011 and Vice President, Managing Director from January 2008 to December 2010.Mr. Pyne joined a Unum Group predecessor company in 1994, left1992.
Mr. Till has served as Executive Vice President and CEO Designate, Unum International since joining the Company in 2000 to further his education andFebruary 2021. He has been named to serve as a consultant with McKinsey & Company, a global management consulting firm,Executive Vice President and rejoinedChief Executive Officer, Unum International in April 2021 following Mr. O’Donnell’s planned departure at the end of the first quarter of 2021. Prior to joining the Company, Mr. Till served from July 2020 to January 2021 as Managing Director, Platform Solutions at Aegon, an international financial services organization, in 2003.the U.K. (Aegon UK). While at Aegon UK, he served as Managing Director, Digital Solutions from May 2018 to July 2020, as Chief Distribution and Marketing Officer from June 2016 to May 2018, and as Managing Director, Customer Value Management from September 2015 to June 2016.He previously served as Head of Personal Investing and
Marketing Director for Fidelity International from January 2012 to February 2015. Mr. Till has also held senior positions with Standard Life, HomeServe PLC and Barclays Bank.
ITEM 1A. RISK FACTORS
Overview
We face a wide range of risks, and our continued success depends on our ability to identify and appropriately manage our risk exposures. Discussed below are factors that may adversely affect our business, results of operations, or financial condition. Any one or more of the following factors may cause our actual results for various financial reporting periods to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company, including those in this document or made by us elsewhere, such as in earnings release investor calls, investor conference presentations, or press releases. See "Cautionary Statement Regarding Forward-Looking Statements" contained herein on page 1.
COVID-19
The COVID-19 pandemic is negatively impacting certain aspects of our business and, depending on severity and duration beyond current experience, could have a material adverse effect on our financial position, results of operations, liquidity and capital resources, and overall business operations.
The COVID-19 pandemic has caused significant disruption to the global economy and has resulted in unfavorable impacts to our company as well as the overall insurance industry. Due to the unprecedented nature of these events and the current pace of change in this environment, we cannot fully estimate the duration or ultimate impact of the COVID-19 pandemic at this time. Further events that we are unable to control, such as the further spread, changes in mortality levels, or spikes in the number of cases of COVID-19 or the emergence of new strains of coronavirus, and the related responses by government authorities and businesses, may heighten the impacts of COVID-19 and present additional risks. We are closely monitoring several key risks related to our business that may potentially have adverse impacts on our business and operations.
We may experience significant lapse activity related to both our group and individual customers due to a rise in unemployment levels, the deterioration of economic conditions, and the general uncertainty regarding the financial situation of our customers. This may put strain on our liquidity and capital position and may also result in a decline in both premium income and persistency, particularly if customers do not ultimately return following a lapse. Further, adverse economic conditions may adversely affect the discretionary spending of current or potential customers, which may result in lower sales or other negative changes to customer purchasing patterns.
Depending on the duration and severity of the current economic uncertainty, we may experience an increase in COVID-19-related deaths which could result in higher mortality within our life product lines. In addition, we may experience higher claim rates in our short-term disability products and higher expenses related to our leave management services.
In response to the disruptive economic effects of the COVID-19 pandemic, the Federal Reserve has taken actions to reduce interest rates, and the potential for a sustained low interest rate environment is magnified by the effects of COVID-19 on economic conditions. Further declines in interest rates or the continuance of low interest rates may place substantial pressure on our profit margins as well as on the discount rates used to calculate our insurance liabilities. Furthermore, the current economic conditions may result in the inability for companies to make interest and principal payments on their debt securities or mortgage loans that we hold for investment purposes. Accordingly, although we maintain a disciplined approach regarding our overall investment strategy, we may still incur significant losses that can result in a decline in net investment income and/or material increases in credit losses on our investment portfolio. With respect to commercial real estate, there could be potential impacts to estimates of expected losses resulting from lower underlying values, reflecting current market conditions at that time.
If we experience unfavorable developments related to our revenues, benefits, or expenses as described above, we may correspondingly experience adverse impacts to our overall future profitability and growth, which may alter the timing and magnitude of our plans for overall business expansion. In addition, these unfavorable developments may result in the write-off or impairment of intangible/long-lived assets such as deferred acquisition costs (DAC), value of business acquired, and goodwill, or the establishment of a valuation allowance regarding the realization of our deferred tax assets.
Although we have access to significant amounts of liquidity, which include credit facilities, FHLB arrangements, and the ability to liquidate certain investments, it may be insufficient or even inaccessible if we are not in compliance with required covenants
under our borrowing arrangements or if the associated lenders are unable to provide funds. In addition, if investment markets become illiquid or severely impaired, we may be unable to liquidate our investments in a timely and advantageous manner.
From an operational perspective, our employees, sales associates, brokers and distribution partners, as well as the workforces of our vendors, service providers and counterparties, may also be adversely affected by the COVID-19 pandemic or efforts to mitigate the pandemic, including government-mandated shutdowns, requests or orders for employees to work remotely, and other social distancing measures. The social distancing measures could result in an adverse impact on our ability to conduct our business, including our ability to sell our policies, including policies that are traditionally sold in person, and our ability to adjudicate and pay claims in a timely manner. Additionally, the vast majority of our employees are currently working remotely and have been doing so for an extended length of time. This working environment is unprecedented and may expose us to various additional risks such as elevated cyber-security vulnerability resulting from the wide-scale remote usage of our company networks and risks to the effectiveness of our internal controls over financial reporting.
See "Executive Summary", "Segment Operating Results", and "Liquidity and Capital Resources" included herein in Part 2, Item 7 under "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional discussion.
To the extent the COVID-19 pandemic adversely affects our business, financial position, results of operations, liquidity and capital resources, and overall business operations, it may also have the effect of heightening many of the other risks disclosed herein this Item 1A "Risk Factors".
Market and Credit Risks
Sustained periods of low interest rates in the long-term investment market may adversely affect our reported net investment income and the discount rates used in reserving for our insurance products and projecting our pension obligations, which may adversely affect our results of operations or financial condition.
Further declinesDeclines in interest rates and/or the continuance of the current level of low interest rates and yields on fixed income investments may cause the rates of return on our investment portfolio to decrease more than expected, leading to lower net investment income than assumed in the pricing and reserving for our insurance products. An interest, or discount, rate is used in calculating reserves for our insurance products. We set our GAAP reserve discount rate assumptions based on our current and expected future investment yield for assets supporting the reserves, considering current and expected future market conditions. If the discount rate assumed in our reserve calculations is higher than our future investment returns, our invested assets will not earn enough investment income to support our future claim payments. In that case, the reserves may eventually be insufficient, resulting in the need to increase our reserves and/or increase ourcontribute additional capital contributions to our insurance subsidiaries, either of which could have a material adverse effect on our results of operations or financial condition. Similarly, we are required to perform annual adequacy testing, that considers multiple interest rate scenarios, to ensure our statutory reserves continue to meet statutory requirements, which could also require us to increase to our statutory reserves and/or contribute additional capital.
Our net periodic benefit costs and the value of our benefit obligations for our pension plans are determined based on a set of economic and demographic assumptions that represent our best estimate of future expected experience. Major assumptions used in accounting for these plans include the expected discount (interest) rate and the long-term rate of return on plan assets. We set the discount rate assumption at the measurement date for each of our plans to reflect the yield of a portfolio of high quality fixed income corporate debt instruments matched against the timing and amounts of projected future benefits. A lower discount rate increases the present value of benefit obligations and increases our costs. Our expectations for the future investment returns on plan assets are based on a combination of historical market performance, current market conditions, and future capital market assumptions obtained from external consultants and economists. The actual rate of return on plan assets is determined based on the fair value of the plan assets at the beginning and end of the measurement period. Increases or decreases in long-term interest rates as well as equity market volatility will impact the fair value of our plan assets and may result in a decrease in the funded status of our pension plans and/or increased pension costs, which may adversely affect our results of operations, financial condition, or liquidity.
See "Reserves for Policy and Contract Benefits" contained herein in Item 1, "Critical Accounting Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, "Interest
Rate Risk" contained herein in Item 7A, and Note 9 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
Actual experience may differ from our reserve assumptions which may adversely affect our results of operations or financial condition.
Historical results may not be indicative of future performance due to, among other things, changes in our mix of business, re-pricing of certain lines of business, or any number of economic cyclical effects on our business. Reserves, whether calculated under GAAP or statutory accounting principles, do not represent an exact calculation of future benefit liabilities but are instead estimates made by us using actuarial and statistical procedures. Actual experience may differ from our reserve assumptions. There can be no assurance that our reserves will be sufficient to fund our future liabilities in all circumstances. Future loss development may require reserves to be increased, which would adversely affect earnings in current and future periods. Life expectancies may continue to increase, which could lengthen the time a claimant receives disability or long-term care benefits and could result in a change in mortality assumptions and an increase in reserves for these and other long-tailed products. Adjustments to reserve amounts may also be required in the event of changes from the assumptions regarding future morbidity (the incidence of claims and the rate of recovery, including the effects thereon of inflation and other societal and economic factors); premium rate increases; persistency; policy benefit offsets, including those for social security and other government-based welfare benefits; and interest rates used in calculating the reserve amounts, which could have a material adverse effect on our results of operations or financial condition.
See "Reserves for Policy and Contract Benefits" contained herein in Item 1, "Executive Summary" and "Critical Accounting Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, and Notes 1 and 6 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
Unfavorable economic or market conditions may result in lower sales, lower premium growth and persistency, higher claims incidence, unfavorable mortality, and longer claims duration, which may adversely affect our results of operations or financial condition.
We are affected by conditions in the capital markets and the general economy, bothprimarily in the United States, the United Kingdom, Poland, and to a lesser extent, the broader global financial markets. Negative developments in the capital markets and/or the general economy could adversely affect our business and results of operations.
In particular, factors such as unemployment levels, consumer confidence levels, consumer spending, business investment, government spending, the volatility and strength of the capital markets, inflation, pandemics, and inflationthe threat of terrorism all affect the business and economic environment and, ultimately, the amount and profitability of our businesses. Given the nature of our products, in an economic environment characterized by higher unemployment, lower personal income, reduced consumer spending, and lower corporate earnings and investment, new product sales may be adversely affected. Our premium growth may also be negatively impacted by lower premium growth from existing customers due to lower salary growth and lower growth in the number of employees covered under an existing policy. In addition, during such periods we may experience higher claims incidence, longer claims duration, and/or an increase in policy lapses, any of which could have a material adverse effect on our results of operations or financial condition.
We and our insurance subsidiaries are subject to extensive supervision and regulation. Changes in laws and regulations that affect our industry or the customers to whom we sell our products may affect the cost or demand for our products, increase capital requirements for our insurance subsidiaries, and adversely affect our profitability, liquidity, or growth.
Our insurance subsidiaries are subject to extensive supervision and regulation in the United States and abroad. The primary purpose of insurance regulation is to protect policyholders, not stockholders. To that end, applicable laws establish regulatory authorities, including state insurance departments in the United States and the PRA in the United Kingdom, with broad administrative powers over many aspects of the insurance business. For example, our insurance subsidiaries may not be able to obtain or maintain necessary licenses, permits, authorizations, or accreditations, or may be able to do so only at great cost. In addition, we and our insurance subsidiaries may not be able to comply fully with, or obtain appropriate exemptions from, the wide variety of laws and regulations applicable to insurance companies and insurance holding companies. These laws and regulations can be complex and subject to differing interpretations and are regularly re-examined. Existing or future laws and regulations, and the manner in which they are interpreted or applied, may become more restrictive or otherwise adversely affect our operations. For example, they may restrict or prohibit the payment of dividends by our subsidiaries to us, restrict transactions between subsidiaries and/or between us and our subsidiaries, and may require contributions of capital by us to our insurance subsidiaries even if we are otherwise in compliance with stated requirements. Failure to comply with or to obtain
appropriate exemptions under any applicable laws or regulations could result in restrictions on the ability of our insurance subsidiaries to do business in one or more of the jurisdictions in which they operate and could result in fines and other sanctions, which may have a material adverse effect on our business or results of operations.
It is possible that there will be heightened oversight of insurers by regulatory authorities in the jurisdictions in which our insurance subsidiaries are domiciled and operate. We cannot predict specific proposals that might be adopted, or what impact, if any, such proposals or, if enacted, such laws, could have on our business, results of operations, or financial condition. The NAIC or state regulators may adopt revisions to the RBC formula, the PRA may revise its capital adequacy requirements and minimum solvency margins, the IAIS may adopt capital requirements to which we could be subject, or rating agencies may incorporate higher capital thresholds into their quantitative analyses, thus requiring additional capital contributions by us to our insurance subsidiaries. Increased financial services regulation, which could include activities undertaken by the NAIC and regulatory authorities in the U.K. and the EU may impose greater quantitative requirements, supervisory review, and disclosure requirements and may impact the business strategies, capital requirements, and profitability of our insurance subsidiaries. The United Kingdom's Financial Ombudsman Service, which was established to help settle disputes between consumers and businesses providing financial services, and the FCA, which has rule-making, investigative, and enforcement powers to protect consumers, may hamper our ability to do business, which could have a material adverse effect on our U.K. operations.
We use affiliated captive reinsurers for the limited purpose of reinsuring risks attributable to specified policies issued or reinsured by our insurance subsidiaries in order to effectively manage risks in connection with certain blocks of our business as well as to enhance our capital efficiency. If we were required to discontinue use of the captive reinsurers or to alter the structure of the captive reinsurance arrangements, our ability to maintain current RBC ratios and/or our capital deployment activities could be adversely affected.
Changes in U.S. programs such as healthcare reform and financial services sector reform may compete with or diminish the need or demand for our products, particularly as it may affect our ability to sell our products through employers or in the workplace. The U.S. social security disability insurance program may not be sustainable, which may adversely affect the level of our disability claim payments and reserves. Legislative changes related to pension funding requirements could negatively impact our cash flows from operations and our profitability.
Changes in tax laws and other regulations or interpretations of such laws or regulations could unfavorably impact our corporate taxes. In addition, changes in tax laws could make some of our products less attractive to consumers. Although we expect tax reform to be beneficial to our earnings and long-term cash generation, we may experience some further pressure on our RBC ratios as a result of expected NAIC revisions to the RBC calculations to consider the lower U.S. statutory income tax rate. We expect our insurance subsidiaries to generate stronger statutory earnings. The level of excess capital generation is dependent on the timing and magnitude of these NAIC changes and the extent to which and how quickly the rating agencies will expect the industry to rebuild its RBC ratio levels.
During 2016, the U.K. held a referendum and voted to leave the EU. The U.K. subsequently invoked Article 50 of the Treaty on the European Union and is due to leave the EU on March 29, 2019. We may see some continued dampening of growth in the U.K. due to the current disruption and uncertainty in the U.K. economy. We may experience volatility in the fair values of our investments in U.K. and EU-based issuers, but we do not expect a material increase in other-than-temporary impairments or defaults, nor do we believe this volatility will impact our ability to hold these investments. The magnitude and longevity of potential negative economic impacts on our growth will depend on the agreements reached by the U.K. and EU as a result of exit negotiations and the resulting response of the U.K. marketplace. There are currently no indications that capital requirements for our U.K. operations will change, but economic conditions may cause volatility in our solvency ratios. Our reported consolidated financial results may continue to be unfavorably impacted by the weakening of the British pound sterling relative to preceding periods.
Dodd-Frank directs various government agencies and bodies to promulgate regulations implementing the law, an ongoing process that continues to develop. As a result of the regulations implemented thus far, regulations directed at some derivative activities and the implementation of central clearing rules have increased the cost of some hedging activities primarily as a result of more restrictive collateral requirements. We cannot predict the requirements of the remaining regulations that might ultimately be adopted, whether existing requirements will be repealed or changed, or how or whether such regulations will affect our businesses, results of operations, cash flows, or financial condition, require us to raise additional capital, or result in a downgrade of our credit ratings.
Most group long-term and short-term disability plans we administer are governed by the Employee Retirement Income Security Act (ERISA). Changes to ERISA enacted by Congress or through judicial interpretations may adversely affect the risk to us of
managing employee benefit plans, increase the premiums associated with such plans, and ultimately affect their affordability and our profitability.
The insurance departments in jurisdictions wherein our insurance subsidiaries conduct business may limit our ability to obtain rate increases under guaranteed renewable contracts or could require changes in rates and/or benefits to meet minimum loss ratio requirements which could negatively impact the profitability of our products. Many regulatory and governmental bodies have the authority to review our products and business practices and those of our agents and employees. These regulatory or governmental bodies may bring regulatory or other legal actions against us if, in their view, our practices are improper. These actions could result in substantial fines or restrictions on our business activities and could have a material adverse effect on our business or results of operations.
Regulatory examinations or investigations could result in, among other things, changes in our claims handling or other business practices, changes in procedures for the identification and payment to the states of benefits and other property that is not claimed by the owners, changes in the use and oversight of reinsurance, increases to reserving requirements, changes in governance and other oversight procedures, assessments by tax authorities or other governing agencies, fines, and other administrative action, which could injure our reputation, adversely affect our issuer credit ratings and financial strength ratings, place us at a competitive disadvantage in marketing or administering our products, impair our ability to sell or retain insurance policies, and/or have a material adverse effect on our results of operations or financial condition. Determination by regulatory authorities that we have engaged in improper conduct may also adversely affect our defense of various lawsuits.
See "Regulation" contained herein in Item 1 and Notes 7 and 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
In addition to interest rate risk as previously discussed, we are exposed to other risks related to our investment portfolio which may adversely affect our results of operations, financial condition, or liquidity.
Default Risk
Our investment portfolio consists primarily of fixed maturity securities. These securities are issued by both domestic and foreign entities and are backed either by collateral or the credit of the underlying issuer. Factors such as an economic downturn or political change in the country of the issuer, a regulatory change pertaining to the issuer's industry, a significant deterioration in the cash flows of the issuer, unforeseen accounting irregularities or fraud committed by the issuer, widening risk spreads, ratings downgrades, a change in the issuer's marketplace or business prospects, or other events that adversely affect the issuers of these securities may result in the issuer defaulting on its obligations.
Our mortgage loan portfolio has default risk. Events or developments, such as economic conditions that impact the ability of tenants to pay their rents or limit the availability of refinancing, may have a negative effect on our mortgage loan portfolio. Events or developments that have a negative effect on any particular geographic region or sector may have a greater adverse effect on an investment portfolio to the extent that the portfolio is concentrated in that region or sector.
A default results in the recognition of an impairment loss on the investment. A default may also adversely affect our ability to collect principal and interest due to us. The probability of credit downgrades and defaults increases when the fixed income markets experience periods of volatility and illiquidity.
Credit Spread Risk
Our exposure to credit spreads, which is the yield above comparable U.S. Treasury securities, primarily relates to market price and cash flow variability associated with changes in credit spreads. A widening of credit spreads may unfavorably impact the net unrealized gain or loss position of the investment portfolio and may adversely impact liquidity. Credit spread tightening may reduce net investment income associated with new purchases of fixed income securities.
Valuation Risk
We report our fixed maturity securities and certain other financial instruments at fair value. Valuations may include inputs and assumptions that are less observable or require greater estimation, particularly during periods of market disruption, resulting in values which may be less than the value at which the investments may ultimately be sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported in our
financial statements, and the period to period changes in value could vary significantly. Decreases in value may have a material adverse effect on our results of operations or financial condition.
We evaluate our investment portfolio for impairments.credit losses. There can be no assurance that we have accurately assessed the level of impairmentscredit losses taken. Additional impairmentscredit losses may need to be taken in the future, and historical trends may not be indicative of future impairments.credit losses. Any event reducing the value of our securities other than on a temporary basis may have a material adverse effect on our business, results of operations, or financial condition.
Market Timing and Liquidity Risk
While we attempt to match our asset cash flows and durations with expected liability cash flows and durations to meet the funding requirements of our business, there may at times be a lack of appropriate investments in the market which can be
acquired. In particular, due to the long duration of our long-term care product, the timing of our investment cash flows do not match those of our maturing liabilities. In addition, we may, in certain circumstances, need to sell investments due to changes in regulatory or capital requirements, changes in tax laws, rating agency decisions, and/or unexpected changes in liquidity needs. There may also be a limited market for certain of our investments, such as our private placement fixed maturity securities, mortgage loans, and policy loans, which makes them more illiquid. In periods of market volatility or disruption, other of our securities may also experience reduced liquidity. If events occur wherein we need to sell securities in an unfavorable interest rate or credit environment or need to quickly sell securities which are illiquid, market prices may be lower than what we might realize under normal circumstances, with a resulting adverse effect on our results of operations, financial condition, or liquidity.
Reinsurance may not be available or affordable, or reinsurers may be unwilling or unable to meet their obligations under our reinsurance contracts, which may adversely affect our results of operations or financial condition.
As part of our overall risk management and capital management strategies, we purchase reinsurance for certain risks underwritten by our various businesses. We also utilize reinsurance to exit certain lines of business. Market conditions beyond our control determine the availability and cost of reinsurance. Any decrease in the amount of reinsurance will increase our risk of loss and may impact the level of capital requirements for our insurance subsidiaries, and any increase in the cost of reinsurance will, absent a decrease in the amount of reinsurance, reduce our results of operations. Accordingly, we may be forced to incur additional expenses for reinsurance or may be unable to obtain sufficient reinsurance on acceptable terms, which may adversely affect our ability to write future business, result in the assumption of more risk with respect to the policies we issue, and increase our capital requirements. The collectibility of our reinsurance recoverable is primarily a function of the solvency of the individual reinsurers. We cannot provide assurance that our reinsurers will pay the reinsurance recoverables owed to us or that they will pay these recoverables on a timely basis. The insolvency of a reinsurer or the inability or unwillingness of a reinsurer to comply with the terms of a reinsurance contract may have an adverse effect on our results of operations or financial condition.
The effectiveness and utilization of our hedging programs may be affected by changes in the economic environment, changes in interest rates, capital market volatility, non-performance by our counterparties, changes in the level of required collateral, or regulation, which may adversely affect our results of operations, financial condition, or liquidity.
We use derivative financial instruments to help us manage certain risks related to our business operations, primarily foreign currency risk, interest rate risk, and risk related to matching duration for our assets and liabilities. Factors associated with derivative financial instruments could adversely affect our results of operations, financial condition, or liquidity. Ineffectiveness of our hedges due to changes in expected future events, such as the risk created by uncertainty in the economic environment or if our counterparties fail or refuse to honor their obligations under these derivative instruments, may have a material adverse effect on our results of operations or financial condition. Capital market turmoil may result in an increase in the risk of non-performance by our counterparties, many of which are financial institutions. Non-performance by our counterparties may force us to unwind hedges, and we may be unable to replace the hedge, thereby leaving the risk unhedged. Under the terms of our hedging contracts, we are required to post collateral and to maintain a certain level of collateral, which may adversely affect our liquidity and could subject us to the credit risk of the counterparty to the extent it holds such collateral. Changes in regulations may have an adverse effect on our ability to execute hedging strategies due to the increased economic cost of derivatives, primarily as a result of more restrictive collateral requirements.
London Interbank Offered Rate (LIBOR) transition
We are continuing to monitor the developments surrounding the transition from LIBOR. We have evaluated our existing financial arrangements which primarily include investments, derivatives, and debt agreements and also have evaluated our insurance and reinsurance contracts and have determined that we will not be impacted significantly from this transition. In those circumstances where we do have financial or other contracts that are impacted by the LIBOR transition, we are appropriately modifying those contracts to reference a suitable alternative rate or are comfortable with the existing fallback language in those contracts.
Currency translation could materially impact our reported operating results.
The functional currency of our U.K. and Polish operations is the British pound sterling and the Polish zloty, respectively. Fluctuations in exchange rates have an effect on our reported financial results, which may be unfavorably impacted when the functional currency weakens. However, it is important to distinguish between translating and converting foreign currency. Except for a limited number of transactions, we do not actually convert our functional currency into dollars. As a result, we
view foreign currency translation as a financial reporting item and not a reflection of operations or profitability in the U.K or Poland.
See "Reserves for Policy and Contract Benefits" contained herein in Item 1, "Critical Accounting Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, "Interest Rate Risk" contained herein in Item 7A, and Notes 1, 2, 3, 4 and 49 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion ofdiscussion.
Insurance Risks
Actual experience may differ from our investments and derivatives.
A cyber attack or other security breach could disrupt our operations, result in the unauthorized disclosure or loss of confidential data, damage our reputation or relationships, and expose us to significant financial and legal liability, which may adversely affect our business, results of operations, or financial condition.
We store confidential policyholder and employee information and other proprietary information on our information technology systems as a part of our normal business operations. Although we devote significant resources to maintain security systems and implement measures to protect our information technology systems and the confidentiality, integrity, and availability of information retained on them, and to date have not experienced a material breach of cybersecurity, there is no assurance that these systems and measures will be sufficient to prevent physical and electronic break-ins, computer viruses or other malicious code, cyber attacks, and similar disruptions from unauthorized tampering. We have contractual and governance safeguards in place with our third-party outsourcing partners and cloud computing providers to manage security as part of the service they deliver to us, but these measures may not prevent attackers from exploiting weaknesses in their networks to access, misappropriate, alter, or delete our data. Threats to our systems or those of third-party providers may originate externally, such as from cyber criminals or other hackers, or internally from within our company, such as from employee error or malfeasance. In some cases, especially because the techniques used change frequently or are not recognized until launched, we may be unaware of emerging threats and the magnitude of their effects, or we may not become aware of an unauthorized data disclosure incident for some time after it occurs, which could increase our exposure. As we increase the amount of information that we retain and that we share with third parties, our exposure to data security and related cybersecurity risks increases.
A successful penetration or circumvention of the security of our information systems could cause serious negative consequences for us, including significant disruption of our operations, the loss or unauthorized disclosure of confidential information retained on those systems, harm to our reputation, decreased levels of customer service or satisfaction, violations of applicable privacy or other laws, and exposure to litigation or enforcement proceedings.
While we maintain cyber liability insurance that provides coverage for network security, privacy liability, technology errors and omissions, media liability, first party network business interruption, and electronic restoration (which includes coverage for credit monitoring, notification costs, regulatory expense, and investigative expense), our insurance may not provide adequate loss coverage in all circumstances.
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 could adversely affect our profitability, results of operations, or financial condition.
In the event of a disaster such as a natural catastrophe, an epidemic, a cyber attack, cyber security breach or other information technology systems failure, a terrorist attack, or war, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to conduct business and on our results of operations and financial condition, particularly if those problems affect our information technology systems and destroy valuable data. In addition, in the event that a significant number of our employees were unavailable in the event of a disaster, our ability to effectively conduct business could be severely compromised.
The failure of our information technology and/or disaster recovery systems for any reason could cause significant interruptions or malfunctions in our or our customers’ operations and result in the loss, theft, or failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers. Such a failure could harm our reputation, subject us to regulatory sanctions, legal claims, and increased expenses, and lead to a loss of customers and revenues.
The failure to effectively execute upgrades to or replacements of information technology systems could adversely affect our business, results of operations, or financial condition.
We rely heavily on the effective operation of our information technology systems to administer our business. Although we believe we have information technology systems which adequately support our business needs, we continually upgrade our existing information technology systems and acquire or develop new systems to keep pace with the rapidly changing business and technology environment. There are risks involved with upgrading or replacing information technology systems, including, but not limited to, data loss, data errors, and disruption to our operations. We seek to monitor and control our exposure to the risks arising out of these activities through our risk control framework which encompasses a variety of reporting systems, internal controls, management review processes, and other mechanisms.
Competition may adversely affect our market share or profitability.
All of our businesses are highly competitive. We believe that the principal competitive factors affecting our business are price, the quality of our customer's experience regarding service and claims management, integrated product choices, enrollment capabilities, financial strength, and claims-paying ratings. We compete for new product sales, the retention of existing business, and the ability to attract and retain independent agents and brokers to market our products, all of which affect our profitability. All areas of the employee benefits markets are highly competitive due to the yearly renewable term nature of the group products and the large number of insurance companies offering products in this market. There is a risk that purchasers of employee benefits products may be able to obtain more favorable terms from competitors in lieu of renewing coverage with us, particularly if industry pricing levels do not align with our view of adequate premium rates. We are operating in a dynamic competitive environment of both traditional and non-traditional competitors, with changes in product offerings, enrollment capabilities, and technology solutions. The level and intensity of competition may also grow due to existing competitors becoming more aggressive, and an increase in merger and acquisition activity which may result in larger competitors with greater financial resources. There are many insurance companies which actively compete with us in our lines of business, and there is no assurance that we will be able to compete effectively against these companies and new competitors in the future. See "Competition" contained herein in Item 1 for further discussion.
A decrease in our financial strength or issuer credit ratings may adversely affect our competitive position, our ability to hedge our risks, and our cost of capital or ability to raise capital,reserve assumptions which may adversely affect our results of operations or financial condition, or liquidity.condition.
We compete based in part on the financial strength ratings provided by rating agencies. A downgradeHistorical results may not be indicative of our financial strength ratings may adversely affect us and could potentially,future performance due to, among other things, changes in our mix of business, re-pricing of certain lines of business, or any number of economic cyclical effects on our business. Reserves, whether calculated under GAAP or statutory accounting principles, do not represent an exact calculation of future benefit liabilities but are instead estimates made by us using actuarial and statistical procedures. Actual experience may differ from our reserve assumptions. There can be no assurance that our reserves will be sufficient to fund our future liabilities in all circumstances. Future loss development may require reserves to be increased, which would adversely affect our relationships with distributors of our productsearnings in current and servicesfuture periods. Life expectancies may continue to increase, which could lengthen the time a claimant receives disability or long-term care benefits and retention of our sales force, negatively impact persistencycould result in a change in mortality assumptions and new sales,an increase in reserves for these and generally adversely affect our abilityother long-tailed products. Adjustments to compete. A downgradereserve amounts may also be required in the issuer credit rating assigned to Unum Group can be expected to adversely affect our costevent of capitalchanges from the assumptions regarding future morbidity (which represents the incidence of claims and our ability to raise additional capital. If we are downgraded significantly, ratings triggersthe rate of recovery, including the effects thereon of inflation and other societal and economic factors); premium rate increases; persistency; policy benefit offsets, including those for social security and other government-based welfare benefits; and interest rates used in our derivatives financial instrument contracts may result in our counterparties enforcing their option to terminatecalculating the derivative contracts. Such an event mayreserve amounts, which could have a material adverse effect on our financial condition or our ability to hedge our risks. It is unclear how rating agencies will view the impact to RBC as a result of the TCJA and there is a potential that rating agencies may require additional capital for tax reform RBC impacts in order to maintain credit ratings.
See "Ratings" contained herein in Item 1 and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7 for further discussion.
Events that damage our reputation may adversely affect our business, results of operations or financial condition.
There are many events which may harm our reputation, including, but not limited to, those discussed in this Item 1A regarding regulatory investigations, legal proceedings, and cyber or other information security incidents.
In addition, as an insurance company, we are paid to accept certain risks. Those who conduct our business, including executive officers and members of management, sales managers, investment professionals, and to some extent, independent agents and brokers, do so in part by making decisions that involve exposing us to risk. These include decisions such as maintaining effective underwriting and pricing discipline, maintaining effective claim management and customer service performance, managing our investment portfolio and derivatives trading activities, delivering effective technology solutions, complying with established sales practices, executing our capital management strategy, exiting a line of business and/or pursuing strategic growth initiatives, and other decisions. Although we employ controls and procedures designed to monitor business decisions and prevent us from taking excessive risks or unintentionally failing to comply with internal policies and practices such that errors occur, there can be no assurance that these controls and procedures will be effective. If our employees and business associates take excessive risks and/or fail to comply with internal policies and practices, the impact of those events may damage our market position and reputation.
Depending on the severity of the damage to our reputation, we may be unable to effectively compete for new products or retain our existing business, which could adversely affect our results of operations or financial condition. Damage to our reputation may also hinder our ability to raise new capital and/or increase our cost of capital. See "Regulation" contained herein in Item 1 and Note 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for additional information on regulatory matters and legal proceedings.
We provide a broad array of disability, long-term care, group life, and voluntary insurance products that are affected by many factors, and changes in any of those factors may adversely affect our results of operations, financial condition, or liquidity.
Disability Insurance
Disability insurance may be affected by a number of social, economic, governmental, competitive, and other factors. Changes in societal attitudes, such as work ethic, motivation, or stability, can significantly affect the demand for and underwriting results from disability products.
Both economic and societal factors can affect claim incidence and recoveries for disability insurance. Claim incidence and claim recovery rates may be influenced by, among other factors, the rate of unemployment and consumer confidence. Claim incidence and claim recovery rates may also be influenced by the emergence of new infectious diseases or illnesses. Claim durations may be extended by medical improvements which could extend life expectancies. The relationship between these and other factors and overall incidence is very complex and will vary due to contract design features and the degree of expertise within the insuring organization to price, underwrite, and adjudicate the claims.
Within the group disability market, pricing and renewal actions can be taken to react to higher claim rates. However, these actions take time to implement, and there is a risk that the market will not sustain increased prices. In addition, changes in economic and external conditions may not manifest themselves in claims experience for an extended period of time. The pricing actions available in the individual disability market differ among product classes. Our individual noncancelable disability policies, in which the policy is guaranteed to be renewable through the life of the policy at a fixed premium, do not permit us to adjust premiums on our in-force business. Guaranteed renewable contracts that are not noncancelable can be re-priced to reflect adverse experience, but rate changes cannot be implemented as quickly as in the group disability market.
Long-term Care Insurance
Long-term care insurance can be affected by a number of demographic, medical, economic, governmental, competitive, and other factors. Because long-term care insurance is a relatively new product for the insurance industry and is long-duration in nature, there is not as much historical data as is available for our other products.products, especially at advanced ages. This creates a level of uncertainty in properly pricing the product and using appropriate assumptions when establishing reserves. Long-term
care insurance is guaranteed renewable and can be re-priced to reflect adverse experience, but the re-pricing is subject to regulatory approval by our states of
domicile and may also be subject to approval by jurisdictions in which our policyholders reside. The rate approval process can affect the length of time in which the re-pricing can be implemented, if at all, and the rate increases ultimately approved may be favorable or unfavorable relative to assumptions used to establish our reserves. We monitor our own experience and industry studies concerning morbidity, mortality, and policyholder terminations to understand emerging trends. Changes in actual experience relative to our expectations may adversely affect our profitability and reserves. Mortality continues to improveTo the extent mortality improves for the general population, and life expectancy has increased,expectancies increase, the period for which could lengthen the time a claimant receives long-term care benefits may lengthen and may subject more policyholders tothe associated impact of advanced aging andof policyholders may cause an associated increase in claims incidence. Medical advances may continue to have an impact on claim incidence and duration, both favorable and unfavorable. Due to the long duration of the product, the timing and/or amount of our investment cash flows are difficult to match to those of our maturing liabilities. Sustained periods of low or declining interest rates could result in increases in reserves and adversely affect our results of operations.
Group Life Insurance
Group life insurance may be affected bythe characteristics of the employees insured, the amount of insurance employees may elect voluntarily, our risk selection process, our ability to retain employer groups with favorable risk characteristics, the geographical concentration of employees, and mortality rates. Claim incidence may also be influenced by unexpected catastrophic events such as terrorist attacks, natural disasters, and pandemic health events, which may also affect the cost of and availability of reinsurance coverage.
Voluntary Products
Voluntary products sold in the workplace may be affected by the characteristics of the employees insured, the level of employee participation and the amount of insurance the employees elect, our risk selection process, and our ability to retain employer groups with favorable risk characteristics. OurA portion of our voluntary life insurance products generally include interest sensitive forms of insurance which contain a guaranteed minimum interest crediting rate. It is possible that our investment returns could be lower than the guaranteed crediting rate. TheWhile a significant portion of our non-life contracts are optionally renewable, some are guaranteed renewable and can be repriced to reflect adverse experience, but rate changes cannot be implemented as quickly as for group disability and group life products.
We have assets which may not be fully recoverable or realizable, which could adversely affect our results of operations or financial condition.
If our business does not perform well or as initially anticipated in our assumptions, we may be required to accelerate amortization or recognize an impairment loss on intangible assets or long-lived assets or to establish a valuation allowance against the deferred income tax asset.
We have intangible assets such as DAC, value of business acquired (VOBA), and goodwill. DAC and VOBA are amortized based primarily upon expected future premium income of the related insurance policies. Recoverability testing for DAC and VOBA is performed on an annual basis. Insurance contracts are grouped on a basis consistent with our manner of acquiring, servicing, and measuring profitability of the contracts. If recoverability testing indicates that either DAC and/or VOBA are not recoverable, the deficiency is charged to expense.
Goodwill is not amortized, but on an annual basis, or more frequently if necessary, we review the carrying amount of goodwill for indications of impairment, considering in that review the financial performance and other relevant factors. In accordance with accounting guidance, we test for impairment at either the operating segment level or one level below. In addition, certain events including, but not limited to, a significant adverse change in legal factors or the business environment, an adverse action by a regulator or rating agency, or unanticipated competition would cause us to review goodwill for impairment more frequently than annually.
Long-lived assets, including assets such as real estate and information technology software, also may require impairment testing to determine whether changes in circumstances indicate that we may be unable to recover the carrying amount.
We assess our deferred tax assets to determine if they are realizable. Factors in our determination include the performance of the business, including the ability to generate future taxable income. If based on available information, it is more likely than not that the deferred income tax asset will not be realized, a valuation allowance is established with a corresponding charge to net income.
Charges such as accelerated amortization, impairment losses, or the establishment of valuation allowances could have a material adverse effect on our results of operations or financial condition.
See "Reserves for Policy and Contract Benefits" contained herein in Item 1 and "Executive Summary" and "Critical Accounting Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, and Note 13 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
ChangesOperational Risks
A cyber attack or other security breach could disrupt our operations, result in accounting standardsthe unauthorized disclosure or loss of confidential data, damage our reputation or relationships, and expose us to significant financial and legal liability, which may materiallyadversely affect our financial statements.
Our financial statements are subject to the application of generally accepted accounting principles, in both the United States and the United Kingdom, which are periodically revised and/or expanded. Accordingly, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the U.S. Financial Accounting Standards Board (FASB), the U.K. Accounting Standards Board (ASB), and the NAIC. Accounting standards issued by the FASB and ASB may be influenced by the International Accounting Standards Board (IASB). These authoritative bodies have several ongoing projects regarding accounting standards that will likely be issued in the near future. Future accounting standards we adopt will change current accounting and disclosure requirements applicable to our financial statements. Such changes may have a material effect on our reportedbusiness, results of operations, or financial condition.
We store confidential information about our business and our policyholders, employees, agents and others on our information technology systems, including proprietary and personally identifiable information. As part of our normal business operations, we use this information and engage third-party providers, including outsourcing, cloud computing, and other business partners, that store, access, process, and transmit such information on our behalf. We devote significant resources and employ security measures to help protect our information technology systems and confidential information, and we have programs in place to detect, contain, and respond to information security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we and our third-party providers may be unable to anticipate these techniques or implement adequate preventative measures. In addition, hardware, software, or applications we develop or procure from third parties or through open source solutions may contain defects in design or manufacture or other problems that could unexpectedly compromise our information security. Unauthorized parties, whether within or outside our company, may disrupt or gain access to our systems, or those of third parties with whom we do business, through human error, misfeasance, fraud, trickery, or other forms of deceit, including break-ins, use of stolen credentials, social engineering, phishing, or other cyber attacks, computer viruses, malicious codes, and similar means of unauthorized and destructive tampering.
We and our third-party providers have experienced and likely will continue to experience information security incidents from time to time. Although known incidents have not had a material effect on our business or financial condition, there is no assurance that our security systems and measures will be able to prevent, mitigate, or remediate future incidents that could have such an effect. A successful penetration or circumvention of the security of our information technology systems, or those of third parties with whom we do business, could cause serious negative consequences for us, including significant disruption of our operations, unauthorized disclosure or loss of confidential information, harm to our brand or reputation, loss of customers and revenues, violations of privacy and other laws, and exposure to litigation, monetary damages, regulatory enforcement proceedings, fines, and potentially criminal proceedings and penalties. If we are unaware of the incident for some time after it occurs, our exposure could increase. In addition, the costs to address or remediate systems disruptions or security threats or vulnerabilities, whether before or after an incident, could be significant. As we continue to build our digital capabilities and focus on enhancing the customer experience, the amount of information that we retain and share with third parties, as well as our reliance on them, is likely to grow, increasing the cost to prevent data security breaches and the cost and potential consequences of such breaches. An information technology systems failure could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to potential disciplinary action by regulators. Further, successful cyber-attacks at other large financial institutions or other market participants, whether or not we are affected, could lead to a general loss of customer and investor confidence in financial institutions that could negatively affect us.
Although we have insurance against some cyber risks and attacks, we may be subject to litigation and financial losses that exceed our policy limits, are subject to deductibles or are not covered under any of our current insurance policies.
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 could adversely affect our profitability, results of operations, or financial condition.
In the event of a disaster such as a natural catastrophe, an epidemic/pandemic, a cyber attack, cyber security breach or other information technology systems failure, a terrorist attack, or war, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to conduct business and on our results of operations and financial condition, particularly if those problems affect our information technology systems and destroy valuable data or result in a significant failure of our internal control environment. In addition, in the event that a significant number of our employees were unavailable in the event of a disaster, our ability to effectively conduct business could be severely compromised.
The failure of our information technology and/or disaster recovery processes or systems for any reason could cause significant interruptions or malfunctions in our or our customers’ operations and result in the loss, theft, or failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers. Such a failure could harm our reputation, subject us to regulatory sanctions, legal claims, and increased expenses, and lead to a loss of customers and revenues.
Our failure to develop digital capabilities or to effectively execute upgrades to or replacements of information technology systems could impair our ability to deliver on our growth initiatives or administer our business, which may adversely affect our business, results of operations, or financial condition.
Our business plans increasingly rely on digital capabilities to meet or surpass customer expectations, simplify our operations, and deliver innovative product and service offerings. If we are unable to effectively develop and offer digital capabilities that enhance our customers' experience, we may not fully achieve our strategic growth initiatives and may also experience the loss of existing business. Although we believe we have information technology systems which adequately support our business needs, we continually upgrade our existing information technology systems and acquire or develop new systems to keep pace with the rapidly changing business and technology environment. There are risks involved with upgrading or replacing information technology systems, including, but not limited to, data loss, data errors, and disruption to our operations. We seek to monitor and control our exposure to the risks arising out of these activities through our risk control framework which encompasses a variety of reporting systems, internal controls, management review processes, and other mechanisms.
Unum Group depends on funds from its subsidiaries to meet its obligations and pay dividends. The ability of our subsidiaries to transfer funds to Unum Group may be impaired by adverse financial results or a change in capital requirements. Accordingly, internal sources of capital and liquidity may not always be sufficient. If we need to seek external capital, adverse market conditions may affect our access to capital or our cost of capital.
Unum Group is a holding company for insurance and other subsidiaries and has limited operations of its own. Our insurance subsidiaries are subject to insurance laws and regulatory limitations on the payment of dividends and on other transfers of funds or other assets to affiliates, including to Unum Group. The level of earnings and capital in our subsidiaries, as well as business conditions and rating agency considerations, could impact our insurance and other subsidiaries' ability to pay dividends or to make other transfers of funds to Unum Group, which could impair our ability to pay dividends to Unum Group's common stockholders, meet our debt and other payment obligations, and/or repurchase shares of Unum Group's common stock. The use of funds held by Unum Group as consideration in any acquisition could affect our capital plan and render those funds unavailable for other corporate purposes.
A change in demand for our insurance products or an increase in the incidence of new claims or the duration of existing claims could negatively impact our cash flows from operations. Deterioration in the credit market, which could delay our ability to sell our positions in certain of our fixed maturity securities in a timely manner, could also negatively impact our cash flows. Regulatory changes such as those discussed herein in this Item 1A may impose higher capital or reserve requirements on our insurance subsidiaries, increase collateral requirements for certain of our derivatives transactions, and/or implement other requirements which could unfavorably affect our liquidity. Without sufficient liquidity, our ability to maintain and grow our operations would be limited. If our internal sources of liquidity prove to be insufficient, we may be unable to successfully obtain additional financing and capital on favorable terms, or at all, which may adversely affect us.
If our financial results are unfavorable, we may need to increase our capital in order to maintain our credit ratings or satisfy regulatory requirements. Maintaining appropriate levels of statutory surplus is considered important not only by us but by insurance regulatory authorities in the U.S., the PRA in the U.K., the KNF in Poland, and the rating agencies that rate insurers' claims-paying abilities and financial strength. Failure to maintain certain levels of statutory surplus could result in increased
regulatory scrutiny, action by regulatory authorities, or a downgrade by the rating agencies. Need for additional capital may limit a subsidiary's ability to distribute funds to our holding companies.
Obtaining financing for even a small amount of capital could be challenging in unfavorable market conditions and during periods of economic uncertainty. The markets may exert downward pressure on availability of liquidity and credit capacity for certain issuers. The availability of financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry, our credit ratings and credit capacity, and the possibility that customers or lenders could develop a negative perception of our financial prospects. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. Raising capital in unfavorable market conditions could increase our interest expense or negatively impact our shareholders through increased dilution of their common stock in Unum Group.
We rely on our credit facilities as a potential source of liquidity. Our right to borrow funds under these facilities is subject to financial covenants, negative covenants, and events of default. Our ability to borrow under these facilities are also subject to the continued willingness and ability of the lenders to provide funds. Our failure to comply with the covenants in the credit facilities or the failure of lenders to fund their lending commitments would restrict our ability to access these facilities when needed, with a resulting adverse effect on our results of operations, financial condition, or liquidity.
See "Regulation" contained herein in Item 1,"Liquidity and Capital Resources" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, and Notes 8 and 16 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
Our risk management program may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business.
We have devoted significant resources to develop our enterprise risk management program, which has the objective of managing our strategic, market, credit, insurance, and operations risks, which ultimately impact our reputational risk. However, our program may not be comprehensive, and our methods for monitoring and managing risk may not fully predict or mitigate future exposures. In this case, there may be a negative impact to our business, results of operations, or financial condition.
See "Regulation" contained herein Item 1, "Critical Accounting Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7 and Notes 1, 7 and 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for additional information on legal proceedings.
See "Quantitative and Qualitative Disclosures About Market Risk" contained herein in Item 7A for further information about our risk management program.
General Risks
We and our insurance subsidiaries are subject to extensive supervision and regulation. Changes in laws and regulations that affect our industry or findings from examinations and investigations may affect the cost or demand for our products, increase capital and reserving requirements for our insurance subsidiaries, and adversely affect our profitability, liquidity, or growth.
Our insurance subsidiaries are subject to extensive supervision and regulation in the United States and abroad. The primary purpose of insurance regulation is to protect policyholders, not stockholders. To that end, applicable laws establish regulatory authorities, including state insurance departments in the United States, the PRA in the United Kingdom, and the KNF in Poland, with broad administrative powers over many aspects of the insurance business. For example, our insurance subsidiaries may not be able to obtain or maintain necessary licenses, permits, authorizations, or accreditations, or may be able to do so only at great cost. In addition, we and our insurance subsidiaries may not be able to comply fully with, or obtain appropriate exemptions from, the wide variety of laws and regulations applicable to insurance companies and insurance holding companies. These laws and regulations can be complex and subject to differing interpretations and are regularly re-examined. Existing or future laws and regulations, and the manner in which they are interpreted or applied, may become more restrictive or otherwise adversely affect our operations. For example, they may restrict or prohibit the payment of dividends by our subsidiaries to us, restrict transactions between subsidiaries and/or between us and our subsidiaries, and may require contributions of capital by us to our insurance subsidiaries even if we are otherwise in compliance with stated requirements. Failure to comply with or to obtain appropriate exemptions under any applicable laws or regulations could result in restrictions on the ability of our insurance subsidiaries to do business in one or more of the jurisdictions in which they operate and could result in fines and other sanctions, which may have a material adverse effect on our business or results of operations.
Regulatory examinations or investigations could result in, among other things, an increase to reserving requirements, changes in our claims handling or other business practices, changes in procedures for the identification and payment to the states of benefits and other property that is not claimed by the owners, changes in the use and oversight of reinsurance, changes in governance and other oversight procedures, assessments by tax authorities or other governing agencies, fines, and other administrative action, which could injure our reputation, adversely affect our issuer credit ratings and financial strength ratings, place us at a competitive disadvantage in marketing or administering our products, impair our ability to sell or retain insurance policies, and/or have a material adverse effect on our results of operations or financial condition.
It is possible that there will be heightened oversight of insurers by regulatory authorities in the jurisdictions in which our insurance subsidiaries are domiciled and operate. We cannot predict specific proposals that might be adopted, or what impact, if any, such proposals or, if enacted, such laws, could have on our business, results of operations, or financial condition. For instance, the NAIC or state regulators may adopt further revisions to statutory reserving standards or the RBC formula, the PRA may revise its capital adequacy requirements and minimum solvency margins, the IAIS may adopt capital requirements to which we could be subject, or rating agencies may incorporate higher capital thresholds into their quantitative analyses, thus requiring additional capital contributions by us to our insurance subsidiaries. Increased financial services regulation, which could include activities undertaken by the NAIC and regulatory authorities in the U.K., Poland, and the EU may impose greater quantitative requirements, supervisory review, and disclosure requirements and may impact the business strategies, capital requirements, and profitability of our insurance subsidiaries. The United Kingdom's Financial Ombudsman Service, which was established to help settle disputes between consumers and businesses providing financial services, and the FCA, which has rule-making, investigative, and enforcement powers to protect consumers, may hamper our ability to do business, which could have a material adverse effect on our U.K. operations.
Our financial statements are subject to the application of generally accepted accounting principles, in the United States, the United Kingdom, and Poland, which are periodically revised and/or expanded. Accordingly, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies within these countries, which may also be influenced by the International Accounting Standards Board. Future accounting standards we adopt, including the U.S. Financial Accounting Standards Board's accounting standard update related to long-duration targeted improvements for insurance contracts, will change current accounting and disclosure requirements applicable to our financial statements. Such changes may have a material effect on our reported results of operations or financial condition and may also impact the perception of our business by external stakeholders.
We use an affiliated captive reinsurer for the limited purpose of reinsuring risks attributable to specified policies issued or reinsured by one of our insurance subsidiaries in order to effectively manage risks in connection with certain blocks of our business as well as to enhance our capital efficiency. If we were required to discontinue use of the captive reinsurer or to alter the structure of the captive reinsurance arrangement, our ability to maintain current RBC ratios and/or our capital deployment activities could be adversely affected.
