<Page>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 3, 2010.
FILE NO.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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UNION SECURITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
IOWA
(State or other jurisdiction of incorporation or organization)
6311
(Primary Standard Industrial Classification Code Number)
81-0170040
(I.R.S. Employer Identification Number)
2323 GRAND BOULEVARD
KANSAS CITY, MO 64108
(816) 474-2345
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODES, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RICHARD J. WIRTH
HARTFORD LIFE INSURANCE COMPANY
P.O. BOX 2999
HARTFORD, CONNECTICUT 06104-2999
(860) 843-1941
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
(APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC)
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/X/ If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box.
/ / If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number
of the earlier effective registration statement for the same offering.
/ / If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
/ / If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE
TOTAL OF EACH CLASS OF AMOUNT TO BE OFFERING REGISTRATION AMOUNT
SECURITIES TO BE REGISTERED REGISTERED PER UNIT PRICE FEE* OF FEE
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Deferred Annuity Contracts & Participating Interests Therein N/A * N/A **
</Table>
* The maximum aggregate offering price is estimated solely for the purpose of
determining the registration fee. The amount being registered and the
proposed maximum offering price per unit are not applicable in that these
contracts are not issued in predetermined amounts or units.
** Pursuant to Rule 457(p) under the Securities Act of 1933, unsold securities
previously registered on Form S-1 (File No. 333-65231, CIK 0000823533, filed
on December 18, 1998) are being carried forward to this Registration
Statement. As of March 31, 2010, the amount of unsold securities was
$144,900,000. A registration fee in the amount of $43,618.20 was previously
paid in connection with the above-referenced filing.
Registrant is relying upon Rules 456(b) and 457(r) under the Securities Act of
1933, as amended, with respect to the registration of an indeterminate amount of
securities of each class identified above.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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<Page>
PART I
<Page>
TRIPLE CROWN VARIABLE ANNUITY
VARIABLE ACCOUNT D
ISSUED BY:
UNION SECURITY INSURANCE COMPANY
2323 GRAND BOULEVARD
KANSAS CITY, MO 64108
ADMINISTERED BY:
HARTFORD LIFE AND ANNUITY INSURANCE COMPANY
P.O. BOX 5085
HARTFORD, CONNECTICUT 06102-5085
TELEPHONE: 1-800-862-6668 (CONTRACT OWNERS)
1-800-862-7155 (REGISTERED REPRESENTATIVES)
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This prospectus describes information you should know before you purchase the
Triple Crown Variable Annuity. Please read it carefully before you purchase your
variable annuity.
Triple Crown Variable Annuity is a contract between you and Union Security
Insurance Company (formerly Fortis Benefits Insurance Company) where you agree
to make at least one Premium Payment and Union Security agrees to make a series
of Annuity Payouts at a later date. This Contract is a flexible premium,
tax-deferred, variable annuity offered to both individuals and groups. It is:
X Flexible, because you may add Premium Payments at any time.
X Tax-deferred, which means you don't pay taxes until you take money out or
until we start to make Annuity Payouts.
X Variable, because the value of your Contract will fluctuate with the
performance of the underlying Funds.
There are two different forms of the Contract offered by this prospectus. One
form is offered when all of the Contract Owners are less than age 61 when the
Contract is purchased. The second form is offered when one or more of the
Contract Owners are age 61 or older at the time the Contract is purchased. The
differences between the two forms of contracts are: (1) the form of the death
benefit provided; (2) the provision for withdrawals from the contract without a
surrender charge, and (3) the mortality and expense risk charge imposed. See
"Charges and Fees" and "Death Benefit" for a complete description of the two
forms of the Contract.
At the time you purchase your Contract, you allocate your Premium Payment to
"Sub-Accounts." These are subdivisions of our Separate Account, an account that
keeps your Contract assets separate from our company assets. The Sub-Accounts
then purchase shares of mutual funds set up exclusively for variable annuity or
variable life insurance products. These are not the same mutual funds that you
buy through your stockbroker or through a retail mutual fund. They may have
similar investment strategies and the same portfolio managers as retail mutual
funds. This Contract offers you Funds with investment strategies ranging from
conservative to aggressive and you may pick those Funds that meet your
investment goals and risk tolerance. The Funds are part of the following
Portfolio company: Federated Insurance Series.
You may also allocate some or all of your Premium Payment to the Fixed
Accumulation Feature, which pays an interest rate guaranteed for a certain time
period from the time the Premium Payment is made. You may also allocate some or
all of your Premium Payment to a Guarantee Period in our General Account, which
guarantees a rate of interest until a specified maturity date and may be subject
to a Market Value Adjustment. Premium Payments allocated to either the Fixed
Accumulation Feature or to a Guaranteed Period are not segregated from our
company assets like the assets of the Separate Account. The Fixed Accumulation
Feature and the Guaranteed Periods are not available in all states.
If you decide to buy this Contract, you should keep this prospectus for your
records. You can also call us to get a Statement of Additional Information, free
of charge. The Statement of Additional Information contains more information
about this Contract, and, like this prospectus, the Statement of Additional
Information is filed with the Securities and Exchange Commission ("SEC").
Although we file the prospectus and the Statement of Additional Information with
the SEC, the SEC doesn't approve or disapprove these securities or determine if
the information in this prospectus is truthful or complete. Anyone who
represents that the SEC does these things may be guilty of a criminal offense.
This prospectus and the Statement of Additional Information can also be obtained
from the SEC's website (www.sec.gov).
This Contract IS NOT:
- A bank deposit or obligation
- Federally insured
- Endorsed by any bank or governmental agency
This Contract and its features are no longer available for sale.
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PROSPECTUS DATED: MAY 3, 2010
STATEMENT OF ADDITIONAL INFORMATION DATED: MAY 3, 2010
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2 UNION SECURITY INSURANCE COMPANY
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
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DEFINITIONS 3
FEE TABLES 5
HIGHLIGHTS 7
GENERAL CONTRACT INFORMATION 8
Union Security Insurance Company 8
The Separate Account 8
The Funds 8
PERFORMANCE RELATED INFORMATION 10
FIXED ACCUMULATION FEATURE 11
GUARANTEE PERIODS 12
THE CONTRACT 13
Purchases and Contract Value 13
Charges and Fees 16
Death Benefit 18
Surrenders 20
ANNUITY PAYOUTS 21
OTHER PROGRAMS AVAILABLE 23
OTHER INFORMATION 24
Legal Proceedings 26
More Information 26
FEDERAL TAX CONSIDERATIONS 26
INFORMATION REGARDING TAX-QUALIFIED RETIREMENT PLANS 32
ACCUMULATION UNIT VALUES 40
FURTHER INFORMATION ABOUT UNION SECURITY INSURANCE COMPANY 43
TABLE OF CONTENTS TO STATEMENT OF ADDITIONAL INFORMATION 128
APPENDIX I -- SAMPLE MARKET VALUE ADJUSTMENT CALCULATIONS 129
APPENDIX II -- INVESTMENTS BY UNION SECURITY 131
</Table>
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UNION SECURITY INSURANCE COMPANY 3
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DEFINITIONS
These terms are capitalized when used throughout this prospectus. Please refer
to these defined terms if you have any questions as you read your prospectus.
ACCOUNT: Any of the Sub-Accounts, the Fixed Accumulation Feature, or Guarantee
Periods.
ACCUMULATION PERIOD: The time after you purchase the Contract until we begin to
make Annuity Payouts.
ACCUMULATION UNITS: If you allocate your Premium Payment to any of the
Sub-Accounts, we will convert those payments into Accumulation Units in the
selected Sub-Accounts. Accumulation Units are valued at the end of each
Valuation Day and are used to calculate the value of your Contract prior to
Annuitization.
ACCUMULATION UNIT VALUE: The daily price of Accumulation Units on any Valuation
Day.
ADMINISTRATIVE OFFICE: Hartford Life and Annuity Insurance Company administers
these Contracts. Their location and overnight mailing address is: 1 Griffin Road
North, Windsor, CT 06095-1512. Their standard mailing address is: P.O. Box 5085,
Hartford, Connecticut 06102-5085.
ANNIVERSARY VALUE: The value equal to the Contract Value as of a Contract
Anniversary, adjusted for subsequent Premium Payments and partial Surrenders.
ANNUAL WITHDRAWAL AMOUNT: This is the amount you can Surrender each Contract
Year without paying a Contingent Deferred Sales Charge. This amount is non-
cumulative, meaning that it cannot be carried over from one year to the next.
ANNUITANT: The person on whose life the Contract is issued. The Annuitant may
not be changed after your Contract is issued.
ANNUITY CALCULATION DATE: The date we calculate the first Annuity Payout.
ANNUITY COMMENCEMENT DATE: The later of the 10th Contract Anniversary or the
date the Annuitant reaches age 90, unless you elect an earlier date or we, in
our sole discretion, agree to postpone to another date following our receipt of
an extension request.
ANNUITY PAYOUT: The money we pay out after the Annuity Commencement Date for the
duration and frequency you select.
ANNUITY PAYOUT OPTION: Any of the options available for payout after the Annuity
Commencement Date or death of the Contract Owner or Annuitant.
ANNUITY PERIOD: The time during which we make Annuity Payouts.
ANNUITY UNIT: The unit of measure we use to calculate the value of your Annuity
Payouts under a variable dollar amount Annuity Payout Option.
ANNUITY UNIT VALUE: The daily price of Annuity Units on any Valuation Day.
BENEFICIARY: The person entitled to receive benefits pursuant to the terms of
the Contract upon the death of any Contract Owner, joint Contract Owner or
Annuitant.
CHARITABLE REMAINDER TRUST: An irrevocable trust, where an individual donor
makes a gift to the trust, and in return receives an income tax deduction. In
addition, the individual donor has the right to receive a percentage of the
trust earnings for a specified period of time.
CODE: The Internal Revenue Code of 1986, as amended.
COMMUTED VALUE: The present value of any remaining guaranteed Annuity Payouts.
This amount is calculated using the Assumed Investment Return for variable
dollar amount Annuity Payouts and a rate of return determined by us for fixed
dollar amount Annuity Payouts.
CONTINGENT ANNUITANT: The person you may designate to become the Annuitant if
the original Annuitant dies before the Annuity Commencement Date. You must name
a Contingent Annuitant before the original Annuitant's death. This is only
available if you own a Non-Qualified Contract.
CONTINGENT DEFERRED SALES CHARGE: The deferred sales charge that may apply when
you make a full or partial Surrender.
CONTRACT: The individual Annuity Contract and any endorsements or riders. Group
participants and some individuals may receive a certificate rather than a
Contract.
CONTRACT ANNIVERSARY: The anniversary of the date we issued your Contract. If
the Contract Anniversary falls on a Non-Valuation Day, then the Contract
Anniversary will be the next Valuation Day.
CONTRACT OWNER, OWNER OR YOU: The owner or holder of the Contract described in
this prospectus including any joint Owners. We do not capitalize "you" in the
prospectus.
CONTRACT VALUE: The total value of the Accounts on any Valuation Day.
CONTRACT YEAR: Any 12 month period between Contract Anniversaries, beginning
with the date the Contract was issued.
DEATH BENEFIT: The amount payable after the Contract Owner or the Annuitant
dies.
DOLLAR COST AVERAGING: A program that allows you to systematically make
transfers between Accounts available in your Contract.
FIXED ACCUMULATION FEATURE: Part of our General Account, where you may allocate
all or a portion of your Contract Value. In your Contract, this is defined as
the "Fixed Account".
GUARANTEE PERIOD: The period for which the Guarantee Rate is credited.
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4 UNION SECURITY INSURANCE COMPANY
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GUARANTEE RATE: The rate of interest credited and compounded annually during the
Guarantee Period.
GENERAL ACCOUNT: This account holds our company assets and any assets not
allocated to a Separate Account.
JOINT ANNUITANT: The person on whose life Annuity Payouts are based if the
Annuitant dies after Annuitization. You may name a Joint Annuitant only if your
Annuity Payout Option provides for a survivor. The Joint Annuitant may not be
changed.
MARKET VALUE ADJUSTMENT: An adjustment that either increases or decreases the
amount we pay you under certain circumstances.
NET INVESTMENT FACTOR: This is used to measure the investment performance of a
Sub-Account from one Valuation Day to the next, and is also used to calculate
your Annuity Payout amount.
NON-VALUATION DAY: Any day the New York Stock Exchange is not open for trading.
PAYEE: The person or party you designate to receive Annuity Payouts.
PREMIUM PAYMENT: Money sent to us to be invested in your Contract.
