We own and occupy two connected buildings in Chattanooga, Tennessee, with approximately 861,000 square feet of office space. We own and occupy five facilities in Portland, Maine, with approximately 838,000 square feet of office space. We own and occupy facilities totaling approximately 378,000 square feet in Worcester, Massachusetts. We lease and occupy approximately 53,300 square feet of office space in Glendale, California. These properties are used primarily for operations supporting Unum US, Individual Disability - Closed Block, and Corporate and Other.
The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and less judgment utilized in measuring fair value. An active market for a financial instrument is a market in which transactions for an asset or a similar asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and should be used to measure fair value whenever available. Conversely, financial instruments rarely traded or not quoted have less observability and are measured at fair value using valuation techniques that require more judgment. Pricing observability is generally impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, and overall market conditions.
As of December 31, 2010, approximately 13.5 percent of our fixed maturity securities were categorized as Level 1, 83.9 percent as Level 2, and 2.6 percent as Level 3. During 2010, we transferred $565.1 million of fixed maturity securities into Level 3 and $503.8 million of fixed maturity securities out of Level 3. The transfers between levels resulted primarily from a change in observability of three inputs used to determine fair values of the securities transferred: (1) transactional data for new issuance and secondary trades, (2) broker/dealer quotes and pricing, primarily related to changes in the level of activity in the market and whether the market was considered orderly, and (3) comparable bond metrics from which to perform an analysis. For fair value measurements of financial instruments that were transferred either into or out of Level 3, we reflect the transfers using the fair value at the beginning of the period. We believe this allows for greater transparency as all changes in fair value that arise during the reporting period of the transfer are disclosed as a component of our Level 3 reconciliation as shown in Note 2 of the “Notes to Consolidated Financial Statements” contained herein in Item 8.
The long-term rate of return on assets used in the net periodic pension costs for our U.S. qualified defined benefit pension plan for 2011 and 2010 was 7.50 percent for both years. The long-term rate of return on asset assumption used for 2011 and 2010 for our U.K. pension plan was 6.70 percent and 6.90 percent, respectively, and for our OPEB plan, 5.75 percent for both years. The actual rate of return on plan assets is determined based on the fair value of the plan assets at the beginning and the end of the period, adjusted for contributions and benefit payments.
that satisfies the recognition threshold at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more likely than not threshold but that now satisfy the recognition threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more likely than not recognition threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. If a previously recognized tax position is settled for an amount that is different from the amount initially measured, the difference will be recognized as a tax benefit or expense in the period the settlement is effective. We believe that tax positions have been reflected in our financial statements at appropriate amounts in conformity with GAAP.
Interest and debt expense for 2010 was higher than in 2009 due to higher levels of outstanding debt, partially offset by lower rates of interest on our floating rate debt. Interest and debt expense for 2009 was lower than 2008 due primarily to lower average levels of outstanding debt and lower rates of interest on our floating rate debt. See “Debt” contained in this Item 7 for additional information.
During 2009, Unum America entered into a quota share reinsurance agreement with RGA Americas Reinsurance Company, Ltd. under which Unum America ceded closed blocks of group long-term disability claims in 2009 and in 2010. The reinsurance transaction does not meet the conditions for reinsurance accounting and is therefore recorded using the deposit method of accounting. As such, there is no effect on reported premium income or benefits. The only impact on the income statement is the risk charge paid to the reinsurer.
Interest and debt expense related to the debt issued by Tailwind Holdings decreased in 2009 relative to 2008 due to lower rates of interest on the floating rate debt and a decrease in the amount of outstanding debt resulting from principal repayments.
Premium income for group life and accidental death and dismemberment decreased in 2009 relative to 2008, a portion of which was expected and was due to our pricing, renewal, and risk selection strategy. Consistent with the decline in premium income for group disability, premium growth for group life and accidental death and dismemberment was also negatively impacted by lower premium growth from existing customers. Premium income for accidental death and dismemberment declined in part due to a reinsurance agreement entered into, effective January 1, 2009, to cede an $8.0 million annualized premium in-force block of business. In both product lines, premium persistency improved, but case persistency declined in comparison to 2008 due to a higher number of terminated cases in the fewer than 100 lives market segment. Net investment income was consistent in 2009 relative to 2008, with an increase in the level of assets offset by lower interest rates on floating rate assets.