Changes in U.S. programs such as healthcare reform, the emergence of paid family and medical leave legislation, and financial services sector reform may compete with or diminish the need or demand for our products, particularly as it may affect our ability to sell our products through employers or in the workplace. The U.S. social security disability insurance program may not be sustainable, which may adversely affect the level of our disability claim payments and reserves. Legislative changes related to pension funding requirements could negatively impact our cash flows from operations and our profitability.
Changes in tax laws and other regulations or interpretations of such laws or regulations could unfavorably impact our corporate taxes. In addition, changes in tax laws could make some of our products less attractive to consumers.
On January 31, 2020, an official bill was passed formalizing the withdrawal of the U.K. from the European Union (EU). A deal was reached on December 24, 2020 on the future trading relationship with the EU. The deal focused primarily on the trading of goods rather than the U.K.’s service sector, which will be subject to further negotiations in 2021 and will focus on financial services and future regulation. In addition, the U.K. government is reviewing the regulatory framework of financial services companies which may result in changes to U.K. regulatory capital or U.K. tax regulations. We do not expect that the underlying operations of our U.K. business, nor the Polish business which is in the EU, will be significantly impacted by the withdrawal but we may see some continued dampening of growth in the U.K. as well as earnings volatility due to the current disruption and uncertainty in the U.K. economy. We may also experience volatility in the fair values of our investments in U.K. and EU-based issuers, but we do not expect a material increase in credit losses or defaults, nor do we believe this volatility will impact our ability to hold these investments. In addition, the current economic conditions may also cause volatility in our
solvency ratios. Our reported consolidated financial results continue to be impacted by fluctuations in the British pound sterling to dollar exchange rate.
Most group long-term and short-term disability plans we administer are governed by the Employee Retirement Income Security Act (ERISA). Changes to ERISA enacted by Congress or through judicial interpretations may adversely affect the risk to us of managing employee benefit plans, increase the premiums associated with such plans, and ultimately affect their affordability and our profitability.
The insurance departments in jurisdictions wherein our insurance subsidiaries conduct business may limit our ability to obtain rate increases under guaranteed renewable contracts or could require changes in rates and/or benefits to meet minimum loss ratio requirements which could negatively impact the profitability of our products. Many regulatory and governmental bodies have the authority to review our products and business practices and those of our agents and employees. These regulatory or governmental bodies may bring regulatory or other legal actions against us if, in their view, our practices are improper. These actions could result in substantial fines or restrictions on our business activities and could have a material adverse effect on our business or results of operations. Determination by regulatory authorities that we have engaged in improper conduct may also adversely affect our defense of various lawsuits.
A decrease in our financial strength or issuer credit ratings may adversely affect our competitive position, our ability to hedge our risks, and our cost of capital or ability to raise capital, which may adversely affect our results of operations, financial condition, or liquidity.
We compete based in part on the financial strength ratings provided by rating agencies. A downgrade of our financial strength ratings may adversely affect us and could potentially, among other things, adversely affect our relationships with distributors of our products and services and retention of our sales force, negatively impact persistency and new sales, and generally adversely affect our ability to compete. A downgrade in the issuer credit rating assigned to Unum Group can be expected to adversely affect our cost of capital and our ability to raise additional capital. If we are downgraded significantly, ratings triggers in our derivatives financial instrument contracts may result in our counterparties enforcing their option to terminate the derivative contracts. Such an event may have a material adverse effect on our financial condition or our ability to hedge our risks.
Competition may adversely affect our market share or profitability.
All of our businesses are highly competitive. We believe that the principal competitive factors affecting our business are price, the quality of our customer's experience regarding service and claims management, integrated product choices, enrollment capabilities, financial strength, and claims-paying ratings. We compete for new product sales, the retention of existing business, and the ability to attract and retain independent agents and brokers to market our products, all of which affect our profitability. All areas of the employee benefits markets are highly competitive due to the yearly renewable term nature of the group products and the large number of insurance companies offering products in this market. There is a risk that our customers may be able to obtain more favorable terms or improved technology solutions from competitors in lieu of renewing coverage with us, particularly if industry pricing levels do not align with our view of adequate premium rates. We are operating in a dynamic competitive environment of both traditional and non-traditional competitors, with changes in product offerings, enrollment capabilities, and technology solutions. The level and intensity of competition may also grow due to existing competitors becoming more aggressive, and an increase in merger and acquisition activity which may result in larger competitors with greater financial resources. There are many insurance companies which actively compete with us in our lines of business, and there is no assurance that we will be able to compete effectively against these companies and new competitors in the future.
Events that damage our reputation may adversely affect our business, results of operations, or financial condition.
There are many events which may harm our reputation, including, but not limited to, those discussed in this Item 1A regarding regulatory investigations, legal proceedings, social issues, and cyber or other information security incidents.
In addition, being in the business of insurance, we are paid to accept certain risks. Those who conduct business on our behalf, including executive officers and members of management, sales managers, investment professionals, and to some extent, independent agents and brokers, do so in part by making decisions that involve exposing us to risk. These include decisions such as maintaining effective underwriting and pricing discipline, maintaining effective claim management and customer service performance, managing our investment portfolio and derivatives trading activities, delivering effective technology solutions, complying with established sales practices, executing our capital management strategy, exiting a line of business and/or pursuing strategic growth initiatives, and other decisions. Although we employ controls and procedures designed to monitor
business decisions and prevent us from taking excessive risks or unintentionally failing to comply with internal policies and practices such that errors occur, there can be no assurance that these controls and procedures will be effective. If our employees and business associates take excessive risks and/or fail to comply with internal policies and practices, the impact of those events may damage our market position and reputation.
Depending on the severity of the damage to our reputation, we may be unable to effectively compete for new products or retain our existing business, which could adversely affect our results of operations or financial condition. Damage to our reputation may also hinder our ability to raise new capital and/or increase our cost of capital.
Litigation and contingencies are common in our businesses and may result in financial losses and/or harm to our reputation.
We are, and in the future may be, defendants in a number of litigation matters, and the outcome of this litigation is uncertain. Some of these proceedings have been brought on behalf of various alleged classes of complainants. Plaintiffs in class action and other lawsuits against us may seek very large and/or indeterminate amounts, including punitive and treble damages. An estimated loss is accrued when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An adverse outcome in one or more of these actions may, depending on the nature, scope and amount of the ruling, materially and adversely affect our results of operations or financial condition, encourage other litigation, and limit our ability to write new business, particularly if the adverse outcomes negatively impact certain of our ratings.
As part of our normal operations in managing claims, we are engaged in claim litigation where disputes arise as a result of a denial or termination of benefits. Typically those lawsuits are filed on behalf of a single claimant or policyholder, and in some of these individual actions punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims. For our general claim litigation, we maintain reserves based on experience to satisfy judgments and settlements in the normal course. We expect that the ultimate liability, if any, with respect to general claim litigation, after consideration of the reserves maintained, will not be material to our financial condition. Nevertheless, given the inherent unpredictability of litigation, it is possible that an adverse outcome in certain claim litigation involving punitive damages may, from time to time, have a material adverse effect on our results of operations. We are unable to estimate a range of reasonably possible punitive losses.
See "Critical Accounting Estimates" included in "Management's Discussion"Reserves for Policy and Analysis of Financial ConditionContract Benefits", "Competition", "Regulation" and Results of Operations""Ratings" contained herein in Item 7 and Note 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for additional information on legal proceedings.
Reinsurance may not be available or affordable, or reinsurers may be unwilling or unable to meet their obligations under our reinsurance contracts, which may adversely affect our results of operations or financial condition.
As part of our overall risk management and capital management strategies, we purchase reinsurance for certain risks underwritten by our various businesses. Market conditions beyond our control determine the availability and cost of reinsurance. Any decrease in the amount of reinsurance will increase our risk of loss and may impact the level of capital requirements for our insurance subsidiaries, and any increase in the cost of reinsurance will, absent a decrease in the amount of reinsurance, reduce our results of operations. Accordingly, we may be forced to incur additional expenses for reinsurance or may be unable to obtain sufficient reinsurance on acceptable terms, which may adversely affect our ability to write future business, result in the assumption of more risk with respect to the policies we issue, and increase our capital requirements. The collectibility of our reinsurance recoverable is primarily a function of the solvency of the individual reinsurers. We cannot provide assurance that our reinsurers will pay the reinsurance recoverables owed to us or that they will pay these recoverables on a timely basis. The insolvency of a reinsurer or the inability or unwillingness of a reinsurer to comply with the terms of a reinsurance contract may have an adverse effect on our results of operations or financial condition.
The effectiveness of our hedging programs may be affected by changes in the economic environment, changes in interest rates, capital market volatility, non-performance by our counterparties, changes in the level of required collateral, or regulation, which may adversely affect our results of operations, financial condition, or liquidity.
We use derivative financial instruments to help us manage certain risks related to our business operations, primarily interest rate risk, risk related to matching duration for our assets and liabilities, and foreign currency risk. Factors associated with derivative financial instruments could adversely affect our results of operations, financial condition, or liquidity. Ineffectiveness of our hedges due to changes in expected future events, such as the risk created by uncertainty in the economic environment or if our counterparties fail or refuse to honor their obligations under these derivative instruments, may have a material adverse effect on our results of operations or financial condition. Capital market turmoil may result in an increase in the risk of non-performance by our counterparties, many of which are financial institutions. Non-performance by our counterparties may force us to unwind hedges, and we may be unable to replace the hedge, thereby leaving the risk unhedged. Under the terms of our hedging contracts, we are required to post collateral and to maintain a certain level of collateral, which may adversely affect our liquidity and could subject us to the credit risk of the counterparty to the extent it holds such collateral. Changes in regulations may have an adverse effect on our ability to execute hedging strategies due to the increased economic cost of derivatives, primarily as a result of more restrictive collateral requirements.
Currency translation could materially impact our reported operating results.
The functional currency of our U.K. operations is the British pound sterling. Fluctuations in the pound to dollar exchange rate have an effect on our reported financial results. Our reported consolidated financial results may continue to be unfavorably impacted by the weakening of the British pound sterling. However, it is important to distinguish between translating and converting foreign currency. Except for a limited number of transactions, we do not actually convert pounds into dollars. As a result, we view foreign currency translation as a financial reporting item and not a reflection of operations or profitability in the U.K.
Unum Group depends on the ability of its subsidiaries to transfer funds to it so that it can meet its obligations and pay dividends. Our ability to transfer funds to Unum Group may be impaired by adverse financial results or a change in capital requirements. Accordingly, internal sources of capital and liquidity may not always be sufficient. If we need to seek external capital, adverse market conditions may affect our access to capital or our cost of capital.
Unum Group is a holding company for insurance and other subsidiaries and has no significant operations of its own. Our insurance subsidiaries are subject to insurance laws and regulatory limitations on the payment of dividends and on other transfers of funds or other assets to affiliates, including to Unum Group. The level of earnings and capital in our subsidiaries, as well as business conditions and rating agency considerations, could impact our insurance and other subsidiaries' ability to pay dividends or to make other transfers of funds to Unum Group, which could impair our ability to pay dividends to Unum Group's common stockholders, meet our debt and other payment obligations, and/or repurchase shares of Unum Group's common stock. The use of funds held by Unum Group as consideration in any acquisition could affect our capital plan and render those funds unavailable for other corporate purposes.
A change in demand for our insurance products or an increase in the incidence of new claims or the duration of existing claims could negatively impact our cash flows from operations. Deterioration in the credit market, which could delay our ability to sell our positions in certain of our fixed maturity securities in a timely manner, could also negatively impact our cash flows. Regulatory changes such as those discussed herein in this Item 1A may impose higher capital or reserve requirements on our insurance subsidiaries, increase collateral requirements for certain of our derivatives transactions, and/or implement other requirements which could unfavorably affect our liquidity. Without sufficient liquidity, our ability to maintain and grow our operations would be limited. If our internal sources of liquidity prove to be insufficient, we may be unable to successfully obtain additional financing and capital on favorable terms, or at all, which may adversely affect us.
If our financial results are unfavorable, we may need to increase our capital in order to maintain our credit ratings or satisfy regulatory requirements. Maintaining appropriate levels of statutory surplus is considered important not only by us but by insurance regulatory authorities in the U.S., the PRA in the U.K., and the rating agencies that rate insurers' claims-paying abilities and financial strength. Failure to maintain certain levels of statutory surplus could result in increased regulatory scrutiny, action by regulatory authorities, or a downgrade by the rating agencies. Need for additional capital may limit a subsidiary's ability to distribute funds to our holding companies.
Obtaining financing for even a small amount of capital could be challenging in unfavorable market conditions and during periods of economic uncertainty. The markets may exert downward pressure on availability of liquidity and credit capacity for certain issuers. The availability of financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry, our credit ratings and credit capacity, and the possibility that customers or lenders could develop a negative perception of our financial prospects. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. Raising capital in unfavorable market conditions could increase our interest expense or negatively impact our shareholders through increased dilution of their common stock in Unum Group.
We rely on our credit facility as a potential source of liquidity. Our right to borrow funds under this facility is subject to financial covenants, negative covenants, and events of default. Our ability to borrow under this facility is also subject to the continued willingness and ability of the lenders to provide funds. Our failure to comply with the covenants in the credit facility or the failure of lenders to fund their lending commitments would restrict our ability to access this facility when needed, with a resulting adverse effect on our results of operations, financial condition, or liquidity.
See "Regulation" contained herein in Item 1,"Liquidity and Capital Resources" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, and Notes 8 and 15 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
We have assets which may not be fully recoverable or realizable, which could adversely affect our results of operations or financial condition.
If our business does not perform well or as initially anticipated in our assumptions, we may be required to accelerate amortization or recognize an impairment loss on intangible assets or long-lived assets or to establish a valuation allowance against the deferred income tax asset.
We have intangible assets such as deferred acquisition costs (DAC), value of business acquired (VOBA), and goodwill. DAC and VOBA are amortized based primarily upon expected future premium income of the related insurance policies. Recoverability testing for DAC and VOBA is performed on an annual basis. Insurance contracts are grouped on a basis consistent with our manner of acquiring, servicing, and measuring profitability of the contracts. If recoverability testing indicates that either DAC and/or VOBA are not recoverable, the deficiency is charged to expense.
Goodwill is not amortized, but on an annual basis, or more frequently if necessary, we review the carrying amount of goodwill for indications of impairment, considering in that review the financial performance and other relevant factors. In accordance with accounting guidance, we test for impairment at either the operating segment level or one level below. In addition, certain events including, but not limited to, a significant adverse change in legal factors or the business environment, an adverse action by a regulator or rating agency, or unanticipated competition would cause us to review goodwill for impairment more frequently than annually.
Long-lived assets, including assets such as real estate and information technology software, also require impairment testing to determine whether changes in circumstances indicate that we may be unable to recover the carrying amount.
We assess our deferred tax assets to determine if they are realizable. Factors in our determination include the performance of the business, including the ability to generate future taxable income. If based on available information, it is more likely than not that the deferred income tax asset will not be realized, a valuation allowance is established with a corresponding charge to net income.
Charges such as accelerated amortization, impairment losses, or the establishment of valuation allowances could have a material adverse effect on our results of operations or financial condition.
See "Executive Summary" and "Critical Accounting Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, and Notes 1, 6, 7, and 1314 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
The continued threat of terrorism and ongoing military actions may adversely affect the value of certain assets in our investment portfolio, disrupt our operations, or result in higher claim costs.
The continued threat of terrorism, both within the U.S. and abroad, ongoing military actions, and heightened security measures in response to these types of threats may cause significant volatility in the global financial markets and result in loss of life, property damage, business disruption, and reduced economic activity. Some of the assets in our investment portfolio may be adversely affected by declines in the credit and equity markets and reduced economic activity caused by the continued threat of terrorism. Terrorist actions also could disrupt our operations centers in the U.S. or abroad. In addition, the occurrence of terrorist actions could result in higher claims under our insurance policies than anticipated. Beyond obtaining insurance coverage for our facilities, there are few, if any, commercial options through which to transfer the exposure from extreme events away from us. We purchase reinsurance protection against catastrophic disaster events, including terrorism. The continued threat of terrorism could result in increased reinsurance prices and reduced insurance coverage and potentially cause us to retain more risk than we otherwise would retain if we were able to obtain reinsurance at lower prices. See "Reinsurance" contained herein in Item 18 for further discussion.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
As of December 31, 2017,2020, we owned approximately 2.3 million square feet of office space comprised of five campuses located in Chattanooga, Tennessee; Portland, Maine; Columbia, South Carolina; Baton Rouge, Louisiana; and Dorking in the United Kingdom. In addition, as of December 31, 2017,2020, we leased approximately 0.2 million square feet of office space in Worcester, Massachusetts and approximately 0.6 million square feet in various other locations throughout the United States, the United Kingdom, Ireland, and Ireland. AllPoland. Substantially all of the properties owned or leased are used by one or more of all five reporting segments, depending on the location. We believe our properties and facilities are suitable and adequate for current operations.
ITEM 3. LEGAL PROCEEDINGS
Refer to Note 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for information on legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common stock of Unum Group is traded on the New York Stock Exchange. The stock symbol is UNM. Quarterly market prices and dividends declared and paid per share of common stock are as follows:
|
| | | | | | | | | | | |
| Market Price | | |
| High | | Low | | Dividend |
2017 | | | | | |
4th Quarter | $ | 57.55 |
| | $ | 50.94 |
| | $ | 0.230 |
|
3rd Quarter | 51.50 |
| | 46.08 |
| | 0.230 |
|
2nd Quarter | 47.96 |
| | 43.55 |
| | 0.200 |
|
1st Quarter | 50.27 |
| | 43.58 |
| | 0.200 |
|
| | | | | |
2016 | | | | | |
4th Quarter | $ | 45.01 |
| | $ | 34.83 |
| | $ | 0.200 |
|
3rd Quarter | 35.94 |
| | 29.79 |
| | 0.200 |
|
2nd Quarter | 37.18 |
| | 29.86 |
| | 0.185 |
|
1st Quarter | 32.83 |
| | 23.99 |
| | 0.185 |
|
| | | | | |
2020 | |
4th Quarter | $ | 0.285 | |
3rd Quarter | 0.285 | |
2nd Quarter | 0.285 | |
1st Quarter | 0.285 | |
| |
2019 | |
4th Quarter | $ | 0.285 | |
3rd Quarter | 0.285 | |
2nd Quarter | 0.260 | |
1st Quarter | 0.260 | |
Our board of directors has the authority to declare cash dividends on shares of our common stock. In determining dividends, the board takes into account a number of factors including our financial condition and results of operations, regulatory limitations on the payment of dividends from subsidiaries, cash requirements, general economic conditions, and other factors the board may deem relevant. For information on restrictions relating to our subsidiaries' ability to pay dividends to Unum Group and certain of its intermediate holding company subsidiaries, see "Liquidity and Capital Resources - Cash Available from Subsidiaries" contained herein in Item 7 and Note 1516 of the "Notes to Consolidated Financial Statements" contained herein in Item 8. For information relating to compensation plans under which Unum Group's equity securities are authorized for issuance, see Item 12 contained herein.
As of February 20, 2018,12, 2021, there were 9,6508,495 registered holders of common stock.
The following table provides information about our share repurchase activity for the fourth quarter of 2017:
|
| | | | | | | | | | | | | |
| (a) Total Number of Shares Purchased | | (b) Average Price Paid per Share (1) | | (c) Total Number of Shares Purchased as Part of Publicly Announced Program (2) | | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (2) |
October 1 - October 31, 2017 | 122,000 |
| | $ | 52.35 |
| | 122,000 |
| | $ | 606,403,799 |
|
November 1 - November 30, 2017 | 892,477 |
| | 52.95 |
| | 892,477 |
| | 559,145,936 |
|
December 1 - December 31, 2017 | 836,614 |
| | 55.41 |
| | 836,614 |
| | 512,790,121 |
|
Total | 1,851,091 |
| | | | 1,851,091 |
| | |
(1) The average price paid per share excludes the cost of commissions.
(2) In May 2017,2019, our board of directors authorized the repurchase of up to $750$750.0 million of Unum Group's common stock through November 25, 2018.
23, 2020, at which point the authorization expired. We did not repurchase any shares during 2020 and as of December 31, 2020, we had not authorized a new share repurchase program.
ITEM 6. SELECTED FINANCIAL DATA
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions of dollars, except share data) | | | | | | | | | |
| At or for the Year Ended December 31 |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | | |
Income Statement Data | | | | | | | | | |
| | | | | | | | | |
Revenue | | | | | | | | | |
Premium Income | $ | 9,378.1 | | | $ | 9,365.6 | | | $ | 8,986.1 | | | $ | 8,597.1 | | | $ | 8,357.7 | |
Net Investment Income | 2,360.7 | | | 2,435.3 | | | 2,453.7 | | | 2,451.7 | | | 2,459.0 | |
Net Realized Investment Gain (Loss)1 | 1,199.1 | | | (23.2) | | | (39.5) | | | 40.3 | | | 24.2 | |
Other Income | 224.2 | | | 221.2 | | | 198.2 | | | 197.7 | | | 205.6 | |
Total Revenue | 13,162.1 | | | 11,998.9 | | | 11,598.5 | | | 11,286.8 | | | 11,046.5 | |
| | | | | | | | | |
Benefits and Expenses | | | | | | | | | |
Benefits and Change in Reserves for Future Benefits2 | 8,972.9 | | | 7,496.2 | | | 8,020.4 | | | 7,055.7 | | | 6,941.8 | |
Commissions | 1,057.3 | | | 1,122.7 | | | 1,108.4 | | | 1,060.8 | | | 1,026.7 | |
Interest and Debt Expense and Cost Related to Early Retirement of Debt3 | 188.2 | | | 204.7 | | | 167.3 | | | 159.9 | | | 166.0 | |
Other Expenses4 | 1,979.7 | | | 1,793.2 | | | 1,674.6 | | | 1,606.4 | | | 1,564.3 | |
Total Benefits and Expenses | 12,198.1 | | | 10,616.8 | | | 10,970.7 | | | 9,882.8 | | | 9,698.8 | |
| | | | | | | | | |
Income Before Income Tax | 964.0 | | | 1,382.1 | | | 627.8 | | | 1,404.0 | | | 1,347.7 | |
Income Tax | 171.0 | | | 281.8 | | | 104.4 | | | 409.8 | | | 416.3 | |
| | | | | | | | | |
Net Income | $ | 793.0 | | | $ | 1,100.3 | | | $ | 523.4 | | | $ | 994.2 | | | $ | 931.4 | |
| | | | | | | | | |
Balance Sheet Data | | | | | | | | | |
| | | | | | | | | |
Assets | $ | 70,625.8 | | | $ | 67,013.4 | | | $ | 61,875.6 | | | $ | 64,013.1 | | | $ | 61,941.5 | |
| | | | | | | | | |
Long-term Debt | $ | 3,345.7 | | | $ | 2,926.9 | | | $ | 2,971.3 | | | $ | 2,738.4 | | | $ | 2,999.4 | |
| | | | | | | | | |
Accumulated Other Comprehensive Income (Loss) | $ | 374.2 | | | $ | 37.3 | | | $ | (814.2) | | | $ | 127.5 | | | $ | (51.0) | |
Other Stockholders' Equity | 10,496.8 | | | 9,927.7 | | | 9,436.0 | | | 9,447.4 | | | 9,019.0 | |
Total Stockholders' Equity | $ | 10,871.0 | | | $ | 9,965.0 | | | $ | 8,621.8 | | | $ | 9,574.9 | | | $ | 8,968.0 | |
| | | | | | | | | |
Per Share Data | | | | | | | | | |
| | | | | | | | | |
Net Income | | | | | | | | | |
Basic | $ | 3.89 | | | $ | 5.25 | | | $ | 2.38 | | | $ | 4.39 | | | $ | 3.96 | |
Assuming Dilution | $ | 3.89 | | | $ | 5.24 | | | $ | 2.38 | | | $ | 4.37 | | | $ | 3.95 | |
| | | | | | | | | |
Stockholders' Equity | $ | 53.37 | | | $ | 49.10 | | | $ | 40.19 | | | $ | 43.02 | | | $ | 39.02 | |
| | | | | | | | | |
Cash Dividends | $ | 1.14 | | | $ | 1.09 | | | $ | 0.98 | | | $ | 0.86 | | | $ | 0.77 | |
| | | | | | | | | |
Weighted Average Common Shares Outstanding | | | | | | | | | |
Basic (000s) | 203,642.0 | | | 209,728.9 | | | 219,635.6 | | | 226,492.4 | | | 235,445.7 | |
Assuming Dilution (000s) | 203,755.3 | | | 209,854.4 | | | 220,058.6 | | | 227,335.2 | | | 235,979.2 | |
|
| | | | | | | | | | | | | | | | | | | |
(in millions of dollars, except share data) | | | | | | | | | |
| At or for the Year Ended December 31 |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Income Statement Data | | | | | | | | | |
| | | | | | | | | |
Revenue | | | | | | | | | |
Premium Income | $ | 8,597.1 |
| | $ | 8,357.7 |
| | $ | 8,082.4 |
| | $ | 7,797.2 |
| | $ | 7,624.7 |
|
Net Investment Income | 2,451.7 |
| | 2,459.0 |
| | 2,481.2 |
| | 2,492.2 |
| | 2,506.9 |
|
Net Realized Investment Gain (Loss) | 40.3 |
| | 24.2 |
| | (43.8 | ) | | 16.1 |
| | 6.8 |
|
Other Income | 197.7 |
| | 205.6 |
| | 211.5 |
| | 219.0 |
| | 230.2 |
|
Total Revenue | 11,286.8 |
| | 11,046.5 |
| | 10,731.3 |
| | 10,524.5 |
| | 10,368.6 |
|
| | | | | | | | | |
Benefits and Expenses | | | | | | | | | |
Benefits and Change in Reserves for Future Benefits (1) | 7,055.7 |
| | 6,941.8 |
| | 6,782.8 |
| | 7,310.8 |
| | 6,595.7 |
|
Commissions | 1,060.8 |
| | 1,026.7 |
| | 996.3 |
| | 935.3 |
| | 909.5 |
|
Interest and Debt Expense | 159.9 |
| | 166.0 |
| | 152.8 |
| | 167.5 |
| | 149.4 |
|
Other Expenses (2) | 1,606.4 |
| | 1,564.3 |
| | 1,561.1 |
| | 1,568.9 |
| | 1,494.0 |
|
Total Benefits and Expenses | 9,882.8 |
| | 9,698.8 |
| | 9,493.0 |
| | 9,982.5 |
| | 9,148.6 |
|
| | | | | | | | | |
Income Before Income Tax | 1,404.0 |
|
| 1,347.7 |
| | 1,238.3 |
| | 542.0 |
| | 1,220.0 |
|
Income Tax | 409.8 |
| | 416.3 |
| | 371.2 |
| | 139.9 |
| | 373.0 |
|
| | | | | | | | | |
Net Income | $ | 994.2 |
| | $ | 931.4 |
| | $ | 867.1 |
| | $ | 402.1 |
| | $ | 847.0 |
|
| | |
| |
| |
| |
|
Balance Sheet Data | | | | | | | | | |
| | | | | | | | | |
Assets | $ | 64,013.1 |
| | $ | 61,941.5 |
| | $ | 60,563.6 |
| | $ | 62,422.5 |
| | $ | 59,345.6 |
|
| | | | | | | | | |
Long-term Debt | $ | 2,738.4 |
| | $ | 2,999.4 |
| | $ | 2,449.4 |
| | $ | 2,601.6 |
| | $ | 2,583.5 |
|
| | | | | | | | | |
Accumulated Other Comprehensive Income (Loss) | $ | 127.5 |
| | $ | (51.0 | ) | | $ | 16.1 |
| | $ | 166.4 |
| | $ | 255.0 |
|
Other Stockholders' Equity | 9,447.4 |
| | 9,019.0 |
| | 8,647.8 |
| | 8,355.5 |
| | 8,384.9 |
|
Total Stockholders' Equity | $ | 9,574.9 |
| | $ | 8,968.0 |
| | $ | 8,663.9 |
| | $ | 8,521.9 |
| | $ | 8,639.9 |
|
| | | | | | | | | |
Per Share Data | | | | | | | | | |
| | | | | | | | | |
Net Income | | | | | | | | | |
Basic | $ | 4.39 |
| | $ | 3.96 |
| | $ | 3.51 |
| | $ | 1.57 |
| | $ | 3.20 |
|
Assuming Dilution | $ | 4.37 |
| | $ | 3.95 |
| | $ | 3.50 |
| | $ | 1.57 |
| | $ | 3.19 |
|
| | | | | | | | | |
Stockholders' Equity | $ | 43.02 |
| | $ | 39.02 |
| | $ | 35.96 |
| | $ | 33.78 |
| | $ | 33.23 |
|
| | | | | | | | | |
Cash Dividends | $ | 0.86 |
| | $ | 0.77 |
| | $ | 0.70 |
| | $ | 0.62 |
| | $ | 0.55 |
|
| | | | | | | | | |
Weighted Average Common Shares Outstanding | | | | | | | | | |
Basic (000s) | 226,492.4 |
| | 235,445.7 |
| | 246,986.7 |
| | 255,525.9 |
| | 264,725.8 |
|
Assuming Dilution (000s) | 227,335.2 |
| | 235,979.2 |
| | 247,854.7 |
| | 256,652.8 |
| | 265,949.2 |
|
1Includes net realized investment gains of $1,302.3 million in 2020 related to the transfer of investments in the Closed Block individual disability reinsurance transaction. See Notes 3 and 12 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of the reinsurance transaction.
(1) 2Includes a reserve increase of $698.2$151.5 million and $750.8 million in 20142020 and 2018, respectively, related to our long-term care closed block business, as well as a reserve increase of $17.5 million in 2020 to our group pension closed block business. Also includes an increase in benefits and change in reserves for future benefits of $1,284.5 million in 2020 resulting from the recognition of the adjustment related to unrealized investment gains and losses previously recognized in accumulated other comprehensive income related to the previously mentioned reinsurance transaction. See Notes 6 and 12 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 and "Executive Summary" contained herein in Item 7 for further discussion of the 2020 and 2018 reserve increases and the reinsurance transaction, respectively.
(2)3 Includes cost related to early retirement of debt of $27.3 million in 2019. See Note 8 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of the 2019 cost related to early retirement of debt.
4 Includes the net change in deferred acquisition costs as well as compensation expense and other expenses. Includes $64.4the amortization of the cost of reinsurance of $2.6 million and transaction costs of $21.0 million related to the Closed Block individual disability reinsurance transaction in 2020. Also includes a right-of-use (ROU) asset impairment of $12.7 million in 20142020 related to a settlement lossone of our operating leases for a pensionoffice space that we do not plan amendment.to continue using to support general operations and $23.3 million of costs related to an organizational design update in 2020. See Note 13 and 15 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion on the organizational design update and ROU asset impairment, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis presented in this section should be read in conjunction with the "Cautionary Statement Regarding Forward-Looking Statements" included below the Table of Contents, "Risk Factors" included inherein Item 1A, "Selected Financial Data" included inherein this Item 6, and the Consolidated Financial Statements and notes thereto included in Item 8.
Executive Summary
20172020 Operating Performance and Capital Management
For 2017,2020, we reported net income of $994.2$793.0 million, or $4.37$3.89 per diluted common share, compared to net income of $931.4$1,100.3 million, or $3.95$5.24 per diluted common share, in 2016.2019. Included in theour results for 2017 and 2016 are2020 are: (i) the impact from the Closed Block individual disability reinsurance agreement, which resulted in a net realized investment gains and losses. Also included in the 2017 results are a loss from a guaranty fund assessment related to an unaffiliated insurer that was declared insolvent of $20.6$5.8 million before tax and $13.4a net gain of $32.0 million after tax, or $0.06$0.16 per diluted common share, (ii) a 2017 reserve increase related to unclaimed death benefitsour long-term care block of $39.0business of $151.5 million before tax and $25.4$119.7 million after tax, or $0.59 per diluted common share, (iii) a reserve increase related to our group pension block of business of $17.5 million before tax and $13.8 million after tax, or $0.07 per diluted common share, (iv) costs related to an organizational design update in the amount of $23.3 million before tax and $18.6 million after tax, or $0.09 per diluted common share, (v) an impairment loss on the right-of-use (ROU) asset related to one of our operating leases of $12.7 million before tax and $10.0 million after tax, or $0.05 per diluted common share, and (vi) a net realized investment loss, excluding the net realized investment gain related to the reinsurance transaction, of $103.2 million before tax and $82.3 million after tax, or $0.40 per diluted common share. Included in our 2019 results are costs related to the early retirement of debt of $27.3 million before tax and $21.6 million after tax, or $0.11 per diluted common share and a net realized investment loss of $23.2 million before tax benefit related to U.S.and $18.7 million after tax, reform of $31.5 million, or $0.14$0.09 per diluted common share. ExcludingAdjusting for these items, after-tax adjusted operating income for 20172020 was $976.2$1,005.4 million, or $4.29$4.93 per diluted common share compared to $915.6$1,140.6 million, or $3.88$5.44 per diluted common share in 2016.for 2019. See "Unclaimed Death Benefits"Closed Block Individual Disability Reinsurance Agreement," "Long-term Care Reserve Increase," "U.S. Tax Reform,"Group Pension Reserve Increase," "Costs Related to Organizational Design Update," "Impairment Loss on ROU Asset," "Reconciliation of Non-GAAP and Other Financial Measures," and "Consolidated Operating Results" contained herein in this Item 7 for further discussion and a reconciliation of these items.
Our Unum US segment reported an increasea decrease in adjusted operating income including the 2017 unclaimed death benefits reserve increase, of 7.519.9 percent in 20172020 compared to 2016. Excluding2019, due to unfavorable benefits experience, particularly in the reserve increase, adjustedgroup life product line, and higher operating income increased 10.4 percent with growth in premium income and overall favorable benefits experience, partially offset by lower net investment income. Theexpenses. The benefit ratio for our Unum US segment for 20172020 was 67.868.8 percent or 67.4 percent excluding the unclaimed death benefit reserve increase,, compared to 69.266.9 percent in 2016.2019. Unum US sales increased 19.6decreased 10.0 percent in 20172020 compared to 2016, aided by our addition of the dental and vision product offering in the third quarter of 2016. Persistency declined2019. Overall persistency was lower relative to the prior year but remains within our expectations.period.
Our Unum UKInternational segment reported a decrease in adjusted operating income,income of 29.0 percent in 2020 compared to 2019, as measured in U.S. dollars. Our Unum UK'sUK line of business reported a decrease in adjusted operating income of 32.3 percent compared to 2019, as measured in local currency, of 8.6 percent in 2017 compareddue primarily to 2016, due to less favorableunfavorable benefits experience and lower net investment income, partially offset by increasesan increase in premium income and net investment income. Premium income in local currency increased 1.9 percent in 2017 relative to 2016. The benefit ratio for our Unum UK line of business was 74.478.9 percent in 20172020 compared to 69.476.7 percent in 2016.2019. Unum International sales, as measured in U.S. dollars, decreased 9.5 percent in 2020 compared to 2019. Unum UK sales, as measured in local currency, increased 6.5decreased 10.8 percent in 20172020 compared to 2016. Persistency2019. Overall persistency was generally stablelower relative to the prior year and is consistent with our expectations.period.
Our Colonial Life segment reported a decrease in adjusted operating income including the 2017 unclaimed death benefits reserve increase, of 0.52.6 percent in 20172020 compared to 2016. Excluding the reserve increase, adjusted operating income increased 3.4 percent2019 due to growth in premium income,unfavorable benefits experience, partially offset by slightly less favorable benefits experience.premium growth, higher net investment income, and lower operating expenses. The 20172020 benefit ratio for Colonial Life was 52.252.9 percent, or 51.4 percent excluding the unclaimed death benefit reserve increase, compared to 51.3 percent in 2016.2019. Colonial Life sales increased 7.5decreased 27.0 percent in 20172020 compared to 2016. Persistency2019. Overall persistency was generally stable in 2017 comparedhigher relative to 2016 and is consistent with our expectations.the prior year period.
Our Closed Block segment reported a decrease inloss before income tax and net realized investment gains and losses of $1,235.7 million, which includes the impacts related to the Closed Block individual disability reinsurance agreement and the reserve increases related to our long-term care and group pension blocks of business. Excluding these items, our Closed Block segment reported adjusted operating income of 4.3 percent$241.4 million in 20172020 compared to 2016, due primarily$137.7 million in 2019. The long-term care interest adjusted loss ratio for 2020 was favorable relative to an expected decline in premium income and declining investment yields. Benefits experience for individual disability remains within our range of expectations. Benefits experience in our long-term care line of business resulted in anThe individual disability interest adjusted loss ratio, thatexcluding the reserve recognition impact from the Closed Block individual disability reinsurance agreement, was consistent with the prior year,unfavorable in 2020 compared to 2019 but was slightly higher thangenerally remained within our range of expectations.
Although our profit marginsOur net investment income yields continue to be pressured by the impact of the low interest rate environment on our net investment income yields,as we maintain consistent credit quality in our invested asset quality remains strong.portfolio. The net unrealized gain on our fixed maturity securities was $5.7$7.6 billion at December 31, 2017,
2020, compared to $4.7$6.4 billion at December 31, 2016,2019, with the increase due primarily to a decline in U.S. Treasury rates and credit spreads during 2017.rates. The earned book yield on our investment portfolio was 5.234.75 percent for 20172020 compared to a yield of 5.305.00 percent for 2016.2019.
We believe our capital and financial positions are strong. At December 31, 2017,2020, the RBC ratio for our traditional U.S. insurance subsidiaries, calculated on a weighted average basis using the NAIC Company Action Level formula, was approximately 390365 percent, lower relative to the prior year, due primarily to the impacts of U.S. tax reform which reduced the admitted deferred tax assetsis in line with our insurance subsidiaries. The reduction in the admitted deferred tax assets is a result of the
reduced U.S. statutory tax rate as well as the elimination of net operating loss carryback provisions for life insurance companies. During 2017, we repurchased 8.2 millionexpectations. We did not repurchase shares of Unum Group common stock under our share repurchase program, at a cost of approximately $400 million.during 2020. Our weighted average common shares outstanding, assuming dilution, equaled 227.3203.8 million for 20172020 compared to 236.0209.9 million for 2016, reflecting our capital management strategy of returning capital to shareholders through repurchases of our common stock.2019. As of December 31, 2017,2020, Unum Group and our intermediate holding companies had available holding company liquidity of $1,512 million that was held primarily in fixed maturity securities, short-term investments, and cashcash.
Closed Block Individual Disability Reinsurance Agreement
In December 2020, Provident Life and Accident Insurance Company, The Paul Revere Life Insurance Company, and Unum Life Insurance Company of $864America, wholly-owned domestic insurance subsidiaries of Unum Group and collectively referred to as "the ceding companies", entered into a series of agreements (collectively referred to as the "reinsurance agreement") with Commonwealth Annuity and Life Insurance Company (Commonwealth), a subsidiary of Global Atlantic Financial Group, to reinsure on a coinsurance basis effective as of July 1, 2020, approximately 75 percent of the Closed Block individual disability insurance business, primarily direct business written by the ceding companies. Commonwealth has established and will maintain collateralized trust accounts for the benefit of the ceding companies to secure its obligations under the reinsurance agreement. As part of the agreement, additional Closed Block individual disability business consisting of direct business not ceded in December 2020 and business assumed by the ceding companies from third parties, is expected to be reinsured in the first quarter of 2021, subject to receipt of required consents and regulatory approvals and the satisfaction or waiver of other customary closing conditions and is considered the second phase of this transaction.
In December 2020, Provident Life and Casualty Insurance Company (PLC), also a wholly-owned domestic insurance subsidiary of Unum Group, entered into an agreement with Commonwealth whereby PLC will provide a 12-year volatility cover to Commonwealth for the active life cohort (ALR cohort), which represents approximately five percent of the reserves ceded to Commonwealth. As part of this agreement, PLC received a payment from Commonwealth of approximately $62 million. PLC will provide similar coverage to Commonwealth related to the additional business that will be ceded as part of the second phase of the transaction. At the end of the 12-year coverage period, Commonwealth will retain the remaining incidence and claims risk on the ALR cohort of the ceded business.
Unclaimed Death Benefits (UDB) Reserve Increase
Beginning in 2011, a number of state regulators began requiring insurers to cross-check specified insurance policiesIn connection with the Social Security Administration’s Death Master Filefirst phase of the coinsurance agreement that closed in December 2020, the ceding companies paid a total cash ceding commission to identify potential matches. IfCommonwealth of approximately $438 million and transferred additional assets consisting primarily of fixed maturity securities and cash totaling $6,669.8 million. As a potential match was identified, insurers were requestedresult of this reinsurance agreement, we recognized the following in the fourth quarter of 2020:
•Net realized investment gains totaling $1,302.3 million, or $1,028.8 million after tax, related to determine ifthe transfer of investments.
•Increase in benefits were due, locate beneficiaries, and make payments where appropriate. We initiated this process where requested,change in reserves for future benefits of $1,284.5 million, or $1,014.7 million after tax, resulting from the realization of previously unrealized investment gains and losses recorded in 2012 we began implementing this process in all statesaccumulated other comprehensive income.
•Transaction costs totaling $21.0 million, or $16.6 million after tax.
•Tax benefit of $36.5 million.
•Reinsurance recoverable of $6,141.5 million related to the policies on a forward-looking basis. In additionclaim status (DLR cohort).
•Cost of reinsurance, or prepaid reinsurance premium, of $815.7 million related to implementing this on a forward-looking basis, in 2013 we began an initiative to search for potential claims from previous years. During 2013, we completed our assessmentthe DLR cohort, of benefits which we estimated would be paid under this initiative, and as such, established additional reserves for paymentrecognized amortization expense of these benefits.
Similar$2.6 million, or $2.0 million after tax, subsequent to other insurers, we are undergoing an examination by a third party acting on behalf of a number of state treasurers concerning our compliance with the unclaimed property lawsclosing of the participating states. transaction.
•Deposit asset of $88.2 million related to the ALR cohort.
In the fourth quarter of 2017,2020, we started the process to reach a Global Resolution Agreement with the third party regarding settlementreleased approximately $400 million of the examination, which we finalized in January of 2018. During the fourth quarter of 2017, we established reserves which reflect our estimate of the liability expected to be paidcapital as we execute on the terms of the settlement. Claim reserves were increased $18.5 million for Unum US group life, $8.1 million for Unum US voluntary life, and $12.4 million for Colonial Life voluntary life, for a total reserve increase of $39.0 million before tax and $25.4 million after tax.
U.S. Tax Reform
On December 22, 2017, the U.S. Federal government enacted a 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). The TCJA, among other things, included a reduction to the U.S. corporate statutory tax rate from 35 percent to 21 percent and a tax on undistributed and previously untaxed foreign earnings and profits at reduced rates. As a result of these changes,the reinsurance transaction and we recognized a tax benefitexpect to release approximately $250 million of $97.9 millionadditional capital in 2017 relatedthe first quarter of 2021 assuming the second phase of the transaction is fully executed, subject to receipt of required consents and regulatory approvals and the revaluationsatisfaction or waiver of our net deferred tax liabilities associated with our U.S. operations to the newly enacted U.S. corporate tax rate and a tax expense of $66.4 million resulting from the tax on undistributed and previously untaxed foreign earnings and profits.other customary closing conditions. See "Regulation""Reinsurance" contained herein in Item 11; "Segment Results," and Note"Liquidity and Capital Resources - Cash Available from Subsidiaries" contained herein in Item 7, and Notes 12 and 16 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further details.discussion on the impacts related to this reinsurance agreement.
2020 Long-term Care Reserve Increase
During the fourth quarter of 2020, we completed a review of policy reserve adequacy, which incorporated our most recent experience and included a review of all material assumptions. Based on our analysis, during the fourth quarter of 2020, we updated our reserve assumptions and determined that our gross policy and claim reserves should be increased by $151.5 million to reflect our current estimate of future benefit obligations. This increase was primarily driven by an update to our interest rate assumption, partially offset by favorable premium rate increase approvals and inventory updates. See "Trends in Key Assumptions" contained herein in the "Critical Accounting Estimates" of this Item 7 for further discussion of the assumptions used in our long-term care reserve update.
2020 Group Pension Reserve Increase
During the fourth quarter of 2020, we completed our annual review of policy reserve adequacy, which incorporated our most recent experience and included a review of all assumptions. Based on our analysis, during the fourth quarter of 2020, we updated our reserve assumptions and determined that our policy and claim reserves should be increased by $17.5 million to reflect our updated discount rate assumptions.
Costs Related to Organizational Design Update
During the third quarter of 2020, we realigned certain parts of our organizational structure by shifting resources to accelerate growth, fund priority investments, and simplify and improve our business practices. In connection with this update, we incurred charges of $23.3 million, which primarily consisted of employee severance and benefit costs as well as costs related to lease terminations and the disposal of certain fixed assets. This update did not result in the exit or disposal of any of our lines of business and we do not expect material additional costs associated with this update in the future.
Impairment Loss on ROU Asset
During the second quarter of 2020, we recognized an impairment loss of $12.7 million on the ROU asset related to one of our operating leases for office space that we do not plan to continue using to support our general operations. The impairment loss was recorded as a result of a decrease in the fair value of the ROU asset compared to its carrying value.
U.K. Tax Law Change
On July 22, 2020, the Finance Bill 2019-21 was enacted, resulting in a U.K. tax rate increase from 17 percent to 19 percent, retroactively effective April 1, 2020, which resulted in tax expense of $9.3 million for the revaluation of our tax assets and liabilities.
U.K. Referendum
During 2016,
On January 31, 2020, an official bill was passed formalizing the withdrawal of the U.K. held a referendum and voted to leavefrom the European Union (EU). A deal was reached on December 24, 2020 on the future trading relationship with the EU. The deal focused primarily on the trading of goods rather than the U.K.’s service sector, which will be subject to further negotiations in 2021 and will focus on financial services and future regulation. In addition, the U.K. subsequently invoked Article 50government is reviewing the regulatory framework of financial services companies which may result in changes to U.K. regulatory capital or U.K. tax regulations. We do not expect that the Treaty on European Union andunderlying operations of our U.K. business, nor the Polish business which is due to leavein the EU, on March 29, 2019. Wewill be significantly impacted by the withdrawal, but we may see some continued dampening of growth in the U.K. as well as claimsearnings volatility due to the current disruption and uncertainty in the U.K. economy. We may also experience volatility in the fair values of our investments in U.K. and EU-based issuers, but we do not expect a material increase in other-than-temporary impairments or defaults, nor do we believe this volatility will impact our ability to hold these investments. The magnitude and longevity of potential negative economic impacts on our growth will depend onIn addition, the agreements reached by the U.K. and EU as a result of exit negotiations and the resulting response of the U.K. marketplace. There are currently no indications that capital requirements for our U.K. operations will change, butcurrent economic conditions may also cause volatility in our solvency ratios. Our reported consolidated financial results may continue to be impacted by fluctuations in the British pound sterling to dollar exchange rate. Further discussion isSee "Regulation" contained herein in Item 1, "Risk Factors" contained herein Item 1A, and "Unum UKInternational Segment" contained herein this Item 7.
Coronavirus Disease 2019 (COVID-19)
2016
On March 11, 2020, the World Health Organization identified the spread of COVID-19 as a pandemic. COVID-19 has caused significant disruption to the global economy and 2015 Acquisitionshas unfavorably impacted our company as well as the overall insurance industry. Due to the unprecedented nature of Business
In August 2016,these events and the current pace of change in this environment, we acquired 100 percentcannot fully estimate the ultimate impact of the sharesCOVID-19 pandemic at this time. We are closely monitoring several key factors related to our business that have and voting interestsmay continue to have adverse impacts.
Results of Operations
Benefits Experience
We have identified activity in H&J Capital, L.L.C., parentcertain of Starmount Life Insurance Companyour products that is inconsistent with historical experience that is due to COVID-19 and AlwaysCare Benefits (which collectivelythe related environment. In particular, we referhave experienced higher mortality in our life product lines, higher claim incidence in certain of our disability product lines, and lower claim resolutions in our Unum UK group long-term disability product line due to as Starmount), for a total cash purchase price of $140.3 million plus contingent cash consideration of $10.0 million to be paiddisruptions in two increments of $5.0 million each, at 18 and 24 months from the date of acquisition upon satisfaction of certain conditions. Starmount Life Insurance Company is an independent provider of dental and vision insuranceour claims processes. Conversely, we experienced lower claims utilization in the U.S. workplace, and AlwaysCare Benefits is a nationally licensed, third-party administrator. The acquisition of Starmount broadens our employee benefit offerings in the U.S. Starmount's dental and vision products, particularly in the second quarter of 2020, resulting from the impact of stay-at-home orders and new dentalgeneral quarantine measures. With respect to our long-term care product line, we have experienced higher claimant mortality and visionlower submitted incidence.
We continue to monitor the benefits experience across all of our products marketed by Unum US are reportedfor trends potentially correlated with COVID-19. For further discussion regarding the benefits experience for each of our operating business segments, see "Segment Results" herein in this Item 7.
Net Investment Income
During 2020, we have experienced a decline in our Unum US segment within our supplemental and voluntary product lines. Colonial Life dental and vision products will be introduced in 2018net investment income as a result of the current economic conditions. The current economic conditions have sustained the low interest rate environment, which has and will be reportedcontinue to impact the yield on our invested assets, particularly related to the investment of new cash flows. The net asset values of our partnership investments continued to improve in the fourth quarter of 2020 from the depressed values experienced earlier in the year reflecting the improved market conditions of the third quarter of 2020 and resulted in overall positive earnings in 2020 for our partnership investments although lower than the level of earnings we experienced in 2019. We have also worked with certain of our commercial mortgage loan borrowers that have requested temporary payment deferrals but these instances have not resulted in a significant number of loans with deferrals or a significant impact on our net investment income. For further information on our investment portfolio, see "Investments" contained herein in this Item 7 and Notes 2 and 3 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Premium Income and Premium Receivable Collectability
We have experienced a disruption in sales activity related to certain of our product lines due to some potential new customers deferring their purchasing decisions given the current economic environment and challenges in our Colonial Life segment. This acquisition,ability to meet with potential new customers for policies that are traditionally sold in person mitigated somewhat by our investment in digital tools and capabilities. If we continue to experience this disruption, our premium income may decline. In addition, in certain of our product lines, we are also experiencing a decline in the number of lives insured by our customers as they navigate the current environment. Although we have not experienced a material decline in the collectability of premiums due from our customers, we have increased the allowance for credit losses on our premium receivable balances to consider higher unemployment levels and the general uncertainty regarding the financial condition of our customers. We continue to work with our customers to understand their respective financial conditions and develop solutions on a case-by-case basis to allow for additional payment flexibility to enhance the likelihood of premium collection and avoid disruptions in coverage. However, circumstances may deteriorate quickly which could result in the decline of persistency levels and sales growth in the near term, and potentially longer if the current situation persists, which may materially impact our results of which are includedoperations through continued increases in our consolidated financial statementsallowances for the period subsequent to the date of acquisition, did not have a material impact on revenue, operating results, or sales for 2016.credit losses and lower premium income.