PREMIUM TAX: A tax charged by a state or municipality on Premium Payments.
QUALIFIED CONTRACT: A Contract that is defined as a tax-qualified retirement
plan in the Code.
REQUIRED MINIMUM DISTRIBUTION: A federal requirement that individuals age 70 1/2
and older must take a distribution from their tax-qualified retirement account
by December 31, each year. For employer sponsored Qualified Contracts, the
individual must begin taking distributions at the age of 70 1/2 or upon
retirement, whichever comes later.
SUB-ACCOUNT VALUE: The value on or before the Annuity Calculation Date, which is
determined on any day by multiplying the number of Accumulation Units by the
Accumulation Unit Value for that Sub-Account.
SURRENDER: A complete or partial withdrawal from your Contract.
SURRENDER VALUE: The amount we pay you if you terminate your Contract before the
Annuity Commencement Date. The Surrender Value is equal to the Contract Value
minus any applicable charges (subject to rounding) and increased or decreased,
as applicable, by any Market Value Adjustment.
UNION SECURITY: Union Security Insurance Company, the company that issued this
Contract.
VALUATION DAY: Every day the New York Stock Exchange is open for trading. Values
of the Separate Account are determined as of the close of the New York Stock
Exchange, generally 4:00 p.m. Eastern Time.
VALUATION PERIOD: The time span between the close of trading on the New York
Stock Exchange from one Valuation Day to the next.
<Page>
UNION SECURITY INSURANCE COMPANY 5
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FEE TABLES
THE FOLLOWING TABLES DESCRIBE THE FEES AND EXPENSES THAT YOU WILL PAY WHEN
BUYING, OWNING, AND SURRENDERING THE CONTRACT.
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU WILL PAY AT THE TIME THAT
YOU PURCHASE THE CONTRACT OR SURRENDER THE CONTRACT. CHARGES FOR STATE PREMIUM
TAXES MAY ALSO BE DEDUCTED WHEN YOU PURCHASE THE CONTRACT, UPON SURRENDER OR
WHEN WE START TO MAKE ANNUITY PAYOUTS.
CONTRACT OWNER TRANSACTION EXPENSES
<Table>
<Caption>
ALL CONTRACT OWNERS ARE ONE OR MORE CONTRACT OWNERS ARE
UNDER AGE 61 AGE 61 OR OLDER
AT THE TIME THE AT THE TIME THE CONTRACT IS
CONTRACT IS PURCHASED PURCHASED
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Sales Charge Imposed on Purchases (as a percentage of Premium
Payments) None None
Maximum Contingent Deferred Sales Charge (as a percentage of
Premium Payments) (1) 7% 7%
First Year through Third Year (2) 7% 7%
Fourth Year 5% 5%
Fifth Year 4% 4%
Sixth Year 3% 3%
Seventh Year 2% 2%
Eighth Year 0% 0%
</Table>
(1) Each Premium Payment has its own Contingent Deferred Sales Charge schedule.
The Contingent Deferred Sales Charge is not assessed on partial Surrenders
which do not exceed the Annual Withdrawal Amount.
(2) Length of time from each Premium Payment.
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU WILL PAY PERIODICALLY AND ON
A DAILY BASIS DURING THE TIME THAT YOU OWN THE CONTRACT, NOT INCLUDING FEES AND
EXPENSES OF THE UNDERLYING FUNDS.
<Table>
<Caption>
ALL CONTRACT OWNERS ARE ONE OR MORE CONTRACT OWNERS ARE
UNDER AGE 61 AGE 61 OR OLDER
AT THE TIME THE AT THE TIME THE CONTRACT IS
CONTRACT IS PURCHASED PURCHASED
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SEPARATE ACCOUNT ANNUAL EXPENSES (as a percentage of average
daily Sub-Account Value)
Mortality and Expense Risk Charge 1.10% 1.30%
Administrative Expense Charge 0.10% 0.10%
Total Separate Account Annual Expenses 1.20% 1.40%
</Table>
THIS TABLE SHOWS THE MINIMUM AND MAXIMUM TOTAL ANNUAL FUND OPERATING EXPENSES
CHARGED BY THE UNDERLYING FUNDS THAT YOU MAY PAY ON A DAILY BASIS DURING THE
TIME THAT YOU OWN THE CONTRACT. MORE DETAIL CONCERNING EACH FUND'S FEES AND
EXPENSES IS CONTAINED IN THE PROSPECTUS FOR EACH FUND.
<Table>
<Caption>
MINIMUM MAXIMUM
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TOTAL ANNUAL FUND OPERATING EXPENSES 1.00% 2.34%
(these are expenses that are deducted from Fund assets,
including management fees, Rule 12b-1 distribution
and/or service fees, and other expenses)
</Table>
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6 UNION SECURITY INSURANCE COMPANY
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EXAMPLE
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE
CONTRACT WITH THE COST OF INVESTING IN OTHER VARIABLE ANNUITY CONTRACTS. THESE
COSTS INCLUDE CONTRACT OWNER TRANSACTION EXPENSES, MAXIMUM SEPARATE ACCOUNT
ANNUAL EXPENSES, AND TOTAL ANNUAL FUND OPERATING EXPENSES.
THE EXAMPLE ASSUMES THAT YOU INVEST $10,000 IN THE CONTRACT FOR THE TIME PERIODS
INDICATED. THE EXAMPLE ALSO ASSUMES THAT YOUR INVESTMENT HAS A 5% RETURN EACH
YEAR AND ASSUMES THE MAXIMUM FEES AND EXPENSES OF ANY OF THE FUNDS. ALTHOUGH
YOUR ACTUAL COSTS MAY BE HIGHER OR LOWER, BASED ON THESE ASSUMPTIONS, YOUR COSTS
WOULD BE:
(1) If you Surrender your Contract at the end of the applicable time period:
<Table>
1 year $1,048
3 years $1,846
5 years $2,362
10 years $4,041
</Table>
(2) If you annuitize at the end of the applicable time period:
<Table>
1 year $383
3 years $1,164
5 years $1,962
10 years $4,041
</Table>
(3) If you do not Surrender your Contract:
<Table>
1 year $383
3 years $1,164
5 years $1,962
10 years $4,041
</Table>
CONDENSED FINANCIAL INFORMATION
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When Premium Payments are credited to your Sub-Accounts, they are converted into
Accumulation Units by dividing the amount of your Premium Payments, minus any
Premium Taxes, by the Accumulation Unit Value for that day. For more information
on how Accumulation Unit Values are calculated see "How is the value of my
Contract calculated before the Annuity Commencement Date?". Please refer to the
"Accumulation Unit Values" section of this Prospectus for information regarding
Accumulation Unit Values.
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UNION SECURITY INSURANCE COMPANY 7
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HIGHLIGHTS
WHAT TYPE OF SALES CHARGE WILL I PAY?
We may charge you a Contingent Deferred Sales Charge when you partially or fully
Surrender your Contract. The Contingent Deferred Sales Charge will depend on the
amount you choose to Surrender and the length of time the Premium Payment you
made has been in your Contract.
The percentage used to calculate the Contingent Deferred Sales Charge is equal
to:
<Table>
<Caption>
NUMBER OF YEARS FROM CONTINGENT DEFERRED
PREMIUM PAYMENT SALES CHARGE
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1-3 7%
4 5%
5 4%
6 3%
7 2%
8 or more 0%
</Table>
You won't be charged a Contingent Deferred Sales Charge on:
X The Annual Withdrawal Amount
X Premium Payments or earnings that have been in your Contract for more than
seven years
X Distributions made due to death
X Distributions under a program for substantially equal periodic payments
X Most payments we make to you as part of your Annuity Payout
WHAT CHARGES WILL I PAY ON AN ANNUAL BASIS?
You pay the following charges each year:
- MORTALITY AND EXPENSE RISK CHARGE -- In cases where all Contract Owners are
less than age 61 at the time contract is purchased, a mortality and expense
risk charge is deducted daily and is equal to an annual charge of 1.10% of
the Contract Value invested in the Sub-Accounts. If one or more of the
Contract Owners is age 61 or older at the time of the contract is purchased,
a mortality and expense risk charge is deducted daily and is equal to an
annual charge of 1.30% of the Contract Value invested in the Sub-Accounts.
- ADMINISTRATIVE CHARGE -- This is a charge for the administration of the
Contract. This is an administrative fee equal to an annual charge of 0.10%
of the Contract Values held in the Sub-Account.
- ANNUAL FUND OPERATING EXPENSES -- These are charges for the Funds. See the
Funds' prospectuses for more complete information.
Charges and fees may have a significant impact on Contract Values and the
investment performance of Sub-Accounts. This impact may be more significant with
Contracts with lower Contract Values.
CAN I TAKE OUT ANY OF MY MONEY?
You may Surrender all or part of the amounts you have invested at any time
before we start making Annuity Payouts.
- You may have to pay income tax on the money you take out and, if you
Surrender before you are age 59 1/2, you may have to pay an income tax
penalty.
- You may have to pay a Contingent Deferred Sales Charge and a Market Value
Adjustment on the amount you Surrender.
IS THERE A MARKET VALUE ADJUSTMENT?
Surrenders and other withdrawals from a Guarantee Period in our General Account
more than fifteen days from the end of a Guarantee Period are subject to a
Market Value Adjustment. The Market Value Adjustment may increase or reduce the
General Account value of your Contract. A Market Value Adjustment will also be
applied to any General Account value that is transferred from the General
Account to other Sub-Accounts before the end of the Guarantee Period. The Market
Value Adjustment is computed using a formula that is described in this
prospectus under "Market Value Adjustment".
WHAT INVESTMENT CHOICES ARE AVAILABLE?
You may allocate your Premium Payment or Contract Values among the following
investment choices:
- The variable Sub-Accounts that invest in underlying Funds; or
- The Fixed Accumulation Feature, or one or more Guarantee Periods which may
be subject to a Market Value Adjustment.
The Guarantee Periods are not available for Contracts issued in Maryland,
Pennsylvania, and Washington. The Fixed Accumulation Feature is only available
in Maryland, Pennsylvania, and Washington.
WILL UNION SECURITY PAY A DEATH BENEFIT?
There is a Death Benefit if the Contract Owner or the Annuitant dies before we
begin to make Annuity Payouts. The Death Benefit amount will remain invested in
the Sub-Accounts according to your last instructions and will fluctuate with the
performance of the underlying Funds until we receive proof of death and complete
instructions from the Beneficiary. The Death Benefit is different if all of the
Contract Owners are less than age 61 years when the Contract is purchased than
the Death Benefit if one or more of the Contract Owners are age 61 or older when
the contract is purchased. See "Death Benefit" for a complete description for
the Death Benefit applicable to your Contract.
WHAT ANNUITY PAYOUT OPTIONS ARE AVAILABLE?
When it comes time for us to make payouts, you may choose one of the following
Annuity Payout Options: Life Annuity, Life Annuity with Payments for 10 or 20
years, Joint and 1/2 Contingent Survivor Annuity, and Joint and Full Survivor
Annuity. We may make other Annuity Payout Options available at any time.
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8 UNION SECURITY INSURANCE COMPANY
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You must begin to take payouts by the Annuitant's 110th birthday unless you
elect a later date to begin receiving payments subject to the laws and
regulations then in effect and our approval. The date you select may have tax
consequences, so please check with a qualified tax advisor. You cannot begin to
take Annuity Payouts until the completion of the 2nd Contract Year. If you do
not tell us what Annuity Payout Option you want before that time, we will make
Automatic Annuity Payouts under the Life Annuity with Payments Guaranteed for 10
Years. Depending on the investment allocation of your Contract in effect on the
Annuity Commencement Date, we will make Automatic Annuity Payouts that are:
- fixed dollar amount Automatic Annuity Payouts,
- variable dollar amount Automatic Annuity Payouts, or
- a combination of fixed dollar amount and variable dollar amount Automatic
Annuity Payouts.
GENERAL CONTRACT INFORMATION
UNION SECURITY INSURANCE COMPANY
Union Security Insurance Company ("Union Security" or the "Company") is the
issuer of the contracts. Union Security is a Kansas corporation founded in 1910.
It is qualified to sell life insurance and annuity contracts in the District of
Columbia and in all states except New York.
Union Security is a wholly owned subsidiary of Assurant, Inc. ("Assurant" or the
"Parent") Assurant is the ultimate parent of Union Security Insurance Company.
Assurant is a premier provider of specialized insurance products and related
services in North America and selected other international markets. Its stock is
traded on the New York Stock Exchange under the symbol AIZ.