Periods of economic downturns have historically affected disability claim incidence rates and, to a lesser extent, disability claim recovery rates in certain sectors of the market. Certain risks and uncertainties are inherent in
Sales in Unum UK increased in 2009 compared to 2008, aided by the exit of another large insurance provider from the U.K. group risk market, as previously noted. Excluding the sales related to this exit of this provider, Unum UK sales increased 8.6 percent in 2009 compared to 2008. The sales growth in group life was attributable to sales growth in both the core market and in the large case market, partially offset by lower sales to existing customers. The decline in group long-term disability sales was due to a decrease in sales to existing customers, partially offset by sales growth in both the core and large case markets. The increase in sales in supplemental and voluntary was due to sales growth in both the core and large case markets.
The overall benefit ratio increased in 2010 relative to 2009 due to unfavorable experience in the accident, sickness, and disability product line resulting from an increase in the level of paid claims and reserves driven by a higher level of claim incidence and slightly higher average claim sizes. The cancer and critical illness benefit ratio increased relative to 2009 due primarily to the continued higher levels of large claims on the older block of cancer products, partially offset by a refinement of the loss adjustment expense reserve calculation. Somewhat negatively affecting year over year comparisons is the release of active life reserves in the second quarter of 2009 in our cancer and critical illness product line. The life benefit ratio decreased in 2010 relative to 2009 due primarily to favorable mortality.
Premium income declined in 2009 relative to 2008 as expected for the run-off of this block of closed business. Net investment income decreased in 2009 relative to 2008 due to lower interest rates on floating rate assets as well as a lower level of assets supporting this closed block of business, partially offset by an increased level of prepayment income on mortgage-backed securities. We also received fewer bond call premiums and consent fees during 2009 compared to 2008.
Operating revenue for our insurance products was $123.6 million in 2010 compared to $133.1 million and $135.1 million in 2009 and 2008, respectively. These closed lines of business had operating income of $16.5 million in 2010 compared to $32.7 million and $16.6 million in 2009 and 2008, respectively. Operating expenses were higher in 2010 compared to 2009 due to increased litigation costs.
Net investment income was $2,346.6 million in 2009, a decrease of 1.8 percent relative to 2008. The weaker pound in 2009 relative to 2008 unfavorably affected translated results for net investment income. During 2009, we also received lower investment income on bonds for which interest income is linked to a U.K. inflation index, as compared to 2008, and we earned lower interest rates on our floating rate invested assets during 2009. We also
To assess the impact of a duration mismatch, we measure the potential changes in estimated fair value based on a hypothetical change in interest rates to quantify a dollar value change. At December 31, 2010, a hypothetical one basis point increase or decrease in interest rates would have resulted in a $33.0 million change in the fair value of our liabilities and an offsetting $31.8 million change in the fair value of assets supporting those liabilities. 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 more 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 rates embedded in the reserves.
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. However, our historical pattern of benefits paid to revenues is consistent, even during cycles of economic downturns, which serves to minimize liquidity risk.
On February 2, 2011, our board of directors authorized the repurchase of up to $1.0 billion of Unum Group’s common stock, in addition to the amount remaining to be repurchased under the previous authorization discussed above. The $1.0 billion share repurchase program has an expiration date of August 2012.
Our sales of available-for-sale securities declined in 2010 relative to 2009. Proceeds from maturities of available-for-sale securities were higher in 2010 compared to 2009 primarily due to a significant increase in bond calls and bond maturities. Proceeds from sales and maturities of available-for-sale securities in 2009 were lower than 2008 primarily due to lower sales of fixed maturity securities, a decrease in bond maturities and bonds that were called at par, and the translation of investment proceeds from our U.K. operations at lower exchange rates.
Long-term debt repayments include the 2010, 2009, and 2008 principal payments of $10.0 million each year on Tailwind Holdings’ floating rate, senior secured non-recourse notes and the principal payments of $58.3 million, $48.0 million, and $59.3 million, respectively, on Northwind Holdings’ floating rate, senior secured non-recourse notes. Long-term debt repayments also include the purchase and retirement of $10.0 million of our 7.08% medium-term notes in 2010, $1.2 million aggregate principal of our 7.19% medium-term notes and $0.6 million aggregate principal of our 6.75% notes in 2009, and $36.6 million of our 6.85% senior notes in 2008.