In September 2015, we acquired 100 percent of the common shares and voting interests in National Dental Plan Limited and associated companies (National Dental) for a total cash purchase price of £35.9 million or $54.3 million. National Dental, a leading provider of dental insurance in the U.K. workplace, is reported in our Unum UK segment as part of our supplemental product line. The acquisition of National Dental extends our market reach, broadening our employee benefit offerings in the U.K. This acquisition, the results of which are included in our financial results and sales for the period subsequent to the date of acquisition, did not have a material impact on revenue, operating results, or sales for 2015. See Note 131 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further detailsinformation on our allowances for credit losses.
Financial Condition
Investments
Regarding our fixed maturity security portfolio, the current economic conditions have increased volatility in the capital markets and have caused significant pressure on the acquisitions.profitability of many companies. The sharp decline in oil prices experienced earlier in the year and decrease in demand due to COVID-19, which began in the first quarter of 2020, also caused pressure on the profitability of companies in the energy sector. We recorded credit losses during the first quarter of 2020 primarily related to fixed maturity securities issued by companies in the energy sector, but recorded minimal credit losses related to energy securities in the remainder of 2020 primarily as a result of the improvement in oil prices. Our exposure to consumer cyclicals which have been stressed due to COVID-19 related shutdowns is a small portion of our portfolio and our exposure to other stressed industries such as airlines and restaurants is minimal. We continue to monitor capital market activity on a regular basis and to the extent that there are continued volatility and ratings downgrades related to the issuers of our fixed maturity securities, we could experience further credit losses, an increase in defaults, and the need for additional capital in our insurance subsidiaries. However, we remain confident in the overall strength and credit quality of our investment portfolio.
Definitive Purchase AgreementOther
If we continue to experience unfavorable trends in the above areas of focus, we may also experience certain additional, correlated impacts such as an increase in the amortization of deferred acquisition costs if we have a decline in persistency. We may also be required to write-off or impair certain intangible/long-lived assets such as value of business acquired and goodwill if we experience declines in the overall profitability of our businesses. Furthermore, if the profitability of our businesses declines, we may also be required to establish a valuation allowance regarding the realization of our deferred tax assets.
Liquidity and Capital Resources
We have strengthened our liquidity position through actions such as maintaining a higher level of short-term investments and posting additional collateral from certain of our U.S. insurance subsidiaries to the regional Federal Home Loan Banks (FHLB). As a result, we believe we have the appropriate liquidity and access to capital to avoid significant disruption to our operations. We have not yet experienced a significant impact to our liquidity as a result of the collection of premiums and submitted claims activity; however, we continually monitor the developments of these items.
As of December 31, 2020, we have borrowed $312.2 million of funds through our memberships with the regional FHLBs and those funds are used for the purpose of investing in either short-term investments or fixed maturity securities. Although we did increase FHLB borrowings at December 31, 2020, we have additional borrowing capacity of approximately $1,093 million that can be utilized for liquidity if the need arises. Additionally, we have access to two unsecured revolving credit facilities under separate syndicates of lenders that allow us to borrow up to a total of $600 million. There are currently no outstanding borrowings on these facilities but we remain in compliance with required covenants should we choose to borrow in the future. In JanuaryMay 2020, we issued $500.0 million of 4.500% senior notes due 2025 which strengthened our liquidity and demonstrated our ability to raise capital in a strained economic environment.
Following the maturity of our $400.0 million aggregate principal amount of 5.625% unsecured notes in the third quarter of 2020, which was funded through an issuance of debt during the second quarter of 2019, we have no significant upcoming debt maturities until 2024. We continue to meet the financial covenants contained in our current debt agreements and credit facilities, and we expect that we will continue to meet those covenants in subsequent periods.
To the extent that we begin to experience a significant impact to our liquidity, we would likely sell highly liquid invested assets or borrow funds on our credit facilities to meet operational cash flow requirements.
Business Operations
Other than disruption to sales processes in certain of our product lines, we have not experienced a significant disruption to our operational processes as we have been able to successfully implement our business continuation plans to accommodate remote work arrangements for the safety of our employees and customers. We also have not experienced significant disruption to our financial reporting systems or internal control over financial reporting and disclosure controls and procedures as a result of COVID-19. We have implemented travel restrictions for the safety of our employees and customers, but do not expect those restrictions to significantly disrupt our operations.
2018 Long-term Care Reserve Increase
Policy reserves for our long-term care block of business are determined using the gross premium valuation method and, prior to the third quarter of 2018, were valued based on assumptions established as of December 31, 2014, the date of our last assumption update under loss recognition. Gross premium valuation assumptions do not change after the date of loss recognition unless reserves are again determined to be deficient. We undertake a review of policy reserve adequacy annually during the fourth quarter of each year, or more frequently if appropriate, using best estimate assumptions as of the date of the review.
During the third quarter of 2018, we entered intocompleted our annual review of policy reserve adequacy, which incorporated our most recent experience and included a definitive agreementreview of all assumptions. The review utilized internal and external data and outside consulting firms for quality assurance and industry benchmarking. Based on our analysis, during the third quarter of 2018, we updated our reserve assumptions and determined that our policy and claim reserves should be increased by $750.8 million, or $593.1 million after-tax, to acquirereflect our current estimate of future benefit obligations. This increase was primarily driven by the update to our liability and interest rate assumptions, particularly claims incidence and claim termination rates, which resulted in an increase to reserves of approximately $2.2 billion. Partially offsetting the increase was the update to our assumptions for premium rate increases which decreased reserves approximately $1.4 billion, resulting in the net increase to reserves of $750.8 million.
2018 Acquisitions of Business
In November 2018, we acquired 100 percent of the shares and voting interests in Jaimini Health, Inc. (Jaimini Health), a dental health maintenance organization. The acquisition of Jaimini Health will broaden our employee benefit dental offerings in the U.S., particularly in the state of California and is reported in our Unum US segment.
In October 2018, we acquired 100 percent of the shares and voting interests in Pramerica Zycie TUiR SA ("Pramerica")S.A. (which we have subsequently renamed Unum Zycie TUiR S.A. and refer to as Unum Poland), a financial protection benefits provider in Poland. TheThis acquisition of Pramerica will expand our European presence, which we believe to be an attractive market for financial protection benefits.
In January 2018, we acquired 100 percent of the shares and voting interests in Leavelogic, Inc (Leavelogic), a leave management technology provider. The transaction, which we anticipateacquisition of Leavelogic will closeenhance our current leave management offerings by providing tools for employers and employees to better manage the endfamily leave process and is reported in our Unum US segment.
See Note 13 of 2018 subjectthe " Notes to customary approvals and closing conditions, is not expected to materially impact our results of operations or financial positionConsolidated Financial Statements” contained herein in Item 8 for 2018 or alter our share repurchase and common stock dividend strategy.further details.
Consolidated Company Outlook for 20182021
We believe our disciplined approach to providing financial protection products at the workplace puts us in a position of strength as we seek to capitalize on the growing and largely unfilled need for our products and services. We believe the need for ourstrength. The products and services remains strong,we provide have never been more important to employers, employees and we intend to continue protecting our solid margins and returns through our pricing and risk actions.their families, especially given the emergence of the COVID-19 pandemic. We continue to invest infulfill our infrastructure and our employees, with a focus on quality and simplificationcorporate purpose of processes and offerings.helping the working world thrive throughout life’s moments by providing excellent service to people at their time of need. Our strategy isremains centered on market expansion, enhancing the customer experience, providing an innovative product portfolio of financial protection choices, and investing in new solutions to further improve productivity.
Our outlook for 2018 is for continued solid premium growth trends ingrowing our core businesses with stable persistencythrough investing and a disciplined approachtransforming our operations and technology to sales growth. Weanticipate and respond to the changing needs of our customers, expand into new adjacent markets through meaningful partnerships and effective deployment of our capital across our portfolio.
In consideration of the recent COVID-19 pandemic, in the near term, we expect top line growth to have generally stable benefitsbe challenging, and we may also continue to experience due to our focus on disciplined pricing, risk selection, and management of renewals. We will maintain our commitment to expense discipline and improving our operational efficiencies.
increased claims volatility. The low interest rate environment continues to place pressure on our profit margins and could unfavorably impact the adequacyby impacting net investment income yields as well as potentially discount rates on our insurance liabilities. We would also expect to experience further investment volatility through net investment income, particularly for partnership net asset value changes. As part of our reserves for some products. Accordingly,continued pricing discipline and our reserving methodology, we will continue to gradually increasecontinuously monitor emerging interest rate experience and adjust our allocation to alternative assets, particularly in our long-term care line ofpricing and reserve discount rates, as appropriate.
Our business while still adhering to our disciplined risk management strategy. This increase in allocation may cause an increase in volatility in our net investment income. Our reported consolidated financial results may also continue to be unfavorably impactedis well-diversified by politicalgeography, industry exposures and economic uncertainty in the U.K., specifically lower interest rates, wage inflationcase size, and employer spending, and claims volatility due to the U.K. Referendum. As a result of tax reform, we expect our effective tax rate for 2018 to be in the range of 19 percent to 20 percent. Although we expect tax reform to be beneficial to our earnings and long-term cash generation, we may experience some further pressure on our RBC ratios as a result of expected NAIC revisions to the RBC calculations to consider the lower U.S. statutory income tax rate. We expect our insurance subsidiaries to generate stronger statutory earnings. The level of excess capital generation is dependent on the timing and magnitude of these NAIC changes and the extent to which and how quickly the rating agencies will expect the industry to rebuild its RBC ratio levels.
We continue to analyze and employ strategies that we believe will help us navigate the current environment andenvironment. These strategies allow us to maintain solid operating margins and significant financial flexibility to support the needs of our businesses, while also continuing to returnreturning capital to our shareholders and exploring merger and acquisition opportunities to enhance our business lines.shareholders. We have substantialstrong core businesses that have a track record of generating significant capital, and we will continue to invest in our operations and expand into adjacent markets where we can best leverage our expertise and capabilities to rising interest rates and an improving economy which generates payrollcapture market growth and wage inflation. Weopportunities as those opportunities re-emerge. Long-term, we believe that consistent operating results, combined with the implementation of strategic initiatives and the effective deployment of capital, will allow us to meet our long-term financial objectives.
Further discussion is included in "Reconciliation of Non-GAAP Financial Measures," "Consolidated Operating Results," "Segment Results," "Investments," and "Liquidity and Capital Resources" contained herein in this Item 7 and in the "Notes to Consolidated Financial Statements" contained herein in Item 8.
ReconciliationReserves for Policy and Contract Benefits
The applicable insurance laws under which insurance companies operate require that they report, as liabilities, policy reserves to meet future obligations on their outstanding policies. These reserves are the amounts which, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated to be sufficient to meet the various policy and contract obligations as they mature. These laws specify that the reserves shall not be less than reserves calculated using certain specified mortality and morbidity tables, interest rates, and methods of Non-GAAPvaluation required for statutory accounting.
The reserves reported in our financial statements contained herein are calculated in conformity with GAAP and Other Financial Measuresdiffer from those specified by the laws of the various states and reported in the statutory financial statements of our life insurance subsidiaries. These differences result from the use of mortality and morbidity tables and interest assumptions which we believe are more representative of the expected experience for these policies than those required for statutory accounting purposes and also result from differences in actuarial reserving methods.
The assumptions we use to calculate our reserves are intended to represent an estimate of experience for the period that policy benefits are payable. If actual experience is equal, or favorable, to our reserve assumptions, then reserves should be adequate to provide for future benefits and expenses. If experience is less favorable than the reserve assumptions, additional reserves may be required. The key experience assumptions include claim incidence rates, claim resolution rates, mortality and morbidity rates, policy persistency, interest rates, premium rate increases, and any applicable policy benefit offsets, including those for social security and other government-based welfare benefits. We analyzeperiodically review our performanceexperience and update our policy reserves for new issues and reserves for all claims incurred, as we believe appropriate.
The consolidated statements of income include the annual change in reserves for future policy and contract benefits. The change reflects a normal accretion for premium payments and interest buildup and decreases for policy terminations such as lapses, deaths, and benefit payments. If policy reserves using non-GAAP financial measures. A non-GAAP financial measure is a numerical measurebest estimate assumptions as of the date of a company's performance, financial position, or cash flows that excludes or includes amounts thattest for loss recognition are not normally excluded orhigher than existing policy reserves net of any deferred acquisition costs, the increase in reserves necessary to recognize the deficiency is also included in the most directly comparable measure calculatedchange in reserves for future policy and presentedcontract benefits.
For further discussion of reserves, refer to "Risk Factors" contained herein in accordance with GAAP. The non-GAAP financial measureItem 1A, "Critical Accounting Estimates" and the discussion of "after-tax adjusted operating income" differs from net income as presented in our consolidatedsegment operating results included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, and Notes 1 and 6 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Investments
Investment activities are an integral part of our business, and profitability is significantly affected by investment results. We segment our invested assets into portfolios that support our various product lines. Generally, our investment strategy for our portfolios is to manage the effective asset cash flows and durations with related expected liability cash flows and durations to consistently meet the liability funding requirements of our businesses. We seek to earn investment income statements preparedwhile assuming credit risk in accordancea prudent and selective manner, subject to constraints of quality, liquidity, diversification, and regulatory considerations. Our overall investment philosophy is to invest in a portfolio of high quality assets that provide investment returns consistent with GAAPthat assumed in the pricing of our insurance products. Assets are invested predominately in fixed maturity securities. Changes in interest rates may affect the amount and timing of cash flows.
We manage our asset and liability cash flow match and our asset and liability duration match to manage interest rate risk. We may redistribute investments among our different lines of business, when necessary, to adjust the cash flow and/or duration of the asset portfolios to better match the cash flow and duration of the liability portfolios. Asset and liability portfolio modeling is updated on a quarterly basis and is used as part of the overall interest rate risk management strategy. Cash flows from the in-force asset and liability portfolios are projected at current interest rate levels and at levels reflecting an increase and a decrease in interest rates to obtain a range of projected cash flows under the different interest rate scenarios. These results enable us to assess the impact of projected changes in cash flows and duration resulting from potential changes in interest rates. Testing the asset and liability portfolios under various interest rate scenarios enables us to choose what we believe to be the most appropriate investment strategy, as well as to limit the risk of disadvantageous outcomes. Although we test the asset and liability portfolios under various interest rate scenarios as part of our modeling, the majority of our liabilities related to insurance contracts are not interest rate sensitive, and we therefore have minimal exposure to policy withdrawal risk. Our determination of investment strategy relies on long-term measures such as reserve adequacy analysis and the relationship between the portfolio yields supporting our various product lines and the aggregate discount rate assumptions embedded in the
reserves. We also use this analysis in determining hedging strategies and utilizing derivative financial instruments for managing interest rate risk and the risk related to matching duration for our assets and liabilities. We do not use derivative financial instruments for speculative purposes.
Refer to "Risk Factors" contained herein in Item 1A; "Critical Accounting Estimates" and the discussion of investments in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7; "Quantitative and Qualitative Disclosures About Market Risk" herein in Item 7A; and Notes 1, 2, 3, and 4 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for information on our investments and derivative financial instruments.
Ratings
AM Best, Fitch Ratings (Fitch), Moody's Investors Service (Moody's), and Standard & Poor's Ratings Services (S&P) are among the third parties that assign issuer credit ratings to Unum Group and financial strength ratings to our insurance subsidiaries. Issuer credit ratings reflect an agency's opinion of the overall financial capacity of a company to meet its senior debt obligations. Financial strength ratings are specific to each individual insurance subsidiary and reflect each rating agency's view of the overall financial strength (capital levels, earnings, growth, investments, business mix, operating performance, and market position) of the insuring entity and its ability to meet its obligations to policyholders. Both the issuer credit ratings and financial strength ratings incorporate quantitative and qualitative analyses by rating agencies and are routinely reviewed and updated on an ongoing basis.
Rating agencies assign an outlook statement of "positive," "negative," or "developing" to indicate an intermediate-term trend in credit fundamentals which could lead to a rating change. "Positive" means that a rating may be raised, "negative" means that a rating may be lowered, and "developing" means that a rating may be raised or lowered with equal probability. Alternatively, a rating may have a "stable" outlook to indicate that the rating is not expected to change.
"Credit watch" or "under review" highlights the potential direction of a short-term or long-term rating. It focuses on identifiable events and short-term trends that cause a rating to be placed under heightened surveillance by a rating agency. Events that may trigger this action include mergers, acquisitions, recapitalizations, regulatory actions, criteria changes, or operating developments. Ratings may be placed on credit watch or under review when an event or a change in an expected trend occurs and additional information is needed to evaluate the current rating level. This status does not mean that a rating change is inevitable, and ratings may change without first being placed on a watch list. A rating is not a recommendation to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the rating agency. Each rating should be evaluated independently of any other rating.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Ratings" contained herein in Item 7 for our current outlook, issuer credit, and financial strength ratings. See also further discussion in "Risk Factors" contained herein in Item 1A.
Competition
There is significant competition among insurance companies for the types of products we sell. We are operating in a dynamic competitive environment of both traditional and non-traditional competitors, with changes in product offerings, enrollment services, and technology solutions. We believe that the principal competitive factors affecting our business are price, quality of the customer experience regarding service and claims management, integrated product choices, enrollment capabilities, financial strength ratings, claims-paying ratings, and a solution to allow our customers to comply with the changing laws and regulations related to family medical leave benefits.
Our principal competitors for our products include the largest insurance companies in the industry as well as regional companies offering specialty products. Some of these companies have more competitive pricing or have higher claims-paying ratings. Some may also have greater financial resources with which to compete.
In the United Kingdom and Poland, where we sell both individual and group products, we compete with a mix of large internationally recognized providers and strong local carriers.
All areas of the employee benefits markets are highly competitive due to the exclusionyearly renewable term nature of our products and the large number of insurance companies offering products in this market. There is a risk that our customers may be able to obtain more favorable terms or improved technology solutions from competitors in lieu of renewing coverage with us. The
effect of competition may, as a result, adversely affect the persistency of these and other products, as well as our ability to sell products in the future.
We must attract and retain independent agents and brokers to actively market our products. Strong competition exists among insurers for agents and brokers. We compete with other insurers for sales agents and brokers primarily on the basis of our product offerings, financial strength, support services, and compensation. Sales of our products could be materially adversely affected if we are unsuccessful in attracting and retaining agents and brokers.
For further discussion, refer to "Risk Factors" contained herein in Item 1A.
Regulation
We and our subsidiaries are subject to extensive and comprehensive supervision and regulation in the United States, the United Kingdom, and Poland. The laws and regulations with which we must comply are complex and subject to change. New or existing laws and regulations may become more restrictive or otherwise adversely affect our operations.
Insurance Regulation and Oversight
Our U.S. insurance subsidiaries are subject to regulation and oversight by insurance regulatory authorities in the jurisdictions in which they do business and by the U.S. Department of Labor (DOL) on a national basis, primarily for the protection of policyholders. State insurance regulators in the U.S. generally have broad powers with respect to all aspects of the insurance business, including the power to: license and examine insurance companies; regulate and supervise sales practices and market conduct; license agents and brokers; approve policy forms; approve premium rates and subsequent increases thereon for certain insurance products; establish reserve requirements and solvency standards; place limitations on shareholder dividends; prescribe the form and content of required financial statements and reports; regulate the types and amounts of permitted investments; and regulate reinsurance transactions. Our U.S. insurance subsidiaries are examined periodically by their states of domicile and by other states in which they are licensed to conduct business. The domestic examinations have traditionally emphasized financial matters from the perspective of protection of policyholders, but they can and have covered other subjects that an examining state may be interested in reviewing, such as market conduct issues and reserve adequacy. Examinations in other states more typically focus on market conduct, such as a review of sales practices, including the content and use of advertising materials and the licensing and appointing of agents and brokers, as well as underwriting, claims, and customer service practices, and identification and handling of unclaimed property to determine compliance with state laws. Our U.S. insurance subsidiaries are also subject to assessments by state insurance guaranty associations to cover the proportional cost of insolvent or failed insurers. The DOL enforces a comprehensive federal statute which regulates claims paying fiduciary responsibilities and reporting and disclosure requirements for most employee benefit plans.
Our U.K. insurance subsidiary, Unum Limited, is subject to dual regulation by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The PRA oversees the financial health and stability of financial services firms and is responsible for the prudential regulation and day-to-day supervision of insurance companies. The FCA seeks to protect consumers and oversees financial services products and practices, including those governing insurance companies in the U.K.
On January 31, 2020, an official bill was passed formalizing the withdrawal of the U.K. from the European Union (EU). A deal was reached on December 24, 2020 on the future trading relationship with the EU. The deal focused primarily on the trading of goods rather than the U.K.’s service sector, which will be subject to further negotiations in 2021 and will focus on financial services and future regulation. In addition, the U.K. government is reviewing the regulatory framework of financial services companies which may result in changes to U.K. regulatory capital or U.K. tax regulations. We do not expect that the underlying operations of our U.K. business, nor the Polish business which is in the EU, will be significantly impacted by the withdrawal, but we may see some continued dampening of growth in the U.K. as well as earnings volatility due to the current disruption and uncertainty in the U.K. economy. We may also experience volatility in the fair values of our investments in U.K. and EU-based issuers, but we do not expect a material increase in credit losses or defaults, nor do we believe this volatility will impact our ability to hold these investments. In addition, the current economic conditions may also cause volatility in our solvency ratios. Our reported consolidated financial results continue to be impacted by fluctuations in the British pound sterling to dollar exchange rate.
Our Polish insurance subsidiary, Unum Zycie TUiR, is subject to regulation by the Komisja Nadzoru Finansowego (KNF) of the Financial Supervision Authority (FSA) in Poland. The KNF oversees the financial health and stability of financial services firms and is responsible for the prudential regulation and day-to-day supervision of insurance companies and other financial institutions.
Capital Requirements
Risk-based capital (RBC) standards for U.S. life insurance companies are prescribed by the National Association of Insurance Commissioners (NAIC). The domiciliary states of our U.S. insurance subsidiaries have all adopted a version of the NAIC RBC Model Act, which prescribes a system for assessing the adequacy of statutory capital and surplus for all life and health insurers. The basis of the system is a risk-based formula that applies prescribed factors to the various risk elements in a life and health insurer's business to report a minimum capital requirement proportional to the amount of risk assumed by the insurer. The life and health RBC formula is designed to measure annually (i) the risk of loss from asset defaults and asset value fluctuations, (ii) the risk of loss from adverse mortality and morbidity experience, (iii) the risk of loss from mismatching of asset and liability cash flow due to changing interest rates, and (iv) business risks. The formula is used as an early warning tool to identify companies that are potentially inadequately capitalized. The formula is intended to be used as a regulatory tool only and is not intended as a means to rank insurers generally. The NAIC approved a new and more granular RBC structure for fixed income asset capital charges on April 30, 2020 for 2020 year-end reporting. The structure expands the fixed income asset designations from six to 20 categories. Factor values for the new structure are currently under review by the NAIC, and therefore the only impact of this change for 2020 was to report using the new categories. We will continue to monitor the NAIC's activities on this issue.
The NAIC continues to review the state-based solvency regulation framework to identify opportunities to respond to national and international insurance regulatory and solvency developments. The topics of its review include capital requirements, governance and risk management, statutory accounting and financial reporting, and reinsurance. This ongoing review will likely result in changes to U.S. insurance regulation and solvency standards, including those for our U.S. insurance subsidiaries. One of the outcomes of the NAIC's review was the adoption of the NAIC Risk Management and Own Risk and Solvency Assessment (ORSA) Model Act which, following enactment at the state level, requires insurers to provide, at least annually, a group-level perspective on the risks of the current and future business plans and the sufficiency of capital to support those risks. All states where our traditional U.S. insurance subsidiaries are domiciled have enacted ORSA requirements, and we file an ORSA summary report annually with the applicable insurance regulators.
The NAIC has established a working group charged with developing a group capital calculation that can be used by regulators in assessing the risks and financial position of insurance groups. The NAIC continues to push this initiative forward on an accelerated timeline, and therefore we continue to closely monitor and assess developments. We are also monitoring developments around the implementation of reforms adopted by the International Association of Insurance Supervisors (IAIS) in November 2019 that established similar group capital requirements applicable to Internationally Active Insurance Groups (IAIGs). We are not subject to the reforms adopted by the IAIS, however, the requirements are a factor influencing the substance and timeframe of the reforms that will be adopted by the NAIC. We will continue to monitor the NAIC's activities on this issue but it is still too early to determine what, if any, impact these developments will have on our capital requirements.
The NAIC has adopted a valuation manual containing a principles-based approach to life insurance company reserves for new business. The earliest effective date was January 2017 with a three-year optional period before mandatory adoption by January 2020. The Company elected a staged approach to the implementation of the new requirements, with no material impact on our statutory reserves.
In 2012, the NAIC established a subgroup to study the insurance industry's use of captive reinsurers and special purpose vehicles to transfer insurance risk and is considering ways to promote uniformity in both the approval and supervision of such reinsurers. More recently, the NAIC adopted a proposal to subject certain captive reinsurers and special purpose vehicles to the same capital requirements as traditional insurers. As the NAIC and state insurance regulators continue to examine the use of captive insurance companies to finance reserves required under current regulations, we cannot predict the ultimate outcome of their work, or how long or extensively they will continue to focus on this issue. Although we believe it to be unlikely, a potential outcome of future NAIC decisions from its various committees, task forces, and working groups is that companies could be prohibited from using captive reinsurers. No changes in the use or regulation of captive reinsurers have been proposed by the NAIC, and we are unable to predict the extent of any changes that might be made. As a result of the recapture of the reinsurance agreements with Northwind Re, as of December 31, 2020, no insurance risk remains in Northwind Re and therefore Fairwind remains the only active captive insurer. We expect to continue our strategy of using captive reinsurers to manage risks and enhance capital efficiency while monitoring the NAIC's study and proposed changes in regulations. See "Reinsurance" contained herein in this Item 1 for further discussion.
The PRA has statutory requirements, including capital adequacy and liquidity requirements and minimum solvency margins, to which Unum Limited must adhere as part of the provisions of Solvency II, an EU directive that prescribes capital requirements and risk management standards for the European insurance industry. Our European holding company is also subject to the
Solvency II requirements relevant to insurance holding companies, while its subsidiaries, which includes Unum Limited, are subject to group supervision under Solvency II. The Unum European Economic Area (EEA) Group, which is comprised of the European holding company and its subsidiaries, received approval from the PRA to use its own internal model for calculating regulatory capital and also received approval for certain associated regulatory permissions including transitional relief as the Solvency II capital regime is implemented. The U.K. government is reviewing the regulatory framework of financial services companies which may result in changes to U.K. regulatory capital or U.K. tax regulations.
See further discussion in "Risk Factors" contained herein in Item 1A and "Executive Summary," "Liquidity and Capital Resources" contained herein in Item 7 and Note 16 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Insurance Holding Company Regulation
We and our U.S. insurance subsidiaries (excluding captive reinsurers) are subject to regulation under the insurance holding company laws in the states in which our insurance subsidiaries are domiciled, which currently include Maine, Massachusetts, New York, South Carolina, and Tennessee. These laws generally require each insurance company that is domiciled in the state and a member of an insurance holding company system to register with the insurance department of that state and to furnish at least annually financial and other information about the operations of companies within the holding company system, including information concerning capital structure, ownership, management, financial condition, and certain intercompany transactions. Transactions between an insurer and affiliates in the holding company system generally must be fair and reasonable and, if material, require prior notice and approval by the domiciliary insurance regulator.
In addition, such laws and regulations restrict the amount of dividends that may be paid by our insurance subsidiaries to their respective shareholders, including our Company and certain of our intermediate holding company subsidiaries. See further discussion in "Risk Factors" contained herein in Item 1A and "Liquidity and Capital Resources - Cash Available from Subsidiaries" contained herein in Item 7.
The NAIC has adopted the Corporate Governance Annual Disclosure Model Act and the Corporate Governance Annual Disclosure Model Regulation, which require U.S. insurers to disclose detailed information regarding their governance practices. The model act and regulation must be adopted by individual state legislatures and insurance regulators in order to be effective in a particular state. All of the states in which our insurance subsidiaries are domiciled have adopted a requirement to file a corporate governance annual disclosure similar to the model act and regulations.
The NAIC has also adopted the Insurance Data Security Model Law, which creates a legal framework that requires insurance companies to establish cybersecurity programs designed to protect the private data of consumers. The law outlines planned cybersecurity testing and the development of incident response plans for breach notification procedures. The model law must be adopted by individual state legislatures and insurance regulators in order to be effective in a particular state. At this time, among the states in which our insurance subsidiaries are domiciled, the model law is effective only in South Carolina. The New York State Department of Financial Services has established similar regulations to this law and the state of California has enacted the California Consumer Privacy Act of 2018.
The laws of most states, including the states in which our insurance subsidiaries are domiciled (or deemed to be commercially domiciled), require regulatory approval of a change in control of an insurance company or its holding company. Where these laws apply to us, there can be no effective change in control of our Company or of any of our insurance subsidiaries unless the person seeking to acquire control has filed a statement containing specified information with the appropriate insurance regulators and has obtained their prior approval of the proposed change. The usual measure for a presumptive change of control pursuant to these laws is the acquisition of 10 percent or more of the voting stock of an insurance company or its holding company, although this presumption is rebuttable. Consequently, a person acquiring 10 percent or more of the voting stock of an insurance company or its holding company without the prior approval of the insurance regulators in the state(s) of domicile of the insurance company(ies) sought to be acquired (or whose holding company is sought to be acquired) will be in violation of these laws. Such a person may also be subject to one or more of the following actions: (i) injunctive action requiring the disposition or seizure of those shares by the applicable insurance regulators; (ii) prohibition of voting of such shares; and (iii) other actions determined by the relevant insurance regulators. Further, many states' insurance laws require that prior notification be given to state insurance regulators of a change in control of a non-domiciled insurance company doing business in the state. These pre-notification statutes do not authorize the state insurance regulators to disapprove the change in control; however, they do authorize regulatory action in the affected state if particular conditions exist, such as undue market concentration. Any future transactions that would constitute a change in control of our Company or of any of our insurance subsidiaries may require prior notification in those states that have adopted pre-notification laws.
These laws may discourage potential acquisition proposals and may delay, deter, or prevent a change in control of our Company, including through transactions, and in particular unsolicited transactions, that some or all of our shareholders might consider to be desirable.
Federal Laws and Regulations
We are subject to the laws and regulations generally applicable to public companies, including the rules and regulations of the Securities and Exchange Commission and the New York Stock Exchange relating to public reporting and disclosure, accounting and financial reporting, corporate governance, and securities trading. Further, the Sarbanes-Oxley Act of 2002, and rules and regulations adopted under this regulation, have increased the requirements for us and other public companies in these and other areas.
The USA PATRIOT Act of 2001 (Patriot Act) contains anti-money laundering and financial transparency laws and mandates the implementation of various regulations applicable to broker-dealers and other financial services companies, including insurance companies. The Patriot Act seeks to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. The National Defense Authorization Act for Fiscal Year 2021 (NDAA) makes the most significant changes to the U.S. anti-money laundering laws since the Patriot Act. The NDAA requires many U.S. companies to report their beneficial owners and establishes a new whistleblower program. We are not subject to the NDAA’s requirements but will monitor any developments resulting from the passage of the NDAA. Anti-money laundering laws outside of the United States contain some similar provisions. Additionally, other federal laws and regulations, including the Foreign Corrupt Practices Act and regulations issued by the Office of Foreign Asset's Controls, as well as the U.K.'s Bribery Act of 2010, have increased requirements relating to identifying customers, prohibiting transactions with certain organizations or individuals, watching for and reporting suspicious transactions, responding to requests for information by regulatory authorities and law enforcement agencies, sharing information with other financial institutions, and requiring the implementation and maintenance of internal practices, procedures, and controls.
We are subject to federal income, employment, excise and other taxes related to both our U.S. and our foreign operations. On December 22, 2017, the U.S. Federal government enacted a 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). The key provisions of the TCJA relevant to us are as follows:
•Establishes a corporate income tax rate of 21 percent;
•Creates a territorial tax system rather than a worldwide system, which will generally allow companies to repatriate future foreign source earnings without incurring additional U.S. taxes by providing a 100 percent exemption for the foreign source portion of dividends from certain foreign subsidiaries;
•Subjects undistributed and previously untaxed foreign earnings and profits to a one-time transition tax also referred to as a deemed repatriation toll charge;
•Creates a U.S. shareholder tax on certain foreign subsidiary income above a routine equity return on tangible depreciable business assets (Global Intangible Low-taxed Income);
•Decreases tax-deductible life and property and casualty insurance reserves;
•Increases the amount and amortization period of acquisition costs capitalized for tax purposes;
•Reduces the maximum deduction for net operating loss (NOL) carryforwards arising in companies other than non-life insurance companies in tax years beginning after 2017 to a percentage of the taxpayer's taxable income. It also allows any NOLs generated in tax years beginning after December 31, 2017 to be carried forward indefinitely and repeals carrybacks. NOL provisions for non-life insurance companies remain unchanged from current law;
•Allows businesses to immediately write off the cost of new investments in certain qualified depreciable assets made after September 27, 2017 subject to phase downs starting in 2023;
•Eliminates or reduces certain deductions (including deductions for certain compensation arrangements, certain payments made to governments for violations of law and certain legal settlements), exclusions and credits and adds other provisions that broaden the tax base; and
•Creates a new base erosion anti-abuse tax (BEAT) that subjects certain payments made by a U.S. company to a related foreign company to additional taxes.
See "Executive Summary" and "Liquidity and Capital Resources" contained herein in Item 7 and Notes 7 and 16 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for discussion of the impact to our financial position and results of operations as a result of these changes.
Federal tax laws and regulations are subject to change, and any such change could materially impact our federal taxes and reduce profitability as well as capital levels in our insurance subsidiaries. We continually monitor federal tax legislative and regulatory developments to understand their potential impact on our profitability.
For further discussion of regulation, refer to "Risk Factors" contained herein in Item 1A.
Geographic Areas
Adjusted operating revenue, which excludes net realized investment gains and losses, for our Unum International segment was approximately 6 percent of our consolidated adjusted operating revenue in 2020, 2019, and certain other items as specified2018. As of December 31, 2020, total assets equaled approximately 6 percent of consolidated assets and total liabilities equaled approximately 5 percent of consolidated liabilities for our Unum International segment. Fluctuations in the reconciliations below.U.S. dollar relative to the local currencies of our Unum International segment will impact our reported operating results. See "Risk Factors" contained herein in Item 1A and "Quantitative and Qualitative Disclosures About Market Risk" contained herein in Item 7A for further discussion of fluctuations in foreign currency exchange rates. See "Reporting Segments" contained herein in this Item 1; "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7; and Note 13 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of Unum International's operating results.
Human Capital Resources
Human Capital
Unum is built on the promise of helping the working world thrive throughout life’s moments, an inspiring purpose that requires harnessing the creativity and energy of our employees. As of December 31, 2020, the Company employed approximately 10,700 employees, of which, approximately 10,300 are full-time employees. Approximately 89 percent of our employees are in the United States, and the remaining 11 percent are international (United Kingdom, Ireland and Poland). Voluntary employee turnover for 2020 was approximately 9.4 percent, a decrease from the prior year.
During 2020, as the COVID-19 pandemic accelerated across the U.S., we quickly and effectively transitioned the majority of our employees to remote work. We also implemented protocols and precautions for a limited portion of staff to work in the office. A key tenet of our strategy was to ensure employee health and safety, while also maintaining operational readiness and flexible work options. Our international locations each created strategies based on their local environment.
Compensation and Benefits
At Unum, we provide compensation and benefits programs which support our employees’ health, wealth and life. In addition to competitive pay, other programs (which vary by country/region) include: annual bonus and employee recognition; stock awards and stock purchase; life, medical, pharmacy, telehealth, health reimbursement accounts; dental, vision, voluntary benefits and disability insurance; tuition and fitness reimbursement; 401(k) plan, financial education, and planning support; student debt relief; employee assistance program, family building; paid time off and caregiver leave, paid parental leave; on-site health resource centers and fitness centers and subsidized healthy food choices.
Inclusion and Diversity
The Company strives to create a workplace culture that attracts and retains the great talent needed to deliver for our customers, who represent a cross-section of society and its different communities, ethnic backgrounds, socioeconomic perspectives and physical abilities. Unum believes the best way to meet the needs of its customers and make better decisions is to reflect their diversity in our own workforce. Of our more than 10,700 employees, 66 percent identify as female; and 17 percent of employees (excluding Poland) identify as members of a minority group.
Unum embraces the unique talents of every team member and helps them reach their full potential. Unum’s culture is built on a foundation of workplace values and principles called We Are Unum, a roadmap that outlines what employees bring to work each day and what they get from the Company in return.
In addition, Unum has a dedicated Office of Inclusion & Diversity focused on driving strategies to create a culture where inclusivity is an expectation for every employee and leader. We partner with diverse stakeholders to increase awareness and
provide guidance to help operationalize inclusion through resources, programs and policies that enhance the company's workforce culture.
The Company has five Employee Resource Groups made up of more than 1,400 employee volunteers who seek to:
•ensure inclusion becomes embedded within the Unum culture;
•create an inclusive environment for all diverse employees;
•support employees with disabilities;
•promote thoughtful discussions that advocate for all racially and ethnically diverse people;
•create an inclusive workplace, free of conscious or unconscious bias;
•ensure the workplace is free of discrimination against and harassment of people based on their gender identity, gender expression and sexual orientation;
•help veterans transition to the workplace and develop their careers; and
•increase women in leadership positions through professional and career development.
Unum has established an expectation for all people leaders to embed inclusion and diversity into their performance goals. By embracing shared ownership for inclusion and diversity, leaders help drive inclusion at all levels.
Unum’s ability to proactively attract, develop and retain diverse, top talent is a critical component of our success. Our talent acquisition area utilizes selection technology with AI capability that gives each candidate a customized recruiting experience. We are committed to diverse hiring and have embedded various initiatives within our selection process that allow us to drive positive results. The talent acquisition area actively partners with our office of I&D to ensure they utilize a multi-prong approach to attract and retain diverse talent. Our recruiters are certified diversity recruiters and have received specialized training in unconscious bias; new recruiters complete this process during their first 90 days of employment. Unum actively partners with various national diverse organizations and associations to support diverse hiring at all levels.
Learning and Development
At Unum, we place a strong emphasis on training and professional development for all levels of our workforce, so people of every background have the tools to reach their full potential. All employees have one-to-one coaching sessions with their managers. On a quarterly basis, managers summarize conversations with meaningful documentation on key accomplishments, progress toward goals, and other areas of focus, including career development. Managers and employees also review next steps to help align activities with company goals. We believe adjusted operating incomecontinuous coaching conversations help all employees and managers work more effectively.
Here are some examples of our commitment to the growth and development of our employees:
•Career development workshops: For the employees who participated in career development workshops in 2019, approximately 31 percent had a promotion or lateral move either later in 2019 or during 2020, and 100 percent of managers felt prepared to more effectively navigate their career following the workshop.
•Managers as Coaches: We provide all people managers with workshops and development opportunities that focus on building coaching capabilities, with a goal of elevating workforce performance.
•Multicultural Leadership Development Program: This program focuses on championing equity and opportunity by preparing racially diverse employees to advance to higher levels of leadership.
•Actuarial Development Program (ADP), Accounting and Finance Development Program (AFDP) and Professional Development Program (PDP): These are multi-year rotational programs that focus on preparing participants to become future leaders of our company. ADP and AFDP focus on developing both leadership and technical skills, while PDP focuses primarily on developing leadership skills and broad operational experience.
•LinkedIn Learning (LIL): All employees have access to Unum's LIL platform, which provides our employees access to videos, articles and training options in everything from improving technical skills to enhancing leadership abilities.
•Leader Academy: An online program which is available to managers, leaders or any employee interested in moving into a bettermanagement role. Each quarter, participants learn about interpersonal effectiveness, elevating performance, measurestrategic decision-making and better indicatorleading change.
We recognize that our employees are an important asset. Therefore, it is imperative that we continue to focus on the growth and development of our workforce in a meaningful way, and provide them with the necessary support to achieve their career goals.
Employee Engagement
To ensure our employees are engaged and are effectively delivering on our mission and meeting our customers’ needs, we regularly conduct confidential employee surveys to obtain feedback and gain insights from our employees. These surveys are thoughtfully considered and actioned by leadership. We are committed to our employees’ growth and development and embrace the diversity of ideas for improvement. In our employee survey conducted in 2020, a total of 9,910 employees responded and approximately 84 percent of those employees indicated favorable engagement and would recommend Unum as a great place to work.
Available Information
Our internet website address is www.unum.com. We make available, free of charge, on or through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material with the Securities and Exchange Commission.
Information about our Executive Officers
Our executive officers and persons chosen to become executive officers as of the date hereof are listed below. Our executive officers, who are also executive officers of certain of our principal subsidiaries, were appointed by Unum Group's board of directors to serve until their successors are chosen and qualified or until their earlier resignation or removal.
| | | | | | | | |
Name | Age | Position |
Richard P. McKenney | 52 | President and Chief Executive Officer and a Director |
Steven A. Zabel | 52 | Executive Vice President, Chief Financial Officer |
Michael Q. Simonds | 47 | Executive Vice President, Chief Operating Officer |
Elizabeth A. Ahmed | 46 | Executive Vice President, People and Communications |
Timothy G. Arnold | 58 | Executive Vice President, Voluntary Benefits and President, Colonial Life |
Puneet Bhasin | 58 | Executive Vice President, Chief Information and Digital Officer |
Lisa G. Iglesias | 55 | Executive Vice President, General Counsel |
Martha D. Leiper | 58 | Executive Vice President, Chief Investment Officer |
Peter G. O'Donnell | 54 | Executive Vice President, Unum International |
Christopher W. Pyne | 51 | Executive Vice President, Group Benefits |
Mark P. Till | 53 | Executive Vice President and CEO Designate, Unum International |
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Mr. McKenney became President in April 2015 and Chief Executive Officer in May 2015. He served as Executive Vice President and Chief Financial Officer from August 2009 until April 2015, having joined the Company in July 2009. Before joining the Company, Mr. McKenney served as Executive Vice President and Chief Financial Officer of Sun Life Financial Inc., an international financial services company, from February 2007, having joined that company as Executive Vice President in September 2006.
Mr. Zabel became Executive Vice President, Chief Financial Officer in July 2019. He previously served as Senior Vice President and President, Closed Block Operations from July 2015 to July 2019 and as Senior Vice President, Chief Risk Officer from August 2013 to July 2015. Prior to joining the Company in August 2013, he served in various senior roles at Genworth Financial, Inc. from 2004, including Senior Vice President of Long-Term Care Insurance, Chief Financial Officer for Insurance Products, and Senior Vice President of Corporate Audit Services. Before that, he was responsible for financial reporting and rating agency relationships at Americo Life, Inc. and managed life and health insurance audit engagements at Ernst & Young LLP.
Mr. Simonds was named Executive Vice President, Chief Operating Officer in February 2020. Prior to that, he served as Executive Vice President, President and Chief Executive Officer, Unum US from July 2013, after having served as Senior Vice President and Chief Operating Officer, Unum US from June 2012. He previously served as Senior Vice President, Growth Operations, Unum US from July 2010, and as Senior Vice President and Chief Marketing Officer, Unum US from March 2008. Mr. Simonds originally joined a Unum Group predecessor company in 1994, left the Company in 2000 to pursue his MBA, and rejoined the Company in 2003 after serving as a consultant with McKinsey & Company, a global management consulting firm.
Ms. Ahmed was named Executive Vice President, People and Communications upon joining the Company in October 2018. She served as Executive Vice President, Chief Human Resources Officer, at AmTrust Financial Services, Inc., a multinational insurance holding company, from May 2015 to October 2018. Prior to that, she served as Vice President of Human Resources at Equity Trust Company, a financial services company, from May 2012 to May 2015, and as Senior Vice President of Human Resources at PNC Bank, a diversified financial services institution, from August 2008 to May 2012.
Mr. Arnold was named Executive Vice President, Voluntary Benefits and President, Colonial Life in February 2020. Prior to that, he served as Executive Vice President, President and Chief Executive Officer, Colonial Life from January 2015, and before that, as Executive Vice President, President, Colonial Life from July 2014. He previously served as Senior Vice President, Sales and Marketing, Colonial Life from August 2012, as Senior Vice President, Chief Operations Officer, Colonial Life from July 2011, and as Senior Vice President, Integrated Underwriting, Unum US from May 2010. Mr. Arnold originally joined a Unum Group predecessor company in 1985.
Mr. Bhasin was named Executive Vice President, Chief Information and Digital Officer after joining the Company in March 2018. He served as Executive Vice President, Corporate Operations and Recycling at Waste Management, Inc., a waste management environmental services provider, from November 2015 to March 2017. While at Waste Management, he also served as Senior Vice President, Corporate Operations from November 2014, Chief Information Officer and Senior Vice President, Technology, Logistics and Customer Service from August 2012, and Senior Vice President and Chief Information Officer from December 2009.
Ms. Iglesias was named Executive Vice President, General Counsel upon joining the Company in January 2015.She served as Senior Vice President, General Counsel and Secretary of WellCare Health Plans, Inc., a managed care company, from February 2012 to December 2014, having first joined WellCare in February 2010 as Vice President, Securities and Assistant General Counsel.Prior to that, she served as General Counsel and Corporate Secretary for Nordstrom, Inc., a fashion specialty retailer, from 2007 to 2008, and as General Counsel and Secretary of Spherion Corporation, a recruiting and staffing company, from 1999 to 2007.
Ms. Leiper was appointed Executive Vice President, Chief Investment Officer of the Company in October 2019. She joined the Company from USAA, a provider of financial services to the military community, where she served as Senior Vice President, Corporate Finance and Enterprise Money Movement from October 2016 to October 2019 and, before that, as Senior Vice President, Corporate Finance and Investments from May 2015 to September 2016 and Senior Vice President, Chief Investment Officer from May 2010 to May 2015. Ms. Leiper previously worked at Unum Group (including predecessor companies) beginning in 1985, holding leadership roles of increasing responsibility, including Senior Vice President and Deputy Chief Investment Officer from January 2006 to May 2010.
Mr. O'Donnell was named Executive Vice President, Unum International in February 2020. As previously announced, Mr. O'Donnell will be leaving the Company following the end of the first quarter of 2021. Prior to his most recent position, he held the position of Executive Vice President and Chief Executive Officer, Unum International from October 2018 when the reporting segment was previously known as Unum UK. He previously served as President and Chief Executive Officer, Unum UK, from September 2012, after having joined the Company as Unum Limited's Chief Financial Officer in 2010. Prior to joining Unum Limited, Mr. O'Donnell served as Director of Group Finance at Prudential plc, an international financial services company, from May 2008 to May 2010. He served as Finance director at Royal & SunAlliance plc, an international financial services company, from May 2005 to May 2008.
Mr. Pyne was named Executive Vice President, Group Benefits in February 2020.He previously served as Senior Vice President, Growth Operations and Distribution from June 2018 to January 2020 and as Senior Vice President, Sales and Client Management from June 2011 to June 2018.Before that, Mr. Pyne held positions of increasing responsibility within the Company's U.S. distribution organization, including Vice President, Sales from January 2011 to May 2011 and Vice President, Managing Director from January 2008 to December 2010.Mr. Pyne joined a Unum Group predecessor company in 1992.
Mr. Till has served as Executive Vice President and CEO Designate, Unum International since joining the Company in February 2021. He has been named to serve as Executive Vice President and Chief Executive Officer, Unum International in April 2021 following Mr. O’Donnell’s planned departure at the end of the first quarter of 2021. Prior to joining the Company, Mr. Till served from July 2020 to January 2021 as Managing Director, Platform Solutions at Aegon, an international financial services organization, in the U.K. (Aegon UK). While at Aegon UK, he served as Managing Director, Digital Solutions from May 2018 to July 2020, as Chief Distribution and Marketing Officer from June 2016 to May 2018, and as Managing Director, Customer Value Management from September 2015 to June 2016.He previously served as Head of Personal Investing and
Marketing Director for Fidelity International from January 2012 to February 2015. Mr. Till has also held senior positions with Standard Life, HomeServe PLC and Barclays Bank.
ITEM 1A. RISK FACTORS
Overview
We face a wide range of risks, and our continued success depends on our ability to identify and appropriately manage our risk exposures. Discussed below are factors that may adversely affect our business, results of operations, or financial condition. Any one or more of the following factors may cause our actual results for various financial reporting periods to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company, including those in this document or made by us elsewhere, such as in earnings release investor calls, investor conference presentations, or press releases. See "Cautionary Statement Regarding Forward-Looking Statements" contained herein on page 1.
COVID-19
The COVID-19 pandemic is negatively impacting certain aspects of our business and, depending on severity and duration beyond current experience, could have a material adverse effect on our financial position, results of operations, liquidity and capital resources, and overall business operations.
The COVID-19 pandemic has caused significant disruption to the global economy and has resulted in unfavorable impacts to our company as well as the overall insurance industry. Due to the unprecedented nature of these events and the current pace of change in this environment, we cannot fully estimate the duration or ultimate impact of the COVID-19 pandemic at this time. Further events that we are unable to control, such as the further spread, changes in mortality levels, or spikes in the number of cases of COVID-19 or the emergence of new strains of coronavirus, and the related responses by government authorities and businesses, may heighten the impacts of COVID-19 and present additional risks. We are closely monitoring several key risks related to our business that may potentially have adverse impacts on our business and operations.
We may experience significant lapse activity related to both our group and individual customers due to a rise in unemployment levels, the deterioration of economic conditions, and the general uncertainty regarding the financial situation of our customers. This may put strain on our liquidity and capital position and may also result in a decline in both premium income and persistency, particularly if customers do not ultimately return following a lapse. Further, adverse economic conditions may adversely affect the discretionary spending of current or potential customers, which may result in lower sales or other negative changes to customer purchasing patterns.
Depending on the duration and severity of the current economic uncertainty, we may experience an increase in COVID-19-related deaths which could result in higher mortality within our life product lines. In addition, we may experience higher claim rates in our short-term disability products and higher expenses related to our leave management services.