All of the guarantees and commitments under the contracts are general
obligations of Union Security. None of Union Security's affiliated companies has
any legal obligation to back Union Security's obligations under the Contracts.
On April 1, 2001, Union Security entered into an agreement with Hartford Life
and Annuity Insurance Company ("Hartford") to co-insure the obligations of Union
Security under the variable annuity Contracts and to provide administration for
the Contracts. Hartford was originally incorporated under the laws of Wisconsin
on January 9, 1956, and subsequently redomiciled to Connecticut. Hartford's
offices are located in Simsbury, Connecticut. Hartford is ultimately controlled
by The Hartford Financial Services Group, Inc., one of the largest financial
service providers in the United States.
THE SEPARATE ACCOUNT
The Separate Account is where we set aside and invest the assets of some of our
annuity contracts, including this Contract. The Separate Account was established
on October 14, 1987 and is registered as a unit investment trust under the
Investment Company Act of 1940. This registration does not involve supervision
by the SEC of the management or the investment practices of the Separate
Account, Union Security or Hartford. The Separate Account meets the definition
of "Separate Account" under federal securities law. This Separate Account holds
only assets for variable annuity contracts. The Separate Account:
- Holds assets for your benefit and the benefit of other Contract Owners, and
the persons entitled to the payouts described in the Contract.
- Is not subject to the liabilities arising out of any other business Union
Security or Hartford may conduct.
- Is not affected by the rate of return of Union Security's General Account or
Hartford's General Account or by the investment performance of any of Union
Security's or Hartford's other Separate Accounts.
- May be subject to liabilities from a Sub-Account of the Separate Account
that holds assets of other variable annuity contracts offered by the
Separate Account, which are not described in this prospectus.
- Is credited with income and gains, and takes losses, whether or not
realized, from the assets it holds.
We do not guarantee the investment results of the Separate Account. There is no
assurance that the value of your Contract will equal the total of the payments
you make to us.
THE FUNDS
<Table>
<Caption>
FUNDING OPTION INVESTMENT OBJECTIVE SUMMARY INVESTMENT ADVISER/SUB-ADVISER
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FEDERATED INSURANCE SERIES
FEDERATED CAPITAL APPRECIATION FUND II Seeks capital appreciation by investing Federated Equity Management Company of
primarily in equity securities of large- Pennsylvania
and mid-cap companies.
FEDERATED CAPITAL INCOME FUND II High current income and moderate capital Federated Equity Management Company of
appreciation by investing in both equity Pennsylvania Sub-advised by Federated
and fixed-income securities that have Investment Management Company
relatively high relative income potential.
</Table>
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<Table>
<Caption>
FUNDING OPTION INVESTMENT OBJECTIVE SUMMARY INVESTMENT ADVISER/SUB-ADVISER
---------------------------------------------------------------------------------------------------------------------------------
FEDERATED FUND FOR U.S. GOVERNMENT Current income by investing primarily in a Federated Investment Management Company
SECURITIES II diversified portfolio of US government and
government agency securities and mortgage
backed securities.
FEDERATED HIGH INCOME BOND FUND II High current income by investing primarily Federated Investment Management Company
in a professionally managed, diversified
portfolio of fixed-income securities.
FEDERATED KAUFMAN FUND II Seeks capital appreciation by investing
primarily in common stocks.
FEDERATED PRIME MONEY FUND II A money market mutual fund seeking to Federated Investment Management Company
provide current income consistent with
stability of principal and liquidity by
investing primarily in a portfolio of
short-term, high-quality, fixed income
securities.
FEDERATED QUALITY BOND FUND II Current income by investing in a Federated Investment Management Company
diversified portfolio of investment-grade,
fixed-income securities.
</Table>
* In a low interest rate environment, yields for money market funds, after
deduction of Contract charges may be negative even though the fund's yield,
before deducting for such charges, is positive. If you allocate a portion of
your Contract Value to a money market Sub-Account or participate in an Asset
Allocation Program where Contract Value is allocated to a money market
Sub-Account, that portion of your Contract Value may decrease in value.
We do not guarantee the investment results of any of the underlying Funds. Since
each underlying Fund has different investment objectives, each is subject to
different risks. These risks and the Funds' expenses are more fully described in
the Funds' prospectus, and the Funds' Statement of Additional Information which
may be ordered from us. The Funds' prospectus should be read in conjunction with
this Prospectus before investing.
The Funds may not be available in all states.
MIXED AND SHARED FUNDING -- Shares of the Funds may be sold to our other
separate accounts and our insurance company affiliates or other unaffiliated
insurance companies to serve as the underlying investment for both variable
annuity contracts and variable life insurance policies, a practice known as
"mixed and shared funding." As a result, there is a possibility that a material
conflict may arise between the interests of Contract Owners, and of owners of
other contracts whose contract values are allocated to one or more of these
other separate accounts investing in any one of the Funds. In the event of any
such material conflicts, we will consider what action may be appropriate,
including removing the Fund from the Separate Account or replacing the Fund with
another underlying fund. There are certain risks associated with mixed and
shared funding. These risks are disclosed in the Funds' prospectus.
VOTING RIGHTS -- We are the legal owners of all Fund shares held in the Separate
Account and we have the right to vote at the Fund's shareholder meetings. To the
extent required by federal securities laws or regulations, we will:
- Notify you of any Fund shareholders' meeting if the shares held for your
Contract may be voted.
- Send proxy materials and a form of instructions that you can use to tell us
how to vote the Fund shares held for your Contract.
- Arrange for the handling and tallying of proxies received from Contract
Owners.
- Vote all Fund shares attributable to your Contract according to instructions
received from you, and
- Vote all Fund shares for which no voting instructions are received in the
same proportion as shares for which instructions have been received.
If any federal securities laws or regulations, or their present interpretation,
change to permit us to vote Fund shares on our own, we may decide to do so. You
may attend any Shareholder Meeting at which shares held for your Contract may be
voted. After we begin to make Annuity Payouts to you, the number of votes you
have will decrease. As a result of proportional voting, a small number of
Contract Owners could determine the outcome of a proposition subject to
shareholder vote.
SUBSTITUTIONS, ADDITIONS, OR DELETIONS OF FUNDS -- We reserve the right, subject
to any applicable law, to make certain changes to the Funds offered under your
Contract. We may, in our sole discretion, establish new Funds. New Funds will be
made available to existing Contract Owners as we determine appropriate. We may
also close one or more Funds to additional Premium Payments or transfers from
existing Sub-Accounts. Unless otherwise directed, investment instructions will
be automatically updated to reflect the Fund surviving after any merger,
substitution or liquidation.
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10 UNION SECURITY INSURANCE COMPANY
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We may eliminate the shares of any of the Funds from the Contract for any reason
and we may substitute shares of another registered investment company for the
shares of any Fund already purchased or to be purchased in the future by the
Separate Account. To the extent required by the Investment Company Act of 1940
(the "1940 Act"), substitutions of shares attributable to your interest in a
Fund will not be made until we have the approval of the Commission and we have
notified you of the change.
In the event of any substitution or change, we may, by appropriate endorsement,
make any changes in the Contract necessary or appropriate to reflect the
substitution or change. If we decide that it is in the best interest of Contract
Owners, the Separate Account may be operated as a management company under the
1940 Act or any other form permitted by law, may be deregistered under the 1940
Act in the event such registration is no longer required, or may be combined
with one or more other Separate Accounts.
ADMINISTRATIVE AND DISTRIBUTION SERVICES -- Union Security has entered into
agreements with the investment advisers or distributors of many of the Funds.
Under the terms of these agreements, Union Security, or its agents, provide
administrative and distribution related services and the Funds pay fees that are
usually based on an annual percentage of the average daily net assets of the
Funds. These agreements may be different for each Fund or each Fund family and
may include fees under a distribution and/or servicing plan adopted by a Fund
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
FEES WE RECEIVE FROM FUNDS AND RELATED PARTIES -- We receive substantial and
varying administrative service payments and Rule 12b-1 fees from certain Funds
or related parties. These types of payments and fees are sometimes referred to
as "revenue sharing" payments. We consider revenue sharing payments and fees
among a number of factors when deciding to add or keep a fund on the menu of
Funds that we offer through the Contract. We collect these payments and fees
under agreements between us and a Fund's principal underwriter, transfer agent,
investment adviser and/or other entities related to the Fund. We expect to make
a profit on these fees.
The availability of these types of arrangements creates an incentive for us to
seek and offer Funds (and classes of shares of such Funds) that pay us revenue
sharing. Other funds (or available classes of shares) may have lower fees and
better overall investment performance.
As of December 31, 2009, we have entered into arrangements to receive
administrative service payments and/or Rule 12b-1 fees from each of the
following Fund complexes (or affiliated entities): AIM Advisors, Inc.,
AllianceBernstein Variable Products Series Funds & Alliance Bernstein
Investments, American Century Investment Services, Inc., DWS Scudder
Distributors, Inc., Federated Securities Corp, Gartmore Variable Insurance
Trust, Gartmore Distribution Services, Gartmore Asset Management Trust, ING Fund
Services, MFS Fund Distributors, Inc. & Massachusetts Financial Services
Company, Neuberger Berman Management Inc., Pioneer Variable Contracts Trust &
Pioneer Investment Management, Inc. & Pioneer Funds Distributor, Inc., Van Eck
Securities Corp; Van Eck Fund, Inc., Van Eck World Wide Investment Trust Funds,
LLC, and Wells Fargo Variable Trust & Wells Fargo Fund Management, LLC.
We are affiliated with Hartford Series Fund, Inc. and Hartford HLS Series Fund
II, Inc. (collectively, the "HLS Funds") based on our affiliation with their
investment advisers HL Investment Advisors, LLC and Hartford Investment
Management Company. In addition to investment advisory fees, we, or our other
insurance company affiliates, receive fees to provide, among other things,
administrative, processing, accounting and shareholder services for the HLS
Funds.
Not all Fund complexes pay the same amounts of revenue sharing payments and/or
Rule 12b-1 fees. Therefore, the amount of fees we collect may be greater or
smaller based on the Funds you select. Revenue sharing and Rule 12b-1 fees did
not exceed 0.50% and 0.35%, respectively, in 2009, of the annual percentage of
the average daily net assets (for instance, in 2009, assuming that you invested
in a Fund that paid us the maximum fees and you maintained a hypothetical
average balance of $10,000, we would collect $85 from that fund). We will
endeavor to update this listing annually and interim arrangements may not be
reflected. For the fiscal year ended December 31, 2009, revenue sharing and Rule
12b-1 fees did not exceed approximately $51,000. These fees do not take into
consideration indirect benefits received by offering HLS Funds as investment
options.
PERFORMANCE RELATED INFORMATION
The Separate Account may advertise certain performance-related information
concerning the Sub-Account. Performance information about a Sub-Account is based
on the Sub-Account's past performance only and is no indication of future
performance.
When a Sub-Account advertises its standardized total return, it will usually be
calculated from the date of either the Separate Account's inception or the
Sub-Account's inception, whichever is later, for one year, five years, and ten
years or some other relevant periods if the Sub-Account has not been in
existence for at least ten years. Total return is measured by comparing the
value of an investment in the Sub-Account at the beginning of the relevant
period to the value of the investment at the end of the period. Total return
calculations reflect a deduction for Total Annual Fund Operating Expenses, any
Contingent Deferred Sales Charge, Separate Account Annual Expenses without any
optional charge deductions, and the Annual Maintenance Fee.
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UNION SECURITY INSURANCE COMPANY 11
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The Separate Account may also advertise non-standardized total returns that
pre-date the inception of the Separate Account. These non-standardized total
returns are calculated by assuming that the Sub-Accounts have been in existence
for the same periods as the underlying Funds and by taking deductions for
charges equal to those currently assessed against the Sub-Accounts.
Non-standardized total return calculations reflect a deduction for Total Annual
Fund Operating Expenses and Separate Account Annual Expenses without any
optional charge deductions, and do not include deduction for Contingent Deferred
Sales Charge or the Annual Maintenance Fee. This means the non-standardized
total return for a Sub-Account is higher than the standardized total return for
a Sub-Account. These non-standardized returns must be accompanied by
standardized returns.
If applicable, the Sub-Accounts may advertise yield in addition to total return.
This yield is based on the 30-day SEC yield of the underlying Fund less the
recurring charges at the Separate Account level.