In 2007, Northwind Holdings issued $800.0 million floating rate, insured, senior, secured notes, due 2037, in a private offering. Recourse for the payment of principal, interest, and other amounts due on the notes will be limited to the assets of Northwind Holdings, consisting primarily of the stock of its sole subsidiary Northwind Re, a Vermont special purpose financial captive insurance company. Northwind Holdings’ ability to meet its payment obligations under the notes will be dependent principally upon its receipt of dividends from Northwind Re. The ability of Northwind Re to pay dividends to Northwind Holdings will depend on its satisfaction of applicable regulatory requirements and on the performance of the reinsured claims of Provident, Paul Revere and Unum America (the ceding insurers) reinsured by Northwind Re. None of Unum Group, the ceding insurers, Northwind Re or any other affiliate of Northwind Holdings is an obligor or guarantor on the notes. The balance outstanding on these notes was $634.4 million at December 31, 2010.
Translation of Foreign Currency: Revenues and expenses of our foreign operations are translated at average exchange rates. Assets and liabilities are translated at the rate of exchange on the balance sheet dates. The translation gain or loss is generally reported in accumulated other comprehensive income, net of deferred tax.
In July 2010, the Financial Accounting Standards Board (FASB) issued an update to require additional disclosures regarding the credit quality of financing receivables, including the entity’s credit risk exposure, its assessment of risk in estimating its allowance for credit losses, changes in the allowance for credit losses, and the reason for those changes. The disclosure requirements of this update have staggered effective dates. We adopted the disclosures around the entity’s credit risk exposure and its assessment of risk in estimating its allowance for credit losses effective December 31, 2010. The adoption of this update expanded our disclosures but had no effect on our financial position or results of operation.
registrants. We adopted Codification effective July 1, 2009. The adoption of Codification had no effect on our financial position or results of operations.
As of December 31, 2010, we held 220 individual investment-grade fixed maturity securities and 42 individual below-investment-grade fixed maturity securities that were in an unrealized loss position, of which 60 investment-grade fixed maturity securities and 29 below-investment-grade fixed maturity securities had been in an unrealized loss position continuously for over one year.
Other-than-temporary impairment losses on fixed maturity securities which we intend to sell or more likely than not will be required to sell before recovery in value are recognized in earnings and equal the entire difference between the security’s amortized cost basis and its fair value. For securities which we do not intend to sell and it is not more likely than not that we will be required to sell before recovery in value, other-than-temporary impairment losses recognized in earnings generally represent the difference between the amortized cost of the security and the present value of our best estimate of cash flows expected to be collected, discounted using the effective interest rate implicit in the security at the date of acquisition. The determination of cash flows is inherently subjective, and methodologies may vary depending on the circumstances specific to the security. The timing and amount of our cash flow estimates are developed using historical and forecast financial information from the issuer, including its current and projected liquidity position. We also consider industry analyst reports and forecasts, sector credit ratings, future business prospects and earnings trends, issuer refinancing capabilities, actual and/or potential asset sales by the issuer, and other data relevant to the collectibility of the contractual cash flows of the security. We take into account the probability of default, expected recoveries, third party guarantees, quality of collateral, and where
As of December 31, 2010, none of our commercial mortgage loans were past due regarding principal and interest payments and none were on nonaccrual status.
On August 31, 2007 and September 28, 2007, plaintiffs’ federal antitrust and RICO claims were dismissed with prejudice. Defendants’ motion for summary judgment on the ERISA counts was granted on January 14, 2008. All pending state law claims were dismissed without prejudice. Plaintiffs filed an appeal with the Third Circuit Court of Appeals of the order dismissing their federal antitrust and RICO claims. On August 16, 2010, the Third Circuit Court of Appeals affirmed the dismissal with prejudice of plaintiff’s federal antitrust and RICO claims against us and certain of our subsidiaries. On September 27, 2010, the District Court entered final judgment against plaintiffs and in favor of defendants, including us and certain of our subsidiaries.