In response to the disruptive economic effects of the COVID-19 pandemic, the Federal Reserve has taken actions to reduce interest rates, and the potential for a sustained low interest rate environment is magnified by the effects of COVID-19 on economic conditions. Further declines in interest rates or the continuance of low interest rates may place substantial pressure on our profit margins as well as on the discount rates used to calculate our insurance liabilities. Furthermore, the current economic conditions may result in the inability for companies to make interest and principal payments on their debt securities or mortgage loans that we hold for investment purposes. Accordingly, although we maintain a disciplined approach regarding our overall investment strategy, we may still incur significant losses that can result in a decline in net investment income and/or material increases in credit losses on our investment portfolio. With respect to commercial real estate, there could be potential impacts to estimates of expected losses resulting from lower underlying values, reflecting current market conditions at that time.
If we experience unfavorable developments related to our revenues, benefits, or expenses as described above, we may correspondingly experience adverse impacts to our overall future profitability and underlying trendsgrowth, which may alter the timing and magnitude of our plans for overall business expansion. In addition, these unfavorable developments may result in the write-off or impairment of intangible/long-lived assets such as deferred acquisition costs (DAC), value of business acquired, and goodwill, or the establishment of a valuation allowance regarding the realization of our deferred tax assets.
Although we have access to significant amounts of liquidity, which include credit facilities, FHLB arrangements, and the ability to liquidate certain investments, it may be insufficient or even inaccessible if we are not in compliance with required covenants
under our borrowing arrangements or if the associated lenders are unable to provide funds. In addition, if investment markets become illiquid or severely impaired, we may be unable to liquidate our investments in a timely and advantageous manner.
From an operational perspective, our employees, sales associates, brokers and distribution partners, as well as the workforces of our vendors, service providers and counterparties, may also be adversely affected by the COVID-19 pandemic or efforts to mitigate the pandemic, including government-mandated shutdowns, requests or orders for employees to work remotely, and other social distancing measures. The social distancing measures could result in an adverse impact on our ability to conduct our business, including our ability to sell our policies, including policies that are traditionally sold in person, and our ability to adjudicate and pay claims in a timely manner. Additionally, the vast majority of our employees are currently working remotely and have been doing so for an extended length of time. This working environment is unprecedented and may expose us to various additional risks such as elevated cyber-security vulnerability resulting from the wide-scale remote usage of our company networks and risks to the effectiveness of our internal controls over financial reporting.
See "Executive Summary", "Segment Operating Results", and "Liquidity and Capital Resources" included herein in Part 2, Item 7 under "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional discussion.
To the extent the COVID-19 pandemic adversely affects our business, financial position, results of operations, liquidity and capital resources, and overall business operations, it may also have the effect of heightening many of the other risks disclosed herein this Item 1A "Risk Factors".
Market and Credit Risks
Sustained periods of low interest rates in the long-term investment market may adversely affect our reported net investment income and the discount rates used in reserving for our insurance products and projecting our pension obligations, which may adversely affect our results of operations or financial condition.
Declines in interest rates and/or the continuance of the current level of low interest rates and yields on fixed income investments may cause the rates of return on our investment portfolio to decrease more than expected, leading to lower net investment income than assumed in the pricing and reserving for our insurance products. An interest, or discount, rate is used in calculating reserves for our insurance products. We set our GAAP reserve discount rate assumptions based on our current and expected future investment yield for assets supporting the reserves, considering current and expected future market conditions. If the discount rate assumed in our business.
Effective December 31, 2017, to more clearly differentiate between the GAAP and non-GAAP financial measures, we changed the naming convention forreserve calculations is higher than our non-GAAP financial measures from “operating” to “adjusted operating” measures, which includes a change from "after-tax operating income" to "after-tax adjusted operating income." The definition of this label remains unchanged. In addition, although they are in accordance with GAAP guidance for segment reporting, we have also changed the naming convention forfuture investment returns, our "operating revenue" to "adjusted operating revenue" and our "operating income" to "adjusted operating income." The definition of these labels also remains unchanged.
Realized investment gains or losses depend on market conditions and doinvested assets will not necessarily relate to decisions regarding the underlying business of our segments. Our investment focus is onearn enough investment income to support our future claim payments. In that case, the reserves may eventually be insufficient, resulting in the need to increase our reserves and/or contribute additional capital to our insurance liabilitiessubsidiaries, either of which could have a material adverse effect on our results of operations or financial condition. Similarly, we are required to perform annual adequacy testing, that considers multiple interest rate scenarios, to ensure our statutory reserves continue to meet statutory requirements, which could also require us to increase to our statutory reserves and/or contribute additional capital.
Our net periodic benefit costs and the value of our benefit obligations for our pension plans are determined based on a set of economic and demographic assumptions that represent our best estimate of future expected experience. Major assumptions used in accounting for these plans include the expected discount (interest) rate and the long-term rate of return on plan assets. We set the discount rate assumption at the measurement date for each of our plans to reflect the yield of a portfolio of high quality fixed income corporate debt instruments matched against the timing and amounts of projected future benefits. A lower discount rate increases the present value of benefit obligations and increases our costs. Our expectations for the future investment returns on plan assets are based on a combination of historical market performance, current market conditions, and future capital market assumptions obtained from external consultants and economists. The actual rate of return on plan assets is determined based on the fair value of the plan assets at the beginning and end of the measurement period. Increases or decreases in long-term interest rates as opposedwell as equity market volatility will impact the fair value of our plan assets and may result in a decrease in the funded status of our pension plans and/or increased pension costs, which may adversely affect our results of operations, financial condition, or liquidity.
Unfavorable economic or market conditions may result in lower sales, lower premium growth and persistency, higher claims incidence, unfavorable mortality, and longer claims duration, which may adversely affect our results of operations or financial condition.
We are affected by conditions in the capital markets and the general economy, primarily in the United States, the United Kingdom, Poland, and to a lesser extent, the generationbroader global financial markets. Negative developments in the capital markets and/or the general economy could adversely affect our business and results of realizedoperations.
In particular, factors such as unemployment levels, consumer confidence levels, consumer spending, business investment, gains or losses. Althoughgovernment spending, the volatility and strength of the capital markets, inflation, pandemics, and the threat of terrorism all affect the business and economic environment and, ultimately, the amount and profitability of our businesses. Given the nature of our products, in an economic environment characterized by higher unemployment, lower personal income, reduced consumer spending, and lower corporate earnings and investment, new product sales may be adversely affected. Our premium growth may also be negatively impacted by lower premium growth from existing customers due to lower salary growth and lower growth in the number of employees covered under an existing policy. In addition, during such periods we may experience realizedhigher claims incidence, longer claims duration, and/or an increase in policy lapses, any of which could have a material adverse effect on our results of operations or financial condition.
In addition to interest rate risk as previously discussed, we are exposed to other risks related to our investment gainsportfolio which may adversely affect our results of operations, financial condition, or liquidity.
Default Risk
Our investment portfolio consists primarily of fixed maturity securities. These securities are issued by both domestic and foreign entities and are backed either by collateral or the credit of the underlying issuer. Factors such as an economic downturn or political change in the country of the issuer, a regulatory change pertaining to the issuer's industry, a significant deterioration in the cash flows of the issuer, unforeseen accounting irregularities or fraud committed by the issuer, widening risk spreads, ratings downgrades, a change in the issuer's marketplace or business prospects, or other events that adversely affect the issuers of these securities may result in the issuer defaulting on its obligations.
Our mortgage loan portfolio has default risk. Events or developments, such as economic conditions that impact the ability of tenants to pay their rents or limit the availability of refinancing, may have a negative effect on our mortgage loan portfolio. Events or developments that have a negative effect on any particular geographic region or sector may have a greater adverse effect on an investment portfolio to the extent that the portfolio is concentrated in that region or sector.
A default results in the recognition of an impairment loss on the investment. A default may also adversely affect our ability to collect principal and interest due to us. The probability of credit downgrades and defaults increases when the fixed income markets experience periods of volatility and illiquidity.
Credit Spread Risk
Our exposure to credit spreads, which is the yield above comparable U.S. Treasury securities, primarily relates to market price and cash flow variability associated with changes in credit spreads. A widening of credit spreads may unfavorably impact the net unrealized gain or loss position of the investment portfolio and may adversely impact liquidity. Credit spread tightening may reduce net investment income associated with new purchases of fixed income securities.
Valuation Risk
We report our fixed maturity securities and certain other financial instruments at fair value. Valuations may include inputs and assumptions that are less observable or require greater estimation, particularly during periods of market disruption, resulting in values which may be less than the value at which the investments may ultimately be sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported in our financial statements, and the period to period changes in value could vary significantly. Decreases in value may have a material adverse effect on our results of operations or financial condition.
We evaluate our investment portfolio for credit losses. There can be no assurance that we have accurately assessed the level of credit losses taken. Additional credit losses may need to be taken in the future, and historical trends may not be indicative of future credit losses. Any event reducing the value of our securities may have a material adverse effect on our business, results of operations, or financial condition.
Market Timing and Liquidity Risk
While we attempt to match our asset cash flows and durations with expected liability cash flows and durations to meet the funding requirements of our business, there may at times be a lack of appropriate investments in the market which can be
acquired. In particular, due to the long duration of our long-term care product, the timing of our investment cash flows do not match those of our maturing liabilities. In addition, we may, in certain circumstances, need to sell investments due to changes in regulatory or capital requirements, changes in tax laws, rating agency decisions, and/or unexpected changes in liquidity needs. There may also be a limited market for certain of our investments, such as our private placement fixed maturity securities, mortgage loans, and policy loans, which makes them more illiquid. In periods of market volatility or disruption, other of our securities may also experience reduced liquidity. If events occur wherein we need to sell securities in an unfavorable interest rate or credit environment or need to quickly sell securities which are illiquid, market prices may be lower than what we might realize under normal circumstances, with a resulting adverse effect on our results of operations, financial condition, or liquidity.
Reinsurance may not be available or affordable, or reinsurers may be unwilling or unable to meet their obligations under our reinsurance contracts, which may adversely affect our results of operations or financial condition.
As part of our overall risk management and capital management strategies, we purchase reinsurance for certain risks underwritten by our various businesses. We also utilize reinsurance to exit certain lines of business. Market conditions beyond our control determine the availability and cost of reinsurance. Any decrease in the amount of reinsurance will increase our risk of loss and may impact the level of capital requirements for our insurance subsidiaries, and any increase in the cost of reinsurance will, absent a decrease in the amount of reinsurance, reduce our results of operations. Accordingly, we may be forced to incur additional expenses for reinsurance or may be unable to obtain sufficient reinsurance on acceptable terms, which may adversely affect our ability to write future earnings levels,business, result in the assumption of more risk with respect to the policies we issue, and increase our capital requirements. The collectibility of our reinsurance recoverable is primarily a long-term focus is necessaryfunction of the solvency of the individual reinsurers. We cannot provide assurance that our reinsurers will pay the reinsurance recoverables owed to us or that they will pay these recoverables on a timely basis. The insolvency of a reinsurer or the inability or unwillingness of a reinsurer to comply with the terms of a reinsurance contract may have an adverse effect on our results of operations or financial condition.
The effectiveness and utilization of our hedging programs may be affected by changes in the economic environment, changes in interest rates, capital market volatility, non-performance by our counterparties, changes in the level of required collateral, or regulation, which may adversely affect our results of operations, financial condition, or liquidity.
We use derivative financial instruments to help us manage certain risks related to our business operations, primarily foreign currency risk, interest rate risk, and risk related to matching duration for our assets and liabilities. Factors associated with derivative financial instruments could adversely affect our results of operations, financial condition, or liquidity. Ineffectiveness of our hedges due to changes in expected future events, such as the risk created by uncertainty in the economic environment or if our counterparties fail or refuse to honor their obligations under these derivative instruments, may have a material adverse effect on our results of operations or financial condition. Capital market turmoil may result in an increase in the risk of non-performance by our counterparties, many of which are financial institutions. Non-performance by our counterparties may force us to unwind hedges, and we may be unable to replace the hedge, thereby leaving the risk unhedged. Under the terms of our hedging contracts, we are required to post collateral and to maintain a certain level of collateral, which may adversely affect our liquidity and could subject us to the credit risk of the counterparty to the extent it holds such collateral. Changes in regulations may have an adverse effect on our ability to execute hedging strategies due to the increased economic cost of derivatives, primarily as a result of more restrictive collateral requirements.
London Interbank Offered Rate (LIBOR) transition
We are continuing to monitor the developments surrounding the transition from LIBOR. We have evaluated our existing financial arrangements which primarily include investments, derivatives, and debt agreements and also have evaluated our insurance and reinsurance contracts and have determined that we will not be impacted significantly from this transition. In those circumstances where we do have financial or other contracts that are impacted by the LIBOR transition, we are appropriately modifying those contracts to reference a suitable alternative rate or are comfortable with the existing fallback language in those contracts.
Currency translation could materially impact our reported operating results.
The functional currency of our U.K. and Polish operations is the British pound sterling and the Polish zloty, respectively. Fluctuations in exchange rates have an effect on our reported financial results, which may be unfavorably impacted when the functional currency weakens. However, it is important to distinguish between translating and converting foreign currency. Except for a limited number of transactions, we do not actually convert our functional currency into dollars. As a result, we
view foreign currency translation as a financial reporting item and not a reflection of operations or profitability overin the U.K or Poland.
See "Reserves for Policy and Contract Benefits" contained herein in Item 1, "Critical Accounting Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, "Interest Rate Risk" contained herein in Item 7A, and Notes 1, 2, 3, 4 and 9 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
Insurance Risks
Actual experience may differ from our reserve assumptions which may adversely affect our results of operations or financial condition.
Historical results may not be indicative of future performance due to, among other things, changes in our mix of business, re-pricing of certain lines of business, or any number of economic cyclical effects on our business. Reserves, whether calculated under GAAP or statutory accounting principles, do not represent an exact calculation of future benefit liabilities but are instead estimates made by us using actuarial and statistical procedures. Actual experience may differ from our reserve assumptions. There can be no assurance that our reserves will be sufficient to fund our future liabilities in all circumstances. Future loss development may require reserves to be increased, which would adversely affect earnings in current and future periods. Life expectancies may continue to increase, which could lengthen the time a claimant receives disability or long-term care benefits and could result in a change in mortality assumptions and an increase in reserves for these and other long-tailed products. Adjustments to reserve amounts may also be required in the event of changes from the assumptions regarding future morbidity (which represents the incidence of claims and the rate of recovery, including the effects thereon of inflation and other societal and economic factors); premium rate increases; persistency; policy benefit offsets, including those for social security and other government-based welfare benefits; and interest rates used in calculating the reserve amounts, which could have a material adverse effect on our results of operations or financial condition.
We provide a broad array of disability, long-term care, group life, and voluntary insurance products that are affected by many factors, and changes in any of those factors may adversely affect our results of operations, financial condition, or liquidity.
Disability Insurance
Disability insurance may be affected by a number of social, economic, governmental, competitive, and other factors. Changes in societal attitudes, such as work ethic, motivation, or stability, can significantly affect the demand for and underwriting results from disability products.
Both economic and societal factors can affect claim incidence and recoveries for disability insurance. Claim incidence and claim recovery rates may be influenced by, among other factors, the rate of unemployment and consumer confidence. Claim incidence and claim recovery rates may also be influenced by the emergence of new infectious diseases or illnesses. Claim durations may be extended by medical improvements which could extend life expectancies. The relationship between these and other factors and overall incidence is very complex and will vary due to contract design features and the degree of expertise within the insuring organization to price, underwrite, and adjudicate the claims.
Within the group disability market, pricing and renewal actions can be taken to react to higher claim rates. However, these actions take time to implement, and there is a risk that the market will not sustain increased prices. In addition, changes in economic and external conditions may not manifest themselves in claims experience for an extended period of time. The pricing actions available in the individual disability market differ among product classes. Our individual noncancelable disability policies, in which the policy is guaranteed to be renewable through the life of the business sincepolicy at a fixed premium, do not permit us to adjust premiums on our underlying businessin-force business. Guaranteed renewable contracts that are not noncancelable can be re-priced to reflect adverse experience, but rate changes cannot be implemented as quickly as in the group disability market.
Long-term Care Insurance
Long-term care insurance can be affected by a number of demographic, medical, economic, governmental, competitive, and other factors. Because long-term care insurance is long-terma relatively new product for the insurance industry and is long-duration in nature, there is not as much historical data as is available for our other products, especially at advanced ages. This creates a level of uncertainty in properly pricing the product and using appropriate assumptions when establishing reserves. Long-term
care insurance is guaranteed renewable and can be re-priced to reflect adverse experience, but the re-pricing is subject to regulatory approval by our states of domicile and may also be subject to approval by jurisdictions in which our policyholders reside. The rate approval process can affect the length of time in which the re-pricing can be implemented, if at all, and the rate increases ultimately approved may be unfavorable relative to assumptions used to establish our reserves. We monitor our own experience and industry studies concerning morbidity, mortality, and policyholder terminations to understand emerging trends. Changes in actual experience relative to our expectations may adversely affect our profitability and reserves. To the extent mortality improves for the general population, and life expectancies increase, the period for which a claimant receives long-term care benefits may lengthen and the associated impact of advanced aging of policyholders may cause an increase in claims incidence. Medical advances may continue to have an impact on claim incidence and duration, both favorable and unfavorable. Due to the long duration of the product, the timing and/or amount of our investment cash flows are difficult to match to those of our maturing liabilities. Sustained periods of low or declining interest rates could result in increases in reserves and adversely affect our results of operations.
Group Life Insurance
Group life insurance may be affected bythe characteristics of the employees insured, the amount of insurance employees may elect voluntarily, our risk selection process, our ability to retain employer groups with favorable risk characteristics, the geographical concentration of employees, and mortality rates. Claim incidence may also be influenced by unexpected catastrophic events such as terrorist attacks, natural disasters, and pandemic health events, which may also affect the cost of and availability of reinsurance coverage.
Voluntary Products
Voluntary products sold in the workplace may be affected by the characteristics of the employees insured, the level of employee participation and the amount of insurance the employees elect, our risk selection process, and our ability to retain employer groups with favorable risk characteristics. A portion of our voluntary life insurance products include interest sensitive forms of insurance which contain a guaranteed minimum interest crediting rate. It is possible that our investment returns could be lower than the guaranteed crediting rate. While a significant portion of our non-life contracts are optionally renewable, some are guaranteed renewable and can be repriced to reflect adverse experience, but rate changes cannot be implemented as quickly as for group disability and group life products.
We have assets which may not be fully recoverable or realizable, which could adversely affect our results of operations or financial condition.
If our business does not perform well or as initially anticipated in our assumptions, we may be required to accelerate amortization or recognize an impairment loss on intangible assets or long-lived assets or to establish a valuation allowance against the deferred income tax asset.
We have intangible assets such as DAC, value of business acquired (VOBA), and goodwill. DAC and VOBA are amortized based primarily upon expected future premium income of the related insurance policies. Recoverability testing for DAC and VOBA is performed on an annual basis. Insurance contracts are grouped on a basis consistent with our manner of acquiring, servicing, and measuring profitability of the contracts. If recoverability testing indicates that either DAC and/or VOBA are not recoverable, the deficiency is charged to expense.
Goodwill is not amortized, but on an annual basis, or more frequently if necessary, we review the carrying amount of goodwill for indications of impairment, considering in that review the financial performance and other relevant factors. In accordance with accounting guidance, we test for impairment at either the operating segment level or one level below. In addition, certain events including, but not limited to, a significant adverse change in legal factors or the business environment, an adverse action by a regulator or rating agency, or unanticipated competition would cause us to review goodwill for impairment more frequently than annually.
Long-lived assets, including assets such as real estate and information technology software, also may require impairment testing to determine whether changes in circumstances indicate that we may be unable to recover the carrying amount.
We assess our deferred tax assets to determine if they are realizable. Factors in our determination include the performance of the business, including the ability to generate future taxable income. If based on available information, it is more likely than not that the deferred income tax asset will not be realized, a valuation allowance is established with a corresponding charge to net income.
Charges such as accelerated amortization, impairment losses, or the establishment of valuation allowances could have a material adverse effect on our results of operations or financial condition.
See "Critical Accounting Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, and Note 13 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
Operational Risks
A cyber attack or other security breach could disrupt our operations, result in the unauthorized disclosure or loss of confidential data, damage our reputation or relationships, and expose us to significant financial and legal liability, which may adversely affect our business, results of operations, or financial condition.
We store confidential information about our business and our policyholders, employees, agents and others on our information technology systems, including proprietary and personally identifiable information. As part of our normal business operations, we use this information and engage third-party providers, including outsourcing, cloud computing, and other business partners, that store, access, process, and transmit such information on our behalf. We devote significant resources and employ security measures to help protect our information technology systems and confidential information, and we have programs in place to detect, contain, and respond to information security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we and our third-party providers may be unable to anticipate these techniques or implement adequate preventative measures. In addition, hardware, software, or applications we develop or procure from third parties or through open source solutions may contain defects in design or manufacture or other problems that could unexpectedly compromise our information security. Unauthorized parties, whether within or outside our company, may disrupt or gain access to our systems, or those of third parties with whom we do business, through human error, misfeasance, fraud, trickery, or other forms of deceit, including break-ins, use of stolen credentials, social engineering, phishing, or other cyber attacks, computer viruses, malicious codes, and similar means of unauthorized and destructive tampering.
We and our third-party providers have experienced and likely will continue to experience information security incidents from time to time. Although known incidents have not had a material effect on our business or financial condition, there is no assurance that our security systems and measures will be able to prevent, mitigate, or remediate future incidents that could have such an effect. A successful penetration or circumvention of the security of our information technology systems, or those of third parties with whom we do business, could cause serious negative consequences for us, including significant disruption of our operations, unauthorized disclosure or loss of confidential information, harm to our brand or reputation, loss of customers and revenues, violations of privacy and other laws, and exposure to litigation, monetary damages, regulatory enforcement proceedings, fines, and potentially criminal proceedings and penalties. If we are unaware of the incident for some time after it occurs, our exposure could increase. In addition, the costs to address or remediate systems disruptions or security threats or vulnerabilities, whether before or after an incident, could be significant. As we continue to build our digital capabilities and focus on enhancing the customer experience, the amount of information that we retain and share with third parties, as well as our reliance on them, is likely to grow, increasing the cost to prevent data security breaches and the cost and potential consequences of such breaches. An information technology systems failure could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to potential disciplinary action by regulators. Further, successful cyber-attacks at other large financial institutions or other market participants, whether or not we are affected, could lead to a general loss of customer and investor confidence in financial institutions that could negatively affect us.
Although we have insurance against some cyber risks and attacks, we may be subject to litigation and financial losses that exceed our policy limits, are subject to deductibles or are not covered under any of our current insurance policies.
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 could adversely affect our profitability, results of operations, or financial condition.
In the event of a disaster such as a natural catastrophe, an epidemic/pandemic, a cyber attack, cyber security breach or other information technology systems failure, a terrorist attack, or war, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to conduct business and on our results of operations and financial condition, particularly if those problems affect our information technology systems and destroy valuable data or result in a significant failure of our internal control environment. In addition, in the event that a significant number of our employees were unavailable in the event of a disaster, our ability to effectively conduct business could be severely compromised.
The failure of our information technology and/or disaster recovery processes or systems for any reason could cause significant interruptions or malfunctions in our or our customers’ operations and result in the loss, theft, or failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers. Such a failure could harm our reputation, subject us to regulatory sanctions, legal claims, and increased expenses, and lead to a loss of customers and revenues.
Our failure to develop digital capabilities or to effectively execute upgrades to or replacements of information technology systems could impair our ability to deliver on our growth initiatives or administer our business, which may adversely affect our business, results of operations, or financial condition.
Our business plans increasingly rely on digital capabilities to meet or surpass customer expectations, simplify our operations, and deliver innovative product and service offerings. If we are unable to effectively develop and offer digital capabilities that enhance our customers' experience, we may not fully achieve our strategic growth initiatives and may also experience the loss of existing business. Although we believe we have information technology systems which adequately support our business needs, we continually upgrade our existing information technology systems and acquire or develop new systems to keep pace with the rapidly changing business and technology environment. There are risks involved with upgrading or replacing information technology systems, including, but not limited to, data loss, data errors, and disruption to our operations. We seek to monitor and control our exposure to the risks arising out of these activities through our risk control framework which encompasses a variety of reporting systems, internal controls, management review processes, and other mechanisms.
Unum Group depends on funds from its subsidiaries to meet its obligations and pay dividends. The ability of our subsidiaries to transfer funds to Unum Group may be impaired by adverse financial results or a change in capital requirements. Accordingly, internal sources of capital and liquidity may not always be sufficient. If we need to earnseek external capital, adverse market conditions may affect our access to capital or our cost of capital.
Unum Group is a holding company for insurance and other subsidiaries and has limited operations of its own. Our insurance subsidiaries are subject to insurance laws and regulatory limitations on the interest rates assumedpayment of dividends and on other transfers of funds or other assets to affiliates, including to Unum Group. The level of earnings and capital in calculating our liabilities.subsidiaries, as well as business conditions and rating agency considerations, could impact our insurance and other subsidiaries' ability to pay dividends or to make other transfers of funds to Unum Group, which could impair our ability to pay dividends to Unum Group's common stockholders, meet our debt and other payment obligations, and/or repurchase shares of Unum Group's common stock. The use of funds held by Unum Group as consideration in any acquisition could affect our capital plan and render those funds unavailable for other corporate purposes.
We previously excluded the amortization of prior period actuarial gains or losses, a component of the net periodic benefit costA change in demand for our pension and other postretirement benefit plans. Effective January 1, 2017, the amortization of prior period actuarial gainsinsurance products or losses is now included in "after-tax adjusted operating income" and "adjusted operating income"an increase in the following charts. Amountsincidence of new claims or the duration of existing claims could negatively impact our cash flows from operations. Deterioration in the credit market, which could delay our ability to sell our positions in certain of our fixed maturity securities in a timely manner, could also negatively impact our cash flows. Regulatory changes such as those discussed herein in this Item 1A may impose higher capital or reserve requirements on our insurance subsidiaries, increase collateral requirements for periods priorcertain of our derivatives transactions, and/or implement other requirements which could unfavorably affect our liquidity. Without sufficient liquidity, our ability to January 1, 2017 have been adjustedmaintain and grow our operations would be limited. If our internal sources of liquidity prove to conformbe insufficient, we may be unable to current year reporting.successfully obtain additional financing and capital on favorable terms, or at all, which may adversely affect us.
WeIf our financial results are unfavorable, we may at other times exclude certain other items fromneed to increase our discussion of financial ratios and metricscapital in order to enhancemaintain our credit ratings or satisfy regulatory requirements. Maintaining appropriate levels of statutory surplus is considered important not only by us but by insurance regulatory authorities in the understandingU.S., the PRA in the U.K., the KNF in Poland, and comparabilitythe rating agencies that rate insurers' claims-paying abilities and financial strength. Failure to maintain certain levels of statutory surplus could result in increased
regulatory scrutiny, action by regulatory authorities, or a downgrade by the rating agencies. Need for additional capital may limit a subsidiary's ability to distribute funds to our holding companies.
Obtaining financing for even a small amount of capital could be challenging in unfavorable market conditions and during periods of economic uncertainty. The markets may exert downward pressure on availability of liquidity and credit capacity for certain issuers. The availability of financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry, our credit ratings and credit capacity, and the possibility that customers or lenders could develop a negative perception of our operational performancefinancial prospects. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. Raising capital in unfavorable market conditions could increase our interest expense or negatively impact our shareholders through increased dilution of their common stock in Unum Group.
We rely on our credit facilities as a potential source of liquidity. Our right to borrow funds under these facilities is subject to financial covenants, negative covenants, and events of default. Our ability to borrow under these facilities are also subject to the continued willingness and ability of the lenders to provide funds. Our failure to comply with the covenants in the credit facilities or the failure of lenders to fund their lending commitments would restrict our ability to access these facilities when needed, with a resulting adverse effect on our results of operations, financial condition, or liquidity.
See "Regulation" contained herein in Item 1,"Liquidity and Capital Resources" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, and Notes 8 and 16 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
Our risk management program may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business.
We have devoted significant resources to develop our enterprise risk management program, which has the objective of managing our strategic, market, credit, insurance, and operations risks, which ultimately impact our reputational risk. However, our program may not be comprehensive, and our methods for monitoring and managing risk may not fully predict or mitigate future exposures. In this case, there may be a negative impact to our business, results of operations, or financial condition.
See "Regulation" contained herein Item 1, "Critical Accounting Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7 and Notes 1, 7 and 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for additional information on legal proceedings.
See "Quantitative and Qualitative Disclosures About Market Risk" contained herein in Item 7A for further information about our risk management program.
General Risks
We and our insurance subsidiaries are subject to extensive supervision and regulation. Changes in laws and regulations that affect our industry or findings from examinations and investigations may affect the cost or demand for our products, increase capital and reserving requirements for our insurance subsidiaries, and adversely affect our profitability, liquidity, or growth.
Our insurance subsidiaries are subject to extensive supervision and regulation in the United States and abroad. The primary purpose of insurance regulation is to protect policyholders, not stockholders. To that end, applicable laws establish regulatory authorities, including state insurance departments in the United States, the PRA in the United Kingdom, and the underlying fundamentals, but this exclusionKNF in Poland, with broad administrative powers over many aspects of the insurance business. For example, our insurance subsidiaries may not be able to obtain or maintain necessary licenses, permits, authorizations, or accreditations, or may be able to do so only at great cost. In addition, we and our insurance subsidiaries may not be able to comply fully with, or obtain appropriate exemptions from, the wide variety of laws and regulations applicable to insurance companies and insurance holding companies. These laws and regulations can be complex and subject to differing interpretations and are regularly re-examined. Existing or future laws and regulations, and the manner in which they are interpreted or applied, may become more restrictive or otherwise adversely affect our operations. For example, they may restrict or prohibit the payment of dividends by our subsidiaries to us, restrict transactions between subsidiaries and/or between us and our subsidiaries, and may require contributions of capital by us to our insurance subsidiaries even if we are otherwise in compliance with stated requirements. Failure to comply with or to obtain appropriate exemptions under any applicable laws or regulations could result in restrictions on the ability of our insurance subsidiaries to do business in one or more of the jurisdictions in which they operate and could result in fines and other sanctions, which may have a material adverse effect on our business or results of operations.
Regulatory examinations or investigations could result in, among other things, an increase to reserving requirements, changes in our claims handling or other business practices, changes in procedures for the identification and payment to the states of benefits and other property that is not claimed by the owners, changes in the use and oversight of reinsurance, changes in governance and other oversight procedures, assessments by tax authorities or other governing agencies, fines, and other administrative action, which could injure our reputation, adversely affect our issuer credit ratings and financial strength ratings, place us at a competitive disadvantage in marketing or administering our products, impair our ability to sell or retain insurance policies, and/or have a material adverse effect on our results of operations or financial condition.
It is possible that there will be heightened oversight of insurers by regulatory authorities in the jurisdictions in which our insurance subsidiaries are domiciled and operate. We cannot predict specific proposals that might be adopted, or what impact, if any, such proposals or, if enacted, such laws, could have on our business, results of operations, or financial condition. For instance, the NAIC or state regulators may adopt further revisions to statutory reserving standards or the RBC formula, the PRA may revise its capital adequacy requirements and minimum solvency margins, the IAIS may adopt capital requirements to which we could be subject, or rating agencies may incorporate higher capital thresholds into their quantitative analyses, thus requiring additional capital contributions by us to our insurance subsidiaries. Increased financial services regulation, which could include activities undertaken by the NAIC and regulatory authorities in the U.K., Poland, and the EU may impose greater quantitative requirements, supervisory review, and disclosure requirements and may impact the business strategies, capital requirements, and profitability of our insurance subsidiaries. The United Kingdom's Financial Ombudsman Service, which was established to help settle disputes between consumers and businesses providing financial services, and the FCA, which has rule-making, investigative, and enforcement powers to protect consumers, may hamper our ability to do business, which could have a material adverse effect on our U.K. operations.
Our financial statements are subject to the application of generally accepted accounting principles, in the United States, the United Kingdom, and Poland, which are periodically revised and/or expanded. Accordingly, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies within these countries, which may also be influenced by the International Accounting Standards Board. Future accounting standards we adopt, including the U.S. Financial Accounting Standards Board's accounting standard update related to long-duration targeted improvements for insurance contracts, will change current accounting and disclosure requirements applicable to our financial statements. Such changes may have a material effect on our reported results of operations or financial condition and may also impact the perception of our business by external stakeholders.
We use an indication that similar itemsaffiliated captive reinsurer for the limited purpose of reinsuring risks attributable to specified policies issued or reinsured by one of our insurance subsidiaries in order to effectively manage risks in connection with certain blocks of our business as well as to enhance our capital efficiency. If we were required to discontinue use of the captive reinsurer or to alter the structure of the captive reinsurance arrangement, our ability to maintain current RBC ratios and/or our capital deployment activities could be adversely affected.
Changes in U.S. programs such as healthcare reform, the emergence of paid family and medical leave legislation, and financial services sector reform may compete with or diminish the need or demand for our products, particularly as it may affect our ability to sell our products through employers or in the workplace. The U.S. social security disability insurance program may not recurbe sustainable, which may adversely affect the level of our disability claim payments and doesreserves. Legislative changes related to pension funding requirements could negatively impact our cash flows from operations and our profitability.
Changes in tax laws and other regulations or interpretations of such laws or regulations could unfavorably impact our corporate taxes. In addition, changes in tax laws could make some of our products less attractive to consumers.
On January 31, 2020, an official bill was passed formalizing the withdrawal of the U.K. from the European Union (EU). A deal was reached on December 24, 2020 on the future trading relationship with the EU. The deal focused primarily on the trading of goods rather than the U.K.’s service sector, which will be subject to further negotiations in 2021 and will focus on financial services and future regulation. In addition, the U.K. government is reviewing the regulatory framework of financial services companies which may result in changes to U.K. regulatory capital or U.K. tax regulations. We do not replace net incomeexpect that the underlying operations of our U.K. business, nor the Polish business which is in the EU, will be significantly impacted by the withdrawal but we may see some continued dampening of growth in the U.K. as well as earnings volatility due to the current disruption and uncertainty in the U.K. economy. We may also experience volatility in the fair values of our investments in U.K. and EU-based issuers, but we do not expect a material increase in credit losses or netdefaults, nor do we believe this volatility will impact our ability to hold these investments. In addition, the current economic conditions may also cause volatility in our
solvency ratios. Our reported consolidated financial results continue to be impacted by fluctuations in the British pound sterling to dollar exchange rate.
Most group long-term and short-term disability plans we administer are governed by the Employee Retirement Income Security Act (ERISA). Changes to ERISA enacted by Congress or through judicial interpretations may adversely affect the risk to us of managing employee benefit plans, increase the premiums associated with such plans, and ultimately affect their affordability and our profitability.
The insurance departments in jurisdictions wherein our insurance subsidiaries conduct business may limit our ability to obtain rate increases under guaranteed renewable contracts or could require changes in rates and/or benefits to meet minimum loss ratio requirements which could negatively impact the profitability of our products. Many regulatory and governmental bodies have the authority to review our products and business practices and those of our agents and employees. These regulatory or governmental bodies may bring regulatory or other legal actions against us if, in their view, our practices are improper. These actions could result in substantial fines or restrictions on our business activities and could have a material adverse effect on our business or results of operations. Determination by regulatory authorities that we have engaged in improper conduct may also adversely affect our defense of various lawsuits.
A decrease in our financial strength or issuer credit ratings may adversely affect our competitive position, our ability to hedge our risks, and our cost of capital or ability to raise capital, which may adversely affect our results of operations, financial condition, or liquidity.
We compete based in part on the financial strength ratings provided by rating agencies. A downgrade of our financial strength ratings may adversely affect us and could potentially, among other things, adversely affect our relationships with distributors of our products and services and retention of our sales force, negatively impact persistency and new sales, and generally adversely affect our ability to compete. A downgrade in the issuer credit rating assigned to Unum Group can be expected to adversely affect our cost of capital and our ability to raise additional capital. If we are downgraded significantly, ratings triggers in our derivatives financial instrument contracts may result in our counterparties enforcing their option to terminate the derivative contracts. Such an event may have a material adverse effect on our financial condition or our ability to hedge our risks.
Competition may adversely affect our market share or profitability.
All of our businesses are highly competitive. We believe that the principal competitive factors affecting our business are price, the quality of our customer's experience regarding service and claims management, integrated product choices, enrollment capabilities, financial strength, and claims-paying ratings. We compete for new product sales, the retention of existing business, and the ability to attract and retain independent agents and brokers to market our products, all of which affect our profitability. All areas of the employee benefits markets are highly competitive due to the yearly renewable term nature of the group products and the large number of insurance companies offering products in this market. There is a risk that our customers may be able to obtain more favorable terms or improved technology solutions from competitors in lieu of renewing coverage with us, particularly if industry pricing levels do not align with our view of adequate premium rates. We are operating in a dynamic competitive environment of both traditional and non-traditional competitors, with changes in product offerings, enrollment capabilities, and technology solutions. The level and intensity of competition may also grow due to existing competitors becoming more aggressive, and an increase in merger and acquisition activity which may result in larger competitors with greater financial resources. There are many insurance companies which actively compete with us in our lines of business, and there is no assurance that we will be able to compete effectively against these companies and new competitors in the future.
Events that damage our reputation may adversely affect our business, results of operations, or financial condition.
There are many events which may harm our reputation, including, but not limited to, those discussed in this Item 1A regarding regulatory investigations, legal proceedings, social issues, and cyber or other information security incidents.
In addition, being in the business of insurance, we are paid to accept certain risks. Those who conduct business on our behalf, including executive officers and members of management, sales managers, investment professionals, and to some extent, independent agents and brokers, do so in part by making decisions that involve exposing us to risk. These include decisions such as maintaining effective underwriting and pricing discipline, maintaining effective claim management and customer service performance, managing our investment portfolio and derivatives trading activities, delivering effective technology solutions, complying with established sales practices, executing our capital management strategy, exiting a line of business and/or pursuing strategic growth initiatives, and other decisions. Although we employ controls and procedures designed to monitor
business decisions and prevent us from taking excessive risks or unintentionally failing to comply with internal policies and practices such that errors occur, there can be no assurance that these controls and procedures will be effective. If our employees and business associates take excessive risks and/or fail to comply with internal policies and practices, the impact of those events may damage our market position and reputation.
Depending on the severity of the damage to our reputation, we may be unable to effectively compete for new products or retain our existing business, which could adversely affect our results of operations or financial condition. Damage to our reputation may also hinder our ability to raise new capital and/or increase our cost of capital.
Litigation and contingencies are common in our businesses and may result in financial losses and/or harm to our reputation.
We are, and in the future may be, defendants in a number of litigation matters, and the outcome of this litigation is uncertain. Some of these proceedings have been brought on behalf of various alleged classes of complainants. Plaintiffs in class action and other lawsuits against us may seek very large and/or indeterminate amounts, including punitive and treble damages. An estimated loss is accrued when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An adverse outcome in one or more of these actions may, depending on the nature, scope and amount of the ruling, materially and adversely affect our results of operations or financial condition, encourage other litigation, and limit our ability to write new business, particularly if the adverse outcomes negatively impact certain of our ratings.
As part of our normal operations in managing claims, we are engaged in claim litigation where disputes arise as a measureresult of a denial or termination of benefits. Typically those lawsuits are filed on behalf of a single claimant or policyholder, and in some of these individual actions punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims. For our overall profitability.general claim litigation, we maintain reserves based on experience to satisfy judgments and settlements in the normal course. We expect that the ultimate liability, if any, with respect to general claim litigation, after consideration of the reserves maintained, will not be material to our financial condition. Nevertheless, given the inherent unpredictability of litigation, it is possible that an adverse outcome in certain claim litigation involving punitive damages may, from time to time, have a material adverse effect on our results of operations. We are unable to estimate a range of reasonably possible punitive losses.
See "Reserves for Policy and Contract Benefits", "Competition", "Regulation" and "Ratings" contained herein in Item 1, "Executive Summary" and "Critical Accounting Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, and Notes 1, 6, 7, and 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion regardingdiscussion.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
As of December 31, 2020, we owned office space comprised of five campuses located in Chattanooga, Tennessee; Portland, Maine; Columbia, South Carolina; Baton Rouge, Louisiana; and Dorking in the impactsUnited Kingdom. In addition, as of December 31, 2020, we leased office space in Worcester, Massachusetts and various other locations throughout the United States, the United Kingdom, Ireland, and Poland. Substantially all of the TCJA,properties owned or leased are used by one or more of all five reporting segments, depending on the unclaimed death benefitlocation. We believe our properties and facilities are suitable and adequate for current operations.
ITEM 3. LEGAL PROCEEDINGS
Refer to Note 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for information on legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common stock of Unum Group is traded on the New York Stock Exchange. The stock symbol is UNM. Quarterly dividends declared and paid per share of common stock are as follows:
| | | | | |
2020 | |
4th Quarter | $ | 0.285 | |
3rd Quarter | 0.285 | |
2nd Quarter | 0.285 | |
1st Quarter | 0.285 | |
| |
2019 | |
4th Quarter | $ | 0.285 | |
3rd Quarter | 0.285 | |
2nd Quarter | 0.260 | |
1st Quarter | 0.260 | |
Our board of directors has the authority to declare cash dividends on shares of our common stock. In determining dividends, the board takes into account a number of factors including our financial condition and results of operations, regulatory limitations on the payment of dividends from subsidiaries, cash requirements, general economic conditions, and other factors the board may deem relevant. For information on restrictions relating to our subsidiaries' ability to pay dividends to Unum Group and certain of its intermediate holding company subsidiaries, see "Liquidity and Capital Resources - Cash Available from Subsidiaries" contained herein in Item 7 and Note 16 of the "Notes to Consolidated Financial Statements" contained herein in Item 8. For information relating to compensation plans under which Unum Group's equity securities are authorized for issuance, see Item 12 contained herein.
As of February 12, 2021, there were 8,495 registered holders of common stock.
In May 2019, our board of directors authorized the repurchase of up to $750.0 million of Unum Group's common stock through November 23, 2020, at which point the authorization expired. We did not repurchase any shares during 2020 and as of December 31, 2020, we had not authorized a new share repurchase program.
ITEM 6. SELECTED FINANCIAL DATA
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions of dollars, except share data) | | | | | | | | | |
| At or for the Year Ended December 31 |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | | |
Income Statement Data | | | | | | | | | |
| | | | | | | | | |
Revenue | | | | | | | | | |
Premium Income | $ | 9,378.1 | | | $ | 9,365.6 | | | $ | 8,986.1 | | | $ | 8,597.1 | | | $ | 8,357.7 | |
Net Investment Income | 2,360.7 | | | 2,435.3 | | | 2,453.7 | | | 2,451.7 | | | 2,459.0 | |
Net Realized Investment Gain (Loss)1 | 1,199.1 | | | (23.2) | | | (39.5) | | | 40.3 | | | 24.2 | |
Other Income | 224.2 | | | 221.2 | | | 198.2 | | | 197.7 | | | 205.6 | |
Total Revenue | 13,162.1 | | | 11,998.9 | | | 11,598.5 | | | 11,286.8 | | | 11,046.5 | |
| | | | | | | | | |
Benefits and Expenses | | | | | | | | | |
Benefits and Change in Reserves for Future Benefits2 | 8,972.9 | | | 7,496.2 | | | 8,020.4 | | | 7,055.7 | | | 6,941.8 | |
Commissions | 1,057.3 | | | 1,122.7 | | | 1,108.4 | | | 1,060.8 | | | 1,026.7 | |
Interest and Debt Expense and Cost Related to Early Retirement of Debt3 | 188.2 | | | 204.7 | | | 167.3 | | | 159.9 | | | 166.0 | |
Other Expenses4 | 1,979.7 | | | 1,793.2 | | | 1,674.6 | | | 1,606.4 | | | 1,564.3 | |
Total Benefits and Expenses | 12,198.1 | | | 10,616.8 | | | 10,970.7 | | | 9,882.8 | | | 9,698.8 | |
| | | | | | | | | |
Income Before Income Tax | 964.0 | | | 1,382.1 | | | 627.8 | | | 1,404.0 | | | 1,347.7 | |
Income Tax | 171.0 | | | 281.8 | | | 104.4 | | | 409.8 | | | 416.3 | |
| | | | | | | | | |
Net Income | $ | 793.0 | | | $ | 1,100.3 | | | $ | 523.4 | | | $ | 994.2 | | | $ | 931.4 | |
| | | | | | | | | |
Balance Sheet Data | | | | | | | | | |
| | | | | | | | | |
Assets | $ | 70,625.8 | | | $ | 67,013.4 | | | $ | 61,875.6 | | | $ | 64,013.1 | | | $ | 61,941.5 | |
| | | | | | | | | |
Long-term Debt | $ | 3,345.7 | | | $ | 2,926.9 | | | $ | 2,971.3 | | | $ | 2,738.4 | | | $ | 2,999.4 | |
| | | | | | | | | |
Accumulated Other Comprehensive Income (Loss) | $ | 374.2 | | | $ | 37.3 | | | $ | (814.2) | | | $ | 127.5 | | | $ | (51.0) | |
Other Stockholders' Equity | 10,496.8 | | | 9,927.7 | | | 9,436.0 | | | 9,447.4 | | | 9,019.0 | |
Total Stockholders' Equity | $ | 10,871.0 | | | $ | 9,965.0 | | | $ | 8,621.8 | | | $ | 9,574.9 | | | $ | 8,968.0 | |
| | | | | | | | | |
Per Share Data | | | | | | | | | |
| | | | | | | | | |
Net Income | | | | | | | | | |
Basic | $ | 3.89 | | | $ | 5.25 | | | $ | 2.38 | | | $ | 4.39 | | | $ | 3.96 | |
Assuming Dilution | $ | 3.89 | | | $ | 5.24 | | | $ | 2.38 | | | $ | 4.37 | | | $ | 3.95 | |
| | | | | | | | | |
Stockholders' Equity | $ | 53.37 | | | $ | 49.10 | | | $ | 40.19 | | | $ | 43.02 | | | $ | 39.02 | |
| | | | | | | | | |
Cash Dividends | $ | 1.14 | | | $ | 1.09 | | | $ | 0.98 | | | $ | 0.86 | | | $ | 0.77 | |
| | | | | | | | | |
Weighted Average Common Shares Outstanding | | | | | | | | | |
Basic (000s) | 203,642.0 | | | 209,728.9 | | | 219,635.6 | | | 226,492.4 | | | 235,445.7 | |
Assuming Dilution (000s) | 203,755.3 | | | 209,854.4 | | | 220,058.6 | | | 227,335.2 | | | 235,979.2 | |
1Includes net realized investment gains of $1,302.3 million in 2020 related to the transfer of investments in the Closed Block individual disability reinsurance transaction. See Notes 3 and 12 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of the reinsurance transaction.
2 Includes a reserve increase of $151.5 million and $750.8 million in 2020 and 2018, respectively, related to our long-term care closed block business, as well as a reserve increase of $17.5 million in 2020 to our group pension closed block business. Also includes an increase in benefits and change in reserves for future benefits of $1,284.5 million in 2020 resulting from the recognition of the adjustment related to unrealized investment gains and losses previously recognized in accumulated other comprehensive income related to the previously mentioned reinsurance transaction. See Notes 6 and 12 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 and "Executive Summary" contained herein in Item 7 for further discussion of the 2020 and 2018 reserve increases and the reinsurance transaction, respectively.
3 Includes cost related to early retirement of debt of $27.3 million in 2019. See Note 8 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of the 2019 cost related to early retirement of debt.
4 Includes the net change in deferred acquisition costs as well as compensation expense and other expenses. Includes the amortization of the cost of reinsurance of $2.6 million and transaction costs of $21.0 million related to the Closed Block individual disability reinsurance transaction in 2020. Also includes a right-of-use (ROU) asset impairment of $12.7 million in 2020 related to one of our operating leases for office space that we do not plan to continue using to support general operations and $23.3 million of costs related to an organizational design update in 2020. See Note 13 and 15 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion on the organizational design update and ROU asset impairment, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis presented in this section should be read in conjunction with the "Cautionary Statement Regarding Forward-Looking Statements" included below the Table of Contents, "Risk Factors" included herein Item 1A, "Selected Financial Data" included herein this Item 6, and the Consolidated Financial Statements and notes thereto included in Item 8.
Executive Summary
2020 Operating Performance and Capital Management
For 2020, we reported net income of $793.0 million, or $3.89 per diluted common share, compared to net income of $1,100.3 million, or $5.24 per diluted common share, in 2019. Included in our results for 2020 are: (i) the impact from the Closed Block individual disability reinsurance agreement, which resulted in a net loss fromof $5.8 million before tax and a guaranty fund assessment, respectively.
Anet gain of $32.0 million after tax, or $0.16 per diluted common share, (ii) a reserve increase related to our long-term care block of business of $151.5 million before tax and $119.7 million after tax, or $0.59 per diluted common share, (iii) a reserve increase related to our group pension block of business of $17.5 million before tax and $13.8 million after tax, or $0.07 per diluted common share, (iv) costs related to an organizational design update in the amount of $23.3 million before tax and $18.6 million after tax, or $0.09 per diluted common share, (v) an impairment loss on the right-of-use (ROU) asset related to one of our operating leases of $12.7 million before tax and $10.0 million after tax, or $0.05 per diluted common share, and (vi) a net realized investment loss, excluding the net realized investment gain related to the reinsurance transaction, of $103.2 million before tax and $82.3 million after tax, or $0.40 per diluted common share. Included in our 2019 results are costs related to the early retirement of debt of $27.3 million before tax and $21.6 million after tax, or $0.11 per diluted common share and a net realized investment loss of $23.2 million before tax and $18.7 million after tax, or $0.09 per diluted common share. Adjusting for these items, after-tax adjusted operating income for 2020 was $1,005.4 million, or $4.93 per diluted common share compared to $1,140.6 million, or $5.44 per diluted common share for 2019. See "Closed Block Individual Disability Reinsurance Agreement," "Long-term Care Reserve Increase," "Group Pension Reserve Increase," "Costs Related to Organizational Design Update," "Impairment Loss on ROU Asset," "Reconciliation of Non-GAAP and Other Financial Measures," and "Consolidated Operating Results" contained herein in this Item 7 for further discussion and a reconciliation of GAAP financial measuresthese items.
Our Unum US segment reported a decrease in adjusted operating income of 19.9 percent in 2020 compared to 2019, due to unfavorable benefits experience, particularly in the group life product line, and higher operating expenses. The benefit ratio for our non-GAAP financial measures isUnum US segment for 2020 was 68.8 percent, compared to 66.9 percent in 2019. Unum US sales decreased 10.0 percent in 2020 compared to 2019. Overall persistency was lower relative to the prior year period.