A money market Sub-Account may advertise yield and effective yield. The yield of
a Sub-Account over a seven-day period and then annualized, i.e. the income
earned in the period is assumed to be earned every seven days over a 52-week
period and stated as a percentage of the investment. Effective yield is
calculated similarly but when annualized, the income earned by the investment is
compounded in the course of a 52-week period. Yield and effective yield include
the recurring charges at the Separate Account level.
We may provide information on various topics to Contract Owners and prospective
Contract Owners in advertising, sales literature or other materials. These
topics may include the relationship between sectors of the economy and the
economy as a whole and its effect on various securities markets, investment
strategies and techniques (such as systematic investing, Dollar Cost Averaging
and asset allocation), the advantages and disadvantages of investing in
tax-deferred and taxable instruments, customer profiles and hypothetical
purchase scenarios, financial management and tax and retirement planning, and
other investment alternatives, including comparisons between the Contract and
the characteristics of and market for such alternatives.
FIXED ACCUMULATION FEATURE
IMPORTANT INFORMATION YOU SHOULD KNOW: THIS PORTION OF THE PROSPECTUS RELATING
TO THE FIXED ACCUMULATION FEATURE, WHICH IS CALLED THE FIXED ACCOUNT IN YOUR
CONTRACT, IS NOT REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT") AND
THE FIXED ACCUMULATION FEATURE IS NOT REGISTERED AS AN INVESTMENT COMPANY UNDER
THE 1940 ACT. THE FIXED ACCUMULATION FEATURE OR ANY OF ITS INTERESTS ARE NOT
SUBJECT TO THE PROVISIONS OR RESTRICTIONS OF THE 1933 ACT OR THE 1940 ACT, AND
THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION HAS NOT REVIEWED THE
DISCLOSURE REGARDING THE FIXED ACCUMULATION FEATURE. THE FOLLOWING DISCLOSURE
ABOUT THE FIXED ACCUMULATION FEATURE MAY BE SUBJECT TO CERTAIN GENERALLY
APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS REGARDING THE ACCURACY AND
COMPLETENESS OF DISCLOSURE.
Premium Payments and Contract Values allocated to the Fixed Accumulation Feature
become a part of our General Account assets. We invest the assets of the General
Account according to the laws governing the investments of insurance company
General Accounts. Premium Payments and Contract Values allocated to the Fixed
Accumulation Feature are available to our general creditors. The maximum allowed
to be invested in the Fixed Accumulation Feature is $500,000. The General
Account is not a bank account and is not insured by the FDIC or any other
government agency. We receive a benefit from all amounts held in the General
Account.
We guarantee that we will credit interest to amounts you allocate to the Fixed
Accumulation Feature at a minimum rate that meets your State's minimum
non-forfeiture requirements. We reserve the right to prospectively declare
different rates of excess interest depending on when amounts are allocated or
transferred to the Fixed Accumulation Feature. This means that amounts at any
designated time may be credited with a different rate of excess interest than
the rate previously credited to such amounts and to amounts allocated or
transferred at any other designated time. We will periodically publish the Fixed
Accumulation Feature interest rates currently in effect. There is no specific
formula for determining interest rates and no assurances are offered as to
future rates. Some of the factors that we may consider in determining whether to
credit excess interest are: general economic trends, rates of return currently
available for the types of investments and durations that match our liabilities
and anticipated yields on our investments; regulatory and tax requirements; and
competitive factors. We will account for any deductions, Surrenders or transfers
from the Fixed Accumulation Feature on a "first-in first-out" basis.
IMPORTANT: ANY INTEREST CREDITED TO AMOUNTS YOU ALLOCATE TO THE FIXED
ACCUMULATION FEATURE IN EXCESS OF 3% PER YEAR WILL BE DETERMINED AT OUR SOLE
DISCRETION. YOU ASSUME THE RISK THAT INTEREST CREDITED TO THE FIXED ACCUMULATION
FEATURE MAY NOT EXCEED THE MINIMUM GUARANTEE OF 3% FOR ANY GIVEN YEAR.
The Fixed Accumulation Feature is only available in Maryland, Pennsylvania, and
Washington.
From time to time, we may credit increased interest rates under certain programs
established in our sole discretion.
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12 UNION SECURITY INSURANCE COMPANY
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GUARANTEE PERIODS
Any amount you allocate to our General Account under this Contract earns a
guaranteed interest rate beginning on the date you make the allocation. The
guaranteed interest rate continues for the number of years you select, up to a
maximum of ten years. We call this a Guarantee Period. At the end of your
Guarantee Period, your Contract Value, including accrued interest, will be
allocated to a new Guarantee Period that is the same length as your original
Guarantee Period. However, you may reallocate your Contract Value to different
then available Guarantee Periods or to the Sub-Accounts. If you decide to
reallocate your Contract Value, you must do so by sending us a written request.
We must receive your written request at least three business days before the end
of your Guarantee Period. The first day of your new Guarantee Period or other
reallocation will be the day after the end of your previous Guarantee Period. We
will notify you at least 45 days and not more than 75 days before the end of
your Guarantee Period.
Each Guarantee Period has its own guaranteed interest rate, which may differ
from other Guarantee Periods. We will, at our discretion, change the guaranteed
interest rate for future Guarantee Periods. These changes will not affect the
guaranteed interest rates we are paying on current Guarantee Periods. The
guaranteed interest rate will never be less than an effective annual rate of 3%.
We cannot predict or assure the level of any future guaranteed interest rates in
excess of an effective annual rate of 3%.
We declare the guaranteed interest rates from time to time as market conditions
dictate. We advise you of the guaranteed interest rate for a Guarantee Period at
the time we receive a Purchase Payment from you, or at the time we execute a
transfer you have requested, or at the time a Guarantee Period is renewed. You
may obtain information concerning the guaranteed interest rates that apply to
the various Guarantee Periods. You may obtain this information from our home
office or from your sales representative at any time.
The maximum amount you can invest in a Guarantee Period is $500,000.
We do not have a specific formula for establishing the guaranteed interest rates
for the Guarantee Periods. Guaranteed interest rates may be influenced by the
available interest rates on the investments we acquire with the amounts you
allocate for a particular Guarantee Period. Guaranteed interest rates do not
necessarily correspond to the available interest rates on the investments we
acquire with the amounts you allocate for a particular Guarantee Period. In
addition, when we determine guaranteed interest rates, we may consider:
- the duration of a Guarantee Period,
- regulatory and tax requirements,
- sales and administrative expenses we bear,
- risks we assume,
- our profitability objectives, and
- general economic trends.
Guarantee Periods are not available for Contracts issued in Maryland or
Washington.
MARKET VALUE ADJUSTMENT
Except as described below, we will apply a Market Value Adjustment to any
general account value that is surrendered, transferred, or otherwise paid out
(annuitized) before the end of a Guarantee Period. For example, we will apply a
Market Value Adjustment to the general account value that we pay as an amount
applied to an Annuity Payout option, or as an amount paid as a single sum in
lieu of an Annuity Payout.
The purpose of the Market Value Adjustment is to generally transfer the risk to
you of prematurely liquidating your investment. The Market Value Adjustment
reflects both the amount of time left in your Guarantee period and the
difference between the rate of interest credited to your current Guarantee
period and the interest rate we are crediting to a new Guarantee Period with a
duration equal to the amount of time left in your Guarantee Period. If your
Guarantee Period's rate of interest is lower than the sum of the new Guarantee
Period interest rate and the Market Value Adjustment factor, then the
application of the Market Value Adjustment will reduce the amount you receive or
transfer. Conversely, if your Guarantee Period's rate of interest is higher than
the sum of the rate of interest we are crediting for the new Guarantee Period
and the Market Value Adjustment factor, then the application of the Market Value
Adjustment will increase the amount you receive or transfer. You will find a
sample Market Value Adjustment calculation in Appendix I.
We do not apply a Market Value Adjustment to withdrawals and transfers of the
general account value in the following circumstances:
1. Death benefits paid pursuant to a Contract;
2. Surrenders or transfers from the one-year Guarantee Period;
3. Surrenders during a 30 day period that begins 15 days before the end of
the Guarantee Period in which the general account value was being held,
and that ends 15 days after the end of the Guarantee Period in which
the general account value was being held; and
4. Surrenders or transfers from a Guarantee Period on a periodic,
automatic basis. This exception only applies to such withdrawals or
transfers under a formal company program. We may impose conditions and
limitations on any formal company program for the withdrawal or
transfer of general account values. Ask your representative about the
availability of such a program in your state and applicable conditions
and limitations.
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UNION SECURITY INSURANCE COMPANY 13
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THE CONTRACT
PURCHASES AND CONTRACT VALUE
WHAT TYPES OF CONTRACTS ARE AVAILABLE?
The Contract is an individual or group tax-deferred variable annuity contract.
It is designed for retirement planning purposes and may be purchased by any
individual, group or trust, including:
- Any trustee or custodian for a retirement plan qualified under Sections
401(a) or 403(a) of the Code;
- Individual Retirement Annuities adopted according to Section 408 of the
Code;
- Employee pension plans established for employees by a state, a political
subdivision of a state, or an agency of either a state or a political
subdivision of a state; and
- Certain eligible deferred compensation plans as defined in Section 457 of
the Code.
We will no longer accept additional Premium Payments into any individual annuity
contract funded through a 403(b) plan.
The examples above represent Qualified Contracts, as defined by the Code. In
addition, individuals and trusts can also purchase Contracts that are not part
of a tax qualified retirement plan. These are known as Non-Qualified Contracts.
If you are purchasing the Contract for use in an IRA or other qualified
retirement plan, you should consider other features of the Contract besides tax
deferral, since any investment vehicle used within an IRA or other qualified
plan receives tax-deferred treatment under the Code.
HOW DO I PURCHASE A CONTRACT?
This Contract is no longer available for new sales.
Premium Payments sent to us must be made in U.S. dollars and checks must be
drawn on U.S. banks. We do not accept cash, third party checks or double
endorsed checks. We reserve the right to limit the number of checks processed at
one time. If your check does not clear, your purchase will be cancelled and you
could be liable for any losses or fees incurred. A check must clear our account
through our Administrative Office to be considered to be in good order.
Premium Payments may not exceed $1 million without our prior approval. We
reserve the right to impose special conditions on anyone who seeks our approval
to exceed this limit.
You and your Annuitant must not be older than age 85 on the date that your
Contract is issued. You must be of minimum legal age in the state where the
Contract is being purchased or a guardian must act on your behalf. Optional
riders are subject to additional maximum issue age restrictions.
It is important that you notify us if you change your address. If your mail is
returned to us, we are likely to suspend future mailings until an updated
address is obtained. In addition, we may rely on a third party, including the US
Postal Service, to update your current address. Failure to give us a current
address may result in payments due and payable on your annuity contract being
considered abandoned property under state law, and remitted to the applicable
state.
HOW ARE PREMIUM PAYMENTS APPLIED TO MY CONTRACT?
Your initial Premium Payment will be invested within two Valuation Days of our
receipt of both a properly completed application/order request and the Premium
Payment. If we receive your subsequent Premium Payment before the close of the
New York Stock Exchange, it will be priced on the same Valuation Day. If we
receive your Premium Payment after the close of the New York Stock Exchange, it
will be invested on the next Valuation Day. If we receive your subsequent
Premium Payment on a Non-Valuation Day, the amount will be invested on the next
Valuation Day. Unless we receive new instructions, we will invest the Premium
Payment based on your last allocation instructions on record. We will send you a
confirmation when we invest your Premium Payment.
If the request or other information accompanying the initial Premium Payment is
incomplete when received, we will hold the money in a non-interest bearing
account for up to five Valuation Days (from the Valuation Day that we actually
receive your initial Premium Payment at our Administrative Office together with
the Premium Payment) while we try to obtain complete information. If we cannot
obtain the information within five Valuation Days, we will either return the
Premium Payment and explain why the Premium Payment could not be processed or
keep the Premium Payment if you authorize us to keep it until you provide the
necessary information.
CAN I CANCEL MY CONTRACT AFTER I PURCHASE IT?
If, for any reason, you are not satisfied with your Contract, simply return it
within ten days after you receive it with a written request for cancellation
that indicates your tax-withholding instructions. In some states, you may be
allowed more time to cancel your Contract. We may require additional
information, including a signature guarantee, before we can cancel your
Contract.
Unless otherwise required by state law, we will pay you your Contract Value as
of the Valuation Date we receive your request to cancel and will refund any
sales or contract charges incurred during the period you owned the Contract. The
Contract Value may be more or less than your Premium Payments depending upon the
investment performance of your Account. This means that you bear the risk of any
decline in your Contract Value until we receive your notice of cancellation. In
certain states, however, we are required to return your Premium Payment without
deduction for any fees or charges.
HOW IS THE VALUE OF MY CONTRACT CALCULATED BEFORE THE ANNUITY COMMENCEMENT DATE?
The Contract Value is the sum of all Accounts. There are two things that affect
your Sub-Account value: (1) the number of Accumulation Units and (2) the
Accumulation Unit Value. The
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Sub-Account value is determined by multiplying the number of Accumulation Units
by the Accumulation Unit Value. On any Valuation Day your Contract Value
reflects the investment performance of the Sub-Accounts and will fluctuate with
the performance of the underlying Funds.
When Premium Payments are credited to your Sub-Accounts, they are converted into
Accumulation Units by dividing the amount of your Premium Payments, minus any
Premium Taxes, by the Accumulation Unit Value for that day. The more Premium
Payments you make to your Contract, the more Accumulation Units you will own.
You decrease the number of Accumulation Units you have by requesting Surrenders,
transferring money out of an Account, settling a Death Benefit claim or by
annuitizing your Contract.
To determine the current Accumulation Unit Value, we take the prior Valuation
Day's Accumulation Unit Value and multiply it by the Net Investment Factor for
the current Valuation Day.
The Net Investment Factor is used to measure the investment performance of a
Sub-Account from one Valuation Day to the next. The Net Investment Factor for
each Sub-Account equals:
- The net asset value per share plus applicable distributions per share of
each Fund at the end of the current Valuation Day divided by
- The net asset value per share of each Fund held at the end of the prior
Valuation Day; multiplied by
- The daily expense factor for the mortality and expense risk charge adjusted
for the number of days in the period, and any other applicable charges.
We will send you a statement at least annually, which tells you how many
Accumulation Units you have, their value and your total Contract Value.
A Contract's Guarantee Period value is guaranteed by Union Security. We bear the
investment risk with respect to amounts allocated to a Guarantee Period, except
to the extent that (1) we may vary the guaranteed interest rate for future
Guarantee Periods (subject to the 3% effective annual minimum) and (2) the
Market Value Adjustment imposes investment risks on you. The Contract's
Guarantee Period value on any Valuation Date is the sum of its General Account
values in each Guarantee Period on that date. The General Account value in a
Guarantee Period is equal to the following amounts, in each case increased by
accrued interest at the applicable guaranteed interest rate:
- The amount of Premium Payments or transferred amounts allocated to the
Guarantee Period; less
- The amount of any transfers or Surrenders out of the Guarantee Period.
CAN I TRANSFER FROM ONE SUB-ACCOUNT TO ANOTHER?
You may make transfers between the Sub-Accounts offered in this Contract
according to our policies and procedures as amended from time to time.
WHAT IS A SUB-ACCOUNT TRANSFER?
A Sub-Account transfer is a transaction requested by you that involves
reallocating part or all of your Contract Value among the Funds available in
your Contract. Your transfer request will be processed as of the end of the
Valuation Day that it received is in good order. Otherwise, your request will be
processed on the following Valuation Day. We will send you a confirmation when
we process your transfer. You are responsible for verifying transfer
confirmations and promptly advising us of any errors within 30 days of receiving
the confirmation.
WHAT HAPPENS WHEN I REQUEST A SUB-ACCOUNT TRANSFER?
Many Contract Owners request Sub-Account transfers. Some request transfers into
(purchases) a particular Sub-Account, and others request transfers out of
(redemptions) a particular Sub-Account. In addition, some Contract Owners
allocate new Premium Payments to Sub-Accounts, and others request Surrenders. We
combine all the daily requests to transfer out of a Sub-Account along with all
Surrenders from that Sub-Account and determine how many shares of that Fund we
would need to sell to satisfy all Contract Owners' "transfer-out" requests. At
the same time, we also combine all the daily requests to transfer into a
particular Sub-Account or new Premium Payments allocated to that Sub-Account and
determine how many shares of that Fund we would need to buy to satisfy all
Contract Owners' "transfer-in" requests.
In addition, many of the Funds that are available as investment options in our
variable annuity products are also available as investment options in variable
life insurance policies, retirement plans, funding agreements and other products
offered by us or our affiliates. Each day, investors and participants in these
other products engage in similar transfer transactions.
We take advantage of our size and available technology to combine sales of a
particular Fund for many of the variable annuities, variable life insurance
policies, retirement plans, funding agreements or other products offered by us
or our affiliates. We also combine many of the purchases of that particular Fund
for many of the products we offer. We then "net" these trades by offsetting
purchases against redemptions. Netting trades has no impact on the net asset
value of the Fund shares that you purchase or sell. This means that we sometimes
reallocate shares of a Fund rather than buy new shares or sell shares of the
Fund.
For example, if we combine all transfer-out (redemption) requests and Surrenders
of a stock Fund Sub-Account with all other sales of that Fund from all our other
products, we may have to sell $1 million dollars of that Fund on any particular
day. However, if other Contract Owners and the owners of other products offered
by us, want to transfer-in (purchase) an amount equal to $300,000 of that same
Fund, then we would send a sell order to the Fund for $700,000 (a $1 million
sell order minus the purchase order of $300,000) rather than making two or more
transactions.
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WHAT RESTRICTIONS ARE THERE ON MY ABILITY TO MAKE A SUB-ACCOUNT TRANSFER?
FIRST, YOU MAY MAKE ONLY ONE SUB-ACCOUNT TRANSFER REQUEST EACH DAY. We limit
each Contract Owner to one Sub-Account transfer request each Valuation Day. We
count all Sub-Account transfer activity that occurs on any one Valuation Day as
one "Sub-Account transfer;" however, you cannot transfer the same Contract Value
more than once a Valuation Day.
EXAMPLES
<Table>
<Caption>
TRANSFER REQUEST PER VALUATION DAY PERMISSIBLE?
--------------------------------------------------------------------------------
Transfer $10,000 from a money market Sub-Account to a growth Yes
Sub-Account
Transfer $10,000 from a money market Sub-Account to any number Yes
of other Sub-Accounts (dividing the $10,000 among the other
Sub-Accounts however you chose)
Transfer $10,000 from any number of different Sub-Accounts to Yes
any number of other Sub-Accounts
Transfer $10,000 from a money market Sub-Account to a growth No
Sub-Account and then, before the end of that same Valuation Day,
transfer the same $10,000 from the growth Sub-Account to an
international Sub-Account
</Table>
SECOND, YOU ARE ALLOWED TO SUBMIT A TOTAL OF 20 SUB-ACCOUNT TRANSFERS EACH
CONTRACT YEAR (THE "TRANSFER RULE") BY U.S. MAIL, VOICE RESPONSE UNIT, INTERNET
OR TELEPHONE. Once you have reached the maximum number of Sub-Account transfers,
you may only submit any additional Sub-Account transfer requests and any trade
cancellation requests in writing through U.S. Mail or overnight delivery
service. In other words, Voice Response Unit, Internet or telephone transfer
requests will not be honored. We may, but are not obligated to, notify you when
you are in jeopardy of approaching these limits. For example, we will send you a
letter after your 10th Sub-Account transfer to remind you about the Transfer
Rule. After your 20th transfer request, our computer system will not allow you
to do another Sub-Account transfer by telephone, Voice Response Unit or via the
Internet. You will then be instructed to send your Sub-Account transfer request
by U.S. Mail or overnight delivery service.
We reserve the right to aggregate your Contracts (whether currently existing or
those recently surrendered) for the purposes of enforcing these restrictions.
The Transfer Rule does not apply to Sub-Account transfers that occur
automatically as part of a Company-sponsored asset allocation or Dollar Cost
Averaging program. Reallocations made based on a Fund merger, substitution or
liquidation also do not count toward this transfer limit. Restrictions may vary
based on state law.
We make no assurances that the Transfer Rule is or will be effective in
detecting or preventing market timing.
THIRD, POLICIES HAVE BEEN DESIGNED TO RESTRICT EXCESSIVE SUB-ACCOUNT
TRANSFERS. You should not purchase this Contract if you want to make frequent
Sub-Account transfers for any reason. In particular, don't purchase this
Contract if you plan to engage in "market timing," which includes frequent
transfer activity into and out of the same Fund, or frequent Sub-Account
transfers in order to exploit any inefficiencies in the pricing of a Fund. Even
if you do not engage in market timing, certain restrictions may be imposed on
you, as discussed below:
Generally, you are subject to Fund trading policies, if any. We are obligated to
provide, at the Fund's request, tax identification numbers and other shareholder
identifying information contained in our records to assist Funds in identifying
any pattern or frequency of Sub-Account transfers that may violate their trading
policy. In certain instances, we have agreed to serve as a Fund's agent to help
monitor compliance with that Fund's trading policy.
We are obligated to follow each Fund's instructions regarding enforcement of
their trading policy. Penalties for violating these policies may include, among
other things, temporarily or permanently limiting or banning you from making
Sub-Account transfers into a Fund or other funds within that fund complex. We
are not authorized to grant exceptions to a Fund's trading policy. Please refer
to each Fund's prospectus for more information. Transactions that cannot be
processed because of Fund trading policies will be considered not in good order.
In certain circumstances, fund trading policies do not apply or may be limited.
For instance:
- Certain types of financial intermediaries may not be required to provide us
with shareholder information.
- "Excepted funds" such as money market funds and any Fund that affirmatively
permits short-term trading of its securities may opt not to adopt this type
of policy. This type of policy may not apply to any financial intermediary
that a Fund treats as a single investor.
- A Fund can decide to exempt categories of contract holders whose contracts
are subject to inconsistent trading restrictions or none at all.
- Non-shareholder initiated purchases or redemptions may not always be
monitored. These include Sub-Account transfers that are executed: (i)
automatically pursuant to a company-sponsored contractual or systematic
program such as transfers of assets as a result of "dollar cost averaging"
programs, asset allocation programs, automatic rebalancing programs, annuity
payouts, loans, or systematic withdrawal programs; (ii) as a result of the
payment of a Death Benefit; (iii) as a step-up in Contract Value pursuant to
a Contract Death Benefit or guaranteed minimum withdrawal benefit; (iv) as a
result of any deduction of charges or fees under a Contract; or (v) as a
result of payments such as loan repayments, scheduled contributions,
scheduled withdrawals or surrenders, retirement plan salary reduction
contributions, or planned premium payments.
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16 UNION SECURITY INSURANCE COMPANY
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POSSIBILITY OF UNDETECTED ABUSIVE TRADING OR MARKET TIMING. We may not be able
to detect or prevent all abusive trading or market timing activities. For
instance,
- Since we net all the purchases and redemptions for a particular Fund for
this and many of our other products, transfers by any specific market timer
could be inadvertently overlooked.
- Certain forms of variable annuities and types of Funds may be attractive to
market timers. We cannot provide assurances that we will be capable of
addressing possible abuses in a timely manner.
- In some cases, we were unable to count the number of Sub-Account transfers
requested by group annuity participants co-investing in the same Funds
("Participants") or enforce the Transfer Rule because we do not keep
Participants' account records for a Contract. In those cases, the
Participant account records and Participant Sub-Account transfer information
are kept by such owners or its third party service provider. These owners
and third party service providers may provide us with limited information or
no information at all regarding Participant Sub-Account transfers.
POWER OF ATTORNEY -- You may authorize another person to make transfers on your
behalf by submitting a completed power of attorney form. Once we have the
completed form on file, we will accept transfer instructions from your
designated third party, subject to any transfer restrictions in place, until we
receive new instructions in writing from you. You will not be able to make
transfers or other changes to your Contract if you have authorized someone else
to act under a power of attorney.
FIXED ACCUMULATION FEATURE TRANSFERS -- During each Contract Year during the
Accumulation Period, you may make no more than one transfer out of the Fixed
Accumulation Feature to Sub-Accounts. The transfers must be at least $1,000. All
transfer allocations must be in whole numbers (e.g., 1%). You may transfer up to
50% of your total amount in the Fixed Accumulation Feature, unless the balance
is less than $1,000, then you must transfer the entire amount. These transfer
limits do not include transfers done through Dollar Cost Averaging or the DCA
Plus Program.
FIXED ACCUMULATION FEATURE TRANSFER RESTRICTIONS -- We reserve the right to
defer transfers from the Fixed Accumulation Feature for up to 6 months from the
date of your request. After any transfer, you must wait six months before moving
Sub-Account Values back to the Fixed Accumulation Feature. After the Annuity
Commencement Date, you may not make transfers from the Fixed Account Feature.