Our Unum International segment reported a decrease in adjusted operating income of 29.0 percent in 2020 compared to 2019, as follows:measured in U.S. dollars. Our Unum UK line of business reported a decrease in adjusted operating income of 32.3 percent compared to 2019, as measured in local currency, due primarily to unfavorable benefits experience and lower net investment income, partially offset by an increase in premium income. The benefit ratio for our Unum UK line of business was 78.9 percent in 2020 compared to 76.7 percent in 2019. Unum International sales, as measured in U.S. dollars, decreased 9.5 percent in 2020 compared to 2019. Unum UK sales, as measured in local currency, decreased 10.8 percent in 2020 compared to 2019. Overall persistency was lower relative to the prior year period.
Our Colonial Life segment reported a decrease in adjusted operating income of 2.6 percent in 2020 compared to 2019 due to unfavorable benefits experience, partially offset by premium growth, higher net investment income, and lower operating expenses. The 2020 benefit ratio for Colonial Life was 52.9 percent, compared to 51.3 percent in 2019. Colonial Life sales decreased 27.0 percent in 2020 compared to 2019. Overall persistency was higher relative to the prior year period. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31 |
| 2017 | | 2016 | | 2015 |
| (in millions) | | per share * | | (in millions) | | per share * | | (in millions) | | per share * |
Net Income | $ | 994.2 |
| | $ | 4.37 |
| | $ | 931.4 |
| | $ | 3.95 |
| | $ | 867.1 |
| | $ | 3.50 |
|
Excluding: | | | | | | | | | | | |
Net Realized Investment Gain (Loss) (net of tax expense (benefit) of $15.0; $8.4; $(17.7)) | 25.3 |
| | 0.11 |
| | 15.8 |
| | 0.07 |
| | (26.1 | ) | | (0.11 | ) |
Loss from Guaranty Fund Assessment (net of tax benefit of $7.2; $-; $-) | (13.4 | ) | | (0.06 | ) | | — |
| | — |
| | — |
| | — |
|
Unclaimed Death Benefits Reserve Increase (net of tax benefit of $13.6; $-; $-) | (25.4 | ) | | (0.11 | ) | | — |
| | — |
| | — |
| | — |
|
Net Tax Benefit from Impacts of TCJA | 31.5 |
| | 0.14 |
| | — |
| | — |
| | — |
| | — |
|
After-tax Adjusted Operating Income | $ | 976.2 |
| | $ | 4.29 |
| | $ | 915.6 |
| | $ | 3.88 |
| | $ | 893.2 |
| | $ | 3.61 |
|
| | | | | | | | | | | |
* Assuming Dilution | | | | | | | | | | | |
We measure and analyze ourOur Closed Block segment performance on the basis of "adjusted operating revenue" and "adjusted operating income" or "adjusted operating loss", which differ from total revenue and incomereported a loss before income tax as presented in our consolidated statements of income due to the exclusion ofand net realized investment gains and losses of $1,235.7 million, which includes the impacts related to the Closed Block individual disability reinsurance agreement and certain otherthe reserve increases related to our long-term care and group pension blocks of business. Excluding these items, our Closed Block segment reported adjusted operating income of $241.4 million in 2020 compared to $137.7 million in 2019. The long-term care interest adjusted loss ratio for 2020 was favorable relative to our range of expectations. The individual disability interest adjusted loss ratio, excluding the reserve recognition impact from the Closed Block individual disability reinsurance agreement, was unfavorable in 2020 compared to 2019 but generally remained within our expectations.
Our net investment income yields continue to be pressured by the low interest rate environment as specifiedwe maintain consistent credit quality in our invested asset portfolio. The net unrealized gain on our fixed maturity securities was $7.6 billion at December 31,
2020, compared to $6.4 billion at December 31, 2019, with the increase due primarily to a decline in U.S. Treasury rates. The earned book yield on our investment portfolio was 4.75 percent for 2020 compared to a yield of 5.00 percent for 2019.
We believe our capital and financial positions are strong. At December 31, 2020, the RBC ratio for our traditional U.S. insurance subsidiaries, calculated on a weighted average basis using the NAIC Company Action Level formula, was approximately 365 percent, which is in line with our expectations. We did not repurchase shares during 2020. Our weighted average common shares outstanding, assuming dilution, equaled 203.8 million for 2020 compared to 209.9 million for 2019. As of December 31, 2020, Unum Group and our intermediate holding companies had available holding company liquidity of $1,512 million that was held primarily in fixed maturity securities, short-term investments, and cash.
Closed Block Individual Disability Reinsurance Agreement
In December 2020, Provident Life and Accident Insurance Company, The Paul Revere Life Insurance Company, and Unum Life Insurance Company of America, wholly-owned domestic insurance subsidiaries of Unum Group and collectively referred to as "the ceding companies", entered into a series of agreements (collectively referred to as the "reinsurance agreement") with Commonwealth Annuity and Life Insurance Company (Commonwealth), a subsidiary of Global Atlantic Financial Group, to reinsure on a coinsurance basis effective as of July 1, 2020, approximately 75 percent of the Closed Block individual disability insurance business, primarily direct business written by the ceding companies. Commonwealth has established and will maintain collateralized trust accounts for the benefit of the ceding companies to secure its obligations under the reinsurance agreement. As part of the agreement, additional Closed Block individual disability business consisting of direct business not ceded in December 2020 and business assumed by the ceding companies from third parties, is expected to be reinsured in the reconciliations below. These performance measures arefirst quarter of 2021, subject to receipt of required consents and regulatory approvals and the satisfaction or waiver of other customary closing conditions and is considered the second phase of this transaction.
In December 2020, Provident Life and Casualty Insurance Company (PLC), also a wholly-owned domestic insurance subsidiary of Unum Group, entered into an agreement with Commonwealth whereby PLC will provide a 12-year volatility cover to Commonwealth for the active life cohort (ALR cohort), which represents approximately five percent of the reserves ceded to Commonwealth. As part of this agreement, PLC received a payment from Commonwealth of approximately $62 million. PLC will provide similar coverage to Commonwealth related to the additional business that will be ceded as part of the second phase of the transaction. At the end of the 12-year coverage period, Commonwealth will retain the remaining incidence and claims risk on the ALR cohort of the ceded business.
In connection with the first phase of the coinsurance agreement that closed in accordance with GAAP guidanceDecember 2020, the ceding companies paid a total cash ceding commission to Commonwealth of approximately $438 million and transferred additional assets consisting primarily of fixed maturity securities and cash totaling $6,669.8 million. As a result of this reinsurance agreement, we recognized the following in the fourth quarter of 2020:
•Net realized investment gains totaling $1,302.3 million, or $1,028.8 million after tax, related to the transfer of investments.
•Increase in benefits and change in reserves for segment reporting, but they should not be viewedfuture benefits of $1,284.5 million, or $1,014.7 million after tax, resulting from the realization of previously unrealized investment gains and losses recorded in accumulated other comprehensive income.
•Transaction costs totaling $21.0 million, or $16.6 million after tax.
•Tax benefit of $36.5 million.
•Reinsurance recoverable of $6,141.5 million related to the policies on claim status (DLR cohort).
•Cost of reinsurance, or prepaid reinsurance premium, of $815.7 million related to the DLR cohort, of which we recognized amortization expense of $2.6 million, or $2.0 million after tax, subsequent to the closing of the transaction.
•Deposit asset of $88.2 million related to the ALR cohort.
In the fourth quarter of 2020, we released approximately $400 million of capital as a substituteresult of the reinsurance transaction and we expect to release approximately $250 million of additional capital in the first quarter of 2021 assuming the second phase of the transaction is fully executed, subject to receipt of required consents and regulatory approvals and the satisfaction or waiver of other customary closing conditions. See "Reinsurance" contained herein in Item 1; "Segment Results," and "Liquidity and Capital Resources - Cash Available from Subsidiaries" contained herein in Item 7, and Notes 12 and 16 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for total revenue, income before incomefurther discussion on the impacts related to this reinsurance agreement.
2020 Long-term Care Reserve Increase
During the fourth quarter of 2020, we completed a review of policy reserve adequacy, which incorporated our most recent experience and included a review of all material assumptions. Based on our analysis, during the fourth quarter of 2020, we updated our reserve assumptions and determined that our gross policy and claim reserves should be increased by $151.5 million to reflect our current estimate of future benefit obligations. This increase was primarily driven by an update to our interest rate assumption, partially offset by favorable premium rate increase approvals and inventory updates. See "Trends in Key Assumptions" contained herein in the "Critical Accounting Estimates" of this Item 7 for further discussion of the assumptions used in our long-term care reserve update.
2020 Group Pension Reserve Increase
During the fourth quarter of 2020, we completed our annual review of policy reserve adequacy, which incorporated our most recent experience and included a review of all assumptions. Based on our analysis, during the fourth quarter of 2020, we updated our reserve assumptions and determined that our policy and claim reserves should be increased by $17.5 million to reflect our updated discount rate assumptions.
Costs Related to Organizational Design Update
During the third quarter of 2020, we realigned certain parts of our organizational structure by shifting resources to accelerate growth, fund priority investments, and simplify and improve our business practices. In connection with this update, we incurred charges of $23.3 million, which primarily consisted of employee severance and benefit costs as well as costs related to lease terminations and the disposal of certain fixed assets. This update did not result in the exit or disposal of any of our lines of business and we do not expect material additional costs associated with this update in the future.
Impairment Loss on ROU Asset
During the second quarter of 2020, we recognized an impairment loss of $12.7 million on the ROU asset related to one of our operating leases for office space that we do not plan to continue using to support our general operations. The impairment loss was recorded as a result of a decrease in the fair value of the ROU asset compared to its carrying value.
U.K. Tax Law Change
On July 22, 2020, the Finance Bill 2019-21 was enacted, resulting in a U.K. tax rate increase from 17 percent to 19 percent, retroactively effective April 1, 2020, which resulted in tax expense of $9.3 million for the revaluation of our tax assets and liabilities.
U.K. Referendum
On January 31, 2020, an official bill was passed formalizing the withdrawal of the U.K. from the European Union (EU). A deal was reached on December 24, 2020 on the future trading relationship with the EU. The deal focused primarily on the trading of goods rather than the U.K.’s service sector, which will be subject to further negotiations in 2021 and will focus on financial services and future regulation. In addition, the U.K. government is reviewing the regulatory framework of financial services companies which may result in changes to U.K. regulatory capital or net income. A reconciliationU.K. tax regulations. We do not expect that the underlying operations of total revenueour U.K. business, nor the Polish business which is in the EU, will be significantly impacted by the withdrawal, but we may see some continued dampening of growth in the U.K. as well as earnings volatility due to "adjusted operating revenue"the current disruption and income before income taxuncertainty in the U.K. economy. We may also experience volatility in the fair values of our investments in U.K. and EU-based issuers, but we do not expect a material increase in impairments or defaults, nor do we believe this volatility will impact our ability to "adjusted operating income" is as follows:
hold these investments. In addition, the current economic conditions may also cause volatility in our solvency ratios. Our reported consolidated financial results may continue to be impacted by fluctuations in the British pound sterling to dollar exchange rate. See "Regulation" contained herein in Item 1, "Risk Factors" contained herein Item 1A, and "Unum International Segment" contained herein this Item 7.
|
| | | | | | | | | | | |
| Year Ended December 31 |
| 2017 | | 2016 | | 2015 |
| (in millions of dollars) |
Total Revenue | $ | 11,286.8 |
| | $ | 11,046.5 |
| | $ | 10,731.3 |
|
Excluding: | | | | | |
Net Realized Investment Gain (Loss) | 40.3 |
| | 24.2 |
| | (43.8 | ) |
Adjusted Operating Revenue | $ | 11,246.5 |
| | $ | 11,022.3 |
| | $ | 10,775.1 |
|
| | | | | |
Income Before Income Tax | $ | 1,404.0 |
| | $ | 1,347.7 |
| | $ | 1,238.3 |
|
Excluding: | | | | | |
Net Realized Investment Gain (Loss) | 40.3 |
| | 24.2 |
| | (43.8 | ) |
Loss from Guaranty Fund Assessment | (20.6 | ) | | — |
| | — |
|
Unclaimed Death Benefits Reserve Increase | (39.0 | ) | | — |
| | — |
|
Adjusted Operating Income | $ | 1,423.3 |
| | $ | 1,323.5 |
| | $ | 1,282.1 |
|
Coronavirus Disease 2019 (COVID-19)
Critical Accounting Estimates
On March 11, 2020, the World Health Organization identified the spread of COVID-19 as a pandemic. COVID-19 has caused significant disruption to the global economy and has unfavorably impacted our company as well as the overall insurance industry. Due to the unprecedented nature of these events and the current pace of change in this environment, we cannot fully estimate the ultimate impact of the COVID-19 pandemic at this time. We are closely monitoring several key factors related to our business that have and may continue to have adverse impacts.
Results of Operations
Benefits Experience
We preparehave identified activity in certain of our financial statements in accordanceproducts that is inconsistent with GAAP. The preparation of financial statements in conformity with GAAP requires ushistorical experience that is due to make estimatesCOVID-19 and assumptions that affect amounts reportedthe related environment. In particular, we have experienced higher mortality in our financial statementslife product lines, higher claim incidence in certain of our disability product lines, and accompanying notes. Estimateslower claim resolutions in our Unum UK group long-term disability product line due to disruptions in our claims processes. Conversely, we experienced lower claims utilization in our dental and assumptions could changevision products, particularly in the futuresecond quarter of 2020, resulting from the impact of stay-at-home orders and general quarantine measures. With respect to our long-term care product line, we have experienced higher claimant mortality and lower submitted incidence.
We continue to monitor the benefits experience across all of our products for trends potentially correlated with COVID-19. For further discussion regarding the benefits experience for each of our operating business segments, see "Segment Results" herein in this Item 7.
Net Investment Income
During 2020, we have experienced a decline in our net investment income as morea result of the current economic conditions. The current economic conditions have sustained the low interest rate environment, which has and will continue to impact the yield on our invested assets, particularly related to the investment of new cash flows. The net asset values of our partnership investments continued to improve in the fourth quarter of 2020 from the depressed values experienced earlier in the year reflecting the improved market conditions of the third quarter of 2020 and resulted in overall positive earnings in 2020 for our partnership investments although lower than the level of earnings we experienced in 2019. We have also worked with certain of our commercial mortgage loan borrowers that have requested temporary payment deferrals but these instances have not resulted in a significant number of loans with deferrals or a significant impact on our net investment income. For further information becomes known,on our investment portfolio, see "Investments" contained herein in this Item 7 and Notes 2 and 3 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Premium Income and Premium Receivable Collectability
We have experienced a disruption in sales activity related to certain of our product lines due to some potential new customers deferring their purchasing decisions given the current economic environment and challenges in our ability to meet with potential new customers for policies that are traditionally sold in person mitigated somewhat by our investment in digital tools and capabilities. If we continue to experience this disruption, our premium income may decline. In addition, in certain of our product lines, we are also experiencing a decline in the number of lives insured by our customers as they navigate the current environment. Although we have not experienced a material decline in the collectability of premiums due from our customers, we have increased the allowance for credit losses on our premium receivable balances to consider higher unemployment levels and the general uncertainty regarding the financial condition of our customers. We continue to work with our customers to understand their respective financial conditions and develop solutions on a case-by-case basis to allow for additional payment flexibility to enhance the likelihood of premium collection and avoid disruptions in coverage. However, circumstances may deteriorate quickly which could result in the decline of persistency levels and sales growth in the near term, and potentially longer if the current situation persists, which may materially impact the amounts reported and disclosed in our financial statements. The accounting estimates deemed to be most critical to our financial position and results of operations are those related to reservesthrough continued increases in our allowances for policycredit losses and contract benefits, deferred acquisition costs, valuation of investments, pension and postretirement benefit plans, income taxes, and contingent liabilities. For additional information, refer to our significant accounting policies inlower premium income.
See Note 1 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further information on our allowances for credit losses.
Financial Condition
Investments
Regarding our fixed maturity security portfolio, the current economic conditions have increased volatility in the capital markets and have caused significant pressure on the profitability of many companies. The sharp decline in oil prices experienced earlier in the year and decrease in demand due to COVID-19, which began in the first quarter of 2020, also caused pressure on the profitability of companies in the energy sector. We recorded credit losses during the first quarter of 2020 primarily related to fixed maturity securities issued by companies in the energy sector, but recorded minimal credit losses related to energy securities in the remainder of 2020 primarily as a result of the improvement in oil prices. Our exposure to consumer cyclicals which have been stressed due to COVID-19 related shutdowns is a small portion of our portfolio and our exposure to other stressed industries such as airlines and restaurants is minimal. We continue to monitor capital market activity on a regular basis and to the extent that there are continued volatility and ratings downgrades related to the issuers of our fixed maturity securities, we could experience further credit losses, an increase in defaults, and the need for additional capital in our insurance subsidiaries. However, we remain confident in the overall strength and credit quality of our investment portfolio.
Other
If we continue to experience unfavorable trends in the above areas of focus, we may also experience certain additional, correlated impacts such as an increase in the amortization of deferred acquisition costs if we have a decline in persistency. We may also be required to write-off or impair certain intangible/long-lived assets such as value of business acquired and goodwill if we experience declines in the overall profitability of our businesses. Furthermore, if the profitability of our businesses declines, we may also be required to establish a valuation allowance regarding the realization of our deferred tax assets.
Liquidity and Capital Resources
We have strengthened our liquidity position through actions such as maintaining a higher level of short-term investments and posting additional collateral from certain of our U.S. insurance subsidiaries to the regional Federal Home Loan Banks (FHLB). As a result, we believe we have the appropriate liquidity and access to capital to avoid significant disruption to our operations. We have not yet experienced a significant impact to our liquidity as a result of the collection of premiums and submitted claims activity; however, we continually monitor the developments of these items.
As of December 31, 2020, we have borrowed $312.2 million of funds through our memberships with the regional FHLBs and those funds are used for the purpose of investing in either short-term investments or fixed maturity securities. Although we did increase FHLB borrowings at December 31, 2020, we have additional borrowing capacity of approximately $1,093 million that can be utilized for liquidity if the need arises. Additionally, we have access to two unsecured revolving credit facilities under separate syndicates of lenders that allow us to borrow up to a total of $600 million. There are currently no outstanding borrowings on these facilities but we remain in compliance with required covenants should we choose to borrow in the future. In May 2020, we issued $500.0 million of 4.500% senior notes due 2025 which strengthened our liquidity and demonstrated our ability to raise capital in a strained economic environment.
Following the maturity of our $400.0 million aggregate principal amount of 5.625% unsecured notes in the third quarter of 2020, which was funded through an issuance of debt during the second quarter of 2019, we have no significant upcoming debt maturities until 2024. We continue to meet the financial covenants contained in our current debt agreements and credit facilities, and we expect that we will continue to meet those covenants in subsequent periods.
To the extent that we begin to experience a significant impact to our liquidity, we would likely sell highly liquid invested assets or borrow funds on our credit facilities to meet operational cash flow requirements.
Business Operations
Other than disruption to sales processes in certain of our product lines, we have not experienced a significant disruption to our operational processes as we have been able to successfully implement our business continuation plans to accommodate remote work arrangements for the safety of our employees and customers. We also have not experienced significant disruption to our financial reporting systems or internal control over financial reporting and disclosure controls and procedures as a result of COVID-19. We have implemented travel restrictions for the safety of our employees and customers, but do not expect those restrictions to significantly disrupt our operations.
2018 Long-term Care Reserve Increase
Policy reserves for our long-term care block of business are determined using the gross premium valuation method and, prior to the third quarter of 2018, were valued based on assumptions established as of December 31, 2014, the date of our last assumption update under loss recognition. Gross premium valuation assumptions do not change after the date of loss recognition unless reserves are again determined to be deficient. We undertake a review of policy reserve adequacy annually during the fourth quarter of each year, or more frequently if appropriate, using best estimate assumptions as of the date of the review.
During the third quarter of 2018, we completed our annual review of policy reserve adequacy, which incorporated our most recent experience and included a review of all assumptions. The review utilized internal and external data and outside consulting firms for quality assurance and industry benchmarking. Based on our analysis, during the third quarter of 2018, we updated our reserve assumptions and determined that our policy and claim reserves should be increased by $750.8 million, or $593.1 million after-tax, to reflect our current estimate of future benefit obligations. This increase was primarily driven by the update to our liability and interest rate assumptions, particularly claims incidence and claim termination rates, which resulted in an increase to reserves of approximately $2.2 billion. Partially offsetting the increase was the update to our assumptions for premium rate increases which decreased reserves approximately $1.4 billion, resulting in the net increase to reserves of $750.8 million.
2018 Acquisitions of Business
In November 2018, we acquired 100 percent of the shares and voting interests in Jaimini Health, Inc. (Jaimini Health), a dental health maintenance organization. The acquisition of Jaimini Health will broaden our employee benefit dental offerings in the U.S., particularly in the state of California and is reported in our Unum US segment.
In October 2018, we acquired 100 percent of the shares and voting interests in Pramerica Zycie TUiR S.A. (which we have subsequently renamed Unum Zycie TUiR S.A. and refer to as Unum Poland), a financial protection benefits provider in Poland. This acquisition will expand our European presence, which we believe to be an attractive market for financial protection benefits.
In January 2018, we acquired 100 percent of the shares and voting interests in Leavelogic, Inc (Leavelogic), a leave management technology provider. The acquisition of Leavelogic will enhance our current leave management offerings by providing tools for employers and employees to better manage the family leave process and is reported in our Unum US segment.
See Note 13 of the " Notes to Consolidated Financial Statements” contained herein in Item 8 for further details.
Consolidated Company Outlook for 2021
We believe our disciplined approach to providing financial protection products at the workplace puts us in a position of strength. The products and services we provide have never been more important to employers, employees and their families, especially given the emergence of the COVID-19 pandemic. We continue to fulfill our corporate purpose of helping the working world thrive throughout life’s moments by providing excellent service to people at their time of need. Our strategy remains centered on growing our core businesses through investing and transforming our operations and technology to anticipate and respond to the changing needs of our customers, expand into new adjacent markets through meaningful partnerships and effective deployment of our capital across our portfolio.
In consideration of the recent COVID-19 pandemic, in the near term, we expect top line growth to be challenging, and we may also continue to experience increased claims volatility. The low interest rate environment continues to place pressure on our profit margins by impacting net investment income yields as well as potentially discount rates on our insurance liabilities. We would also expect to experience further investment volatility through net investment income, particularly for partnership net asset value changes. As part of our continued pricing discipline and our reserving methodology, we continuously monitor emerging interest rate experience and adjust our pricing and reserve discount rates, as appropriate.
Our business is well-diversified by geography, industry exposures and case size, and we continue to analyze and employ strategies that we believe will help us navigate the current environment. These strategies allow us to maintain financial flexibility to support the needs of our businesses, while also returning capital to our shareholders. We have strong core businesses that have a track record of generating significant capital, and we will continue to invest in our operations and expand into adjacent markets where we can best leverage our expertise and capabilities to capture market growth opportunities as those opportunities re-emerge. Long-term, we believe that consistent operating results, combined with the implementation of strategic initiatives and the effective deployment of capital, will allow us to meet our financial objectives.
Further discussion is included in "Reconciliation of Non-GAAP Financial Measures," "Consolidated Operating Results," "Segment Results," "Investments," and "Liquidity and Capital Resources" contained herein in this Item 7 and in the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Reserves for Policy and Contract Benefits
The applicable insurance laws under which insurance companies operate require that they report, as liabilities, policy reserves to meet future obligations on their outstanding policies. These reserves are the amounts which, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated to be sufficient to meet the various policy and contract obligations as they mature. These laws specify that the reserves shall not be less than reserves calculated using certain specified mortality and morbidity tables, interest rates, and methods of valuation required for statutory accounting.
The reserves reported in our financial statements contained herein are calculated in conformity with GAAP and differ from those specified by the laws of the various states and reported in the statutory financial statements of our life insurance subsidiaries. These differences result from the use of mortality and morbidity tables and interest assumptions which we believe are more representative of the expected experience for these policies than those required for statutory accounting purposes and also result from differences in actuarial reserving methods.
The assumptions we use to calculate our reserves are intended to represent an estimate of experience for the period that policy benefits are payable. If actual experience is equal, or favorable, to our reserve assumptions, then reserves should be adequate to provide for future benefits and expenses. If experience is less favorable than the reserve assumptions, additional reserves may be required. The key experience assumptions include claim incidence rates, claim resolution rates, mortality and morbidity rates, policy persistency, interest rates, premium rate increases, and any applicable policy benefit offsets, including those for social security and other government-based welfare benefits. We periodically review our experience and update our policy reserves for new issues and reserves for all claims incurred, as we believe appropriate.
The consolidated statements of income include the annual change in reserves for future policy and contract benefits. The change reflects a normal accretion for premium payments and interest buildup and decreases for policy terminations such as lapses, deaths, and benefit payments. If policy reserves using best estimate assumptions as of the date of a test for loss recognition are higher than existing policy reserves net of any deferred acquisition costs, the increase in reserves necessary to recognize the deficiency is also included in the change in reserves for future policy and contract benefits.
For further discussion of reserves, refer to "Risk Factors" contained herein in Item 1A, "Critical Accounting Estimates" and the discussion of segment operating results included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, and Notes 1 and 6 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Investments
Investment activities are an integral part of our business, and profitability is significantly affected by investment results. We segment our invested assets into portfolios that support our various product lines. Generally, our investment strategy for our portfolios is to manage the effective asset cash flows and durations with related expected liability cash flows and durations to consistently meet the liability funding requirements of our businesses. We seek to earn investment income while assuming credit risk in a prudent and selective manner, subject to constraints of quality, liquidity, diversification, and regulatory considerations. Our overall investment philosophy is to invest in a portfolio of high quality assets that provide investment returns consistent with that assumed in the pricing of our insurance products. Assets are invested predominately in fixed maturity securities. Changes in interest rates may affect the amount and timing of cash flows.
We manage our asset and liability cash flow match and our asset and liability duration match to manage interest rate risk. We may redistribute investments among our different lines of business, when necessary, to adjust the cash flow and/or duration of the asset portfolios to better match the cash flow and duration of the liability portfolios. Asset and liability portfolio modeling is updated on a quarterly basis and is used as part of the overall interest rate risk management strategy. Cash flows from the in-force asset and liability portfolios are projected at current interest rate levels and at levels reflecting an increase and a decrease in interest rates to obtain a range of projected cash flows under the different interest rate scenarios. These results enable us to assess the impact of projected changes in cash flows and duration resulting from potential changes in interest rates. Testing the asset and liability portfolios under various interest rate scenarios enables us to choose what we believe to be the most appropriate investment strategy, as well as to limit the risk of disadvantageous outcomes. Although we test the asset and liability portfolios under various interest rate scenarios as part of our modeling, the majority of our liabilities related to insurance contracts are not interest rate sensitive, and we therefore have minimal exposure to policy withdrawal risk. Our determination of investment strategy relies on long-term measures such as reserve adequacy analysis and the relationship between the portfolio yields supporting our various product lines and the aggregate discount rate assumptions embedded in the
reserves. We also use this analysis in determining hedging strategies and utilizing derivative financial instruments for managing interest rate risk and the risk related to matching duration for our assets and liabilities. We do not use derivative financial instruments for speculative purposes.
Refer to "Risk Factors" contained herein in Item 1A; "Critical Accounting Estimates" and the discussion of investments in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7; "Quantitative and Qualitative Disclosures About Market Risk" herein in Item 7A; and Notes 1, 2, 3, and 4 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for information on our investments and derivative financial instruments.
Ratings
AM Best, Fitch Ratings (Fitch), Moody's Investors Service (Moody's), and Standard & Poor's Ratings Services (S&P) are among the third parties that assign issuer credit ratings to Unum Group and financial strength ratings to our insurance subsidiaries. Issuer credit ratings reflect an agency's opinion of the overall financial capacity of a company to meet its senior debt obligations. Financial strength ratings are specific to each individual insurance subsidiary and reflect each rating agency's view of the overall financial strength (capital levels, earnings, growth, investments, business mix, operating performance, and market position) of the insuring entity and its ability to meet its obligations to policyholders. Both the issuer credit ratings and financial strength ratings incorporate quantitative and qualitative analyses by rating agencies and are routinely reviewed and updated on an ongoing basis.
Rating agencies assign an outlook statement of "positive," "negative," or "developing" to indicate an intermediate-term trend in credit fundamentals which could lead to a rating change. "Positive" means that a rating may be raised, "negative" means that a rating may be lowered, and "developing" means that a rating may be raised or lowered with equal probability. Alternatively, a rating may have a "stable" outlook to indicate that the rating is not expected to change.
"Credit watch" or "under review" highlights the potential direction of a short-term or long-term rating. It focuses on identifiable events and short-term trends that cause a rating to be placed under heightened surveillance by a rating agency. Events that may trigger this action include mergers, acquisitions, recapitalizations, regulatory actions, criteria changes, or operating developments. Ratings may be placed on credit watch or under review when an event or a change in an expected trend occurs and additional information is needed to evaluate the current rating level. This status does not mean that a rating change is inevitable, and ratings may change without first being placed on a watch list. A rating is not a recommendation to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the rating agency. Each rating should be evaluated independently of any other rating.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Ratings" contained herein in Item 7 for our current outlook, issuer credit, and financial strength ratings. See also further discussion in "Risk Factors" contained herein in Item 1A.
Competition
There is significant competition among insurance companies for the types of products we sell. We are operating in a dynamic competitive environment of both traditional and non-traditional competitors, with changes in product offerings, enrollment services, and technology solutions. We believe that the principal competitive factors affecting our business are price, quality of the customer experience regarding service and claims management, integrated product choices, enrollment capabilities, financial strength ratings, claims-paying ratings, and a solution to allow our customers to comply with the changing laws and regulations related to family medical leave benefits.
Our principal competitors for our products include the largest insurance companies in the industry as well as regional companies offering specialty products. Some of these companies have more competitive pricing or have higher claims-paying ratings. Some may also have greater financial resources with which to compete.
In the United Kingdom and Poland, where we sell both individual and group products, we compete with a mix of large internationally recognized providers and strong local carriers.
All areas of the employee benefits markets are highly competitive due to the yearly renewable term nature of our products and the large number of insurance companies offering products in this market. There is a risk that our customers may be able to obtain more favorable terms or improved technology solutions from competitors in lieu of renewing coverage with us. The
effect of competition may, as a result, adversely affect the persistency of these and other products, as well as our ability to sell products in the future.
We must attract and retain independent agents and brokers to actively market our products. Strong competition exists among insurers for agents and brokers. We compete with other insurers for sales agents and brokers primarily on the basis of our product offerings, financial strength, support services, and compensation. Sales of our products could be materially adversely affected if we are unsuccessful in attracting and retaining agents and brokers.
For further discussion, refer to "Risk Factors" contained herein in Item 1A.
Regulation
We and our subsidiaries are subject to extensive and comprehensive supervision and regulation in the United States, the United Kingdom, and Poland. The laws and regulations with which we must comply are complex and subject to change. New or existing laws and regulations may become more restrictive or otherwise adversely affect our operations.
Insurance Regulation and Oversight
Our U.S. insurance subsidiaries are subject to regulation and oversight by insurance regulatory authorities in the jurisdictions in which they do business and by the U.S. Department of Labor (DOL) on a national basis, primarily for the protection of policyholders. State insurance regulators in the U.S. generally have broad powers with respect to all aspects of the insurance business, including the power to: license and examine insurance companies; regulate and supervise sales practices and market conduct; license agents and brokers; approve policy forms; approve premium rates and subsequent increases thereon for certain insurance products; establish reserve requirements and solvency standards; place limitations on shareholder dividends; prescribe the form and content of required financial statements and reports; regulate the types and amounts of permitted investments; and regulate reinsurance transactions. Our U.S. insurance subsidiaries are examined periodically by their states of domicile and by other states in which they are licensed to conduct business. The domestic examinations have traditionally emphasized financial matters from the perspective of protection of policyholders, but they can and have covered other subjects that an examining state may be interested in reviewing, such as market conduct issues and reserve adequacy. Examinations in other states more typically focus on market conduct, such as a review of sales practices, including the content and use of advertising materials and the licensing and appointing of agents and brokers, as well as underwriting, claims, and customer service practices, and identification and handling of unclaimed property to determine compliance with state laws. Our U.S. insurance subsidiaries are also subject to assessments by state insurance guaranty associations to cover the proportional cost of insolvent or failed insurers. The DOL enforces a comprehensive federal statute which regulates claims paying fiduciary responsibilities and reporting and disclosure requirements for most employee benefit plans.
Our U.K. insurance subsidiary, Unum Limited, is subject to dual regulation by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The PRA oversees the financial health and stability of financial services firms and is responsible for the prudential regulation and day-to-day supervision of insurance companies. The FCA seeks to protect consumers and oversees financial services products and practices, including those governing insurance companies in the U.K.
On January 31, 2020, an official bill was passed formalizing the withdrawal of the U.K. from the European Union (EU). A deal was reached on December 24, 2020 on the future trading relationship with the EU. The deal focused primarily on the trading of goods rather than the U.K.’s service sector, which will be subject to further negotiations in 2021 and will focus on financial services and future regulation. In addition, the U.K. government is reviewing the regulatory framework of financial services companies which may result in changes to U.K. regulatory capital or U.K. tax regulations. We do not expect that the underlying operations of our U.K. business, nor the Polish business which is in the EU, will be significantly impacted by the withdrawal, but we may see some continued dampening of growth in the U.K. as well as earnings volatility due to the current disruption and uncertainty in the U.K. economy. We may also experience volatility in the fair values of our investments in U.K. and EU-based issuers, but we do not expect a material increase in credit losses or defaults, nor do we believe this volatility will impact our ability to hold these investments. In addition, the current economic conditions may also cause volatility in our solvency ratios. Our reported consolidated financial results continue to be impacted by fluctuations in the British pound sterling to dollar exchange rate.
Our Polish insurance subsidiary, Unum Zycie TUiR, is subject to regulation by the Komisja Nadzoru Finansowego (KNF) of the Financial Supervision Authority (FSA) in Poland. The KNF oversees the financial health and stability of financial services firms and is responsible for the prudential regulation and day-to-day supervision of insurance companies and other financial institutions.
Capital Requirements
Risk-based capital (RBC) standards for U.S. life insurance companies are prescribed by the National Association of Insurance Commissioners (NAIC). The domiciliary states of our U.S. insurance subsidiaries have all adopted a version of the NAIC RBC Model Act, which prescribes a system for assessing the adequacy of statutory capital and surplus for all life and health insurers. The basis of the system is a risk-based formula that applies prescribed factors to the various risk elements in a life and health insurer's business to report a minimum capital requirement proportional to the amount of risk assumed by the insurer. The life and health RBC formula is designed to measure annually (i) the risk of loss from asset defaults and asset value fluctuations, (ii) the risk of loss from adverse mortality and morbidity experience, (iii) the risk of loss from mismatching of asset and liability cash flow due to changing interest rates, and (iv) business risks. The formula is used as an early warning tool to identify companies that are potentially inadequately capitalized. The formula is intended to be used as a regulatory tool only and is not intended as a means to rank insurers generally. The NAIC approved a new and more granular RBC structure for fixed income asset capital charges on April 30, 2020 for 2020 year-end reporting. The structure expands the fixed income asset designations from six to 20 categories. Factor values for the new structure are currently under review by the NAIC, and therefore the only impact of this change for 2020 was to report using the new categories. We will continue to monitor the NAIC's activities on this issue.
The NAIC continues to review the state-based solvency regulation framework to identify opportunities to respond to national and international insurance regulatory and solvency developments. The topics of its review include capital requirements, governance and risk management, statutory accounting and financial reporting, and reinsurance. This ongoing review will likely result in changes to U.S. insurance regulation and solvency standards, including those for our U.S. insurance subsidiaries. One of the outcomes of the NAIC's review was the adoption of the NAIC Risk Management and Own Risk and Solvency Assessment (ORSA) Model Act which, following enactment at the state level, requires insurers to provide, at least annually, a group-level perspective on the risks of the current and future business plans and the sufficiency of capital to support those risks. All states where our traditional U.S. insurance subsidiaries are domiciled have enacted ORSA requirements, and we file an ORSA summary report annually with the applicable insurance regulators.
The NAIC has established a working group charged with developing a group capital calculation that can be used by regulators in assessing the risks and financial position of insurance groups. The NAIC continues to push this initiative forward on an accelerated timeline, and therefore we continue to closely monitor and assess developments. We are also monitoring developments around the implementation of reforms adopted by the International Association of Insurance Supervisors (IAIS) in November 2019 that established similar group capital requirements applicable to Internationally Active Insurance Groups (IAIGs). We are not subject to the reforms adopted by the IAIS, however, the requirements are a factor influencing the substance and timeframe of the reforms that will be adopted by the NAIC. We will continue to monitor the NAIC's activities on this issue but it is still too early to determine what, if any, impact these developments will have on our capital requirements.
The NAIC has adopted a valuation manual containing a principles-based approach to life insurance company reserves for new business. The earliest effective date was January 2017 with a three-year optional period before mandatory adoption by January 2020. The Company elected a staged approach to the implementation of the new requirements, with no material impact on our statutory reserves.
In 2012, the NAIC established a subgroup to study the insurance industry's use of captive reinsurers and special purpose vehicles to transfer insurance risk and is considering ways to promote uniformity in both the approval and supervision of such reinsurers. More recently, the NAIC adopted a proposal to subject certain captive reinsurers and special purpose vehicles to the same capital requirements as traditional insurers. As the NAIC and state insurance regulators continue to examine the use of captive insurance companies to finance reserves required under current regulations, we cannot predict the ultimate outcome of their work, or how long or extensively they will continue to focus on this issue. Although we believe it to be unlikely, a potential outcome of future NAIC decisions from its various committees, task forces, and working groups is that companies could be prohibited from using captive reinsurers. No changes in the use or regulation of captive reinsurers have been proposed by the NAIC, and we are unable to predict the extent of any changes that might be made. As a result of the recapture of the reinsurance agreements with Northwind Re, as of December 31, 2020, no insurance risk remains in Northwind Re and therefore Fairwind remains the only active captive insurer. We expect to continue our strategy of using captive reinsurers to manage risks and enhance capital efficiency while monitoring the NAIC's study and proposed changes in regulations. See "Reinsurance" contained herein in this Item 1 for further discussion.
The PRA has statutory requirements, including capital adequacy and liquidity requirements and minimum solvency margins, to which Unum Limited must adhere as part of the provisions of Solvency II, an EU directive that prescribes capital requirements and risk management standards for the European insurance industry. Our European holding company is also subject to the
Solvency II requirements relevant to insurance holding companies, while its subsidiaries, which includes Unum Limited, are subject to group supervision under Solvency II. The Unum European Economic Area (EEA) Group, which is comprised of the European holding company and its subsidiaries, received approval from the PRA to use its own internal model for calculating regulatory capital and also received approval for certain associated regulatory permissions including transitional relief as the Solvency II capital regime is implemented. The U.K. government is reviewing the regulatory framework of financial services companies which may result in changes to U.K. regulatory capital or U.K. tax regulations.
See further discussion in "Risk Factors" contained herein in Item 1A and "Executive Summary," "Liquidity and Capital Resources" contained herein in Item 7 and Note 16 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Insurance Holding Company Regulation
We and our U.S. insurance subsidiaries (excluding captive reinsurers) are subject to regulation under the insurance holding company laws in the states in which our insurance subsidiaries are domiciled, which currently include Maine, Massachusetts, New York, South Carolina, and Tennessee. These laws generally require each insurance company that is domiciled in the state and a member of an insurance holding company system to register with the insurance department of that state and to furnish at least annually financial and other information about the operations of companies within the holding company system, including information concerning capital structure, ownership, management, financial condition, and certain intercompany transactions. Transactions between an insurer and affiliates in the holding company system generally must be fair and reasonable and, if material, require prior notice and approval by the domiciliary insurance regulator.
In addition, such laws and regulations restrict the amount of dividends that may be paid by our insurance subsidiaries to their respective shareholders, including our Company and certain of our intermediate holding company subsidiaries. See further discussion in "Risk Factors" contained herein in Item 1A and "Liquidity and Capital Resources - Cash Available from Subsidiaries" contained herein in Item 7.
The NAIC has adopted the Corporate Governance Annual Disclosure Model Act and the Corporate Governance Annual Disclosure Model Regulation, which require U.S. insurers to disclose detailed information regarding their governance practices. The model act and regulation must be adopted by individual state legislatures and insurance regulators in order to be effective in a particular state. All of the states in which our insurance subsidiaries are domiciled have adopted a requirement to file a corporate governance annual disclosure similar to the model act and regulations.
The NAIC has also adopted the Insurance Data Security Model Law, which creates a legal framework that requires insurance companies to establish cybersecurity programs designed to protect the private data of consumers. The law outlines planned cybersecurity testing and the development of incident response plans for breach notification procedures. The model law must be adopted by individual state legislatures and insurance regulators in order to be effective in a particular state. At this time, among the states in which our insurance subsidiaries are domiciled, the model law is effective only in South Carolina. The New York State Department of Financial Services has established similar regulations to this law and the state of California has enacted the California Consumer Privacy Act of 2018.
The laws of most states, including the states in which our insurance subsidiaries are domiciled (or deemed to be commercially domiciled), require regulatory approval of a change in control of an insurance company or its holding company. Where these laws apply to us, there can be no effective change in control of our Company or of any of our insurance subsidiaries unless the person seeking to acquire control has filed a statement containing specified information with the appropriate insurance regulators and has obtained their prior approval of the proposed change. The usual measure for a presumptive change of control pursuant to these laws is the acquisition of 10 percent or more of the voting stock of an insurance company or its holding company, although this presumption is rebuttable. Consequently, a person acquiring 10 percent or more of the voting stock of an insurance company or its holding company without the prior approval of the insurance regulators in the state(s) of domicile of the insurance company(ies) sought to be acquired (or whose holding company is sought to be acquired) will be in violation of these laws. Such a person may also be subject to one or more of the following actions: (i) injunctive action requiring the disposition or seizure of those shares by the applicable insurance regulators; (ii) prohibition of voting of such shares; and (iii) other actions determined by the relevant insurance regulators. Further, many states' insurance laws require that prior notification be given to state insurance regulators of a change in control of a non-domiciled insurance company doing business in the state. These pre-notification statutes do not authorize the state insurance regulators to disapprove the change in control; however, they do authorize regulatory action in the affected state if particular conditions exist, such as undue market concentration. Any future transactions that would constitute a change in control of our Company or of any of our insurance subsidiaries may require prior notification in those states that have adopted pre-notification laws.
These laws may discourage potential acquisition proposals and may delay, deter, or prevent a change in control of our Company, including through transactions, and in particular unsolicited transactions, that some or all of our shareholders might consider to be desirable.
Federal Laws and Regulations
We are subject to the laws and regulations generally applicable to public companies, including the rules and regulations of the Securities and Exchange Commission and the New York Stock Exchange relating to public reporting and disclosure, accounting and financial reporting, corporate governance, and securities trading. Further, the Sarbanes-Oxley Act of 2002, and rules and regulations adopted under this regulation, have increased the requirements for us and other public companies in these and other areas.
The USA PATRIOT Act of 2001 (Patriot Act) contains anti-money laundering and financial transparency laws and mandates the implementation of various regulations applicable to broker-dealers and other financial services companies, including insurance companies. The Patriot Act seeks to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. The National Defense Authorization Act for Fiscal Year 2021 (NDAA) makes the most significant changes to the U.S. anti-money laundering laws since the Patriot Act. The NDAA requires many U.S. companies to report their beneficial owners and establishes a new whistleblower program. We are not subject to the NDAA’s requirements but will monitor any developments resulting from the passage of the NDAA. Anti-money laundering laws outside of the United States contain some similar provisions. Additionally, other federal laws and regulations, including the Foreign Corrupt Practices Act and regulations issued by the Office of Foreign Asset's Controls, as well as the U.K.'s Bribery Act of 2010, have increased requirements relating to identifying customers, prohibiting transactions with certain organizations or individuals, watching for and reporting suspicious transactions, responding to requests for information by regulatory authorities and law enforcement agencies, sharing information with other financial institutions, and requiring the implementation and maintenance of internal practices, procedures, and controls.
We are subject to federal income, employment, excise and other taxes related to both our U.S. and our foreign operations. On December 22, 2017, the U.S. Federal government enacted a 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). The key provisions of the TCJA relevant to us are as follows:
•Establishes a corporate income tax rate of 21 percent;
•Creates a territorial tax system rather than a worldwide system, which will generally allow companies to repatriate future foreign source earnings without incurring additional U.S. taxes by providing a 100 percent exemption for the foreign source portion of dividends from certain foreign subsidiaries;
•Subjects undistributed and previously untaxed foreign earnings and profits to a one-time transition tax also referred to as a deemed repatriation toll charge;
•Creates a U.S. shareholder tax on certain foreign subsidiary income above a routine equity return on tangible depreciable business assets (Global Intangible Low-taxed Income);
•Decreases tax-deductible life and property and casualty insurance reserves;
•Increases the amount and amortization period of acquisition costs capitalized for tax purposes;
•Reduces the maximum deduction for net operating loss (NOL) carryforwards arising in companies other than non-life insurance companies in tax years beginning after 2017 to a percentage of the taxpayer's taxable income. It also allows any NOLs generated in tax years beginning after December 31, 2017 to be carried forward indefinitely and repeals carrybacks. NOL provisions for non-life insurance companies remain unchanged from current law;
•Allows businesses to immediately write off the cost of new investments in certain qualified depreciable assets made after September 27, 2017 subject to phase downs starting in 2023;
•Eliminates or reduces certain deductions (including deductions for certain compensation arrangements, certain payments made to governments for violations of law and certain legal settlements), exclusions and credits and adds other provisions that broaden the tax base; and
•Creates a new base erosion anti-abuse tax (BEAT) that subjects certain payments made by a U.S. company to a related foreign company to additional taxes.
See "Executive Summary" and "Liquidity and Capital Resources" contained herein in Item 7 and Notes 7 and 16 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for discussion of the impact to our financial position and results of operations as a result of these changes.
Federal tax laws and regulations are subject to change, and any such change could materially impact our federal taxes and reduce profitability as well as capital levels in our insurance subsidiaries. We continually monitor federal tax legislative and regulatory developments to understand their potential impact on our profitability.
For further discussion of regulation, refer to "Risk Factors" contained herein in Item 1A.
Geographic Areas
Adjusted operating revenue, which excludes net realized investment gains and losses, for our Unum International segment was approximately 6 percent of our consolidated adjusted operating revenue in 2020, 2019, and 2018. As of December 31, 2020, total assets equaled approximately 6 percent of consolidated assets and total liabilities equaled approximately 5 percent of consolidated liabilities for our Unum International segment. Fluctuations in the U.S. dollar relative to the local currencies of our Unum International segment will impact our reported operating results. See "Risk Factors" contained herein in Item 1A and "Quantitative and Qualitative Disclosures About Market Risk" contained herein in Item 7A for further discussion of fluctuations in foreign currency exchange rates. See "Reporting Segments" contained herein in this Item 1; "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7; and Note 13 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of Unum International's operating results.
Human Capital Resources
Human Capital
Unum is built on the promise of helping the working world thrive throughout life’s moments, an inspiring purpose that requires harnessing the creativity and energy of our employees. As of December 31, 2020, the Company employed approximately 10,700 employees, of which, approximately 10,300 are full-time employees. Approximately 89 percent of our employees are in the United States, and the remaining 11 percent are international (United Kingdom, Ireland and Poland). Voluntary employee turnover for 2020 was approximately 9.4 percent, a decrease from the prior year.
During 2020, as the COVID-19 pandemic accelerated across the U.S., we quickly and effectively transitioned the majority of our employees to remote work. We also implemented protocols and precautions for a limited portion of staff to work in the office. A key tenet of our strategy was to ensure employee health and safety, while also maintaining operational readiness and flexible work options. Our international locations each created strategies based on their local environment.
Compensation and Benefits
At Unum, we provide compensation and benefits programs which support our employees’ health, wealth and life. In addition to competitive pay, other programs (which vary by country/region) include: annual bonus and employee recognition; stock awards and stock purchase; life, medical, pharmacy, telehealth, health reimbursement accounts; dental, vision, voluntary benefits and disability insurance; tuition and fitness reimbursement; 401(k) plan, financial education, and planning support; student debt relief; employee assistance program, family building; paid time off and caregiver leave, paid parental leave; on-site health resource centers and fitness centers and subsidized healthy food choices.
Inclusion and Diversity
The Company strives to create a workplace culture that attracts and retains the great talent needed to deliver for our customers, who represent a cross-section of society and its different communities, ethnic backgrounds, socioeconomic perspectives and physical abilities. Unum believes the best way to meet the needs of its customers and make better decisions is to reflect their diversity in our own workforce. Of our more than 10,700 employees, 66 percent identify as female; and 17 percent of employees (excluding Poland) identify as members of a minority group.
Unum embraces the unique talents of every team member and helps them reach their full potential. Unum’s culture is built on a foundation of workplace values and principles called We Are Unum, a roadmap that outlines what employees bring to work each day and what they get from the Company in return.
In addition, Unum has a dedicated Office of Inclusion & Diversity focused on driving strategies to create a culture where inclusivity is an expectation for every employee and leader. We partner with diverse stakeholders to increase awareness and
provide guidance to help operationalize inclusion through resources, programs and policies that enhance the company's workforce culture.
The Company has five Employee Resource Groups made up of more than 1,400 employee volunteers who seek to:
•ensure inclusion becomes embedded within the Unum culture;
•create an inclusive environment for all diverse employees;
•support employees with disabilities;
•promote thoughtful discussions that advocate for all racially and ethnically diverse people;
•create an inclusive workplace, free of conscious or unconscious bias;
•ensure the workplace is free of discrimination against and harassment of people based on their gender identity, gender expression and sexual orientation;
•help veterans transition to the workplace and develop their careers; and
•increase women in leadership positions through professional and career development.
Unum has established an expectation for all people leaders to embed inclusion and diversity into their performance goals. By embracing shared ownership for inclusion and diversity, leaders help drive inclusion at all levels.
Unum’s ability to proactively attract, develop and retain diverse, top talent is a critical component of our success. Our talent acquisition area utilizes selection technology with AI capability that gives each candidate a customized recruiting experience. We are committed to diverse hiring and have embedded various initiatives within our selection process that allow us to drive positive results. The talent acquisition area actively partners with our office of I&D to ensure they utilize a multi-prong approach to attract and retain diverse talent. Our recruiters are certified diversity recruiters and have received specialized training in unconscious bias; new recruiters complete this process during their first 90 days of employment. Unum actively partners with various national diverse organizations and associations to support diverse hiring at all levels.