TRANSFERS BETWEEN THE SUB-ACCOUNTS AND GUARANTEE PERIODS -- You may transfer
from the Sub-Accounts to a Guarantee Period or from one Guarantee Period to
another Guarantee Period. Transfers from a Guarantee Period, other than the
one-year Guarantee Period, are subject to a Market Value Adjustment if the
transfer is:
- more than 15 days before or 15 days after the expiration of the existing
Guarantee Period, or
- are not part of a formal Union Security program for the transfer of General
Account value.
The amount of any positive or negative Market Value Adjustment will be added or
deducted from the transferred amount.
You may not make a transfer into the one-year Guarantee Period within six months
of a transfer out of the one-year Guarantee Period.
We reserve the right to impose a Transfer Fee not to exceed $25 per transfer.
For purposes of the Transfer Fee, we will count all transfers between and among
the Sub-Accounts, the Fixed Accumulation Feature, and the Guarantee Periods as
one transfer if all of the transfer requests are made at the same time as part
of one request.
CHARGES AND FEES
The following charges and fees are associated with the Contract:
THE CONTINGENT DEFERRED SALES CHARGE
The Contingent Deferred Sales Charge covers some of the expenses relating to the
sale and distribution of the Contract, including commissions paid to registered
representatives and the cost of preparing sales literature and other promotional
activities.
We assess a Contingent Deferred Sales Charge when you request a full or partial
Surrender. The percentage of the Contingent Deferred Sales Charge is based on
how long your Premium Payments have been in the Contract. The Contingent
Deferred Sales Charge will not exceed the total amount of the Premium Payments
made. Each Premium Payment has its own Contingent Deferred Sales Charge
schedule. Premium Payments are Surrendered in the order in which they were
received. The longer you leave your Premium Payments in the Contract, the lower
the Contingent Deferred Sales Charge will be when you Surrender.
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UNION SECURITY INSURANCE COMPANY 17
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The Contingent Deferred Sales Charge is a percentage of the amount Surrendered
and is equal to:
<Table>
<Caption>
NUMBER OF YEARS FROM CONTINGENT DEFERRED
PREMIUM PAYMENT SALES CHARGE
-----------------------------------------------
1-3 7%
4 5%
5 4%
6 3%
7 2%
8 or more 0%
</Table>
SUBJECT TO THE DEEMED ORDER OF SURRENDER BELOW, THE FOLLOWING SURRENDERS ARE NOT
SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE:
- ANNUAL WITHDRAWAL AMOUNT -- In any Contract Year you may take partial
Surrenders up to 10% of the Premium Payments we received before the partial
Surrender, regardless of whether you have previously Surrendered such
Premium Payments.
- SURRENDERS MADE FROM PREMIUM PAYMENTS INVESTED FOR MORE THAN SEVEN YEARS --
After the seventh Contract Year, you may take any Premium Payment that has
been held in the Contract for seven years which has not been previously been
Surrendered.
- ANY EARNINGS THAT HAVE NOT BEEN PREVIOUSLY SURRENDERED.
If all of the Contract Owners are LESS THAN AGE 61 when the Contract is
purchased we deem the portion of a Surrender to be withdrawn in the following
order:
(1) All Purchase Payments that we received more than seven years before the
partial Surrender.
(2) 10% of Premium Payments that have been held in the Contract for less than
seven years before the partial Surrender.
(3) Premium Payments that have been held in the Contract for less than seven
years that have not previously been Surrendered.
(4) Earnings.
If any of the Contract Owners are AGE 61 OR OLDER, when the Contract is
purchased we deem the portion of a Surrender to be withdrawn in the following
order:
(1) Earnings.
(2) All Purchase Payments that we received more than seven years before the
partial Surrender.
(3) 10% of Premium Payments that have been held in the Contract for less than
seven years before the partial Surrender.
(4) Premium Payments that have been held in the Contract for less than seven
years that have not previously been Surrendered.
UNDER THE FOLLOWING SITUATIONS, THE CONTINGENT DEFERRED SALES CHARGE IS WAIVED:
- We will waive any Contingent Deferred Sales Charge applicable to a partial
or full Surrender if you, the joint owner or the Annuitant, is confined for
at least 60 calendar days to a: (a) facility recognized as a general
hospital by the proper authority of the state in which it is located; or (b)
facility recognized as a general hospital by the Joint Commission on the
Accreditation of Hospitals; or (c) facility certified as a hospital or
long-term care facility; or (d) nursing home licensed by the state in which
it is located and offers the services of a registered nurse 24 hours a day.
If you, the joint owner or the Annuitant is confined when you purchase the
Contract, this waiver is not available. For it to apply, you must: (a) have
owned the Contract continuously since it was issued, (b) provide written
proof of confinement satisfactory to us, and (c) request the Surrender
within 60 calendar days of the last day of confinement. This waiver may not
be available in all states. This waiver is also not available for
confinements due to substance abuse or mental disorders without a
demonstrable organic disease. Please contact your Registered Representative
or us to determine if it is available for you.
- FOR REQUIRED MINIMUM DISTRIBUTIONS -- This allows Annuitants who are age 70
1/2 or older, with a Contract held under an Individual Retirement Account or
403(b) plan, to Surrender an amount equal to the Required Minimum
Distribution for the Contract without a Contingent Deferred Sales Charge.
All requests for Required Minimum Distributions must be in writing.
- On or after the Annuitant's 110th birthday.
- For any contract owned by Fortis, or its subsidiaries, and the following
persons associated with such companies, if at the time of contract issuance
they are an officer, director, employee, or a family member of an officer,
director, or employee.
- For any contract owned by any representative or employee of Woodbury
Financial Services, or of other broker-dealers having a sales agreement with
Woodbury Financial Services, or a family member of such representative or
employee.
THE FOLLOWING SITUATIONS ARE NOT SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE:
- UPON DEATH OF THE ANNUITANT OR CONTRACT OWNER -- No Contingent Deferred
Sales Charge will be deducted if the Annuitant or Contract Owner dies.
- UPON ANNUITIZATION -- The Contingent Deferred Sales Charge is not deducted
when you annuitize the Contract. We will charge a Contingent Deferred Sales
Charge if the Contract is fully Surrendered during the Contingent Deferred
Sales Charge period under an Annuity Payout Option which allows Surrenders.
- FOR SUBSTANTIALLY EQUAL PERIODIC PAYMENTS -- We will waive the Contingent
Deferred Sales Charge if you take part
<Page>
18 UNION SECURITY INSURANCE COMPANY
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in a program for partial Surrenders where you receive a scheduled series of
substantially equal periodic payments. Payments under this program must be
made at least annually for your life (or your life expectancy) or the joint
lives (or joint life expectancies) of you and your designated Beneficiary.
- UPON CANCELLATION DURING THE RIGHT TO CANCEL PERIOD.
MORTALITY AND EXPENSE RISK CHARGE
For assuming mortality and expense risks under the Contract we deduct a
mortality and expense risk charge that is subtracted daily. If all of the
Contract Owners are LESS THAN AGE 61 when the Contract is purchased that charge
is equal to an annual charge of 1.10% of your Contract Value invested in the
Sub-Accounts. If any of the Contract Owners are AGE 61 OR OLDER, when the
Contract is purchased that charge is equal to an annual charge of 1.30% of your
Contract Value invested in the Sub-Accounts.
- MORTALITY RISK -- There are two types of mortality risks that we assume,
those made while your Premium Payments are accumulating and those made once
Annuity Payouts have begun.
During the period your Premium Payments are accumulating, we are required to
cover any difference between the Death Benefit paid and the Surrender Value.
These differences may occur during periods of declining value or in periods
where the Contingent Deferred Sales Charges would have been applicable. The risk
that we bear during this period is that actual mortality rates, in aggregate,
may exceed expected mortality rates.
Once Annuity Payouts have begun, we may be required to make Annuity Payouts as
long as the Annuitant is living, regardless of how long the Annuitant lives. We
would be required to make these payments if the Payout Option chosen is the Life
Annuity, Life Annuity With Payments for 10 or 20 years or Joint and Full
Survivor Life Annuity Payout Option. The risk that we bear during this period is
that the actual mortality rates, in aggregate, may be lower than the expected
mortality rates.
- EXPENSE RISK -- We also bear an expense risk that the Contingent Deferred
Sales Charges and the Annual Maintenance Fee collected before the Annuity
Commencement Date may not be enough to cover the actual cost of selling,
distributing and administering the Contract.
Although variable Annuity Payouts will fluctuate with the performance of the
underlying Fund selected, your Annuity Payouts will NOT be affected by (a) the
actual mortality experience of our Annuitants, or (b) our actual expenses if
they are greater than the deductions stated in the Contract. Because we cannot
be certain how long our Annuitants will live, we charge this percentage fee
based on the mortality tables currently in use. The mortality and expense risk
charge enables us to keep our commitments and to pay you as planned.
ADMINISTRATIVE CHARGE
This is a charge for the administration of the Contract. This is an
administrative fee equal to an annual charge of 0.10% of the Contract Values
held in the Separate Account.
PREMIUM TAXES
We deduct Premium Taxes, imposed on us, by a state or other government agency.
Some states collect the taxes when Premium Payments are made; others collect at
Annuitization. Since we pay Premium Taxes when they are required by applicable
law, we may deduct them from your Contract when we pay the taxes, upon
Surrender, or on the Annuity Commencement Date. The Premium Tax rate varies by
state or municipality and currently ranges from 0% - 3.5%.
CHARGES AGAINST THE FUNDS
The Separate Account purchases shares of the Funds at net asset value. The net
asset value of the Fund shares reflects investment advisory fees and
administrative expenses already deducted from the assets of the Funds. These
charges are described in the Fund prospectuses.
DEATH BENEFIT
WHAT IS THE DEATH BENEFIT AND HOW IS IT CALCULATED?
The Death Benefit is the amount we will pay if the Contract Owner or Annuitant
dies before the Annuity Commencement Date. The Death Benefit is calculated when
we receive a certified death certificate or other legal document acceptable to
us along with complete instructions from all beneficiaries on how to pay the
death benefit.
Until we receive proof of death and the completed instructions from the
Beneficiary, the Death Benefit will remain invested in the same Accounts,
according to the Contract Owner's last instructions. Therefore, the Death
Benefit amount will fluctuate with the performance of the underlying Funds. When
there is more than one Beneficiary, we will calculate the Accumulation Units for
each Sub-Account for each Beneficiary's portion of the proceeds.
If all of the Contract Owners are LESS THAN AGE 61 when the Contract is
purchased the Death Benefit is the greatest of:
- The Contract Value of your Contract;
- The highest Anniversary Value of each Contract Anniversary prior to the
earlier of the date of death or the Contract Owner's 80th birthday;
- The total Premium Payments you have made to us minus adjustments for partial
Surrenders;
- If the Contract Owner (or Annuitant in the case of a non-natural Contract
Owner) dies PRIOR to age 80, then the Death Benefit equals total Premium
Payments you have made to us minus adjustments for partial Surrenders plus,
interest compounded annually at 4% on such amounts (3% for policies issued
in the state of Washington) minus adjustments for partial Surrenders (the
"Rollup Amount"); or
<Page>
UNION SECURITY INSURANCE COMPANY 19
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- If the Contract Owner (or Annuitant in the case of a non-natural Contract
Owner) dies AFTER age 80, then the Death benefit equals total Premium
Payments you have made to us minus adjustments for partial Surrenders plus,
the Roll-Up Amount.
Adjustments are made for partial Surrenders for calculating the Anniversary
Value by:
- Taking the amount of the partial Surrender and
- Dividing that amount by the Contract Value immediately before the partial
Surrender and
- Multiplying that amount by the Contract Value on the Contract Anniversary,
plus Premium Payments made since that Anniversary and before the partial
Surrender, minus adjustments for withdrawals made since that Anniversary and
before the partial Surrender.
Adjustments are made for partial Surrenders for calculating the Death Benefit
using the Rollup Amount by:
- Taking the amount of the partial Surrender and
- Dividing that amount by the Contract Value immediately before the partial
Surrender and
- Multiplying that amount by the Rollup Amount before the partial Surrender
plus, any Premium Payments made on or after the date the Contract Owner
reaches his or her 80th birthday and before the partial Surrender, minus
adjustments for any partial Surrenders made on or after the date the
Contract Owner reaches his or her 80th birthday and before the partial
Surrender.
If one or more of the Contract Owners are AGE 61 OR OLDER, when the contract is
purchased the Death Benefit will be the same as the Death Benefit provided
above, except that all references to age 80 will be replaced with age 75.
HOW IS THE DEATH BENEFIT PAID?
The Death Benefit may be taken in one lump sum or under any of the Annuity
Payout Options then being offered by us. On the date we receive proof of death
and complete instructions from the Beneficiary, we will compute the Death
Benefit to be paid out or applied to a selected Annuity Payout Option. When
there is more than one Beneficiary, we will calculate the Death Benefit amount
for each Beneficiary's portion of the proceeds and then pay it out or apply it
to a selected Annuity Payout Option according to each Beneficiary's
instructions. If we receive the complete instructions on a Non-Valuation Day,
computations will take place on the next Valuation Day.
If your Beneficiary elects to receive the Death Benefit amount as a lump sum
payment, we may transfer that amount to our General Account and issue the
Beneficiary a draftbook. The Beneficiary can write one draft for the total
payment of the Death Benefit, or keep the money in the General Account and write
drafts as needed. We will credit interest at a rate determined periodically in
our sole discretion. For Federal income tax purposes, the Beneficiary will be
deemed to have received the lump sum payment on transfer of the Death Benefit
amount to the General Account. The interest will be taxable in the tax year that
it is credited. If the Beneficiary resides or the Contract was purchased in a
state that imposes restrictions on this method of lump sum payment, we may issue
a check to the Beneficiary.
The Beneficiary may elect, under the Annuity Proceeds Settlement Option, "Death
Benefit Remaining with the Company", to leave proceeds from the Death Benefit
with us for up to five years from the date of death if the death occurred before
the Annuity Commencement Date. Once we receive a certified death certificate or
other legal document acceptable to us, the Beneficiary can: (a) make Sub-Account
transfers and (b) take Surrenders.
The Beneficiary of a non-qualified Contract or IRA may also elect the "Single
Life Expectancy Only" option. This option allows the Beneficiary to take the
Death Benefit invested in a series of payments spread over a period equal to the
Beneficiary's remaining life expectancy. Distributions are calculated based on
IRS life expectancy tables. This option is subject to different limitations and
conditions depending on whether the Contract is non-qualified or an IRA.
REQUIRED DISTRIBUTIONS -- If the Contract Owner dies before the Annuity
Commencement Date, the Death Benefit must be distributed within five years after
death, or be distributed under a distribution option or Annuity Payout Option
that satisfies the Alternatives to the Required Distributions described below.
If the Contract Owner dies on or after the Annuity Commencement Date under an
Annuity Payout Option that permits the Beneficiary to elect to continue Annuity
Payouts or receive the Commuted Value, any remaining value must be distributed
at least as rapidly as under the payment method being used as of the Contract
Owner's death.
If the Contract Owner is not an individual (e.g. a trust), then the original
Annuitant will be treated as the Contract Owner in the situations described
above and any change in the original Annuitant will be treated as the death of
the Contract Owner.
WHAT SHOULD THE BENEFICIARY CONSIDER?
ALTERNATIVES TO THE REQUIRED DISTRIBUTIONS -- The selection of an Annuity Payout
Option and the timing of the selection will have an impact on the tax treatment
of the Death Benefit. To receive favorable tax treatment, the Annuity Payout
Option selected: (a) cannot extend beyond the Beneficiary's life or life
expectancy, and (b) must begin within one year of the date of death.
If these conditions are not met, the Death Benefit will be treated as a lump sum
payment for tax purposes. This sum will be taxable in the year in which it is
considered received.
SPOUSAL CONTRACT CONTINUATION -- If the Contract Owner dies and the Beneficiary
is the Contract Owner's spouse, the Beneficiary may elect to continue the
Contract as the Contract Owner, receive the death benefit in one lump sum
payment or elect an Annuity Payout Option. If the Contract continues with the
spouse as Contract Owner, we will adjust the Contract
<Page>
20 UNION SECURITY INSURANCE COMPANY
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Value to the amount that we would have paid as the Death Benefit payment, had
the spouse elected to receive the Death Benefit as a lump sum payment. Spousal
Contract Continuation will only apply one time for each Contract.
SURRENDERS
WHAT KINDS OF SURRENDERS ARE AVAILABLE?
FULL SURRENDERS BEFORE THE ANNUITY COMMENCEMENT DATE -- When you Surrender your
Contract before the Annuity Commencement Date and while the Annuitant is living,
the Surrender Value of the Contract will be made in a lump sum payment. The
Surrender Value is the Contract Value minus any applicable Contingent Deferred
Sales Charge and Premium Taxes. The Surrender Value may be more or less than the
amount of the Premium Payments made to a Contract.
PARTIAL SURRENDERS BEFORE THE ANNUITY COMMENCEMENT DATE -- You may request a
partial Surrender of Contract Values at any time before the Annuity Commencement
Date and while the Annuitant is living. There are two restrictions:
- The partial Surrender amount must be at least equal to $1,000, our current
minimum for partial Surrenders, and
- The Contract must have a minimum Contract Value of $1,000 after the
Surrender. We reserve the right to close your Contract and pay the full
Surrender Value if the Contract Value is under the minimum after the
Surrender.
Both full and partial Surrenders are taken proportionally from the Sub-Accounts
and the Fixed Accumulation Feature.
HOW DO I REQUEST A SURRENDER?
Requests for full Surrenders must be in writing. Requests for partial Surrenders
can be made in writing or by telephone. We will send your money within seven
days of receiving complete instructions. However, we may postpone payment of
Surrenders whenever: (a) the New York Stock Exchange is closed, (b) trading on
the New York Stock Exchange is restricted by the SEC, (c) the SEC permits and
orders postponement, or (d) the SEC determines that an emergency exists to
restrict valuation. We may also defer payment of Surrender proceeds payable out
of the Fixed Accumulation Feature or any Guaranteed Period for a period of up to
6 months.
WRITTEN REQUESTS -- To request a full or partial Surrender, complete a Surrender
Form or send us a letter, signed by you, stating:
- the dollar amount that you want to receive, either before or after we
withhold taxes and deduct for any applicable charges,
- your tax withholding amount or percentage, if any, and
- your mailing address.
You may submit this form via facsimile.
If there are joint Contract Owners, both must authorize all Surrenders. For a
partial Surrender, specify the Accounts that you want your Surrender to come
from, otherwise, the Surrender will be taken in proportion to the value in each
Account.
TELEPHONE REQUESTS -- To request a partial Surrender by telephone, we must have
received your completed Telephone Redemption Program Enrollment Form. If there
are joint Contract Owners, both must sign this form. By signing the form, you
authorize us to accept telephone instructions for partial Surrenders from either
Contract Owner. Telephone authorization will remain in effect until we receive a
written cancellation notice from you or your joint Contract Owner, we
discontinue the program; or you are no longer the owner of the Contract. There
are some restrictions on telephone surrenders, please call us with any
questions.
We may record telephone calls and use other procedures to verify information and
confirm that instructions are genuine. We will not be liable for losses or
expenses arising from telephone instructions reasonably believed to be genuine.
WE MAY MODIFY THE REQUIREMENTS FOR TELEPHONE REDEMPTIONS AT ANY TIME.
Telephone Surrender instructions received before the close of the New York Stock
Exchange will be processed on that Valuation Day. Otherwise, your request will
be processed on the next Valuation Day.
COMPLETING A POWER OF ATTORNEY FORM FOR ANOTHER PERSON TO ACT ON YOUR BEHALF MAY
PREVENT YOU FROM MAKING SURRENDERS VIA TELEPHONE.
WHAT SHOULD BE CONSIDERED ABOUT TAXES?
There are certain tax consequences associated with Surrenders:
PRIOR TO AGE 59 1/2 -- If you make a Surrender prior to age 59 1/2, there may be
adverse tax consequences including a 10% federal income tax penalty on the
taxable portion of the Surrender payment. Surrendering before age 59 1/2 may
also affect the continuing tax-qualified status of some Contracts.
WE DO NOT MONITOR SURRENDER REQUESTS. TO DETERMINE WHETHER A SURRENDER IS
PERMISSIBLE, WITH OR WITHOUT FEDERAL INCOME TAX PENALTY, PLEASE CONSULT YOUR
PERSONAL TAX ADVISER.
MORE THAN ONE CONTRACT ISSUED IN THE SAME CALENDAR YEAR -- If you own more than
one contract issued by us or our affiliates in the same calendar year, then
these contracts may be treated as one contract for the purpose of determining
the taxation of distributions prior to the Annuity Commencement Date. Please
consult your tax adviser for additional information.
INTERNAL REVENUE CODE SECTION 403(b) ANNUITIES -- As of December 31, 1988, all
section 403(b) annuities have limits on full and partial Surrenders.
Contributions to your Contract made after December 31, 1988 and any increases in
cash value after December 31, 1988 may not be distributed unless you are: (a)
age 59 1/2, (b) no longer employed, (c) deceased, (d) disabled, or (e)
experiencing a financial hardship (cash value increases may not be distributed
for hardships prior to age 59 1/2). Distributions prior to age 59 1/2 due to
financial
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hardship; unemployment or retirement may still be subject to a penalty tax of
10%.
We will no longer accept any incoming 403(b) exchanges or applications for
403(b) individual annuity contracts.
WE ENCOURAGE YOU TO CONSULT WITH YOUR QUALIFIED TAX ADVISER BEFORE MAKING ANY
SURRENDERS. PLEASE SEE THE "FEDERAL TAX CONSIDERATIONS" SECTION FOR MORE
INFORMATION.
ANNUITY PAYOUTS
THIS SECTION DESCRIBES WHAT HAPPENS WHEN WE BEGIN TO MAKE REGULAR ANNUITY
PAYOUTS FROM YOUR CONTRACT. YOU, AS THE CONTRACT OWNER, SHOULD ANSWER FIVE
QUESTIONS:
- When do you want Annuity Payouts to begin?
- Which Annuity Payout Option do you want to use?
- How often do you want to receive Annuity Payouts?
- What level of Assumed Investment Return should you choose?
- Do you want Annuity Payouts to be fixed or variable or a combination?
Please check with your Registered Representative to select the Annuity Payout
Option that best meets your income needs.
1. WHEN DO YOU WANT ANNUITY PAYOUTS TO BEGIN?
You select an Annuity Commencement Date when you purchase your Contract or at
any time before you begin receiving Annuity Payouts. You may change the Annuity
Commencement Date by notifying us within thirty days prior to the date. The
Annuity Commencement Date cannot be deferred beyond the Annuitant's 110th
birthday unless you elect a later date to begin receiving payments, subject to
the laws and regulations then in effect and our approval. The date you select
may have tax consequences, so please check with a qualified tax advisor. You
cannot begin to take Annuity Payouts until the end of the 2nd Contract Year. If
this Contract is issued to the trustee of a Charitable Remainder Trust, the
Annuity Commencement Date may be deferred to the Annuitant's 100th birthday.
The Annuity Calculation Date is when the amount of your Annuity Payout is
determined. This occurs within five Valuation Days before your selected Annuity
Commencement Date.
All Annuity Payouts, regardless of frequency, will occur on the same day of the
month as the Annuity Commencement Date. After the initial payout, if an Annuity
Payout date falls on a Non-Valuation Day, the Annuity Payout is computed on the
prior Valuation Day. If the Annuity Payout date does not occur in a given month
due to a leap year or months with only 28 days (i.e. the 31st), the Annuity
Payout will be computed on the last Valuation Day of the month.
2. WHICH ANNUITY PAYOUT OPTION DO YOU WANT TO USE?
Your Contract contains the Annuity Payout Options described below. The Annuity
Proceeds Settlement Option is an option that can be elected by the Beneficiary
and is described in the "Death Benefit" section. We may at times offer other
Annuity Payout Options. Once we begin to make Annuity Payouts, the Annuity
Payout Option cannot be changed.
LIFE ANNUITY
We make Annuity Payouts as long as the Annuitant is living. When the Annuitant
dies, we stop making Annuity Payouts. A Payee would receive only one Annuity
Payout if the Annuitant dies after the first payout, two Annuity Payouts if the
Annuitant dies after the second payout, and so forth.
LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 OR 20 YEARS
We will make Annuity Payouts as long as the Annuitant is living, but we at least
guarantee to make Annuity Payouts for a time period you select either 10 or 20
years. If the Annuitant dies before the guaranteed number of years have passed,
then the Beneficiary may elect to continue Annuity Payouts for the remainder of
the guaranteed number of years.
JOINT AND FULL SURVIVOR ANNUITY
We will make Annuity Payouts as long as the Annuitant and Joint Annuitant are
living. When one Annuitant dies, we continue to make Annuity Payouts to the
Contract Owner until that second Annuitant dies.