Learning and Development
At Unum, we place a strong emphasis on training and professional development for all levels of our workforce, so people of every background have the tools to reach their full potential. All employees have one-to-one coaching sessions with their managers. On a quarterly basis, managers summarize conversations with meaningful documentation on key accomplishments, progress toward goals, and other areas of focus, including career development. Managers and employees also review next steps to help align activities with company goals. We believe continuous coaching conversations help all employees and managers work more effectively.
Here are some examples of our commitment to the growth and development of our employees:
•Career development workshops: For the employees who participated in career development workshops in 2019, approximately 31 percent had a promotion or lateral move either later in 2019 or during 2020, and 100 percent of managers felt prepared to more effectively navigate their career following the workshop.
•Managers as Coaches: We provide all people managers with workshops and development opportunities that focus on building coaching capabilities, with a goal of elevating workforce performance.
•Multicultural Leadership Development Program: This program focuses on championing equity and opportunity by preparing racially diverse employees to advance to higher levels of leadership.
•Actuarial Development Program (ADP), Accounting and Finance Development Program (AFDP) and Professional Development Program (PDP): These are multi-year rotational programs that focus on preparing participants to become future leaders of our company. ADP and AFDP focus on developing both leadership and technical skills, while PDP focuses primarily on developing leadership skills and broad operational experience.
•LinkedIn Learning (LIL): All employees have access to Unum's LIL platform, which provides our employees access to videos, articles and training options in everything from improving technical skills to enhancing leadership abilities.
•Leader Academy: An online program which is available to managers, leaders or any employee interested in moving into a management role. Each quarter, participants learn about interpersonal effectiveness, elevating performance, strategic decision-making and leading change.
We recognize that our employees are an important asset. Therefore, it is imperative that we continue to focus on the growth and development of our workforce in a meaningful way, and provide them with the necessary support to achieve their career goals.
Employee Engagement
To ensure our employees are engaged and are effectively delivering on our mission and meeting our customers’ needs, we regularly conduct confidential employee surveys to obtain feedback and gain insights from our employees. These surveys are thoughtfully considered and actioned by leadership. We are committed to our employees’ growth and development and embrace the diversity of ideas for improvement. In our employee survey conducted in 2020, a total of 9,910 employees responded and approximately 84 percent of those employees indicated favorable engagement and would recommend Unum as a great place to work.
Available Information
Our internet website address is www.unum.com. We make available, free of charge, on or through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material with the Securities and Exchange Commission.
Information about our Executive Officers
Our executive officers and persons chosen to become executive officers as of the date hereof are listed below. Our executive officers, who are also executive officers of certain of our principal subsidiaries, were appointed by Unum Group's board of directors to serve until their successors are chosen and qualified or until their earlier resignation or removal.
| | | | | | | | |
Name | Age | Position |
Richard P. McKenney | 52 | President and Chief Executive Officer and a Director |
Steven A. Zabel | 52 | Executive Vice President, Chief Financial Officer |
Michael Q. Simonds | 47 | Executive Vice President, Chief Operating Officer |
Elizabeth A. Ahmed | 46 | Executive Vice President, People and Communications |
Timothy G. Arnold | 58 | Executive Vice President, Voluntary Benefits and President, Colonial Life |
Puneet Bhasin | 58 | Executive Vice President, Chief Information and Digital Officer |
Lisa G. Iglesias | 55 | Executive Vice President, General Counsel |
Martha D. Leiper | 58 | Executive Vice President, Chief Investment Officer |
Peter G. O'Donnell | 54 | Executive Vice President, Unum International |
Christopher W. Pyne | 51 | Executive Vice President, Group Benefits |
Mark P. Till | 53 | Executive Vice President and CEO Designate, Unum International |
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Mr. McKenney became President in April 2015 and Chief Executive Officer in May 2015. He served as Executive Vice President and Chief Financial Officer from August 2009 until April 2015, having joined the Company in July 2009. Before joining the Company, Mr. McKenney served as Executive Vice President and Chief Financial Officer of Sun Life Financial Inc., an international financial services company, from February 2007, having joined that company as Executive Vice President in September 2006.
Mr. Zabel became Executive Vice President, Chief Financial Officer in July 2019. He previously served as Senior Vice President and President, Closed Block Operations from July 2015 to July 2019 and as Senior Vice President, Chief Risk Officer from August 2013 to July 2015. Prior to joining the Company in August 2013, he served in various senior roles at Genworth Financial, Inc. from 2004, including Senior Vice President of Long-Term Care Insurance, Chief Financial Officer for Insurance Products, and Senior Vice President of Corporate Audit Services. Before that, he was responsible for financial reporting and rating agency relationships at Americo Life, Inc. and managed life and health insurance audit engagements at Ernst & Young LLP.
Mr. Simonds was named Executive Vice President, Chief Operating Officer in February 2020. Prior to that, he served as Executive Vice President, President and Chief Executive Officer, Unum US from July 2013, after having served as Senior Vice President and Chief Operating Officer, Unum US from June 2012. He previously served as Senior Vice President, Growth Operations, Unum US from July 2010, and as Senior Vice President and Chief Marketing Officer, Unum US from March 2008. Mr. Simonds originally joined a Unum Group predecessor company in 1994, left the Company in 2000 to pursue his MBA, and rejoined the Company in 2003 after serving as a consultant with McKinsey & Company, a global management consulting firm.
Ms. Ahmed was named Executive Vice President, People and Communications upon joining the Company in October 2018. She served as Executive Vice President, Chief Human Resources Officer, at AmTrust Financial Services, Inc., a multinational insurance holding company, from May 2015 to October 2018. Prior to that, she served as Vice President of Human Resources at Equity Trust Company, a financial services company, from May 2012 to May 2015, and as Senior Vice President of Human Resources at PNC Bank, a diversified financial services institution, from August 2008 to May 2012.
Mr. Arnold was named Executive Vice President, Voluntary Benefits and President, Colonial Life in February 2020. Prior to that, he served as Executive Vice President, President and Chief Executive Officer, Colonial Life from January 2015, and before that, as Executive Vice President, President, Colonial Life from July 2014. He previously served as Senior Vice President, Sales and Marketing, Colonial Life from August 2012, as Senior Vice President, Chief Operations Officer, Colonial Life from July 2011, and as Senior Vice President, Integrated Underwriting, Unum US from May 2010. Mr. Arnold originally joined a Unum Group predecessor company in 1985.
Mr. Bhasin was named Executive Vice President, Chief Information and Digital Officer after joining the Company in March 2018. He served as Executive Vice President, Corporate Operations and Recycling at Waste Management, Inc., a waste management environmental services provider, from November 2015 to March 2017. While at Waste Management, he also served as Senior Vice President, Corporate Operations from November 2014, Chief Information Officer and Senior Vice President, Technology, Logistics and Customer Service from August 2012, and Senior Vice President and Chief Information Officer from December 2009.
Ms. Iglesias was named Executive Vice President, General Counsel upon joining the Company in January 2015.She served as Senior Vice President, General Counsel and Secretary of WellCare Health Plans, Inc., a managed care company, from February 2012 to December 2014, having first joined WellCare in February 2010 as Vice President, Securities and Assistant General Counsel.Prior to that, she served as General Counsel and Corporate Secretary for Nordstrom, Inc., a fashion specialty retailer, from 2007 to 2008, and as General Counsel and Secretary of Spherion Corporation, a recruiting and staffing company, from 1999 to 2007.
Ms. Leiper was appointed Executive Vice President, Chief Investment Officer of the Company in October 2019. She joined the Company from USAA, a provider of financial services to the military community, where she served as Senior Vice President, Corporate Finance and Enterprise Money Movement from October 2016 to October 2019 and, before that, as Senior Vice President, Corporate Finance and Investments from May 2015 to September 2016 and Senior Vice President, Chief Investment Officer from May 2010 to May 2015. Ms. Leiper previously worked at Unum Group (including predecessor companies) beginning in 1985, holding leadership roles of increasing responsibility, including Senior Vice President and Deputy Chief Investment Officer from January 2006 to May 2010.
Mr. O'Donnell was named Executive Vice President, Unum International in February 2020. As previously announced, Mr. O'Donnell will be leaving the Company following the end of the first quarter of 2021. Prior to his most recent position, he held the position of Executive Vice President and Chief Executive Officer, Unum International from October 2018 when the reporting segment was previously known as Unum UK. He previously served as President and Chief Executive Officer, Unum UK, from September 2012, after having joined the Company as Unum Limited's Chief Financial Officer in 2010. Prior to joining Unum Limited, Mr. O'Donnell served as Director of Group Finance at Prudential plc, an international financial services company, from May 2008 to May 2010. He served as Finance director at Royal & SunAlliance plc, an international financial services company, from May 2005 to May 2008.
Mr. Pyne was named Executive Vice President, Group Benefits in February 2020.He previously served as Senior Vice President, Growth Operations and Distribution from June 2018 to January 2020 and as Senior Vice President, Sales and Client Management from June 2011 to June 2018.Before that, Mr. Pyne held positions of increasing responsibility within the Company's U.S. distribution organization, including Vice President, Sales from January 2011 to May 2011 and Vice President, Managing Director from January 2008 to December 2010.Mr. Pyne joined a Unum Group predecessor company in 1992.
Mr. Till has served as Executive Vice President and CEO Designate, Unum International since joining the Company in February 2021. He has been named to serve as Executive Vice President and Chief Executive Officer, Unum International in April 2021 following Mr. O’Donnell’s planned departure at the end of the first quarter of 2021. Prior to joining the Company, Mr. Till served from July 2020 to January 2021 as Managing Director, Platform Solutions at Aegon, an international financial services organization, in the U.K. (Aegon UK). While at Aegon UK, he served as Managing Director, Digital Solutions from May 2018 to July 2020, as Chief Distribution and Marketing Officer from June 2016 to May 2018, and as Managing Director, Customer Value Management from September 2015 to June 2016.He previously served as Head of Personal Investing and
Marketing Director for Fidelity International from January 2012 to February 2015. Mr. Till has also held senior positions with Standard Life, HomeServe PLC and Barclays Bank.
ITEM 1A. RISK FACTORS
Overview
We face a wide range of risks, and our continued success depends on our ability to identify and appropriately manage our risk exposures. Discussed below are factors that may adversely affect our business, results of operations, or financial condition. Any one or more of the following factors may cause our actual results for various financial reporting periods to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company, including those in this document or made by us elsewhere, such as in earnings release investor calls, investor conference presentations, or press releases. See "Cautionary Statement Regarding Forward-Looking Statements" contained herein on page 1.
COVID-19
The COVID-19 pandemic is negatively impacting certain aspects of our business and, depending on severity and duration beyond current experience, could have a material adverse effect on our financial position, results of operations, liquidity and capital resources, and overall business operations.
The COVID-19 pandemic has caused significant disruption to the global economy and has resulted in unfavorable impacts to our company as well as the overall insurance industry. Due to the unprecedented nature of these events and the current pace of change in this environment, we cannot fully estimate the duration or ultimate impact of the COVID-19 pandemic at this time. Further events that we are unable to control, such as the further spread, changes in mortality levels, or spikes in the number of cases of COVID-19 or the emergence of new strains of coronavirus, and the related responses by government authorities and businesses, may heighten the impacts of COVID-19 and present additional risks. We are closely monitoring several key risks related to our business that may potentially have adverse impacts on our business and operations.
We may experience significant lapse activity related to both our group and individual customers due to a rise in unemployment levels, the deterioration of economic conditions, and the general uncertainty regarding the financial situation of our customers. This may put strain on our liquidity and capital position and may also result in a decline in both premium income and persistency, particularly if customers do not ultimately return following a lapse. Further, adverse economic conditions may adversely affect the discretionary spending of current or potential customers, which may result in lower sales or other negative changes to customer purchasing patterns.
Depending on the duration and severity of the current economic uncertainty, we may experience an increase in COVID-19-related deaths which could result in higher mortality within our life product lines. In addition, we may experience higher claim rates in our short-term disability products and higher expenses related to our leave management services.
In response to the disruptive economic effects of the COVID-19 pandemic, the Federal Reserve has taken actions to reduce interest rates, and the potential for a sustained low interest rate environment is magnified by the effects of COVID-19 on economic conditions. Further declines in interest rates or the continuance of low interest rates may place substantial pressure on our profit margins as well as on the discount rates used to calculate our insurance liabilities. Furthermore, the current economic conditions may result in the inability for companies to make interest and principal payments on their debt securities or mortgage loans that we hold for investment purposes. Accordingly, although we maintain a disciplined approach regarding our overall investment strategy, we may still incur significant losses that can result in a decline in net investment income and/or material increases in credit losses on our investment portfolio. With respect to commercial real estate, there could be potential impacts to estimates of expected losses resulting from lower underlying values, reflecting current market conditions at that time.
If we experience unfavorable developments related to our revenues, benefits, or expenses as described above, we may correspondingly experience adverse impacts to our overall future profitability and growth, which may alter the timing and magnitude of our plans for overall business expansion. In addition, these unfavorable developments may result in the write-off or impairment of intangible/long-lived assets such as deferred acquisition costs (DAC), value of business acquired, and goodwill, or the establishment of a valuation allowance regarding the realization of our deferred tax assets.
Although we have access to significant amounts of liquidity, which include credit facilities, FHLB arrangements, and the ability to liquidate certain investments, it may be insufficient or even inaccessible if we are not in compliance with required covenants
under our borrowing arrangements or if the associated lenders are unable to provide funds. In addition, if investment markets become illiquid or severely impaired, we may be unable to liquidate our investments in a timely and advantageous manner.
From an operational perspective, our employees, sales associates, brokers and distribution partners, as well as the workforces of our vendors, service providers and counterparties, may also be adversely affected by the COVID-19 pandemic or efforts to mitigate the pandemic, including government-mandated shutdowns, requests or orders for employees to work remotely, and other social distancing measures. The social distancing measures could result in an adverse impact on our ability to conduct our business, including our ability to sell our policies, including policies that are traditionally sold in person, and our ability to adjudicate and pay claims in a timely manner. Additionally, the vast majority of our employees are currently working remotely and have been doing so for an extended length of time. This working environment is unprecedented and may expose us to various additional risks such as elevated cyber-security vulnerability resulting from the wide-scale remote usage of our company networks and risks to the effectiveness of our internal controls over financial reporting.
See "Executive Summary", "Segment Operating Results", and "Liquidity and Capital Resources" included herein in Part 2, Item 7 under "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional discussion.
To the extent the COVID-19 pandemic adversely affects our business, financial position, results of operations, liquidity and capital resources, and overall business operations, it may also have the effect of heightening many of the other risks disclosed herein this Item 1A "Risk Factors".
Market and Credit Risks
Sustained periods of low interest rates in the long-term investment market may adversely affect our reported net investment income and the discount rates used in reserving for our insurance products and projecting our pension obligations, which may adversely affect our results of operations or financial condition.
Declines in interest rates and/or the continuance of the current level of low interest rates and yields on fixed income investments may cause the rates of return on our investment portfolio to decrease more than expected, leading to lower net investment income than assumed in the pricing and reserving for our insurance products. An interest, or discount, rate is used in calculating reserves for our insurance products. We set our GAAP reserve discount rate assumptions based on our current and expected future investment yield for assets supporting the reserves, considering current and expected future market conditions. If the discount rate assumed in our reserve calculations is higher than our future investment returns, our invested assets will not earn enough investment income to support our future claim payments. In that case, the reserves may eventually be insufficient, resulting in the need to increase our reserves and/or contribute additional capital to our insurance subsidiaries, either of which could have a material adverse effect on our results of operations or financial condition. Similarly, we are required to perform annual adequacy testing, that considers multiple interest rate scenarios, to ensure our statutory reserves continue to meet statutory requirements, which could also require us to increase to our statutory reserves and/or contribute additional capital.
Our net periodic benefit costs and the value of our benefit obligations for our pension plans are determined based on a set of economic and demographic assumptions that represent our best estimate of future expected experience. Major assumptions used in accounting for these plans include the expected discount (interest) rate and the long-term rate of return on plan assets. We set the discount rate assumption at the measurement date for each of our plans to reflect the yield of a portfolio of high quality fixed income corporate debt instruments matched against the timing and amounts of projected future benefits. A lower discount rate increases the present value of benefit obligations and increases our costs. Our expectations for the future investment returns on plan assets are based on a combination of historical market performance, current market conditions, and future capital market assumptions obtained from external consultants and economists. The actual rate of return on plan assets is determined based on the fair value of the plan assets at the beginning and end of the measurement period. Increases or decreases in long-term interest rates as well as equity market volatility will impact the fair value of our plan assets and may result in a decrease in the funded status of our pension plans and/or increased pension costs, which may adversely affect our results of operations, financial condition, or liquidity.
Unfavorable economic or market conditions may result in lower sales, lower premium growth and persistency, higher claims incidence, unfavorable mortality, and longer claims duration, which may adversely affect our results of operations or financial condition.
We are affected by conditions in the capital markets and the general economy, primarily in the United States, the United Kingdom, Poland, and to a lesser extent, the broader global financial markets. Negative developments in the capital markets and/or the general economy could adversely affect our business and results of operations.
In particular, factors such as unemployment levels, consumer confidence levels, consumer spending, business investment, government spending, the volatility and strength of the capital markets, inflation, pandemics, and the threat of terrorism all affect the business and economic environment and, ultimately, the amount and profitability of our businesses. Given the nature of our products, in an economic environment characterized by higher unemployment, lower personal income, reduced consumer spending, and lower corporate earnings and investment, new product sales may be adversely affected. Our premium growth may also be negatively impacted by lower premium growth from existing customers due to lower salary growth and lower growth in the number of employees covered under an existing policy. In addition, during such periods we may experience higher claims incidence, longer claims duration, and/or an increase in policy lapses, any of which could have a material adverse effect on our results of operations or financial condition.
In addition to interest rate risk as previously discussed, we are exposed to other risks related to our investment portfolio which may adversely affect our results of operations, financial condition, or liquidity.
Default Risk
Our investment portfolio consists primarily of fixed maturity securities. These securities are issued by both domestic and foreign entities and are backed either by collateral or the credit of the underlying issuer. Factors such as an economic downturn or political change in the country of the issuer, a regulatory change pertaining to the issuer's industry, a significant deterioration in the cash flows of the issuer, unforeseen accounting irregularities or fraud committed by the issuer, widening risk spreads, ratings downgrades, a change in the issuer's marketplace or business prospects, or other events that adversely affect the issuers of these securities may result in the issuer defaulting on its obligations.
Our mortgage loan portfolio has default risk. Events or developments, such as economic conditions that impact the ability of tenants to pay their rents or limit the availability of refinancing, may have a negative effect on our mortgage loan portfolio. Events or developments that have a negative effect on any particular geographic region or sector may have a greater adverse effect on an investment portfolio to the extent that the portfolio is concentrated in that region or sector.
A default results in the recognition of an impairment loss on the investment. A default may also adversely affect our ability to collect principal and interest due to us. The probability of credit downgrades and defaults increases when the fixed income markets experience periods of volatility and illiquidity.
Credit Spread Risk
Our exposure to credit spreads, which is the yield above comparable U.S. Treasury securities, primarily relates to market price and cash flow variability associated with changes in credit spreads. A widening of credit spreads may unfavorably impact the net unrealized gain or loss position of the investment portfolio and may adversely impact liquidity. Credit spread tightening may reduce net investment income associated with new purchases of fixed income securities.
Valuation Risk
We report our fixed maturity securities and certain other financial instruments at fair value. Valuations may include inputs and assumptions that are less observable or require greater estimation, particularly during periods of market disruption, resulting in values which may be less than the value at which the investments may ultimately be sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported in our financial statements, and the period to period changes in value could vary significantly. Decreases in value may have a material adverse effect on our results of operations or financial condition.
We evaluate our investment portfolio for credit losses. There can be no assurance that we have accurately assessed the level of credit losses taken. Additional credit losses may need to be taken in the future, and historical trends may not be indicative of future credit losses. Any event reducing the value of our securities may have a material adverse effect on our business, results of operations, or financial condition.
Market Timing and Liquidity Risk
While we attempt to match our asset cash flows and durations with expected liability cash flows and durations to meet the funding requirements of our business, there may at times be a lack of appropriate investments in the market which can be
acquired. In particular, due to the long duration of our long-term care product, the timing of our investment cash flows do not match those of our maturing liabilities. In addition, we may, in certain circumstances, need to sell investments due to changes in regulatory or capital requirements, changes in tax laws, rating agency decisions, and/or unexpected changes in liquidity needs. There may also be a limited market for certain of our investments, such as our private placement fixed maturity securities, mortgage loans, and policy loans, which makes them more illiquid. In periods of market volatility or disruption, other of our securities may also experience reduced liquidity. If events occur wherein we need to sell securities in an unfavorable interest rate or credit environment or need to quickly sell securities which are illiquid, market prices may be lower than what we might realize under normal circumstances, with a resulting adverse effect on our results of operations, financial condition, or liquidity.
Reinsurance may not be available or affordable, or reinsurers may be unwilling or unable to meet their obligations under our reinsurance contracts, which may adversely affect our results of operations or financial condition.
As part of our overall risk management and capital management strategies, we purchase reinsurance for certain risks underwritten by our various businesses. We also utilize reinsurance to exit certain lines of business. Market conditions beyond our control determine the availability and cost of reinsurance. Any decrease in the amount of reinsurance will increase our risk of loss and may impact the level of capital requirements for our insurance subsidiaries, and any increase in the cost of reinsurance will, absent a decrease in the amount of reinsurance, reduce our results of operations. Accordingly, we may be forced to incur additional expenses for reinsurance or may be unable to obtain sufficient reinsurance on acceptable terms, which may adversely affect our ability to write future business, result in the assumption of more risk with respect to the policies we issue, and increase our capital requirements. The collectibility of our reinsurance recoverable is primarily a function of the solvency of the individual reinsurers. We cannot provide assurance that our reinsurers will pay the reinsurance recoverables owed to us or that they will pay these recoverables on a timely basis. The insolvency of a reinsurer or the inability or unwillingness of a reinsurer to comply with the terms of a reinsurance contract may have an adverse effect on our results of operations or financial condition.
The effectiveness and utilization of our hedging programs may be affected by changes in the economic environment, changes in interest rates, capital market volatility, non-performance by our counterparties, changes in the level of required collateral, or regulation, which may adversely affect our results of operations, financial condition, or liquidity.
We use derivative financial instruments to help us manage certain risks related to our business operations, primarily foreign currency risk, interest rate risk, and risk related to matching duration for our assets and liabilities. Factors associated with derivative financial instruments could adversely affect our results of operations, financial condition, or liquidity. Ineffectiveness of our hedges due to changes in expected future events, such as the risk created by uncertainty in the economic environment or if our counterparties fail or refuse to honor their obligations under these derivative instruments, may have a material adverse effect on our results of operations or financial condition. Capital market turmoil may result in an increase in the risk of non-performance by our counterparties, many of which are financial institutions. Non-performance by our counterparties may force us to unwind hedges, and we may be unable to replace the hedge, thereby leaving the risk unhedged. Under the terms of our hedging contracts, we are required to post collateral and to maintain a certain level of collateral, which may adversely affect our liquidity and could subject us to the credit risk of the counterparty to the extent it holds such collateral. Changes in regulations may have an adverse effect on our ability to execute hedging strategies due to the increased economic cost of derivatives, primarily as a result of more restrictive collateral requirements.
London Interbank Offered Rate (LIBOR) transition
We are continuing to monitor the developments surrounding the transition from LIBOR. We have evaluated our existing financial arrangements which primarily include investments, derivatives, and debt agreements and also have evaluated our insurance and reinsurance contracts and have determined that we will not be impacted significantly from this transition. In those circumstances where we do have financial or other contracts that are impacted by the LIBOR transition, we are appropriately modifying those contracts to reference a suitable alternative rate or are comfortable with the existing fallback language in those contracts.
Currency translation could materially impact our reported operating results.
The functional currency of our U.K. and Polish operations is the British pound sterling and the Polish zloty, respectively. Fluctuations in exchange rates have an effect on our reported financial results, which may be unfavorably impacted when the functional currency weakens. However, it is important to distinguish between translating and converting foreign currency. Except for a limited number of transactions, we do not actually convert our functional currency into dollars. As a result, we
view foreign currency translation as a financial reporting item and not a reflection of operations or profitability in the U.K or Poland.
See "Reserves for Policy and Contract Benefits" contained herein in Item 1, "Critical Accounting Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, "Interest Rate Risk" contained herein in Item 7A, and Notes 1, 2, 3, 4 and 9 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
Insurance Risks
Actual experience may differ from our reserve assumptions which may adversely affect our results of operations or financial condition.
Historical results may not be indicative of future performance due to, among other things, changes in our mix of business, re-pricing of certain lines of business, or any number of economic cyclical effects on our business. Reserves, whether calculated under GAAP or statutory accounting principles, do not represent an exact calculation of future benefit liabilities but are instead estimates made by us using actuarial and statistical procedures. Actual experience may differ from our reserve assumptions. There can be no assurance that our reserves will be sufficient to fund our future liabilities in all circumstances. Future loss development may require reserves to be increased, which would adversely affect earnings in current and future periods. Life expectancies may continue to increase, which could lengthen the time a claimant receives disability or long-term care benefits and could result in a change in mortality assumptions and an increase in reserves for these and other long-tailed products. Adjustments to reserve amounts may also be required in the event of changes from the assumptions regarding future morbidity (which represents the incidence of claims and the rate of recovery, including the effects thereon of inflation and other societal and economic factors); premium rate increases; persistency; policy benefit offsets, including those for social security and other government-based welfare benefits; and interest rates used in calculating the reserve amounts, which could have a material adverse effect on our results of operations or financial condition.
We provide a broad array of disability, long-term care, group life, and voluntary insurance products that are affected by many factors, and changes in any of those factors may adversely affect our results of operations, financial condition, or liquidity.
Disability Insurance
Disability insurance may be affected by a number of social, economic, governmental, competitive, and other factors. Changes in societal attitudes, such as work ethic, motivation, or stability, can significantly affect the demand for and underwriting results from disability products.
Both economic and societal factors can affect claim incidence and recoveries for disability insurance. Claim incidence and claim recovery rates may be influenced by, among other factors, the rate of unemployment and consumer confidence. Claim incidence and claim recovery rates may also be influenced by the emergence of new infectious diseases or illnesses. Claim durations may be extended by medical improvements which could extend life expectancies. The relationship between these and other factors and overall incidence is very complex and will vary due to contract design features and the degree of expertise within the insuring organization to price, underwrite, and adjudicate the claims.
Within the group disability market, pricing and renewal actions can be taken to react to higher claim rates. However, these actions take time to implement, and there is a risk that the market will not sustain increased prices. In addition, changes in economic and external conditions may not manifest themselves in claims experience for an extended period of time. The pricing actions available in the individual disability market differ among product classes. Our individual noncancelable disability policies, in which the policy is guaranteed to be renewable through the life of the policy at a fixed premium, do not permit us to adjust premiums on our in-force business. Guaranteed renewable contracts that are not noncancelable can be re-priced to reflect adverse experience, but rate changes cannot be implemented as quickly as in the group disability market.
Long-term Care Insurance
Long-term care insurance can be affected by a number of demographic, medical, economic, governmental, competitive, and other factors. Because long-term care insurance is a relatively new product for the insurance industry and is long-duration in nature, there is not as much historical data as is available for our other products, especially at advanced ages. This creates a level of uncertainty in properly pricing the product and using appropriate assumptions when establishing reserves. Long-term
care insurance is guaranteed renewable and can be re-priced to reflect adverse experience, but the re-pricing is subject to regulatory approval by our states of domicile and may also be subject to approval by jurisdictions in which our policyholders reside. The rate approval process can affect the length of time in which the re-pricing can be implemented, if at all, and the rate increases ultimately approved may be unfavorable relative to assumptions used to establish our reserves. We monitor our own experience and industry studies concerning morbidity, mortality, and policyholder terminations to understand emerging trends. Changes in actual experience relative to our expectations may adversely affect our profitability and reserves. To the extent mortality improves for the general population, and life expectancies increase, the period for which a claimant receives long-term care benefits may lengthen and the associated impact of advanced aging of policyholders may cause an increase in claims incidence. Medical advances may continue to have an impact on claim incidence and duration, both favorable and unfavorable. Due to the long duration of the product, the timing and/or amount of our investment cash flows are difficult to match to those of our maturing liabilities. Sustained periods of low or declining interest rates could result in increases in reserves and adversely affect our results of operations.
Group Life Insurance
Group life insurance may be affected bythe characteristics of the employees insured, the amount of insurance employees may elect voluntarily, our risk selection process, our ability to retain employer groups with favorable risk characteristics, the geographical concentration of employees, and mortality rates. Claim incidence may also be influenced by unexpected catastrophic events such as terrorist attacks, natural disasters, and pandemic health events, which may also affect the cost of and availability of reinsurance coverage.
Voluntary Products
Voluntary products sold in the workplace may be affected by the characteristics of the employees insured, the level of employee participation and the amount of insurance the employees elect, our risk selection process, and our ability to retain employer groups with favorable risk characteristics. A portion of our voluntary life insurance products include interest sensitive forms of insurance which contain a guaranteed minimum interest crediting rate. It is possible that our investment returns could be lower than the guaranteed crediting rate. While a significant portion of our non-life contracts are optionally renewable, some are guaranteed renewable and can be repriced to reflect adverse experience, but rate changes cannot be implemented as quickly as for group disability and group life products.
We have assets which may not be fully recoverable or realizable, which could adversely affect our results of operations or financial condition.
If our business does not perform well or as initially anticipated in our assumptions, we may be required to accelerate amortization or recognize an impairment loss on intangible assets or long-lived assets or to establish a valuation allowance against the deferred income tax asset.
We have intangible assets such as DAC, value of business acquired (VOBA), and goodwill. DAC and VOBA are amortized based primarily upon expected future premium income of the related insurance policies. Recoverability testing for DAC and VOBA is performed on an annual basis. Insurance contracts are grouped on a basis consistent with our manner of acquiring, servicing, and measuring profitability of the contracts. If recoverability testing indicates that either DAC and/or VOBA are not recoverable, the deficiency is charged to expense.
Goodwill is not amortized, but on an annual basis, or more frequently if necessary, we review the carrying amount of goodwill for indications of impairment, considering in that review the financial performance and other relevant factors. In accordance with accounting guidance, we test for impairment at either the operating segment level or one level below. In addition, certain events including, but not limited to, a significant adverse change in legal factors or the business environment, an adverse action by a regulator or rating agency, or unanticipated competition would cause us to review goodwill for impairment more frequently than annually.
Long-lived assets, including assets such as real estate and information technology software, also may require impairment testing to determine whether changes in circumstances indicate that we may be unable to recover the carrying amount.
We assess our deferred tax assets to determine if they are realizable. Factors in our determination include the performance of the business, including the ability to generate future taxable income. If based on available information, it is more likely than not that the deferred income tax asset will not be realized, a valuation allowance is established with a corresponding charge to net income.
Charges such as accelerated amortization, impairment losses, or the establishment of valuation allowances could have a material adverse effect on our results of operations or financial condition.
See "Critical Accounting Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, and Note 13 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
Operational Risks
A cyber attack or other security breach could disrupt our operations, result in the unauthorized disclosure or loss of confidential data, damage our reputation or relationships, and expose us to significant financial and legal liability, which may adversely affect our business, results of operations, or financial condition.
We store confidential information about our business and our policyholders, employees, agents and others on our information technology systems, including proprietary and personally identifiable information. As part of our normal business operations, we use this information and engage third-party providers, including outsourcing, cloud computing, and other business partners, that store, access, process, and transmit such information on our behalf. We devote significant resources and employ security measures to help protect our information technology systems and confidential information, and we have programs in place to detect, contain, and respond to information security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we and our third-party providers may be unable to anticipate these techniques or implement adequate preventative measures. In addition, hardware, software, or applications we develop or procure from third parties or through open source solutions may contain defects in design or manufacture or other problems that could unexpectedly compromise our information security. Unauthorized parties, whether within or outside our company, may disrupt or gain access to our systems, or those of third parties with whom we do business, through human error, misfeasance, fraud, trickery, or other forms of deceit, including break-ins, use of stolen credentials, social engineering, phishing, or other cyber attacks, computer viruses, malicious codes, and similar means of unauthorized and destructive tampering.
We and our third-party providers have experienced and likely will continue to experience information security incidents from time to time. Although known incidents have not had a material effect on our business or financial condition, there is no assurance that our security systems and measures will be able to prevent, mitigate, or remediate future incidents that could have such an effect. A successful penetration or circumvention of the security of our information technology systems, or those of third parties with whom we do business, could cause serious negative consequences for us, including significant disruption of our operations, unauthorized disclosure or loss of confidential information, harm to our brand or reputation, loss of customers and revenues, violations of privacy and other laws, and exposure to litigation, monetary damages, regulatory enforcement proceedings, fines, and potentially criminal proceedings and penalties. If we are unaware of the incident for some time after it occurs, our exposure could increase. In addition, the costs to address or remediate systems disruptions or security threats or vulnerabilities, whether before or after an incident, could be significant. As we continue to build our digital capabilities and focus on enhancing the customer experience, the amount of information that we retain and share with third parties, as well as our reliance on them, is likely to grow, increasing the cost to prevent data security breaches and the cost and potential consequences of such breaches. An information technology systems failure could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to potential disciplinary action by regulators. Further, successful cyber-attacks at other large financial institutions or other market participants, whether or not we are affected, could lead to a general loss of customer and investor confidence in financial institutions that could negatively affect us.
Although we have insurance against some cyber risks and attacks, we may be subject to litigation and financial losses that exceed our policy limits, are subject to deductibles or are not covered under any of our current insurance policies.
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 could adversely affect our profitability, results of operations, or financial condition.
In the event of a disaster such as a natural catastrophe, an epidemic/pandemic, a cyber attack, cyber security breach or other information technology systems failure, a terrorist attack, or war, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to conduct business and on our results of operations and financial condition, particularly if those problems affect our information technology systems and destroy valuable data or result in a significant failure of our internal control environment. In addition, in the event that a significant number of our employees were unavailable in the event of a disaster, our ability to effectively conduct business could be severely compromised.
The failure of our information technology and/or disaster recovery processes or systems for any reason could cause significant interruptions or malfunctions in our or our customers’ operations and result in the loss, theft, or failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers. Such a failure could harm our reputation, subject us to regulatory sanctions, legal claims, and increased expenses, and lead to a loss of customers and revenues.
Our failure to develop digital capabilities or to effectively execute upgrades to or replacements of information technology systems could impair our ability to deliver on our growth initiatives or administer our business, which may adversely affect our business, results of operations, or financial condition.
Our business plans increasingly rely on digital capabilities to meet or surpass customer expectations, simplify our operations, and deliver innovative product and service offerings. If we are unable to effectively develop and offer digital capabilities that enhance our customers' experience, we may not fully achieve our strategic growth initiatives and may also experience the loss of existing business. Although we believe we have information technology systems which adequately support our business needs, we continually upgrade our existing information technology systems and acquire or develop new systems to keep pace with the rapidly changing business and technology environment. There are risks involved with upgrading or replacing information technology systems, including, but not limited to, data loss, data errors, and disruption to our operations. We seek to monitor and control our exposure to the risks arising out of these activities through our risk control framework which encompasses a variety of reporting systems, internal controls, management review processes, and other mechanisms.
Unum Group depends on funds from its subsidiaries to meet its obligations and pay dividends. The ability of our subsidiaries to transfer funds to Unum Group may be impaired by adverse financial results or a change in capital requirements. Accordingly, internal sources of capital and liquidity may not always be sufficient. If we need to seek external capital, adverse market conditions may affect our access to capital or our cost of capital.
Unum Group is a holding company for insurance and other subsidiaries and has limited operations of its own. Our insurance subsidiaries are subject to insurance laws and regulatory limitations on the payment of dividends and on other transfers of funds or other assets to affiliates, including to Unum Group. The level of earnings and capital in our subsidiaries, as well as business conditions and rating agency considerations, could impact our insurance and other subsidiaries' ability to pay dividends or to make other transfers of funds to Unum Group, which could impair our ability to pay dividends to Unum Group's common stockholders, meet our debt and other payment obligations, and/or repurchase shares of Unum Group's common stock. The use of funds held by Unum Group as consideration in any acquisition could affect our capital plan and render those funds unavailable for other corporate purposes.
A change in demand for our insurance products or an increase in the incidence of new claims or the duration of existing claims could negatively impact our cash flows from operations. Deterioration in the credit market, which could delay our ability to sell our positions in certain of our fixed maturity securities in a timely manner, could also negatively impact our cash flows. Regulatory changes such as those discussed herein in this Item 1A may impose higher capital or reserve requirements on our insurance subsidiaries, increase collateral requirements for certain of our derivatives transactions, and/or implement other requirements which could unfavorably affect our liquidity. Without sufficient liquidity, our ability to maintain and grow our operations would be limited. If our internal sources of liquidity prove to be insufficient, we may be unable to successfully obtain additional financing and capital on favorable terms, or at all, which may adversely affect us.
If our financial results are unfavorable, we may need to increase our capital in order to maintain our credit ratings or satisfy regulatory requirements. Maintaining appropriate levels of statutory surplus is considered important not only by us but by insurance regulatory authorities in the U.S., the PRA in the U.K., the KNF in Poland, and the rating agencies that rate insurers' claims-paying abilities and financial strength. Failure to maintain certain levels of statutory surplus could result in increased
regulatory scrutiny, action by regulatory authorities, or a downgrade by the rating agencies. Need for additional capital may limit a subsidiary's ability to distribute funds to our holding companies.
Obtaining financing for even a small amount of capital could be challenging in unfavorable market conditions and during periods of economic uncertainty. The markets may exert downward pressure on availability of liquidity and credit capacity for certain issuers. The availability of financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry, our credit ratings and credit capacity, and the possibility that customers or lenders could develop a negative perception of our financial prospects. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. Raising capital in unfavorable market conditions could increase our interest expense or negatively impact our shareholders through increased dilution of their common stock in Unum Group.
We rely on our credit facilities as a potential source of liquidity. Our right to borrow funds under these facilities is subject to financial covenants, negative covenants, and events of default. Our ability to borrow under these facilities are also subject to the continued willingness and ability of the lenders to provide funds. Our failure to comply with the covenants in the credit facilities or the failure of lenders to fund their lending commitments would restrict our ability to access these facilities when needed, with a resulting adverse effect on our results of operations, financial condition, or liquidity.
See "Regulation" contained herein in Item 1,"Liquidity and Capital Resources" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, and Notes 8 and 16 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
Our risk management program may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business.
We have devoted significant resources to develop our enterprise risk management program, which has the objective of managing our strategic, market, credit, insurance, and operations risks, which ultimately impact our reputational risk. However, our program may not be comprehensive, and our methods for monitoring and managing risk may not fully predict or mitigate future exposures. In this case, there may be a negative impact to our business, results of operations, or financial condition.
See "Regulation" contained herein Item 1, "Critical Accounting Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7 and Notes 1, 7 and 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for additional information on legal proceedings.
See "Quantitative and Qualitative Disclosures About Market Risk" contained herein in Item 7A for further information about our risk management program.
General Risks
We and our insurance subsidiaries are subject to extensive supervision and regulation. Changes in laws and regulations that affect our industry or findings from examinations and investigations may affect the cost or demand for our products, increase capital and reserving requirements for our insurance subsidiaries, and adversely affect our profitability, liquidity, or growth.
Our insurance subsidiaries are subject to extensive supervision and regulation in the United States and abroad. The primary purpose of insurance regulation is to protect policyholders, not stockholders. To that end, applicable laws establish regulatory authorities, including state insurance departments in the United States, the PRA in the United Kingdom, and the KNF in Poland, with broad administrative powers over many aspects of the insurance business. For example, our insurance subsidiaries may not be able to obtain or maintain necessary licenses, permits, authorizations, or accreditations, or may be able to do so only at great cost. In addition, we and our insurance subsidiaries may not be able to comply fully with, or obtain appropriate exemptions from, the wide variety of laws and regulations applicable to insurance companies and insurance holding companies. These laws and regulations can be complex and subject to differing interpretations and are regularly re-examined. Existing or future laws and regulations, and the manner in which they are interpreted or applied, may become more restrictive or otherwise adversely affect our operations. For example, they may restrict or prohibit the payment of dividends by our subsidiaries to us, restrict transactions between subsidiaries and/or between us and our subsidiaries, and may require contributions of capital by us to our insurance subsidiaries even if we are otherwise in compliance with stated requirements. Failure to comply with or to obtain appropriate exemptions under any applicable laws or regulations could result in restrictions on the ability of our insurance subsidiaries to do business in one or more of the jurisdictions in which they operate and could result in fines and other sanctions, which may have a material adverse effect on our business or results of operations.
Regulatory examinations or investigations could result in, among other things, an increase to reserving requirements, changes in our claims handling or other business practices, changes in procedures for the identification and payment to the states of benefits and other property that is not claimed by the owners, changes in the use and oversight of reinsurance, changes in governance and other oversight procedures, assessments by tax authorities or other governing agencies, fines, and other administrative action, which could injure our reputation, adversely affect our issuer credit ratings and financial strength ratings, place us at a competitive disadvantage in marketing or administering our products, impair our ability to sell or retain insurance policies, and/or have a material adverse effect on our results of operations or financial condition.
It is possible that there will be heightened oversight of insurers by regulatory authorities in the jurisdictions in which our insurance subsidiaries are domiciled and operate. We cannot predict specific proposals that might be adopted, or what impact, if any, such proposals or, if enacted, such laws, could have on our business, results of operations, or financial condition. For instance, the NAIC or state regulators may adopt further revisions to statutory reserving standards or the RBC formula, the PRA may revise its capital adequacy requirements and minimum solvency margins, the IAIS may adopt capital requirements to which we could be subject, or rating agencies may incorporate higher capital thresholds into their quantitative analyses, thus requiring additional capital contributions by us to our insurance subsidiaries. Increased financial services regulation, which could include activities undertaken by the NAIC and regulatory authorities in the U.K., Poland, and the EU may impose greater quantitative requirements, supervisory review, and disclosure requirements and may impact the business strategies, capital requirements, and profitability of our insurance subsidiaries. The United Kingdom's Financial Ombudsman Service, which was established to help settle disputes between consumers and businesses providing financial services, and the FCA, which has rule-making, investigative, and enforcement powers to protect consumers, may hamper our ability to do business, which could have a material adverse effect on our U.K. operations.
Our financial statements are subject to the application of generally accepted accounting principles, in the United States, the United Kingdom, and Poland, which are periodically revised and/or expanded. Accordingly, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies within these countries, which may also be influenced by the International Accounting Standards Board. Future accounting standards we adopt, including the U.S. Financial Accounting Standards Board's accounting standard update related to long-duration targeted improvements for insurance contracts, will change current accounting and disclosure requirements applicable to our financial statements. Such changes may have a material effect on our reported results of operations or financial condition and may also impact the perception of our business by external stakeholders.
We use an affiliated captive reinsurer for the limited purpose of reinsuring risks attributable to specified policies issued or reinsured by one of our insurance subsidiaries in order to effectively manage risks in connection with certain blocks of our business as well as to enhance our capital efficiency. If we were required to discontinue use of the captive reinsurer or to alter the structure of the captive reinsurance arrangement, our ability to maintain current RBC ratios and/or our capital deployment activities could be adversely affected.
Changes in U.S. programs such as healthcare reform, the emergence of paid family and medical leave legislation, and financial services sector reform may compete with or diminish the need or demand for our products, particularly as it may affect our ability to sell our products through employers or in the workplace. The U.S. social security disability insurance program may not be sustainable, which may adversely affect the level of our disability claim payments and reserves. Legislative changes related to pension funding requirements could negatively impact our cash flows from operations and our profitability.
Changes in tax laws and other regulations or interpretations of such laws or regulations could unfavorably impact our corporate taxes. In addition, changes in tax laws could make some of our products less attractive to consumers.
On January 31, 2020, an official bill was passed formalizing the withdrawal of the U.K. from the European Union (EU). A deal was reached on December 24, 2020 on the future trading relationship with the EU. The deal focused primarily on the trading of goods rather than the U.K.’s service sector, which will be subject to further negotiations in 2021 and will focus on financial services and future regulation. In addition, the U.K. government is reviewing the regulatory framework of financial services companies which may result in changes to U.K. regulatory capital or U.K. tax regulations. We do not expect that the underlying operations of our U.K. business, nor the Polish business which is in the EU, will be significantly impacted by the withdrawal but we may see some continued dampening of growth in the U.K. as well as earnings volatility due to the current disruption and uncertainty in the U.K. economy. We may also experience volatility in the fair values of our investments in U.K. and EU-based issuers, but we do not expect a material increase in credit losses or defaults, nor do we believe this volatility will impact our ability to hold these investments. In addition, the current economic conditions may also cause volatility in our
solvency ratios. Our reported consolidated financial results continue to be impacted by fluctuations in the British pound sterling to dollar exchange rate.
Most group long-term and short-term disability plans we administer are governed by the Employee Retirement Income Security Act (ERISA). Changes to ERISA enacted by Congress or through judicial interpretations may adversely affect the risk to us of managing employee benefit plans, increase the premiums associated with such plans, and ultimately affect their affordability and our profitability.
The insurance departments in jurisdictions wherein our insurance subsidiaries conduct business may limit our ability to obtain rate increases under guaranteed renewable contracts or could require changes in rates and/or benefits to meet minimum loss ratio requirements which could negatively impact the profitability of our products. Many regulatory and governmental bodies have the authority to review our products and business practices and those of our agents and employees. These regulatory or governmental bodies may bring regulatory or other legal actions against us if, in their view, our practices are improper. These actions could result in substantial fines or restrictions on our business activities and could have a material adverse effect on our business or results of operations. Determination by regulatory authorities that we have engaged in improper conduct may also adversely affect our defense of various lawsuits.
A decrease in our financial strength or issuer credit ratings may adversely affect our competitive position, our ability to hedge our risks, and our cost of capital or ability to raise capital, which may adversely affect our results of operations, financial condition, or liquidity.
We compete based in part on the financial strength ratings provided by rating agencies. A downgrade of our financial strength ratings may adversely affect us and could potentially, among other things, adversely affect our relationships with distributors of our products and services and retention of our sales force, negatively impact persistency and new sales, and generally adversely affect our ability to compete. A downgrade in the issuer credit rating assigned to Unum Group can be expected to adversely affect our cost of capital and our ability to raise additional capital. If we are downgraded significantly, ratings triggers in our derivatives financial instrument contracts may result in our counterparties enforcing their option to terminate the derivative contracts. Such an event may have a material adverse effect on our financial condition or our ability to hedge our risks.
Competition may adversely affect our market share or profitability.
All of our businesses are highly competitive. We believe that the principal competitive factors affecting our business are price, the quality of our customer's experience regarding service and claims management, integrated product choices, enrollment capabilities, financial strength, and claims-paying ratings. We compete for new product sales, the retention of existing business, and the ability to attract and retain independent agents and brokers to market our products, all of which affect our profitability. All areas of the employee benefits markets are highly competitive due to the yearly renewable term nature of the group products and the large number of insurance companies offering products in this market. There is a risk that our customers may be able to obtain more favorable terms or improved technology solutions from competitors in lieu of renewing coverage with us, particularly if industry pricing levels do not align with our view of adequate premium rates. We are operating in a dynamic competitive environment of both traditional and non-traditional competitors, with changes in product offerings, enrollment capabilities, and technology solutions. The level and intensity of competition may also grow due to existing competitors becoming more aggressive, and an increase in merger and acquisition activity which may result in larger competitors with greater financial resources. There are many insurance companies which actively compete with us in our lines of business, and there is no assurance that we will be able to compete effectively against these companies and new competitors in the future.
Events that damage our reputation may adversely affect our business, results of operations, or financial condition.
There are many events which may harm our reputation, including, but not limited to, those discussed in this Item 1A regarding regulatory investigations, legal proceedings, social issues, and cyber or other information security incidents.
In addition, being in the business of insurance, we are paid to accept certain risks. Those who conduct business on our behalf, including executive officers and members of management, sales managers, investment professionals, and to some extent, independent agents and brokers, do so in part by making decisions that involve exposing us to risk. These include decisions such as maintaining effective underwriting and pricing discipline, maintaining effective claim management and customer service performance, managing our investment portfolio and derivatives trading activities, delivering effective technology solutions, complying with established sales practices, executing our capital management strategy, exiting a line of business and/or pursuing strategic growth initiatives, and other decisions. Although we employ controls and procedures designed to monitor
business decisions and prevent us from taking excessive risks or unintentionally failing to comply with internal policies and practices such that errors occur, there can be no assurance that these controls and procedures will be effective. If our employees and business associates take excessive risks and/or fail to comply with internal policies and practices, the impact of those events may damage our market position and reputation.
Depending on the severity of the damage to our reputation, we may be unable to effectively compete for new products or retain our existing business, which could adversely affect our results of operations or financial condition. Damage to our reputation may also hinder our ability to raise new capital and/or increase our cost of capital.
Litigation and contingencies are common in our businesses and may result in financial losses and/or harm to our reputation.
We are, and in the future may be, defendants in a number of litigation matters, and the outcome of this litigation is uncertain. Some of these proceedings have been brought on behalf of various alleged classes of complainants. Plaintiffs in class action and other lawsuits against us may seek very large and/or indeterminate amounts, including punitive and treble damages. An estimated loss is accrued when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An adverse outcome in one or more of these actions may, depending on the nature, scope and amount of the ruling, materially and adversely affect our results of operations or financial condition, encourage other litigation, and limit our ability to write new business, particularly if the adverse outcomes negatively impact certain of our ratings.
As part of our normal operations in managing claims, we are engaged in claim litigation where disputes arise as a result of a denial or termination of benefits. Typically those lawsuits are filed on behalf of a single claimant or policyholder, and in some of these individual actions punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims. For our general claim litigation, we maintain reserves based on experience to satisfy judgments and settlements in the normal course. We expect that the ultimate liability, if any, with respect to general claim litigation, after consideration of the reserves maintained, will not be material to our financial condition. Nevertheless, given the inherent unpredictability of litigation, it is possible that an adverse outcome in certain claim litigation involving punitive damages may, from time to time, have a material adverse effect on our results of operations. We are unable to estimate a range of reasonably possible punitive losses.
See "Reserves for Policy and Contract Benefits", "Competition", "Regulation" and "Ratings" contained herein in Item 1, "Executive Summary" and "Critical Accounting Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, and Notes 1, 6, 7, and 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
As of December 31, 2020, we owned office space comprised of five campuses located in Chattanooga, Tennessee; Portland, Maine; Columbia, South Carolina; Baton Rouge, Louisiana; and Dorking in the United Kingdom. In addition, as of December 31, 2020, we leased office space in Worcester, Massachusetts and various other locations throughout the United States, the United Kingdom, Ireland, and Poland. Substantially all of the properties owned or leased are used by one or more of all five reporting segments, depending on the location. We believe our properties and facilities are suitable and adequate for current operations.
ITEM 3. LEGAL PROCEEDINGS
Refer to Note 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for information on legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common stock of Unum Group is traded on the New York Stock Exchange. The stock symbol is UNM. Quarterly dividends declared and paid per share of common stock are as follows:
| | | | | |
2020 | |
4th Quarter | $ | 0.285 | |
3rd Quarter | 0.285 | |
2nd Quarter | 0.285 | |
1st Quarter | 0.285 | |
| |
2019 | |
4th Quarter | $ | 0.285 | |
3rd Quarter | 0.285 | |
2nd Quarter | 0.260 | |
1st Quarter | 0.260 | |
Our board of directors has the authority to declare cash dividends on shares of our common stock. In determining dividends, the board takes into account a number of factors including our financial condition and results of operations, regulatory limitations on the payment of dividends from subsidiaries, cash requirements, general economic conditions, and other factors the board may deem relevant. For information on restrictions relating to our subsidiaries' ability to pay dividends to Unum Group and certain of its intermediate holding company subsidiaries, see "Liquidity and Capital Resources - Cash Available from Subsidiaries" contained herein in Item 7 and Note 16 of the "Notes to Consolidated Financial Statements" contained herein in Item 8. For information relating to compensation plans under which Unum Group's equity securities are authorized for issuance, see Item 12 contained herein.
As of February 12, 2021, there were 8,495 registered holders of common stock.
In May 2019, our board of directors authorized the repurchase of up to $750.0 million of Unum Group's common stock through November 23, 2020, at which point the authorization expired. We did not repurchase any shares during 2020 and as of December 31, 2020, we had not authorized a new share repurchase program.
ITEM 6. SELECTED FINANCIAL DATA
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions of dollars, except share data) | | | | | | | | | |
| At or for the Year Ended December 31 |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | | |
Income Statement Data | | | | | | | | | |
| | | | | | | | | |
Revenue | | | | | | | | | |
Premium Income | $ | 9,378.1 | | | $ | 9,365.6 | | | $ | 8,986.1 | | | $ | 8,597.1 | | | $ | 8,357.7 | |
Net Investment Income | 2,360.7 | | | 2,435.3 | | | 2,453.7 | | | 2,451.7 | | | 2,459.0 | |
Net Realized Investment Gain (Loss)1 | 1,199.1 | | | (23.2) | | | (39.5) | | | 40.3 | | | 24.2 | |
Other Income | 224.2 | | | 221.2 | | | 198.2 | | | 197.7 | | | 205.6 | |
Total Revenue | 13,162.1 | | | 11,998.9 | | | 11,598.5 | | | 11,286.8 | | | 11,046.5 | |
| | | | | | | | | |
Benefits and Expenses | | | | | | | | | |
Benefits and Change in Reserves for Future Benefits2 | 8,972.9 | | | 7,496.2 | | | 8,020.4 | | | 7,055.7 | | | 6,941.8 | |
Commissions | 1,057.3 | | | 1,122.7 | | | 1,108.4 | | | 1,060.8 | | | 1,026.7 | |
Interest and Debt Expense and Cost Related to Early Retirement of Debt3 | 188.2 | | | 204.7 | | | 167.3 | | | 159.9 | | | 166.0 | |
Other Expenses4 | 1,979.7 | | | 1,793.2 | | | 1,674.6 | | | 1,606.4 | | | 1,564.3 | |
Total Benefits and Expenses | 12,198.1 | | | 10,616.8 | | | 10,970.7 | | | 9,882.8 | | | 9,698.8 | |
| | | | | | | | | |
Income Before Income Tax | 964.0 | | | 1,382.1 | | | 627.8 | | | 1,404.0 | | | 1,347.7 | |
Income Tax | 171.0 | | | 281.8 | | | 104.4 | | | 409.8 | | | 416.3 | |
| | | | | | | | | |
Net Income | $ | 793.0 | | | $ | 1,100.3 | | | $ | 523.4 | | | $ | 994.2 | | | $ | 931.4 | |
| | | | | | | | | |
Balance Sheet Data | | | | | | | | | |
| | | | | | | | | |
Assets | $ | 70,625.8 | | | $ | 67,013.4 | | | $ | 61,875.6 | | | $ | 64,013.1 | | | $ | 61,941.5 | |
| | | | | | | | | |
Long-term Debt | $ | 3,345.7 | | | $ | 2,926.9 | | | $ | 2,971.3 | | | $ | 2,738.4 | | | $ | 2,999.4 | |
| | | | | | | | | |
Accumulated Other Comprehensive Income (Loss) | $ | 374.2 | | | $ | 37.3 | | | $ | (814.2) | | | $ | 127.5 | | | $ | (51.0) | |
Other Stockholders' Equity | 10,496.8 | | | 9,927.7 | | | 9,436.0 | | | 9,447.4 | | | 9,019.0 | |
Total Stockholders' Equity | $ | 10,871.0 | | | $ | 9,965.0 | | | $ | 8,621.8 | | | $ | 9,574.9 | | | $ | 8,968.0 | |
| | | | | | | | | |
Per Share Data | | | | | | | | | |
| | | | | | | | | |
Net Income | | | | | | | | | |
Basic | $ | 3.89 | | | $ | 5.25 | | | $ | 2.38 | | | $ | 4.39 | | | $ | 3.96 | |
Assuming Dilution | $ | 3.89 | | | $ | 5.24 | | | $ | 2.38 | | | $ | 4.37 | | | $ | 3.95 | |
| | | | | | | | | |
Stockholders' Equity | $ | 53.37 | | | $ | 49.10 | | | $ | 40.19 | | | $ | 43.02 | | | $ | 39.02 | |
| | | | | | | | | |
Cash Dividends | $ | 1.14 | | | $ | 1.09 | | | $ | 0.98 | | | $ | 0.86 | | | $ | 0.77 | |
| | | | | | | | | |
Weighted Average Common Shares Outstanding | | | | | | | | | |
Basic (000s) | 203,642.0 | | | 209,728.9 | | | 219,635.6 | | | 226,492.4 | | | 235,445.7 | |
Assuming Dilution (000s) | 203,755.3 | | | 209,854.4 | | | 220,058.6 | | | 227,335.2 | | | 235,979.2 | |
1Includes net realized investment gains of $1,302.3 million in 2020 related to the transfer of investments in the Closed Block individual disability reinsurance transaction. See Notes 3 and 12 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of the reinsurance transaction.
2 Includes a reserve increase of $151.5 million and $750.8 million in 2020 and 2018, respectively, related to our long-term care closed block business, as well as a reserve increase of $17.5 million in 2020 to our group pension closed block business. Also includes an increase in benefits and change in reserves for future benefits of $1,284.5 million in 2020 resulting from the recognition of the adjustment related to unrealized investment gains and losses previously recognized in accumulated other comprehensive income related to the previously mentioned reinsurance transaction. See Notes 6 and 12 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 and "Executive Summary" contained herein in Item 7 for further discussion of the 2020 and 2018 reserve increases and the reinsurance transaction, respectively.
3 Includes cost related to early retirement of debt of $27.3 million in 2019. See Note 8 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of the 2019 cost related to early retirement of debt.
4 Includes the net change in deferred acquisition costs as well as compensation expense and other expenses. Includes the amortization of the cost of reinsurance of $2.6 million and transaction costs of $21.0 million related to the Closed Block individual disability reinsurance transaction in 2020. Also includes a right-of-use (ROU) asset impairment of $12.7 million in 2020 related to one of our operating leases for office space that we do not plan to continue using to support general operations and $23.3 million of costs related to an organizational design update in 2020. See Note 13 and 15 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion on the organizational design update and ROU asset impairment, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis presented in this section should be read in conjunction with the "Cautionary Statement Regarding Forward-Looking Statements" included below the Table of Contents, "Risk Factors" included herein Item 1A, "Selected Financial Data" included herein this Item 6, and the Consolidated Financial Statements and notes thereto included in Item 8.
Executive Summary
2020 Operating Performance and Capital Management
For 2020, we reported net income of $793.0 million, or $3.89 per diluted common share, compared to net income of $1,100.3 million, or $5.24 per diluted common share, in 2019. Included in our results for 2020 are: (i) the impact from the Closed Block individual disability reinsurance agreement, which resulted in a net loss of $5.8 million before tax and a net gain of $32.0 million after tax, or $0.16 per diluted common share, (ii) a reserve increase related to our long-term care block of business of $151.5 million before tax and $119.7 million after tax, or $0.59 per diluted common share, (iii) a reserve increase related to our group pension block of business of $17.5 million before tax and $13.8 million after tax, or $0.07 per diluted common share, (iv) costs related to an organizational design update in the amount of $23.3 million before tax and $18.6 million after tax, or $0.09 per diluted common share, (v) an impairment loss on the right-of-use (ROU) asset related to one of our operating leases of $12.7 million before tax and $10.0 million after tax, or $0.05 per diluted common share, and (vi) a net realized investment loss, excluding the net realized investment gain related to the reinsurance transaction, of $103.2 million before tax and $82.3 million after tax, or $0.40 per diluted common share. Included in our 2019 results are costs related to the early retirement of debt of $27.3 million before tax and $21.6 million after tax, or $0.11 per diluted common share and a net realized investment loss of $23.2 million before tax and $18.7 million after tax, or $0.09 per diluted common share. Adjusting for these items, after-tax adjusted operating income for 2020 was $1,005.4 million, or $4.93 per diluted common share compared to $1,140.6 million, or $5.44 per diluted common share for 2019. See "Closed Block Individual Disability Reinsurance Agreement," "Long-term Care Reserve Increase," "Group Pension Reserve Increase," "Costs Related to Organizational Design Update," "Impairment Loss on ROU Asset," "Reconciliation of Non-GAAP and Other Financial Measures," and "Consolidated Operating Results" contained herein in this Item 7 for further discussion and a reconciliation of these items.
Our Unum US segment reported a decrease in adjusted operating income of 19.9 percent in 2020 compared to 2019, due to unfavorable benefits experience, particularly in the group life product line, and higher operating expenses. The benefit ratio for our Unum US segment for 2020 was 68.8 percent, compared to 66.9 percent in 2019. Unum US sales decreased 10.0 percent in 2020 compared to 2019. Overall persistency was lower relative to the prior year period.
Our Unum International segment reported a decrease in adjusted operating income of 29.0 percent in 2020 compared to 2019, as measured in U.S. dollars. Our Unum UK line of business reported a decrease in adjusted operating income of 32.3 percent compared to 2019, as measured in local currency, due primarily to unfavorable benefits experience and lower net investment income, partially offset by an increase in premium income. The benefit ratio for our Unum UK line of business was 78.9 percent in 2020 compared to 76.7 percent in 2019. Unum International sales, as measured in U.S. dollars, decreased 9.5 percent in 2020 compared to 2019. Unum UK sales, as measured in local currency, decreased 10.8 percent in 2020 compared to 2019. Overall persistency was lower relative to the prior year period.
Our Colonial Life segment reported a decrease in adjusted operating income of 2.6 percent in 2020 compared to 2019 due to unfavorable benefits experience, partially offset by premium growth, higher net investment income, and lower operating expenses. The 2020 benefit ratio for Colonial Life was 52.9 percent, compared to 51.3 percent in 2019. Colonial Life sales decreased 27.0 percent in 2020 compared to 2019. Overall persistency was higher relative to the prior year period.
Our Closed Block segment reported a loss before income tax and net realized investment gains and losses of $1,235.7 million, which includes the impacts related to the Closed Block individual disability reinsurance agreement and the reserve increases related to our long-term care and group pension blocks of business. Excluding these items, our Closed Block segment reported adjusted operating income of $241.4 million in 2020 compared to $137.7 million in 2019. The long-term care interest adjusted loss ratio for 2020 was favorable relative to our range of expectations. The individual disability interest adjusted loss ratio, excluding the reserve recognition impact from the Closed Block individual disability reinsurance agreement, was unfavorable in 2020 compared to 2019 but generally remained within our expectations.
Our net investment income yields continue to be pressured by the low interest rate environment as we maintain consistent credit quality in our invested asset portfolio. The net unrealized gain on our fixed maturity securities was $7.6 billion at December 31,
2020, compared to $6.4 billion at December 31, 2019, with the increase due primarily to a decline in U.S. Treasury rates. The earned book yield on our investment portfolio was 4.75 percent for 2020 compared to a yield of 5.00 percent for 2019.
We believe our capital and financial positions are strong. At December 31, 2020, the RBC ratio for our traditional U.S. insurance subsidiaries, calculated on a weighted average basis using the NAIC Company Action Level formula, was approximately 365 percent, which is in line with our expectations. We did not repurchase shares during 2020. Our weighted average common shares outstanding, assuming dilution, equaled 203.8 million for 2020 compared to 209.9 million for 2019. As of December 31, 2020, Unum Group and our intermediate holding companies had available holding company liquidity of $1,512 million that was held primarily in fixed maturity securities, short-term investments, and cash.
Closed Block Individual Disability Reinsurance Agreement
In December 2020, Provident Life and Accident Insurance Company, The Paul Revere Life Insurance Company, and Unum Life Insurance Company of America, wholly-owned domestic insurance subsidiaries of Unum Group and collectively referred to as "the ceding companies", entered into a series of agreements (collectively referred to as the "reinsurance agreement") with Commonwealth Annuity and Life Insurance Company (Commonwealth), a subsidiary of Global Atlantic Financial Group, to reinsure on a coinsurance basis effective as of July 1, 2020, approximately 75 percent of the Closed Block individual disability insurance business, primarily direct business written by the ceding companies. Commonwealth has established and will maintain collateralized trust accounts for the benefit of the ceding companies to secure its obligations under the reinsurance agreement. As part of the agreement, additional Closed Block individual disability business consisting of direct business not ceded in December 2020 and business assumed by the ceding companies from third parties, is expected to be reinsured in the first quarter of 2021, subject to receipt of required consents and regulatory approvals and the satisfaction or waiver of other customary closing conditions and is considered the second phase of this transaction.
In December 2020, Provident Life and Casualty Insurance Company (PLC), also a wholly-owned domestic insurance subsidiary of Unum Group, entered into an agreement with Commonwealth whereby PLC will provide a 12-year volatility cover to Commonwealth for the active life cohort (ALR cohort), which represents approximately five percent of the reserves ceded to Commonwealth. As part of this agreement, PLC received a payment from Commonwealth of approximately $62 million. PLC will provide similar coverage to Commonwealth related to the additional business that will be ceded as part of the second phase of the transaction. At the end of the 12-year coverage period, Commonwealth will retain the remaining incidence and claims risk on the ALR cohort of the ceded business.
In connection with the first phase of the coinsurance agreement that closed in December 2020, the ceding companies paid a total cash ceding commission to Commonwealth of approximately $438 million and transferred additional assets consisting primarily of fixed maturity securities and cash totaling $6,669.8 million. As a result of this reinsurance agreement, we recognized the following in the fourth quarter of 2020:
•Net realized investment gains totaling $1,302.3 million, or $1,028.8 million after tax, related to the transfer of investments.
•Increase in benefits and change in reserves for future benefits of $1,284.5 million, or $1,014.7 million after tax, resulting from the realization of previously unrealized investment gains and losses recorded in accumulated other comprehensive income.
•Transaction costs totaling $21.0 million, or $16.6 million after tax.
•Tax benefit of $36.5 million.
•Reinsurance recoverable of $6,141.5 million related to the policies on claim status (DLR cohort).
•Cost of reinsurance, or prepaid reinsurance premium, of $815.7 million related to the DLR cohort, of which we recognized amortization expense of $2.6 million, or $2.0 million after tax, subsequent to the closing of the transaction.
•Deposit asset of $88.2 million related to the ALR cohort.
In the fourth quarter of 2020, we released approximately $400 million of capital as a result of the reinsurance transaction and we expect to release approximately $250 million of additional capital in the first quarter of 2021 assuming the second phase of the transaction is fully executed, subject to receipt of required consents and regulatory approvals and the satisfaction or waiver of other customary closing conditions. See "Reinsurance" contained herein in Item 1; "Segment Results," and "Liquidity and Capital Resources - Cash Available from Subsidiaries" contained herein in Item 7, and Notes 12 and 16 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion on the impacts related to this reinsurance agreement.
2020 Long-term Care Reserve Increase
During the fourth quarter of 2020, we completed a review of policy reserve adequacy, which incorporated our most recent experience and included a review of all material assumptions. Based on our analysis, during the fourth quarter of 2020, we updated our reserve assumptions and determined that our gross policy and claim reserves should be increased by $151.5 million to reflect our current estimate of future benefit obligations. This increase was primarily driven by an update to our interest rate assumption, partially offset by favorable premium rate increase approvals and inventory updates. See "Trends in Key Assumptions" contained herein in the "Critical Accounting Estimates" of this Item 7 for further discussion of the assumptions used in our long-term care reserve update.
2020 Group Pension Reserve Increase
During the fourth quarter of 2020, we completed our annual review of policy reserve adequacy, which incorporated our most recent experience and included a review of all assumptions. Based on our analysis, during the fourth quarter of 2020, we updated our reserve assumptions and determined that our policy and claim reserves should be increased by $17.5 million to reflect our updated discount rate assumptions.
Costs Related to Organizational Design Update
During the third quarter of 2020, we realigned certain parts of our organizational structure by shifting resources to accelerate growth, fund priority investments, and simplify and improve our business practices. In connection with this update, we incurred charges of $23.3 million, which primarily consisted of employee severance and benefit costs as well as costs related to lease terminations and the disposal of certain fixed assets. This update did not result in the exit or disposal of any of our lines of business and we do not expect material additional costs associated with this update in the future.
Impairment Loss on ROU Asset
During the second quarter of 2020, we recognized an impairment loss of $12.7 million on the ROU asset related to one of our operating leases for office space that we do not plan to continue using to support our general operations. The impairment loss was recorded as a result of a decrease in the fair value of the ROU asset compared to its carrying value.
U.K. Tax Law Change
On July 22, 2020, the Finance Bill 2019-21 was enacted, resulting in a U.K. tax rate increase from 17 percent to 19 percent, retroactively effective April 1, 2020, which resulted in tax expense of $9.3 million for the revaluation of our tax assets and liabilities.
U.K. Referendum
On January 31, 2020, an official bill was passed formalizing the withdrawal of the U.K. from the European Union (EU). A deal was reached on December 24, 2020 on the future trading relationship with the EU. The deal focused primarily on the trading of goods rather than the U.K.’s service sector, which will be subject to further negotiations in 2021 and will focus on financial services and future regulation. In addition, the U.K. government is reviewing the regulatory framework of financial services companies which may result in changes to U.K. regulatory capital or U.K. tax regulations. We do not expect that the underlying operations of our U.K. business, nor the Polish business which is in the EU, will be significantly impacted by the withdrawal, but we may see some continued dampening of growth in the U.K. as well as earnings volatility due to the current disruption and uncertainty in the U.K. economy. We may also experience volatility in the fair values of our investments in U.K. and EU-based issuers, but we do not expect a material increase in impairments or defaults, nor do we believe this volatility will impact our ability to hold these investments. In addition, the current economic conditions may also cause volatility in our solvency ratios. Our reported consolidated financial results may continue to be impacted by fluctuations in the British pound sterling to dollar exchange rate. See "Regulation" contained herein in Item 1, "Risk Factors" contained herein Item 1A, and "Unum International Segment" contained herein this Item 7.
Coronavirus Disease 2019 (COVID-19)
On March 11, 2020, the World Health Organization identified the spread of COVID-19 as a pandemic. COVID-19 has caused significant disruption to the global economy and has unfavorably impacted our company as well as the overall insurance industry. Due to the unprecedented nature of these events and the current pace of change in this environment, we cannot fully estimate the ultimate impact of the COVID-19 pandemic at this time. We are closely monitoring several key factors related to our business that have and may continue to have adverse impacts.
Results of Operations
Benefits Experience
We have identified activity in certain of our products that is inconsistent with historical experience that is due to COVID-19 and the related environment. In particular, we have experienced higher mortality in our life product lines, higher claim incidence in certain of our disability product lines, and lower claim resolutions in our Unum UK group long-term disability product line due to disruptions in our claims processes. Conversely, we experienced lower claims utilization in our dental and vision products, particularly in the second quarter of 2020, resulting from the impact of stay-at-home orders and general quarantine measures. With respect to our long-term care product line, we have experienced higher claimant mortality and lower submitted incidence.
We continue to monitor the benefits experience across all of our products for trends potentially correlated with COVID-19. For further discussion regarding the benefits experience for each of our operating business segments, see "Segment Results" herein in this Item 7.
Net Investment Income
During 2020, we have experienced a decline in our net investment income as a result of the current economic conditions. The current economic conditions have sustained the low interest rate environment, which has and will continue to impact the yield on our invested assets, particularly related to the investment of new cash flows. The net asset values of our partnership investments continued to improve in the fourth quarter of 2020 from the depressed values experienced earlier in the year reflecting the improved market conditions of the third quarter of 2020 and resulted in overall positive earnings in 2020 for our partnership investments although lower than the level of earnings we experienced in 2019. We have also worked with certain of our commercial mortgage loan borrowers that have requested temporary payment deferrals but these instances have not resulted in a significant number of loans with deferrals or a significant impact on our net investment income. For further information on our investment portfolio, see "Investments" contained herein in this Item 7 and Notes 2 and 3 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Premium Income and Premium Receivable Collectability
We have experienced a disruption in sales activity related to certain of our product lines due to some potential new customers deferring their purchasing decisions given the current economic environment and challenges in our ability to meet with potential new customers for policies that are traditionally sold in person mitigated somewhat by our investment in digital tools and capabilities. If we continue to experience this disruption, our premium income may decline. In addition, in certain of our product lines, we are also experiencing a decline in the number of lives insured by our customers as they navigate the current environment. Although we have not experienced a material decline in the collectability of premiums due from our customers, we have increased the allowance for credit losses on our premium receivable balances to consider higher unemployment levels and the general uncertainty regarding the financial condition of our customers. We continue to work with our customers to understand their respective financial conditions and develop solutions on a case-by-case basis to allow for additional payment flexibility to enhance the likelihood of premium collection and avoid disruptions in coverage. However, circumstances may deteriorate quickly which could result in the decline of persistency levels and sales growth in the near term, and potentially longer if the current situation persists, which may materially impact our results of operations through continued increases in our allowances for credit losses and lower premium income.
See Note 1 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further information on our allowances for credit losses.
Financial Condition
Investments
Regarding our fixed maturity security portfolio, the current economic conditions have increased volatility in the capital markets and have caused significant pressure on the profitability of many companies. The sharp decline in oil prices experienced earlier in the year and decrease in demand due to COVID-19, which began in the first quarter of 2020, also caused pressure on the profitability of companies in the energy sector. We recorded credit losses during the first quarter of 2020 primarily related to fixed maturity securities issued by companies in the energy sector, but recorded minimal credit losses related to energy securities in the remainder of 2020 primarily as a result of the improvement in oil prices. Our exposure to consumer cyclicals which have been stressed due to COVID-19 related shutdowns is a small portion of our portfolio and our exposure to other stressed industries such as airlines and restaurants is minimal. We continue to monitor capital market activity on a regular basis and to the extent that there are continued volatility and ratings downgrades related to the issuers of our fixed maturity securities, we could experience further credit losses, an increase in defaults, and the need for additional capital in our insurance subsidiaries. However, we remain confident in the overall strength and credit quality of our investment portfolio.
Other
If we continue to experience unfavorable trends in the above areas of focus, we may also experience certain additional, correlated impacts such as an increase in the amortization of deferred acquisition costs if we have a decline in persistency. We may also be required to write-off or impair certain intangible/long-lived assets such as value of business acquired and goodwill if we experience declines in the overall profitability of our businesses. Furthermore, if the profitability of our businesses declines, we may also be required to establish a valuation allowance regarding the realization of our deferred tax assets.
Liquidity and Capital Resources
We have strengthened our liquidity position through actions such as maintaining a higher level of short-term investments and posting additional collateral from certain of our U.S. insurance subsidiaries to the regional Federal Home Loan Banks (FHLB). As a result, we believe we have the appropriate liquidity and access to capital to avoid significant disruption to our operations. We have not yet experienced a significant impact to our liquidity as a result of the collection of premiums and submitted claims activity; however, we continually monitor the developments of these items.
As of December 31, 2020, we have borrowed $312.2 million of funds through our memberships with the regional FHLBs and those funds are used for the purpose of investing in either short-term investments or fixed maturity securities. Although we did increase FHLB borrowings at December 31, 2020, we have additional borrowing capacity of approximately $1,093 million that can be utilized for liquidity if the need arises. Additionally, we have access to two unsecured revolving credit facilities under separate syndicates of lenders that allow us to borrow up to a total of $600 million. There are currently no outstanding borrowings on these facilities but we remain in compliance with required covenants should we choose to borrow in the future. In May 2020, we issued $500.0 million of 4.500% senior notes due 2025 which strengthened our liquidity and demonstrated our ability to raise capital in a strained economic environment.
Following the maturity of our $400.0 million aggregate principal amount of 5.625% unsecured notes in the third quarter of 2020, which was funded through an issuance of debt during the second quarter of 2019, we have no significant upcoming debt maturities until 2024. We continue to meet the financial covenants contained in our current debt agreements and credit facilities, and we expect that we will continue to meet those covenants in subsequent periods.
To the extent that we begin to experience a significant impact to our liquidity, we would likely sell highly liquid invested assets or borrow funds on our credit facilities to meet operational cash flow requirements.
Business Operations
Other than disruption to sales processes in certain of our product lines, we have not experienced a significant disruption to our operational processes as we have been able to successfully implement our business continuation plans to accommodate remote work arrangements for the safety of our employees and customers. We also have not experienced significant disruption to our financial reporting systems or internal control over financial reporting and disclosure controls and procedures as a result of COVID-19. We have implemented travel restrictions for the safety of our employees and customers, but do not expect those restrictions to significantly disrupt our operations.
2018 Long-term Care Reserve Increase
Policy reserves for our long-term care block of business are determined using the gross premium valuation method and, prior to the third quarter of 2018, were valued based on assumptions established as of December 31, 2014, the date of our last assumption update under loss recognition. Gross premium valuation assumptions do not change after the date of loss recognition unless reserves are again determined to be deficient. We undertake a review of policy reserve adequacy annually during the fourth quarter of each year, or more frequently if appropriate, using best estimate assumptions as of the date of the review.
During the third quarter of 2018, we completed our annual review of policy reserve adequacy, which incorporated our most recent experience and included a review of all assumptions. The review utilized internal and external data and outside consulting firms for quality assurance and industry benchmarking. Based on our analysis, during the third quarter of 2018, we updated our reserve assumptions and determined that our policy and claim reserves should be increased by $750.8 million, or $593.1 million after-tax, to reflect our current estimate of future benefit obligations. This increase was primarily driven by the update to our liability and interest rate assumptions, particularly claims incidence and claim termination rates, which resulted in an increase to reserves of approximately $2.2 billion. Partially offsetting the increase was the update to our assumptions for premium rate increases which decreased reserves approximately $1.4 billion, resulting in the net increase to reserves of $750.8 million.
2018 Acquisitions of Business
In November 2018, we acquired 100 percent of the shares and voting interests in Jaimini Health, Inc. (Jaimini Health), a dental health maintenance organization. The acquisition of Jaimini Health will broaden our employee benefit dental offerings in the U.S., particularly in the state of California and is reported in our Unum US segment.
In October 2018, we acquired 100 percent of the shares and voting interests in Pramerica Zycie TUiR S.A. (which we have subsequently renamed Unum Zycie TUiR S.A. and refer to as Unum Poland), a financial protection benefits provider in Poland. This acquisition will expand our European presence, which we believe to be an attractive market for financial protection benefits.
In January 2018, we acquired 100 percent of the shares and voting interests in Leavelogic, Inc (Leavelogic), a leave management technology provider. The acquisition of Leavelogic will enhance our current leave management offerings by providing tools for employers and employees to better manage the family leave process and is reported in our Unum US segment.
See Note 13 of the " Notes to Consolidated Financial Statements” contained herein in Item 8 for further details.
Consolidated Company Outlook for 2021
We believe our disciplined approach to providing financial protection products at the workplace puts us in a position of strength. The products and services we provide have never been more important to employers, employees and their families, especially given the emergence of the COVID-19 pandemic. We continue to fulfill our corporate purpose of helping the working world thrive throughout life’s moments by providing excellent service to people at their time of need. Our strategy remains centered on growing our core businesses through investing and transforming our operations and technology to anticipate and respond to the changing needs of our customers, expand into new adjacent markets through meaningful partnerships and effective deployment of our capital across our portfolio.
In consideration of the recent COVID-19 pandemic, in the near term, we expect top line growth to be challenging, and we may also continue to experience increased claims volatility. The low interest rate environment continues to place pressure on our profit margins by impacting net investment income yields as well as potentially discount rates on our insurance liabilities. We would also expect to experience further investment volatility through net investment income, particularly for partnership net asset value changes. As part of our continued pricing discipline and our reserving methodology, we continuously monitor emerging interest rate experience and adjust our pricing and reserve discount rates, as appropriate.
Our business is well-diversified by geography, industry exposures and case size, and we continue to analyze and employ strategies that we believe will help us navigate the current environment. These strategies allow us to maintain financial flexibility to support the needs of our businesses, while also returning capital to our shareholders. We have strong core businesses that have a track record of generating significant capital, and we will continue to invest in our operations and expand into adjacent markets where we can best leverage our expertise and capabilities to capture market growth opportunities as those opportunities re-emerge. Long-term, we believe that consistent operating results, combined with the implementation of strategic initiatives and the effective deployment of capital, will allow us to meet our financial objectives.
Further discussion is included in "Reconciliation of Non-GAAP Financial Measures," "Consolidated Operating Results," "Segment Results," "Investments," and "Liquidity and Capital Resources" contained herein in this Item 7 and in the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Reconciliation of Non-GAAP and Other Financial Measures
We analyze our performance using non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company's performance, financial position, or cash flows that excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP financial measure of "after-tax adjusted operating income" differs from net income as presented in our consolidated operating results and income statements prepared in accordance with GAAP due to the exclusion of net realized investment gains and losses and amortization of the cost of reinsurance as well as certain other items as specified in the reconciliations below. We believe after-tax adjusted operating income is a better performance measure and better indicator of the profitability and underlying trends in our business.
Realized investment gains or losses depend on market conditions and do not necessarily relate to decisions regarding the underlying business of our segments. Our investment focus is on investment income to support our insurance liabilities as opposed to the generation of realized investment gains or losses. Although we may experience realized investment gains or losses which will affect future earnings levels, a long-term focus is necessary to maintain profitability over the life of the business since our underlying business is long-term in nature, and we need to earn the interest rates assumed in calculating our liabilities.
As previously discussed, we have exited a substantial portion of our closed block individual disability product line through the reinsurance agreement that was executed in December 2020. As a result, we exclude the amortization of the cost of reinsurance that was recognized as a result of the exit of the business related to the DLR cohort of policies. We believe that the exclusion of the amortization of the cost of reinsurance provides a better view of our results from our ongoing businesses.
We may at other times exclude certain other items from our discussion of financial ratios and metrics in order to enhance the understanding and comparability of our operational performance and the underlying fundamentals, but this exclusion is not an indication that similar items may not recur and does not replace net income or net loss as a measure of our overall profitability.
See "Executive Summary" contained herein in Item 7 and Notes 6, 7, 8, 12, 13, and 15 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion regarding the impacts of the 2018 and 2020 long-term care reserve increases, the group pension reserve increase, the total impacts of the Closed Block individual disability reinsurance transaction, the amortization of the cost of reinsurance, costs related to the organizational design update, the impairment loss on the ROU asset related to one of our operating leases for office space, and the cost related to the early retirement of debt.
A reconciliation of GAAP financial measures to our non-GAAP financial measures is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31 |
| 2020 | | 2019 | | 2018 |
| (in millions) | | per share * | | (in millions) | | per share * | | (in millions) | | per share * |
Net Income | $ | 793.0 | | | $ | 3.89 | | | $ | 1,100.3 | | | $ | 5.24 | | | $ | 523.4 | | | $ | 2.38 | |
Excluding: | | | | | | | | | | | |
Net Realized Investment Gains and Losses | | | | | | | | | | | |
Net Realized Investment Gain Related to Reinsurance Transaction (net of tax expense of $273.5; $—; $—) | 1,028.8 | | | 5.05 | | | — | | | — | | | — | | | — | |
Net Realized Investment Loss, Other (net of tax benefit of $20.9; $4.5; $11.0) | (82.3) | | | (0.40) | | | (18.7) | | | (0.09) | | | (28.5) | | | (0.12) | |
Total Net Realized Investment Gain (Loss) | 946.5 | | | 4.65 | | | (18.7) | | | (0.09) | | | (28.5) | | | (0.12) | |
Items Related to Closed Block Individual Disability Reinsurance Transaction | | | | | | | | | | | |
Change in Benefit Reserves and Transaction Costs (net of tax benefit of $274.2; $—; $—) | (1,031.3) | | | (5.06) | | | — | | | — | | | — | | | — | |
Amortization of the Cost of Reinsurance (net of tax benefit of $0.6; $—; $—) | (2.0) | | | (0.01) | | | — | | | — | | | — | | | — | |
Net Tax Benefits of Reinsurance Transaction | 36.5 | | | 0.18 | | | — | | | — | | | — | | | — | |
Total Items Related to Closed Block Individual Disability Reinsurance Transaction | (996.8) | | | (4.89) | | | — | | | — | | | — | | | — | |
Long-term Care Reserve Increase (net of tax benefit of $31.8; $—; $157.7) | (119.7) | | | (0.59) | | | — | | | — | | | (593.1) | | | (2.70) | |
Group Pension Reserve Increase (tax benefit of $3.7; $—; $—) | (13.8) | | | (0.07) | | | — | | | — | | | — | | | — | |
Costs Related to Organizational Design Update (net of tax benefit of $4.7; $—; $—) | (18.6) | | | (0.09) | | | — | | | — | | | — | | | — | |
Impairment Loss on ROU Asset (net of tax benefit of $2.7; $—: $—) | (10.0) | | | (0.05) | | | — | | | — | | | — | | | — | |
Costs Related to Early Retirement of Debt (net of tax benefit of $—; $5.7; $—) | — | | | — | | | (21.6) | | | (0.11) | | | — | | | — | |
After-tax Adjusted Operating Income | $ | 1,005.4 | | | $ | 4.93 | | | $ | 1,140.6 | | | $ | 5.44 | | | $ | 1,145.0 | | | $ | 5.20 | |
| | | | | | | | | | | |
* Assuming Dilution | | | | | | | | | | | |
We measure and analyze our segment performance on the basis of "adjusted operating revenue" and "adjusted operating income" or "adjusted operating loss", which differ from total revenue and income before income tax as presented in our consolidated statements of income due to the exclusion of net realized investment gains and losses and amortization of the cost of reinsurance as well as and certain other items as specified in the reconciliations below. These performance measures are in accordance with GAAP guidance for segment reporting, but they should not be viewed as a substitute for total revenue, income before income tax, or net income.
A reconciliation of total revenue to "adjusted operating revenue" and income before income tax to "adjusted operating income" is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31 |
| 2020 | | 2019 | | 2018 |
| (in millions of dollars) |
Total Revenue | $ | 13,162.1 | | | $ | 11,998.9 | | | $ | 11,598.5 | |
Excluding: | | | | | |
Net Realized Investment Gain (Loss) | 1,199.1 | | | (23.2) | | | (39.5) | |
Adjusted Operating Revenue | $ | 11,963.0 | | | $ | 12,022.1 | | | $ | 11,638.0 | |
| | | | | |
Income Before Income Tax | $ | 964.0 | | | $ | 1,382.1 | | | $ | 627.8 | |
Excluding: | | | | | |
Net Realized Investment Gains and Losses | | | | | |
Net Realized Investment Gain Related to Reinsurance Transaction | 1,302.3 | | | — | | | — | |
Net Realized Investment Loss, Other | (103.2) | | | (23.2) | | | (39.5) | |
Total Net Realized Investment Gain (Loss) | 1,199.1 | | | (23.2) | | | (39.5) | |
Items Related to Closed Block Individual Disability Reinsurance Transaction | | | | | |
Change in Benefit Reserves and Transaction Costs | (1,305.5) | | | — | | | — | |
Amortization of the Cost of Reinsurance | (2.6) | | | — | | | — | |
Total Items Related to Closed Block Individual Disability Reinsurance Transaction | (1,308.1) | | | — | | | — | |
Long-term Care Reserve Increase | (151.5) | | | — | | | (750.8) | |
Group Pension Reserve Increase | (17.5) | | | — | | | — | |
Costs Related to Organizational Design Update | (23.3) | | | — | | | — | |
Impairment Loss on ROU Asset | (12.7) | | | — | | | — | |
Costs Related to Early Retirement of Debt | — | | | (27.3) | | | — | |
Adjusted Operating Income | $ | 1,278.0 | | | $ | 1,432.6 | | | $ | 1,418.1 | |
Critical Accounting Estimates
We prepare our financial statements in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in our financial statements and accompanying notes. Estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed in our financial statements. The accounting estimates deemed to be most critical to our financial position and results of operations are those related to reserves for policy and contract benefits, deferred acquisition costs, valuation of investments, pension and postretirement benefit plans, income taxes, and contingent liabilities. For additional information, refer to our significant accounting policies in Note 1 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Reserves for Policy and Contract Benefits
Reserves for policy and contract benefits are our largest liabilities and represent claims that we estimate we will eventually pay to our policyholders. The two primary categories of reserves are policy reserves for claims not yet incurred and claim reserves for claims that have been incurred or are estimated to have been incurred but not yet reported to us. Reserves for policy and contract benefits equaled $42.1$45.3 billion and $41.5$43.7 billion at December 31, 20172020 and 2016,2019, respectively, or approximately 77.475.8 percent and 78.376.6 percent of our total liabilities, respectively. Reserves ceded to reinsurers were $13.2 billion and $7.2 billion at December 31, 2020 and $7.1 billion at December 31, 2017 and 2016, respectively,2019 and are reported as a reinsurance recoverable in our consolidated balance sheets.
Policy Reserves
Policy reserves are established in the same period we issue a policy and equal the difference between projected future policy benefits and future premiums, allowing a margin for expenses and profit. These reserves relate primarily to our non-interest sensitive products, including our individual disability and voluntary benefits products in our Unum US segment; individual disability and life products in our Unum UKInternational segment; disability and cancer and critical illness policies in our Colonial Life segment; and individual disability, long-term care, and other products in our Closed Block segment. The reserves are calculated based on assumptions that were appropriate at the date the policy was issued and are not subsequently modified unless the policy reserves become inadequate (i.e. loss recognition occurs).
•Persistency assumptions are based on our actual historical experience adjusted for future expectations.
•Claim incidence and claim resolution rate assumptions related to mortality and morbidity are based on actual experience or industry standards adjusted as appropriate to reflect our actual experience and future expectations.
•Discount rate assumptions are based on our current and expected net investment returns.
In establishing policy reserves, we use assumptions that reflect our best estimate while considering the potential for adverse variances in actual future experience, which results in a total policy reserve balance that has an embedded reserve for adverse deviation. We do not, however, establish an explicit and separate reserve as a provision for adverse deviation from our assumptions.
We perform loss recognition tests on our policy reserves annually, or more frequently if appropriate, using best estimate assumptions as of the date of the test, without a provision for adverse deviation. We group the policy reserves for each major product line within a segment when we perform the loss recognition tests. If the policy reserves determined using these best estimate assumptions are higher than our existing policy reserves net of any deferred acquisition cost balance, the existing policy reserves are increased or deferred acquisition costs are reduced to immediately recognize the deficiency. Thereafter, the policy reserves for the product line are calculated using the same method we used for the loss recognition testing, referred to as the gross premium valuation method, wherein we use our best estimate as of the gross premium valuation (loss recognition) date rather than the initial policy issue date to determine the expected future claims, commissions, and expenses we will pay and the expected future gross premiums we will receive.
Because the key policy reserve assumptions for policy persistency, mortality and morbidity, and discount rates are all locked in at policy issuance based on assumptions appropriate at that time, policy reserve assumptions are generally not changed due to a change in claim status from active to disabled subsequent to policy issuance. Depending on the funding mechanism, a full policy reserve is held during disability reflecting continued funding of the full policy reserve during a disability claim, or a fractional policy reserve is held reflecting that the individual policyholder would need to recover before he or she can again generate future claims for a separate occurrence. The policy reserves build up and release over time based on assumptions made at the time of policy issuance such that the reserve is eliminated as policyholders either reach the terminal age for coverage, die, or voluntarily lapse the policy. Policy reserves for Unum US, Unum UK,International, and Colonial Life products are determined using the net
net level premium method as prescribed by GAAP. In applying this method, we use, as applicable by product type, morbidity and mortality incidence rate assumptions, claim resolution rate assumptions, and policy persistency assumptions, among others, to determine our expected future claim payments and expected future premium income. We then apply an interest, or discount, rate to determine the present value of the expected future claims and claim expenses we will pay and the expected future premiums we will receive, with a provision for profit allowed.
Policy reserves for our Closed Block segment include certain older policy forms for individual disability, individual and group long-term care, and certain other products, all of which are no longer actively marketed. The reserves for individual disability and individual and group long-term care are determined using the gross premium valuation method. Key assumptions are persistency, mortality and morbidity, claim incidence, claim resolution rates, commission rates, and maintenance expense rates. For long-term care, premium rate increases are also a key assumption. We apply an interest, or discount, rate to determine the present value of the expected future claims, commissions, and expenses we will pay as well as the expected future premiums we will receive, with no provision for future profit. The interest rate is based on our expected net investment returns on the investment portfolio supporting the reserves for these blocks of business. Under the gross premium valuation method, we do not include an embedded provision for the risk of adverse deviation from these assumptions. Gross premium valuation assumptions do not change after the date of loss recognition unless reserves are again determined to be deficient in the future.
Policy reserves for certain other products, excluding individual disability and individual and group long-term care, which are no longer actively marketed and are reported in our Closed Block segment represent $5.9$5.7 billion on a gross basis. We have ceded $5.1$5.0 billion of reserves related to the other products, which are primarily comprised of policy reserves, to reinsurers. The ceded reserve balance is reported in our consolidated balance sheets as a reinsurance recoverable. We continue to service a block of group pension products, which we have not ceded, and the policy reserves for these products are based on expected mortality rates and retirement rates. Expected future payments are discounted at interest rates reflecting the anticipated investment returns for the assets supporting the liabilities.
Claim Reserves
Claim reserves are established when a claim is incurred or is estimated to have been incurred but not yet reported (IBNR) to us and, as prescribed by GAAP, equals our long-term best estimate of the present value of the liability for future claim payments and claim adjustment expenses. A claim reserve is based on actual known facts regarding the claim, such as the benefits available under the applicable policy, the covered benefit period, the age, and, as appropriate, the occupation and cause of disability of the claimant, as well as assumptions derived from our actual historical experience and expected future changes in experience for factors such as the claim duration, discount rate, and policy benefit offsets, including those for social security and other government-based welfare benefits. Reserves for IBNR claims, similar to incurred claim reserves, include our assumptions for claim duration and discount rates, but because we do not yet know the facts regarding the specific claims, these reserves are also established based on historical incidence rate assumptions, including claim reporting patterns, the average cost of claims, and the expected volumes of incurred claims. Our incurred claim reserves and IBNR claim reserves do not include any provision for the risk of adverse deviation from our assumptions.
Claim reserves, unlike policy reserves, are subject to revision as current claim experience and projections of future factors affecting claim experience change. Each quarter we review our emerging experience to ensure that our claim reserves are appropriate. If we believe, based on our actual experience and our view of future events, that our long-term assumptions need to be modified, we adjust our reserves accordingly with a charge or credit to our current period income.
Multiple estimation methods exist to establish claim reserve liabilities, with each method having its own advantages and disadvantages. Available reserving methods utilized to calculate claim reserves include the tabular reserve method, the paid loss development method, the incurred loss development method, the count and severity method, and the expected claim cost method. No single method is better than the others in all situations and for all product lines. The estimation methods we have chosen are those that we believe produce the most reliable reserves.
We use a tabular reserve methodology on reported claims for our Unum US group long-term disability and individual long-term disability claims andas well as for our Closed Block individual disability and group and individual long-term care claims that have been reported.claims. Under the tabular reserve methodology, reserves for reported claims are based on certain characteristics of the actual reported claimants, such as age, length of time disabled, and medical diagnosis, as well as assumptions regarding claim duration, discount rate, and policy benefit offsets. We believe the tabular reserve method is the most accurate to calculate long-term liabilities and allows us to use the most available known facts about each claim. IBNR claim reserves for our long-term products are calculated using the count and severity method using historical patterns of the claims to be reported and the associated claim costs. For Unum US group short-term disability products, an estimate of the value of future payments to be made on claims already submitted, as well as on
IBNR claims, is
determined in aggregate using a paid loss development method rather than on the individual claimant basis that we use for reported claims on long-term products. The average length of time between the event triggering a claim under a policy and the final resolution of those claims is much shorter for these products than for our long-term liabilities and results in less estimation variability.
Claim reserves for Unum US group life and accidental death and dismemberment products are related primarily to death claims reported but not yet paid, IBNR death claims, and a liability for waiver of premium benefits. The death claim reserve is based on the actual face amount to be paid, the IBNR reserve is calculated using the paid loss development method, and the waiver of premium benefits reserve is calculated using the tabular reserve methodology.
Claim reserves supporting the group and individual dental and vision products reported in our Unum US segmentand Colonial Life segments have a short claim payout period. As a result, the reserves, which primarily represent IBNR and a small amount of claims pending payment, are calculated using the paid loss development method.
Claim reserves supporting our Unum UKInternational segment are calculated using generally the same methodology that we use for Unum US disability and group term life reserves. Claim reserves for our Unum UK group dependent life product are calculated using discounted cash flows, based on our assumptions for claim duration and discount rates. The assumptions used in calculating claim reserves for this segment are based on standard United Kingdomcountry-specific industry experience, adjusted for Unum UK'sour own experience.
The majority of the Colonial Life segment lines of business have short-term benefits, which generally have less estimation variability than our long-term products because of the shorter claim payout period. Our claim reserves for Colonial Life's lines of business are predominantly determined using the incurred loss development method based on our own experience. The incurred loss development method uses the historical patterns of payments by loss date to predict future claim payments for each loss date. Where the incurred loss development method may not be appropriate, we estimate the incurred claims using an expected claim cost per policy or other measure of exposure. The key assumptions for claim reserves for the Colonial Life segment lines of business are: (1)are the timing, rate, and amount of estimated future claim payments; and (2) the estimated expenses associated with the payment of claims.
The following table displays policy reserves, incurred claim reserves, and IBNR claim reserves by major product line, with the summation of the policy reserves and claim reserves shown both gross and net of the associated reinsurance recoverable. Incurred claim reserves represent the expected benefits payable under each incurred claim, along with other expenses associated with the payment of the claims. IBNR claim reserves include provisions for incurred but not reported claims and a provision for reopened claims for our disability products. The IBNR and reopened claim reserves for our disability products are developed and maintained in aggregate based on historical monitoring. Impacting year over year comparability of policy and claim reserves in the following chart are the 2020 long-term care and group pension reserve increases as well as the Closed Block individual disability reinsurance transaction that we entered into in December 2020. See "Executive Summary" contained herein in this Item 7 and NoteNotes 6 and 12 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
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(in millions of dollars) | December 31, 2020 |
| Gross | | Total Reinsurance Ceded | | |
| Policy Reserves | | | | Claim Reserves | | | | | | | Total Net |
| | % | | Incurred | | IBNR | | % | | Total | | |
Group Disability | $ | — | | | — | % | | $ | 5,663.4 | | | $ | 720.4 | | | 26.5 | % | | $ | 6,383.8 | | | $ | 58.3 | | | $ | 6,325.5 | |
Group Life and Accidental Death & Dismemberment | 58.8 | | | 0.3 | | | 715.4 | | | 261.3 | | | 4.0 | | | 1,035.5 | | | 3.0 | | | 1,032.5 | |
Individual Disability | 475.9 | | | 2.2 | | | 1,417.4 | | | 146.0 | | | 6.5 | | | 2,039.3 | | | 216.3 | | | 1,823.0 | |
Voluntary Benefits | 1,731.3 | | | 8.2 | | | 46.3 | | | 55.3 | | | 0.4 | | | 1,832.9 | | | 25.3 | | | 1,807.6 | |
Dental and Vision | — | | | — | | | 0.2 | | | 11.3 | | | — | | | 11.5 | | | 0.1 | | | 11.4 | |
Unum US Segment | 2,266.0 | | | 10.7 | | | 7,842.7 | | | 1,194.3 | | | 37.4 | | | 11,303.0 | | | 303.0 | | | 11,000.0 | |
| | | | | | | | | | | | | | | |
Unum International Segment | 208.4 | | | 1.0 | | | 2,077.0 | | | 138.6 | | | 9.2 | | | 2,424.0 | | | 89.9 | | | 2,334.1 | |
| | | | | | | | | | | | | | | |
Colonial Life Segment | 2,354.8 | | | 11.2 | | | 329.0 | | | 117.4 | | | 1.8 | | | 2,801.2 | | | 4.5 | | | 2,796.7 | |
| | | | | | | | | | | | | | | |
Individual Disability | 196.3 | | | 0.9 | | | 9,641.9 | | | 144.2 | | | 40.5 | | | 9,982.4 | | | 7,810.1 | | | 2,172.3 | |
Long-term Care | 10,402.1 | | | 49.3 | | | 2,147.4 | | | 268.5 | | | 10.0 | | | 12,818.0 | | | 44.4 | | | 12,773.6 | |
Other | 5,675.0 | | | 26.9 | | | 166.1 | | | 113.1 | | | 1.1 | | | 5,954.2 | | | 4,966.3 | | | 987.9 | |
Closed Block Segment | 16,273.4 | | | 77.1 | | | 11,955.4 | | | 525.8 | | | 51.6 | | | 28,754.6 | | | 12,820.8 | | | 15,933.8 | |
| | | | | | | | | | | | | | | |
Subtotal | $ | 21,102.6 | | | 100.0 | % | | $ | 22,204.1 | | | $ | 1,976.1 | | | 100.0 | % | | 45,282.8 | | | 13,218.2 | | | 32,064.6 | |
| | | | | | | | | | | | | | | |
Adjustment Related to Unrealized Investment Gains and Losses | | | | | | | | | | | 6,225.6 | | | 200.2 | | | 6,025.4 | |
| | | | | | | | | | | | | | | |
Consolidated | | | | | | | | | | | $ | 51,508.4 | | | $ | 13,418.4 | | | $ | 38,090.0 | |
| | | | | | | | | | | | | | | | | | | | December 31, 2019 |
(in millions of dollars) | December 31, 2017 | |
| Gross | | Total Reinsurance Ceded | | | | Gross | | Total Reinsurance Ceded | |
| Policy Reserves | | | | Claim Reserves | | | | | | Total Net | | Policy Reserves | | Claim Reserves | | | Total Net |
| | % | | Incurred | | IBNR | | % | | Total | | Total Reinsurance Ceded | | % | | Incurred | | IBNR | | % | | Total | | Total Reinsurance Ceded |
Group Disability | $ | — |
| | — | % | | $ | 6,047.0 |
| | $ | 624.2 |
| | 28.7 | % | | $ | 6,671.2 |
| | $ | 73.8 |
| $ | 6,597.4 |
| Group Disability | $ | — | | | — | % | | $ | 5,814.5 | | | $ | 683.8 | | | 28.2 | % | | $ | 6,498.3 | | | $ | 58.3 | | $ | 6,440.0 | |
Group Life and Accidental Death & Dismemberment | 54.9 |
| | 0.3 |
| | 735.5 |
| | 208.0 |
| | 4.1 |
| | 998.4 |
| | 5.2 |
| 993.2 |
| Group Life and Accidental Death & Dismemberment | 59.9 | | | 0.3 | | | 721.1 | | | 234.2 | | | 4.1 | | | 1,015.2 | | | 6.2 | | 1,009.0 | |
Individual Disability | 533.4 |
| | 2.8 |
| | 1,318.0 |
| | 137.6 |
| | 6.3 |
| | 1,989.0 |
| | 207.5 |
| | 1,781.5 |
| Individual Disability | 499.0 | | | 2.4 | | | 1,391.1 | | | 140.3 | | | 6.6 | | | 2,030.4 | | | 217.2 | | | 1,813.2 | |
Voluntary Benefits | 1,566.7 |
| | 8.3 |
| | 46.7 |
| | 61.0 |
| | 0.5 |
| | 1,674.4 |
| | 27.3 |
| | 1,647.1 |
| Voluntary Benefits | 1,700.1 | | | 8.2 | | | 45.8 | | | 51.4 | | | 0.4 | | | 1,797.3 | | | 26.1 | | | 1,771.2 | |
Dental and Vision | — |
| | — |
| | 0.7 |
| | 11.3 |
| | 0.1 |
| | 12.0 |
| | 0.3 |
| | 11.7 |
| Dental and Vision | — | | | — | | | — | | | 15.4 | | | 0.1 | | | 15.4 | | | 0.2 | | | 15.2 | |
Unum US Segment | 2,155.0 |
| | 11.4 |
| | 8,147.9 |
| | 1,042.1 |
| | 39.7 |
| | 11,345.0 |
| | 314.1 |
| | 11,030.9 |
| Unum US Segment | 2,259.0 | | | 10.9 | | | 7,972.5 | | | 1,125.1 | | | 39.4 | | | 11,356.6 | | | 308.0 | | | 11,048.6 | |
| | | | | | | | | | | | | | | | |
Unum UK Segment | 18.1 |
| | 0.1 |
| | 1,918.3 |
| | 108.3 |
| | 8.7 |
| | 2,044.7 |
| | 87.0 |
| | 1,957.7 |
| |
Unum International Segment | | Unum International Segment | 186.5 | | | 0.9 | | | 1,986.4 | | | 110.0 | | | 9.1 | | | 2,282.9 | | | 87.6 | | | 2,195.3 | |
| | | | | | | | | | | | | | | | |
Colonial Life Segment | 1,989.4 |
| | 10.5 |
| | 288.3 |
| | 137.2 |
| | 1.8 |
| | 2,414.9 |
| | 8.5 |
| | 2,406.4 |
| Colonial Life Segment | 2,229.0 | | | 10.8 | | | 297.4 | | | 113.2 | | | 1.8 | | | 2,639.6 | | | 6.2 | | | 2,633.4 | |
| | | | | | | | | | | | | | | | |
Individual Disability | 418.5 |
| | 2.2 |
| | 9,407.4 |
| | 219.1 |
| | 41.5 |
| | 10,045.0 |
| | 1,619.8 |
| | 8,425.2 |
| Individual Disability | 258.8 | | | 1.3 | | | 8,724.1 | | | 172.7 | | | 38.5 | | | 9,155.6 | | | 1,669.4 | | | 7,486.2 | |
Long-term Care | 8,414.3 |
| | 44.5 |
| | 1,494.8 |
| | 150.9 |
| | 7.1 |
| | 10,060.0 |
| | 40.3 |
| | 10,019.7 |
| Long-term Care | 9,864.6 | | | 47.8 | | | 2,045.2 | | | 232.0 | | | 9.9 | | | 12,141.8 | | | 44.7 | | | 12,097.1 | |
Other | 5,894.8 |
| | 31.3 |
| | 187.3 |
| | 120.4 |
| | 1.2 |
| | 6,202.5 |
| | 5,090.6 |
| | 1,111.9 |
| Other | 5,847.9 | | | 28.3 | | | 177.6 | | | 120.5 | | | 1.3 | | | 6,146.0 | | | 5,133.1 | | | 1,012.9 | |
Closed Block Segment | 14,727.6 |
| | 78.0 |
| | 11,089.5 |
| | 490.4 |
| | 49.8 |
| | 26,307.5 |
| | 6,750.7 |
| | 19,556.8 |
| Closed Block Segment | 15,971.3 | | | 77.4 | | | 10,946.9 | | | 525.2 | | | 49.7 | | | 27,443.4 | | | 6,847.2 | | | 20,596.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Subtotal | $ | 18,890.1 |
| | 100.0 | % | | $ | 21,444.0 |
| | $ | 1,778.0 |
| | 100.0 | % | | 42,112.1 |
| | 7,160.3 |
| | 34,951.8 |
| Subtotal | $ | 20,645.8 | | | 100.0 | % | | $ | 21,203.2 | | | $ | 1,873.5 | | | 100.0 | % | | 43,722.5 | | | 7,249.0 | | | 36,473.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjustment Related to Unrealized Investment Gains and Losses | | | | | | | | | | | 5,094.7 |
| | 375.8 |
| | 4,718.9 |
| Adjustment Related to Unrealized Investment Gains and Losses | | 5,803.1 | | | 424.7 | | | 5,378.4 | |
| | | | | | | | | | | | | | | | | | | | | |
Consolidated | | | | | | | | | | | $ | 47,206.8 |
| | $ | 7,536.1 |
| | $ | 39,670.7 |
| Consolidated | | $ | 49,525.6 | | | $ | 7,673.7 | | | $ | 41,851.9 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| Gross | | Total Reinsurance Ceded | | |
| Policy Reserves | | | | Claim Reserves | | | | | | | Total Net |
| | % | | Incurred | | IBNR | | % | | Total | | |
Group Disability | $ | — |
| | — | % | | $ | 6,201.0 |
| | $ | 608.6 |
| | 29.3 | % | | $ | 6,809.6 |
| | $ | 74.3 |
| | $ | 6,735.3 |
|
Group Life and Accidental Death & Dismemberment | 65.4 |
| | 0.3 |
| | 704.8 |
| | 192.6 |
| | 3.9 |
| | 962.8 |
| | 4.1 |
| | 958.7 |
|
Individual Disability | 544.6 |
| | 3.0 |
| | 1,298.5 |
| | 130.6 |
| | 6.1 |
| | 1,973.7 |
| | 201.0 |
| | 1,772.7 |
|
Voluntary Benefits | 1,492.7 |
| | 8.2 |
| | 45.5 |
| | 50.6 |
| | 0.4 |
| | 1,588.8 |
| | 27.7 |
| | 1,561.1 |
|
Dental and Vision | — |
| | — |
| | 3.9 |
| | 8.1 |
| | 0.1 |
| | 12.0 |
| | 0.2 |
| | 11.8 |
|
Unum US Segment | 2,102.7 |
| | 11.5 |
| | 8,253.7 |
| | 990.5 |
| | 39.8 |
| | 11,346.9 |
| | 307.3 |
| | 11,039.6 |
|
| | | | | | | | | | | | | | | |
Unum UK Segment | 18.2 |
| | 0.1 |
| | 1,714.2 |
| | 113.3 |
| | 7.9 |
| | 1,845.7 |
| | 81.8 |
| | 1,763.9 |
|
|
| |
|
| |
| |
| |
|
| |
| |
| |
|
Colonial Life Segment | 1,871.0 |
| | 10.3 |
| | 277.8 |
| | 132.0 |
| | 1.8 |
| | 2,280.8 |
| | 7.9 |
| | 2,272.9 |
|
| | | | | | | | | | | | | | | |
Individual Disability | 513.6 |
| | 2.8 |
| | 9,696.4 |
| | 251.6 |
| | 42.8 |
| | 10,461.6 |
| | 1,601.2 |
| | 8,860.4 |
|
Long-term Care | 7,898.4 |
| | 43.3 |
| | 1,360.4 |
| | 136.6 |
| | 6.4 |
| | 9,395.4 |
| | 41.8 |
| | 9,353.6 |
|
Other | 5,848.3 |
| | 32.0 |
| | 189.8 |
| | 132.1 |
| | 1.3 |
| | 6,170.2 |
| | 5,030.6 |
| | 1,139.6 |
|
Closed Block Segment | 14,260.3 |
| | 78.1 |
| | 11,246.6 |
| | 520.3 |
| | 50.5 |
| | 26,027.2 |
| | 6,673.6 |
| | 19,353.6 |
|
| | | | | | | | | | | | | | | |
Subtotal | $ | 18,252.2 |
| | 100.0 | % | | $ | 21,492.3 |
| | $ | 1,756.1 |
| | 100.0 | % | | 41,500.6 |
| | 7,070.6 |
| | 34,430.0 |
|
| | | | | | | | | | | | | | | |
Adjustment Related to Unrealized Investment Gains and Losses | | | | | | | | | | | 4,253.2 |
| | 321.3 |
| | 3,931.9 |
|
| | | | | | | | | | | | | | | |
Consolidated | | | | | | | | | | | $ | 45,753.8 |
| | $ | 7,391.9 |
| | $ | 38,361.9 |
|
Key Assumptions
The calculation of policy and claim reserves involves numerous assumptions, but the primary assumptions used to calculate reserves are (1) the discount rate, (2) the claim resolution rate, and (3) the claim incidence rate for policy reserves and IBNR claim reserves. Of these assumptions, our discount rate and claim resolution rate assumptions have historically had the most significant effects on our level of reserves because many of our product lines provide benefit payments over an extended period of time.
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1. | The discount rate, which is used in calculating both policy reserves and incurred and IBNR claim reserves, is the interest rate that we use to discount future claim payments to determine the present value. A higher discount rate produces a lower reserve. If the discount rate is higher than our future investment returns, our invested assets will not earn enough investment income to support our future claim payments. In this case, the reserves may eventually be insufficient. We set our assumptions based on our current and expected future investment yield of the assets supporting the reserves, considering current and expected future market conditions. If the investment yield on new investments that are purchased differs from the investment yield of the existing investment portfolio, it is likely that the discount rate assumption on claims will be adjusted to reflect the impact of the new investment yield.
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| |
2. | The claim resolution rate, used for both policy reserves and incurred and IBNR claim reserves, is the probability that a disability or long-term care claim will close due to recovery or death of the insured. It is important because it is used to estimate how long benefits will be paid for a claim. Estimated resolution rates that are set too high will result in reserves that are lower than they need to be to pay the claim benefits over time. Claim resolution assumptions involve many factors, including the cause of disability, the policyholder's age, the type of contractual benefits provided, and the time since initial disability. We primarily use our own claim experience to develop our claim resolution assumptions. These assumptions are established for the probability of death and the probability of recovery from disability. Our studies review actual claim resolution experience over a number of years, with more weight placed on our experience in the more recent years. We also consider any expected future changes in claim resolution experience.
|
1.The discount rate, which is used in calculating both policy reserves and incurred and IBNR claim reserves, is the interest rate that we use to discount future claim payments to determine the present value. A higher discount rate produces a lower reserve. If the discount rate is higher than our future investment returns, our invested assets will not earn enough investment income to support our future claim payments. In this case, the reserves may eventually be insufficient. We set our assumptions based on our current and expected future investment yield of the assets supporting the reserves, considering current and expected future market conditions. If the investment yield on new investments that are purchased differs from the investment yield of the existing investment portfolio, the discount rate assumption on claims may be adjusted to reflect the impact of the new investment yield.
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3. | The incidence rate, used for policy reserves and IBNR claim reserves, is the rate at which new claims are submitted to us. The incidence rate is affected by many factors, including the age of the insured, the insured's occupation or industry, the benefit plan design, and certain external factors such as consumer confidence and levels of unemployment. We establish our incidence assumption using a historical review of actual incidence results along with an outlook of future incidence expectations.
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2.The claim resolution rate, used for both policy reserves and incurred and IBNR claim reserves, is the probability that a disability or long-term care claim will close due to recovery or death of the insured. It is important because it is used to estimate how long benefits will be paid for a claim. Estimated resolution rates that are set too high will result in reserves that are lower than they need to be to pay the claim benefits over time. Claim resolution assumptions involve many factors, including the cause of disability, the policyholder's age, the type of contractual benefits provided, and the time since initial disability. We primarily use our own
claim experience to develop our claim resolution assumptions. These assumptions are established for the probability of death and the probability of recovery from disability. Our studies review actual claim resolution experience over a number of years, with more weight placed on our experience in the more recent years. We also consider any expected future changes in claim resolution experience.
3.The incidence rate, used for policy reserves and IBNR claim reserves, is the rate at which new claims are submitted to us. The incidence rate is affected by many factors, including the age of the insured, the insured's occupation or industry, the benefit plan design, and certain external factors such as consumer confidence and levels of unemployment. We establish our incidence assumption using a historical review of actual incidence results along with an outlook of future incidence expectations.
Establishing reserve assumptions is complex and involves many factors. Reserves, particularly for policies offering insurance coverage for long-term disabilities and long-term care, are dependent on numerous assumptions other than just those presented in the preceding discussion. The impact of internal and external events, such as changes in claims operational procedures, economic trends such as the rate of unemployment and the level of consumer confidence, the emergence of new diseases, new trends and developments in medical treatments, and legal trends and legislative changes, including changes to social security and other government-based welfare benefits programs which provide policy benefit offsets, among other factors, will influence claim incidence rates, claim resolution rates, and claim costs. In addition, for policies offering coverage for disability or long-term care at advanced ages, the level and pattern of mortality rates at advanced ages will impact overall benefit costs. Reserve assumptions differ by product line and by policy type within a product line. Additionally, in any period and over time, our actual experience may have a positive or negative variance from our long-term assumptions, either singularly or collectively, and these variances may offset each other. We test the overall adequacy of our reserves using all assumptions and with a long-term view of our expected experience over the life of a block of business rather than test just one or a few assumptions independently that may be aberrant over a short period of time. Therefore, while it is not possible to bifurcate the assumptions to evaluate the sensitivity of overall adequacy results in our reserves based upon a change in each individual assumption, but ratherthe actual impacts of changes to a variety of underlying assumptions must be considered in the aggregate by product line.line in order to judge the overall potential implications to reserve adequacy. The following section presents an overview of our trend analysis for key assumptions and the results of variability in our assumptions, in aggregate, for the reserves which we believe are reasonably possible to have a material impact on our future financial results if actual claims yield a materially different amount than what we currently expect and have reserved for, either favorable or unfavorable. In December 2020, we reinsured approximately 75 percent of our Closed Block individual disability business pursuant to a reinsurance agreement with Commonwealth and expect that we will complete the second phase of this transaction in the first quarter of 2021 to cede a significant portion of the remaining business. As a result, we are no longer incorporating this block of business into our discussion of trends in key assumptions below.
Trends in Key Assumptions
Generally, we do not expect our mortality and morbidity claim incidence trends or our persistency trends to change significantly in the short-term, and to the extent that these trends do change, we expect those changes to be gradual over a longer period of time. We have historically experienced an increase in our group long-term disability morbidity claim incidence trends during and following a recessionary period and believe claim incidence trends may continue to somewhat follow general economic conditions and demographics of the general workforce. Regarding the 2020 COVID-19 pandemic, in the short-term we have experienced elevated mortality and anticipate continuation through part of 2021. However, at this time, our view on our long-term mortality and morbidity expectations has not been impacted by this limited experience.
Claim incidence rates for Unum US group long-termlong-term disability were lower during 2017generally consistent in 2020 compared to the prior year. Claim incidence rates for our Closed Block
In 2020, both short-term and long-term care line of business continue to be generally consistent with the revised assumptions we established during our 2014 reserve review and assumption update.
Long-term interest rates decreased in 2017 while short-term interest rates increased.decreased. The long-term interest rates supporting the majority of our lines of business remain below historical norms. The assumptions we used to discount our reserves during this period were slightly lower for certain of our product lines. Reserve discount rate assumptions for new policies and new claims are periodically adjusted to reflect our current and expected net investment returns. Changes in our average discount rate assumptions tend to occur gradually over a longer period of time because of the long-duration investment portfolios which support the reserves for the majority of our lines of business.
Our claim resolution rate assumption used in determining reserves is our expectation of the resolution rate we will experience over the life of the block of business and will vary from actual experience in any one period, both favorably and unfavorably. Claim resolution rates are very sensitive to operational and environmental changes and have a greater chance of significant variability in a shorter period of time than our other reserve assumptions. These rates are reviewed on a quarterly basis for the death and recovery components separately. Claim resolution rates in our Unum US group long-term disability product line and in our Closed Block individual disability product line have
exhibited some variability over the last several years exhibited some variability.years. Relative to the resolution rate we expect to experience over the life of the block of business, actual quarterly rates during 20162019 and 20172020 have varied between -15 and +17remained within 5 percent inof our Closed Block individual disability line of business. Actual quarterly rates during 2016 and 2017 have varied by -8 and +5 percentlong-term assumptions in our Unum US group long-term disability line of business, which, along with the Closed Block individual disability line, represents the majority of our claim reserves. During 2017, claimbusiness. Claim resolution rates pertaining to life and overall mortality experience were relatively consistent with the levels of 2016 and 2015. Onfor our group long-term disability product line have generally exhibited an annual basis for the years 2015 to 2017, our overall claim resolution rates were fairly consistent with or slightly favorable to our long-term assumptions.increasing trend.
We monitor and test our reserves for adequacy relative to all of our assumptions in the aggregate. In our estimation, scenarios based on reasonably possible variations in each of our reserve assumptions for our Unum US group long-term disability product, when modeled together in aggregate, could produce potential results as illustrateda change in the chart below.our reserve balance of $201 million based on a 3.3 percent variation, favorable or unfavorable, in our assumptions. The major contributor to the variance for bothis the claim resolution rate.
In addition to our Unum US group long-term disability line of business, and the Closed Block individual disability line of business is the claim resolution rate.
|
| | |
| Potential impact, positive or negative, of variations in reserve assumptions on our December 31, 2017 claim reserve balance (in millions of dollars) |
Unum US group long-term disability | 3.3% | $210 |
Closed Block individual disability | 2.6% | $237 |
In addition, we consider variability in our reserve assumptions related to long-term care policy reserves. These reserves are held under the gross premium valuation method with assumptions established as of December 31, 2014, the date of loss recognition. Assumptions for policy reservesand do not change after the date of loss recognition unless reserves are again determined to be deficient. As such, positive developments will result in the accumulation of reserve margin, while adverse developments would result in an additional reserve charge. Policy reserves for long-term care are based upon a number of key assumptions, and each assumption has various factors which may impact the long-term outcome. Key assumptions with respect to morbidity, mortality, claims incidence and resolutions, persistency, interest rates, and future premium rate increases must incorporate extended views of expectations for many years into the future. Reserves are highly sensitive to these estimates. For example,
During the fourth quarter of 2020, we completed a 25 basis point changereview of policy reserve adequacy, which incorporated our most recent experience and included a review of all material assumptions. Based on our analysis, during the fourth quarter of 2020, we updated our interest rate and premium rate increase reserve assumptions from those established at our prior loss recognition in the assumedthird quarter of 2018 and determined that our gross long-term care policy and claim reserves should be increased by $151.5 million.
Our long-term care discount rate assumption reflects our expectation that the low interest rate environment will continue to persist and our expected impact on future long-term care new money yield rates. Our updated expectation for long-term care new money yield rates assumes a 10-year treasury rate grading over 7 years to a rate of 3.25 percent, when we assume no further increase. Partially offsetting the lifetimeimpact from the discount rate assumption was a favorable update to our assumptions for premium rate increases based on approvals and inventory updates since the third quarter of 2018. The remaining key assumptions for our long-term care business wouldpolicy reserves remain materially unchanged from the third quarter of 2018.
Sensitivity analysis related to our key assumptions for long-term care reserves along with the potential impact to our reserve balance is as follows. This sensitivity analysis was completed as of the date of our assumption update in the fourth quarter of 2020 and will not be updated unless reserves within an approximate range of $450 millionare again determined to $500 million, assuming all other factors held constant.be deficient in the future.
| | | | | | | | | | | | | | | | | | | | | |
Assumption | | Sensitivity | | Unfavorable | | Favorable | |
| | | | (in millions of dollars) | |
Active Policy Terminations | | 7.00 | % | | $ | 420 | | | $ | 395 | | |
Claim Incidence | | 3.50 | % | | $ | 435 | | | $ | 445 | | |
Claim Terminations | | 2.00 | % | | $ | 260 | | | $ | 255 | | |
Morbidity/Mortality Improvement* | | No Improvement/2.00% | | $ | 1,000 | | | $ | 650 | | |
Future Unapproved Rate Increases | | 10.00 | % | | $ | 80 | | | $ | 80 | | |
New Money Rate | | 0.25 | % | | $ | 275 | | | $ | 275 | | |
Discount Rate | | 0.25 | % | | $ | 500 | | | $ | 500 | | |
| | | | | | | |
* Morbidity improvement has been observed in our claims experience over a ten year period, normalized for variables such as age and claims type. | |
Key assumptions and related impacts are also heavily interrelated in both their outcome and in their effects on reserves. For example, changes in the view of morbidity and mortality might be mitigated by either potential future premium rate increases and/or morbidity improvements due to general improvement in health and/or medical breakthroughs. There is potentially a wide range of outcomes for each assumption and in totality.
We believe that these ranges provide a reasonable estimate of the possible changes in reserve balances for those product lines where we believe it is possible that variability in the assumptions, in the aggregate, could result in a material impact on our reserve levels, but we record our reserves based on our long-term best estimate. Because these product lines have long-term claim payout periods, there is a greater potential for significant variability in claim costs, either positive or negative. We closely monitor emerging experience and use these results to inform our view of long-term assumptions.
Deferred Acquisition Costs (DAC)
We defer incremental direct costs associated with the successful acquisition of new or renewal insurance contracts and amortize these costs over the life of the related policies. Deferred costs include certain commissions, other agency compensation, selection and policy issue expenses, and field expenses. Acquisition costs that do not vary with the production of new business, such as commissions on group products which are generally level throughout the life of the policy, are excluded from deferral.
Approximately 88.993.4 percent of our DAC relates to non-interest sensitive products, and we amortize DAC for these products in proportion to the premium income we expect to receive over the life of the policies. DAC related to interest sensitive policies is amortized over the lives of the policies in relation to the present value of estimated gross profits from surrender charges, mortality margins, investment returns, and expense margins. Key assumptions used in developing the future amortization of DAC are persistency, premium income, and for our interest sensitive products, mortality margins and investment returns. We use our own historical experience and expectation of the future performance of our businesses in determining our assumptions. For non-interest sensitive products, the estimated premium income in the early years of the amortization period is generally higher than in the later years due to the anticipated cumulative effect of policy persistency in the early years, which results in a greater proportion of the costs being amortized in the early years of the life of the policy. During 2017, ourOur key assumptions used to develop the future amortization of acquisition costs deferred during 20172020 did not change materially from those used in 2016.2019. Generally, we do not expect our key assumptions to change significantly in the short-term, and to the extent that these trends do change, we expect those changes to be gradual over a longer period of time.
The following are our current assumptions regarding the length of our amortization periods, the approximate DAC balance that remains at the end of years 3, 10, and 15 as a percentage of the cost initially deferred, and our DAC balances as of December 31, 2017 and 2016.balances:
| | | | Balance Remaining as a % | | DAC Balances | | Balance Remaining as a % | | DAC Balances |
| Amortization | | of Initial Deferral | | at December 31 | | Amortization | | of Year-end DAC Balance | | at December 31 |
| Period | | Year 3 | | Year 10 | | Year 15 | | 2017 | | 2016 | | Period | | Year 3 | | Year 10 | | Year 15 | | 2020 | | 2019 |
| | | | | | | | | (in millions of dollars) | | | | | | | | | | (in millions of dollars) |
Unum US | | | | | Unum US | | |
Group Disability | 6 | | 27% | | 0% | | 0% | | $ | 96.8 |
| | $ | 89.8 |
| Group Disability | 4-6 | | 25% | | 0% | | 0% | | $ | 95.3 | | | $ | 99.1 | |
Group Life and Accidental Death & Dismemberment | 6 | | 29% | | 0% | | 0% | | 77.7 |
| | 73.4 |
| Group Life and Accidental Death & Dismemberment | 4-6 | | 26% | | 0% | | 0% | | 76.4 | | | 79.7 | |
Supplemental and Voluntary: | | | | | Supplemental and Voluntary: | |
Individual Disability | 20 | | 71% | | 46% | | 22% | | 431.3 |
| | 432.4 |
| Individual Disability | 20 | | 73% | | 26% | | 6% | | 423.6 | | | 426.1 | |
Voluntary Benefits | 20 | | 53% | | 20% | | 6% | | 596.2 |
| | 580.0 |
| Voluntary Benefits | 10-29 | | 59% | | 16% | | 5% | | 557.4 | | | 604.7 | |
Dental and Vision | 4 | | 28% | | 0% | | 0% | | 3.4 |
| | 0.9 |
| Dental and Vision | 4 | | 26% | | 0% | | 0% | | 16.0 | | | 13.4 | |
| | | | | |
Unum International | | Unum International | |
Unum UK | | | | | Unum UK | |
Group Long-term Disability | 3 | | 0% | | 0% | | 0% | | 3.2 |
| | 3.6 |
| Group Long-term Disability | 3 | | 0% | | 0% | | 0% | | 2.8 | | | 2.7 | |
Group Life | 3 | | 0% | | 0% | | 0% | | 1.3 |
| | 1.3 |
| Group Life | 3 | | 0% | | 0% | | 0% | | 1.2 | | | 1.4 | |
Supplemental | 20 | | 56% | | 12% | | 2% | | 16.8 |
| | 16.5 |
| Supplemental | 20 | | 55% | | 11% | | 2% | | 14.5 | | | 15.3 | |
Unum Poland | | Unum Poland | 30 | | 75% | | 50% | | 37% | | 13.5 | | | 7.0 | |
| | | | | |
Colonial Life | | | | | Colonial Life | |
Accident, Sickness, and Disability | 15 | | 44% | | 11% | | 1% | | 494.0 |
| | 451.8 |
| Accident, Sickness, and Disability | 15 | | 64% | | 10% | | 0% | | 563.2 | | | 553.4 | |
Life | 25 | | 67% | | 29% | | 13% | | 252.5 |
| | 243.1 |
| Life | 25 | | 73% | | 24% | | 7% | | 278.7 | | | 283.6 | |
Cancer and Critical Illness | 19 | | 57% | | 24% | | 10% | | 211.4 |
| | 201.4 |
| Cancer and Critical Illness | 19 | | 79% | | 25% | | 5% | | 230.0 | | | 237.6 | |
| | | | | |
| | | | | |
Totals | | $ | 2,184.6 |
| | $ | 2,094.2 |
| Totals | | $ | 2,272.6 | | | $ | 2,324.0 | |
Amortization of DAC is adjusted to reflect actual experience for assumptions which deviate compared to the anticipated experience. Any deviations from projections may result in a change to the rate of amortization in the period such events occur. As an example, for our non-interest sensitive products, we may experience accelerated amortization if policies terminate earlier than projected, or we may experience a slower rate of amortization if policies persist longer than projected. Our actual experience has not varied materially from our assumptions during the last three years.
See Note 1 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of our DAC accounting policy.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and therefore represents an exit price, not an entry price. The exit price objective applies regardless of our intent and/or ability to sell the asset or transfer the liability at the measurement date. We generally use valuation techniques consistent with the market approach, and to a lesser extent, the income approach. The market approach uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities and the income approach converts future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. We believe the market approach valuation technique provides more observable data than the income approach, considering the types of investments we hold.
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. The market sources from which we obtain or derive the fair values of our assets and liabilities carried at market value include quoted market prices for actual trades, price quotes from third party pricing vendors, price quotes we obtain from outside brokers, matrix pricing, discounted cash flow, and observable prices for similar publicly traded or privately traded issues that incorporate the credit quality and industry sector of the issuer. Our fair value measurements could differ significantly based on the valuation technique and available inputs.
Inputs to valuation techniques refer broadly to the assumptions that market participants use in pricing assets or liabilities, including assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value and/or the risk inherent in the inputs to the valuation technique. We use observable and unobservable inputs in measuring the fair value of our financial instruments. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
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. We consider key assumptions, such as risk-free interest rates and risk premium adjustments, in the valuation of these types of securities. 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.
Rapidly changing credit and equity market conditions can materially impact the valuation of securities, and the period to period changes in value can vary significantly.
See Note 2 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
We evaluate available information, including the factors noted above, both positive and negative, in reaching our conclusions. In particular, we also consider the strength of the issuer’s balance sheet, its debt obligations and near term funding requirements, cash flow and liquidity, the profitability of its core businesses, the availability of marketable assets which could be sold to increase liquidity, its industry fundamentals and regulatory environment, and its access to capital markets. Although all available and applicable factors are considered in our analysis, our expectation of recovering the entire amortized cost basis of the security, whether we intend to sell the security, whether it is more likely than not we will be required to sell the security before recovery of its amortized cost, and whether the security is current on principal and interest payments are the most critical factors in determining whether impairments are other than temporary.a credit loss is possible. The significance of the decline in value and the length of time during which there has been a significant decline areis also an important factors,factor, but we generally do not record an impairmenta credit loss based solely on these two factors,this factor, since often other more relevant factors will impact our evaluation of a security.
We use a comprehensive rating system to evaluate the investment and credit risk of our mortgage loans and to identify specific properties for inspection and reevaluation. We estimate an allowance for credit losses that we expect to incur over the life of our mortgage loans using a probability of default method. For each loan, we estimate the probability that the loan will default before its maturity (probability of default) and the amount of the loss if the loan defaults (loss given default). These two factors result in an expected loss percentage that is applied to the amortized cost of each loan to determine the expected credit loss. Mortgage loans are considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according toreported at amortized cost less the contractual terms of the loan agreement. We establish an allowance for probableexpected credit losses on mortgage loans based on a review of individual loans, consideringwith the value of the underlying collateral, the value of which is periodically assessed. Mortgage loans are not reported at fair valuechange in our consolidated balance sheets unless the mortgage loan is considered impaired, in which case the impairment isexpected credit losses recognized as a realized investment loss in our consolidated statements of income.
There are a number of significant risks inherent in the process of monitoring our investments for impairmentscredit losses and determining when and if an impairment is other than temporary.a credit loss exists. These risks and uncertainties include the following possibilities:
See Notes 1 and 3 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
We sponsor several defined benefit pension and other postretirement benefit (OPEB) plans for our employees, including non-qualified pension plans. The U.S. qualified and non-qualified defined benefit pension plans comprise the majority of our total benefit obligation and benefit cost. We maintain a separate defined benefit plan for eligible employees in our U.K. operation. The U.S. defined benefit pension plans were closed to new entrants on December 31, 2013, the OPEB plan was closed to new entrants on December 31, 2012, and the U.K. plan was closed to new entrants on December 31, 2002.
Our net periodic benefit costs and the value of our benefit obligations for these plans are determined based on a set of economic and demographic assumptions that represent our best estimate of future expected experience. Major assumptions used in accounting for these plans include the expected discount (interest) rate, the long-term rate of return on plan assets, and mortality rates. We also use, as applicable, expected increases in compensation levels and a weighted average annual rate of increase in the per capita cost of covered benefits, which reflects a health care cost trend rate, and the U.K. pension plan also uses expected cost of living increases to plan benefits.
The assumptions chosen for our pension and OPEB plans are reviewed annually, using a December 31 measurement date for each of our plans unless we are required to perform an interim remeasurement. The discount rate, expected long-term rate of return, and mortality rate assumptions have the most significant effect on our net periodic benefit costs associated with these plans. In addition to the effect of changes in our assumptions, the net periodic cost or benefit obligation under our pension and OPEB plans may change due to factors such as plan amendments, actual experience being different from our assumptions, special benefits to terminated employees, and/or changes in benefits provided under the plans.
Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews. Risk tolerance is established through consideration of plan liabilities, plan funded status, and corporate financial condition. We believe our investment portfolios are well diversified by asset class and sector, with no undue risk concentrations in any one category. See Note 9 of the "Notes to
Consolidated Financial Statements" contained herein in Item 8 for further discussion of the investment portfolios for our plans.
The amortization of the unrecognized actuarial gain or loss and the unrecognized prior service credit is a component of our net periodic benefit cost and equaled $19.6$19.7 million, $15.8$18.4 million, and $11.6$22.1 million in 2017, 2016,2020, 2019, and 2015,2018, respectively.
The fair value of plan assets in our U.S. qualified defined benefit pension plan was $1,582.6$1,710.9 million at December 31, 2017,2020, compared to $1,454.1$1,600.0 million at December 31, 2016.2019. The plan was in an underfunded position of $348.8$339.0 million and $312.1$300.8 million at December 31, 20172020 and December 31, 2016,2019, respectively. This year-over-year change was due primarily to the increase in period benefit obligations due to the decrease in discount rate, partially offset by higher than expected asset returns.
The fair value of plan assets in our U.K. pension plan was £187.6£215.1 million at December 31, 2017,2020, compared to £185.1£190.7 million at December 31, 2016.2019. The U.K. pension plan was in an overfundedunderfunded position of £7.2£4.3 million and £4.3£3.1 million at December 31, 20172020 and 2016,2019, respectively. This year-over-year change was due primarily to the increase in period benefit obligations due to the decrease in discount rate, partially offset by higher than expected asset returns.
See Note 9 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
We provide for federal, state, and foreign income taxes currently payable, as well as those deferred due to temporary differences between the financial reporting and tax bases of assets and liabilities. Our accounting for income taxes represents our best estimate of various events and transactions. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws in a multitude of jurisdictions, both domestic and foreign. The amount of income taxes we pay is subject to ongoing audits in various jurisdictions, and a material assessment by a governing tax authority could affect profitability.
We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. Significant judgment is required in determining valuation allowances. In evaluating the ability to recover deferred tax assets, we consider all available positive and negative evidence including past operating results, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. In the event we determine that we most likely will not be able to realize all or part of our deferred tax assets in the future, an increase to the valuation allowance is charged to earnings in the period such determination is made. Likewise, if it is later determined that it is more likely than not that those deferred tax assets will be realized, the previously provided valuation allowance is reversed.
Changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on our provision for income tax and our effective tax rate, which could significantly affect the amounts reported in our financial statements. The TCJA did not significantly change our process for evaluating the above items.
See "Regulation" contained herein in Item 1. See Note 7 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
On a quarterly basis, we review relevant information with respect to litigation and contingencies to be reflected in our consolidated financial statements. An estimated loss is accrued when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. It is possible that our results of operations or cash flows in a particular period could be materially affected by an ultimate unfavorable outcome of pending litigation or regulatory matters depending, in part, on our results of operations or cash flows for the particular period. See Note 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
For information on new accounting standards and the impact, if any, on our financial position or results of operations, see Note 1 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Shown below are sales results for our three principal operating business segments.
Sales shown in the preceding chart generally represent the annualized premium income on new sales which we expect to receive and report as premium income during the next 12 months following or beginning in the initial quarter in which the sale is reported, depending on the effective date of the new sale. Sales do not correspond to premium income reported as revenue in accordance with GAAP. This is because new annualized sales premiums reflect current sales performance and what we expect to recognize as premium income over a 12 month period, while premium income reported in our financial statements is reported on an "as earned" basis rather than an annualized basis and also includes renewals and persistency of in-force policies written in prior years as well as current new sales.
Sales, persistency of the existing block of business, employment and salary growth, and the effectiveness of a renewal program are indicators of growth in premium income. Trends in new sales, as well as existing market share, also indicate the potential for growth in our respective markets and the level of market acceptance of price changeslevels and new product offerings. Sales results may fluctuate significantly due to case size and timing of sales submissions. Given the uncertainty caused by the COVID-19 pandemic, we expect to experience further disruption in our sales activity in 2021.
See "Segment Results" as follows for a discussion of sales by segment.
On December 22, 2017, the U.S. Federal government enacted the TCJA, which reducesreduced the federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018. Although the TCJA's 21 percent corporate tax rate will become effective on January 1, 2018, we are required to adjust deferred tax assets and liabilities through continuing operations on the date of enactment. As a result, in 2017 we recorded an income tax benefit of $97.9 million for the TCJA's corporate tax rate reduction and an income tax expense of $66.4 million for the deemed repatriation transition tax on accumulated foreign E&P.
Our consolidated statements of income include the following changes in unrecognized tax benefits:benefits.
We file federal and state income tax returns in the United States and in foreign jurisdictions. During 2015, we settled our Internal Revenue Service (IRS) audit for 2009 and 2010 and resolved a claim for refund we filed related to tax credits for years 2003 through 2012. As a result, we recognized a tax benefit of $6.8 million in our consolidated statements of income and paid an immaterial amount of additional tax.
We file state income tax returns in nearly every state in the United States. Tax years subsequent to 20122015 remain subject to examination depending on the statute of limitation established by the various states, which is generally three to four years. Tax years subsequent to 2009 remain subject to examination in California.
We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. Our valuation allowance was $20.3$14.5 million and $17.2$28.3 million at December 31, 20172020 and 2016, respectively. We recorded a2019, the majority of which related to our cumulative deferred tax asset for future state income tax benefitsbenefits. The de minimis remaining amount of $22.0 million and $18.7 million, net of federal tax benefits, as of December 31, 2017 and 2016, respectively, and recorded a corresponding valuation allowance of $19.3 million and $16.3 million, respectively, to reduce the deferred tax asset to the amount that is more likely than not to be realized. The remaining of
Collateralized debt is comprised of our senior secured notes and ranks highest in priority, followed by unsecured notes, which consist of senior notes and medium-term notes, followed by junior subordinated debt securities. The senior notes due 2018 and medium-term notes are non-callable and the junior subordinated debt securities are callable under limited, specified circumstances. The remaining debt is callable and may be redeemed, in whole or in part, at any time.
In 2007, Northwind Holdings, LLC (Northwind Holdings), a wholly-owned subsidiary of Unum Group, issued $800.0 million of insured, senior secured notes, (the Northwind notes) in a private offering. The Northwind notes bearbearing interest at a floating rate equal to the three-monththree month LIBOR plus 0.78%.
We sponsor several defined benefit pension and OPEB plans for our employees, including non-qualified pension plans. The U.S. qualified and non-qualified defined benefit pension plans comprise the majority of our total benefit obligation and benefit cost. We maintain a separate defined benefit plan for eligible employees in our U.K. operation. The U.S. defined benefit pension plans were closed to new entrants on December 31, 2013, the OPEB plan was closed to new entrants on December 31, 2012, and the U.K. plan was closed to new entrants on December 31, 2002.
Because all participants in the U.S. and U.K. pension plans are considered inactive, we amortize the net actuarial loss and prior service credit for these plans over the average remaining life expectancy of the plans. As of December 31, 2017,2020, the estimate of the average remaining life expectancy of the plans was approximately 25 years for the U.S. plan and 3231 years for U.K. plan.
The following table provides the changes in the benefit obligation and fair value of plan assets and the funded status of the plans.
The amounts recognized in our consolidated balance sheets for our pension and OPEB plans at December 31, 20172020 and 20162019 are as follows. Certain prior year amounts have been reclassified to conform to current presentation.
The following table provides the changes recognized in other comprehensive income for the years ended December 31, 20172020 and 2016.2019.
The objective of our U.S. pension and OPEB plans is to maximize long-term return, within acceptable risk levels, in a manner that is consistent with the fiduciary standards of the Employee Retirement Income Security Act (ERISA), while maintaining sufficient liquidity to pay current benefits and expenses.
Our U.S. qualified defined benefit pension plan assets include a diversified blend of domestic, international, global, and emerging market equity securities, fixed income securities, opportunistic credit securities, real estate investments, alternative investments, and cash equivalents. Equity securities are comprised of funds and individual securities that are benchmarked against the respective indices specified below. International and global equity funds may allocate a certain percentage of assets to forward currency contracts. Fixed income securities include U.S. government and agency asset-backed securities, corporate investment-grade bonds, private placement securities, and bonds issued by states or other municipalities. Opportunistic credits consist of investments in funds that hold varied fixed income investments purchased at depressed values with the intention to
later sell those investments for a gain. Real estate investments consist primarily of funds that hold commercial real estate investments. Alternative investments, which include private equity direct investments, private equity funds of funds, and hedge funds of funds, utilize proprietary strategies that are intended to have a low correlation to the U.S. stock market. Prohibited investments include, but are not limited to, unlisted securities, futures contracts, options, short sales, and investments in securities issued by Unum Group or its affiliates. The invested asset classes, asset types, and benchmark indices for our U.S. qualified defined benefit pension plan is as follows. We target approximately 36 percent to equity securities, 40 percent to fixed income securities, and 24 percent to opportunistic credits, alternative, and real estate investments.
Assets for our U.K. pension plan are primarily invested in a pooled diversified growth fund. This fund invests in assets such as global equities, hedge funds, commodities, below-investment-grade fixed income securities, and currencies. The objectives of the fund are to generate capital appreciation over the course of a complete economic and market cycle and to deliver equity-like returns in the medium-to-long term while maintaining approximately two thirds of the volatility of equity markets. Performance of this fund is measured against the U.K. inflation rateLIBOR plus four and a half percent. The remaining assets in the U.K. plan are invested in leveraged interest rate and inflation swap and gilt funds of varying durations designed to broadly match the interest rate and inflation sensitivities of the plan's liabilities. The current target allocation for the assets is 65 percent diversified growth assets and 35 percent interest rate and inflation swapgilt funds. There are no categories of investments that are specifically prohibited by the U.K. plan, but there are general guidelines that ensure prudent investment action is taken. Such guidelines include the prevention of the plan from using derivatives for speculative purposes and limiting the concentration of risk in any one type of investment.
Assets for the OPEB plan are invested in life insurance contracts issued by one of our insurance subsidiaries. The assets support life insurance benefits payable to certain former retirees covered under the OPEB plan. The terms of these contracts are consistent in all material respects with those the subsidiary offers to unaffiliated parties that are similarly situated. There are no categories of investments specifically prohibited by the OPEB plan.
We believe our investment portfolios are well diversified by asset class and sector, with no undue risk concentrations in any one category.
The categorization of fair value measurements by input level for the invested assets in our U.S. pension plans is shown below. The carrying values of investment-related receivables and payables approximate fair value due to the short-term nature of the securities and are not included in the following chart. Investments valued using net asset value (NAV) as a practical expedient are not required to be categorized by input level, but these investments are included as follows to reconcile to total invested assets.
Certain equity, opportunistic credit, and real estate investments are valued based on the NAV of the underlying holdings. We made no adjustments to the NAV for 20172020 or 2016.2019. These investments have no unfunded commitments and no specific redemption restrictions.
The categorization of fair value measurements by input level for the invested assets in our U.K. pension plan is shown below. Investments valued using NAV as a practical expedient are not required to be categorized by input level, but these investments are included as follows to reconcile to total invested assets.
Level 1 fixed interest and index-linked securities consist of individual funds that are valued based on unadjusted quoted prices from active markets for identical securities. Diversified growth assets and certain fixed interest and index-linked securities are valued based on the NAV of the underlying holdings. We made no adjustments to the NAV for 20172020 or 2016.2019. These investments have no unfunded commitments and no specific redemption restrictions.
The categorization of fair value measurements by input level for the assets in our OPEB plan is as follows:
The fair value is represented by the actuarial present value of future cash flows of the contracts.
Changes in our OPEB plan assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 20172020 and 20162019 are as follows:
We set the discount rate assumption annually for each of our retirement-related benefit plans at the measurement date to reflect the yield on a portfolio of high quality fixed income corporate debt instruments matched against the projected cash flows for future benefits.
Our long-term rate of return on plan assets assumption is selected from a range of probable return outcomes from an analysis of the asset portfolio. Our expectations for the future investment returns of the asset categories are based on a combination of historical market performance, evaluations of investment forecasts obtained from external consultants and economists, and current market yields. The methodology underlying the return assumption includes the various elements of the expected return for each asset class such as long-term rates of return, volatility of returns, and the correlation of returns between various asset classes. The expected return for the total portfolio is calculated based on the plan's strategic asset allocation. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews. Risk tolerance is established through consideration of plan liabilities, plan funded status, and corporate financial condition.
Our mortality rate assumption reflects our best estimate, as of the measurement date, of the life expectancies of plan participants in order to determine the expected length of time for benefit payments. We derive our assumptions from industry mortality tables.
The rate of compensation increase assumption for our U.K. pension plan is generally based on periodic studies of compensation trends.
The following table provides expected benefit payments, which reflect expected future service, as appropriate.
Our OPEB plan represents a non-vested, non-guaranteed obligation, and current regulations do not require specific funding levels for these benefits, which are comprised of retiree life, medical, and dental benefits. It is our practice to use general assets to pay medical and dental claims as they come due in lieu of utilizing plan assets for the medical and dental benefit portions of our OPEB plan.
We offer a 401(k) plan to all eligible U.S. employees under which a portion of employee contributions is matched. We match dollar-for-dollar up to 5.0 percent of base salary and any recognized sales and performance-based incentive compensation for employee contributions into the plan. We also make an additional non-elective contribution of 4.5 percent of earnings for all eligible employees and a separate transition contribution for eligible employees who met certain age and years of service criteria as of December 31, 2013. The separate transition contributions continued through December 31, 2020, at which point they expired. The 401(k) plan remains in compliance with ERISA guidelines and continues to qualify for a “safe harbor” from annual discrimination testing.
Common stock repurchases, which are accounted for using the cost method and classified as treasury stock until otherwise retired, were as follows:
We issue new shares of common stock for all of our stock plan vestings and exercises.
Compensation expense for the stock plans, as reported in our consolidated statements of income, is as follows:
Restrictions under applicable state insurance laws limit the amount of dividends that can be paid to a parent company from its insurance subsidiaries in any 12-month period without prior approval by regulatory authorities. For life insurance companies domiciled in the U.S., that limitation generally equals, depending on the state of domicile, either ten percent of an insurer's statutory surplus with respect to policyholders as of the preceding year end or the statutory net gain from operations, excluding realized investment gains and losses, of the preceding year. The payment of dividends to a parent company from a life insurance subsidiary is generally further limited to the amount of unassigned funds.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. We evaluated those controls based on the 2013 Internal Control - Integrated Framework from the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, these officers concluded that our disclosure controls and procedures were effective as of December 31, 2017.2020.
There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, during the quarter ended December 31, 20172020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company's internal control over financial reporting encompasses the processes and procedures management has established to (i) maintain records that, in reasonable detail, accurately and fairly reflect the Company's transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles; (iii) provide reasonable assurance that receipts and expenditures are appropriately authorized; and (iv) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, any projection of the evaluation of effectiveness to future periods is subject to the riskrisks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and concluded that, as of December 31, 2017,2020, we maintained effective internal control over financial reporting.
Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial statements included herein, audited the effectiveness of our internal control over financial reporting, as of December 31, 2017,2020, and issued the attestation report included as follows.
We have audited Unum Group and subsidiaries’ internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control-IntegratedControl - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Unum Group and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20172020 and 2016,2019, the related consolidated statements of income, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017,2020, and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) and our report dated February 21, 201817, 2021 expressed an unqualified opinion thereon.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
ITEM 9B. OTHER INFORMATION
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item with respect to directors is included under the caption "Information About the Board of Directors," sub-captions "Director Nominees" and "Additional"Summary of Director - Retiring at the Annual Meeting,"Qualifications and Experience", in our definitive proxy statement for the 20182021 Annual Meeting of Shareholders and is incorporated herein by reference.
The information required by this Item with respect to our executive officers is included under the caption "Executive Officers of the Registrant""Information about our Executive Officers" contained herein in Item 1 and is incorporated herein by reference.
The information required by this Item with respect to compliance with Section 16(a) of the Exchange Act is included under the caption "Ownership of Company Securities,"Securities", sub-caption "Section"Delinquent Section 16(a) - Beneficial Ownership Reporting Compliance,"Reports", in our definitive proxy statement for the 20182021 Annual Meeting of Shareholders and is incorporated herein by reference.
The information required by this Item with respect to a code of ethics for our chief executive officer and certain senior financial officers is included under the caption "Board and Committee Governance,"Governance", sub-caption "Codes of Conduct and Ethics,"Ethics", in our definitive proxy statement for the 20182021 Annual Meeting of Shareholders and is incorporated herein by reference.
The information required by this Item with respect to the audit committee and audit committee financial experts is included under the caption "Board and Committee Governance,"Governance", sub-captions "Committees of the Board", "Committee Responsibilities" and "Audit Committee,"Committee", in our definitive proxy statement for the 20182021 Annual Meeting of Shareholders and is incorporated herein by reference. In addition, information relating to the procedures by which our shareholders may recommend nominees to our board of directors is included under the caption "Corporate Governance,"Governance", sub-caption "Process for Selecting and Nominating Directors,"Directors", in our definitive proxy statement for the 20182021 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item with respect to executive compensation and compensation committee matters is included under the caption "Information About the Board of Directors,"Directors", sub-caption "Director Compensation,"Compensation", under the caption "Board and Committee" Governance", sub-caption "Compensation Committee Interlocks and Insider Participation,"Participation", and under the captions "Compensation Discussion and Analysis," "Report of the Human CapitalAnalysis", "Compensation Committee" Report", and "Compensation Tables," and "Post-Employment Compensation"Tables" in our definitive proxy statement for the 20182021 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item with respect to security ownership of certain beneficial owners and management is included under the captions "Ownership of Company Securities" and "Security Ownership of Certain Shareholders" in our definitive proxy statement for the 20182021 Annual Meeting of Shareholders and is incorporated herein by reference.