JOINT AND 1/2 CONTINGENT SURVIVOR ANNUITY
We make Payouts as long as both the Annuitant and Joint Annuitant are alive. If
the Annuitant dies first, we will make Payouts equal to 1/2 the original payout.
If the Joint Annuitant dies first, we will continue to make Payouts at the full
amount.
We may offer other Annuity Payout Options available.
IMPORTANT INFORMATION:
- YOU CANNOT SURRENDER YOUR CONTRACT ONCE ANNUITY PAYOUTS BEGIN.
- For Qualified Contracts, if you elect an Annuity Payout Option with a Period
Certain, the guaranteed number of years must be less than the life
expectancy of the Annuitant at the time the Annuity Payouts begin. We
compute life expectancy using the IRS mortality tables.
- AUTOMATIC ANNUITY PAYOUTS -- If you do not elect an Annuity Payout Option,
Annuity Payouts will automatically begin on the Annuity Commencement Date
under the Life Annuity with Payments for a Period Certain Annuity Payout
Option with a ten-year period certain. Automatic Annuity Payouts will be
fixed dollar amount Annuity Payouts, variable dollar amount Annuity Payouts,
or a combination of fixed or variable dollar amount Annuity Payouts,
depending on the
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investment allocation of your Account in effect on the Annuity Commencement
Date.
3. HOW OFTEN DO YOU WANT THE PAYEE TO RECEIVE ANNUITY PAYOUTS?
In addition to selecting an Annuity Commencement Date and an Annuity Payout
Option, you must also decide how often you want the Payee to receive Annuity
Payouts. You may choose to receive Annuity Payouts:
- monthly,
- quarterly,
- semiannually, or
- annually.
Once you select a frequency, it cannot be changed. If you do not make a
selection, the Payee will receive monthly Annuity Payouts. You must select a
frequency that results in an Annuity Payout of at least $50 ($20 in Texas). If
the amount falls below $50, we have the right to change the frequency to bring
the Annuity Payout up to at least $50.
WHAT IS THE ASSUMED INVESTMENT RETURN?
The Assumed Investment Return ("AIR") is the investment return before we start
to make Annuity Payouts. It is a critical assumption for calculating variable
dollar amount Annuity Payouts. The first Annuity Payout will be based upon the
AIR. The remaining Annuity Payouts will fluctuate based on the performance of
the underlying Funds. The AIR for this Contract is 3%.
For example, if the Sub-Accounts earned exactly the same as the AIR, then the
second monthly Annuity Payout Option is the same as the first. If the
Sub-Accounts earned more than the AIR, then the second monthly Annuity Payout
Option is higher than the first. If the Sub-Accounts earned less than the AIR,
then the second monthly Annuity Payout Option is lower than the first.
Level variable dollar Annuity Payouts would be produced if the investment
returns remained constant and equal to the AIR. In fact, Annuity Payouts will
vary up or down as the investment rate varies up or down from the AIR.
DO YOU WANT FIXED DOLLAR AMOUNT OR VARIABLE DOLLAR AMOUNT ANNUITY PAYOUTS OR A
COMBINATION OF BOTH?
You may choose an Annuity Payout Option with fixed dollar amounts, variable
dollar amounts or a combination depending on your income needs.
FIXED DOLLAR AMOUNT ANNUITY PAYOUTS -- Once a fixed dollar amount Annuity Payout
begins, you cannot change your selection to receive variable dollar amount
Annuity Payout. You will receive equal fixed dollar amount Annuity Payouts
throughout the Annuity Payout period. Fixed dollar amount Annuity Payout amounts
are determined by multiplying the Contract Value, minus any applicable Premium
Taxes, by an annuity rate. The annuity rate is set by us and is not less than
the rate specified in the fixed dollar amount Annuity Payout Option tables in
your Contract.
VARIABLE DOLLAR AMOUNT ANNUITY PAYOUTS -- A variable dollar amount Annuity
Payout is based on the investment performance of the Sub-Accounts. The variable
dollar amount Annuity Payouts may fluctuate with the performance of the
underlying Funds. To begin making variable dollar amount Annuity Payouts, we
convert the first Annuity Payout amount to a set number of Annuity Units and
then price those units to determine the Annuity Payout amount. The number of
Annuity Units that determines the Annuity Payout amount remains fixed unless you
transfer units between Sub-Accounts.
The dollar amount of the first variable Annuity Payout depends on:
- the Annuity Payout Option chosen,
- the Annuitant's attained age and gender (if applicable),
- the applicable annuity purchase rates based on the 1983a Individual Annuity
Mortality table and,
- the Assumed Investment Return.
The total amount of the first variable dollar amount Annuity Payout is
determined by dividing the Contract Value minus any applicable Premium Taxes, by
$1,000 and multiplying the result by the payment factor defined in the Contract
for the selected Annuity Payout Option.
The dollar amount of each subsequent variable dollar amount Annuity Payout is
equal to the total of:
Annuity Units for each Sub-Account multiplied by Annuity Unit Value for each
Sub-Account.
The Annuity Unit Value of each Sub-Account for any Valuation Period is equal to
the Accumulation Unit Value Net Investment Factor for the current Valuation
Period multiplied by the Annuity Unit Factor, multiplied by the Annuity Unit
Value for the preceding Valuation Period. The Annuity Unit Factor for a 3% AIR
is 0.999919%.
COMBINATION ANNUITY PAYOUTS -- You may choose to receive a combination of fixed
dollar amount and variable dollar amount annuity payouts as long as they total
100% of your Annuity Payout. For example, you may choose to receive 40% fixed
dollar amount and 60% variable dollar amount to meet your income needs.
Combination Annuity Payouts are not available during the first two Contract
Years.
TRANSFER OF ANNUITY UNITS -- After the Annuity Calculation Date, you may
transfer dollar amounts of Annuity Units from one Sub-Account to another. On the
day you make a transfer, the dollar amounts are equal for both Sub-Accounts and
the number of Annuity Units will be different. We will transfer the dollar
amount of your Annuity Units the day we receive your written request if received
before the close of the New York Stock Exchange. Otherwise, the transfer will be
made on the next Valuation Day. All Sub-Account transfers must comply with our
Sub-Account transfer restriction policies. For more infomation on Sub-Account
restrictions, please see the sub-section entitled "Can I transfer from one
Sub-Account to another?" under the section entitled "The Contract."
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OTHER PROGRAMS AVAILABLE
We may discontinue, modify or amend any of these Programs or any other programs
we establish. Any changes to a Program will not affect Contract Owners currently
enrolled in the Program. If you are enrolled in any of these programs while a
Fund merger, substitution or liquidation takes place, unless otherwise noted in
any communication from us, your Contract Value invested in such underlying Fund
will be transferred automatically to the designated surviving Fund in the case
of mergers and any available Money Market Fund in the case of Fund liquidations.
Your enrollment instructions will be automatically updated to reflect the
surviving Fund or a Money Market Fund for any continued and future investments.
INVESTEASE(R) -- InvestEase, which was formerly called "PAC," is an electronic
transfer program that allows you to have money automatically transferred from
your checking or savings account, and invested in your Contract. It is available
for Premium Payments made after your initial Premium Payment. The minimum amount
for each transfer is $50. You can elect to have transfers occur either monthly
or quarterly, and they can be made into any Account available in your Contract.
AUTOMATIC INCOME PROGRAM -- The Automatic Income Program allows you to Surrender
a percentage of your total Premium Payments each Contract Year. You can
Surrender from the Accounts you select systematically on a monthly, quarterly,
semiannual, or annual basis. Please see Federal Tax Considerations and
Information Regarding Tax-Qualified Retirement Plans for more information
regarding the tax consequences associated with your Contract.
STATIC ASSET ALLOCATION MODELS
This feature allows you to select an asset allocation model of Funds based on
several potential factors including your risk tolerance, time horizon,
investment objectives, or your preference to invest in certain funds or fund
families. Based on these factors, you can select one of several asset allocation
models, with each specifying percentage allocations among various Funds
available under your Contract. Asset allocation models can be based on generally
accepted investment theories that take into account the historic returns of
different asset classes (e.g., equities, bonds or cash) over different time
periods, or can be based on certain potential investment strategies that could
possibly be achieved by investing in particular funds or fund families and are
not based on such investment theories.
If you choose to participate in one of these asset allocation models, you must
invest all of your Premium Payment into one model. You may invest in an asset
allocation model through the Dollar Cost Averaging Program where the Fixed
Accumulation Feature, or a Dollar Cost Averaging Plus Program is the source of
the assets to be invested in the asset allocation model you have chosen. You can
also participate in these asset allocation models while enrolled in the
Automatic Income Program.
You may participate in only one asset allocation model at a time. Asset
allocation models cannot be combined with other asset allocation models or with
individual sub-account elections. You can switch asset allocation models up to
twelve times per year. Your ability to elect or switch into and between asset
allocation models may be restricted based on fund abusive trading restrictions.
Your investments in an asset allocation model will be rebalanced quarterly to
reflect the model's original percentages.
We have no discretionary authority or control over your investment decisions.
These asset allocation models are based on then available Funds and do not
include the Fixed Accumulation Feature. We make available educational
information and materials (e.g., risk tolerance questionnaire, pie charts,
graphs, or case studies) that can help you select an asset allocation model, but
we do not recommend asset allocation models or otherwise provide advice as to
what asset allocation model may be appropriate for you.
While we will not alter allocation percentages used in any asset allocation
model, allocation weightings could be affected by mergers, liquidations, fund
substitutions or closures. Individual availability of these models is subject to
fund company restrictions. Please refer to WHAT RESTRICTIONS ARE THERE ON YOUR
ABILITY TO MAKE A SUB-ACCOUNT TRANSFER? for more information.
You will not be provided with information regarding periodic updates to the
Funds and allocation percentages in the asset allocation models, and we will not
reallocate your Account Value based on those updates. Information on updated
asset allocation models may be obtained by contacting your Registered
Representative. If you wish to update your asset allocation model, you may do so
by terminating your existing model and re-enrolling into a new one. Investment
alternatives other than these asset allocation models are available that may
enable you to invest your Contract Value with similar risk and return
characteristics. When considering an asset allocation model for your individual
situation, you should consider your other assets, income and investments in
addition to this annuity.
- Asset Rebalancing
In asset rebalancing, you select a portfolio of Funds, and we will rebalance
your assets at the specified frequency to reflect the original allocation
percentages you selected. You can choose how much of your Contract Value you
want to invest in this program. You can also combine this program with others
such as the Automatic Income Program and Dollar Cost Averaging Program (subject
to restrictions). You may designate only one set of asset allocation
instructions at a time.
- Dollar Cost Averaging
We offer three dollar cost averaging programs:
- DCA Plus
- Fixed Amount DCA
- Earnings/Interest DCA
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OTHER PROGRAM CONSIDERATIONS
- You may terminate your enrollment in any Program (other than Dollar Cost
Averaging Programs) at any time.
- We may discontinue, modify or amend any of these Programs at any time. We
will automatically and unilaterally amend your enrollment instructions if:
- any Fund is merged or substituted into another Fund -- then your
allocations will be directed to the surviving Fund;
- any Fund is liquidated -- then your allocations will be directed to
any available money market Fund.
You may always provide us with updated instructions following any of these
events.
- Continuous or periodic investment neither insures a profit nor protects
against a loss in declining markets. Because these Programs involve
continuous investing regardless of fluctuating price levels, you should
carefully consider your ability to continue investing through periods of
fluctuating prices.
- If you make systematic transfers from the Fixed Accumulation Feature under a
Dollar Cost Averaging Program or DCA Plus Program, you must wait 6 months
after your last systematic transfer before moving Sub-Account Values back to
the Fixed Accumulation Feature.
- We make available educational information and materials (e.g., pie charts,
graphs, or case studies) that can help you select a model portfolio, but we
do not recommend models or otherwise provide advice as to what model
portfolio may be appropriate for you.
- Asset allocation does not guarantee that your Contract Value will increase
nor will it protect against a decline if market prices fall. If you choose
to participate in an asset allocation program, you are responsible for
determining which model portfolio is best for you. Tools used to assess your
risk tolerance may not be accurate and could be useless if your
circumstances change over time. Although each model portfolio is intended to
maximize returns given various levels of risk tolerance, a model portfolio
may not perform as intended. Market, asset class or allocation option class
performance may differ in the future from historical performance and from
the assumptions upon which the model portfolio is based, which could cause a
model portfolio to be ineffective or less effective in reducing volatility.
A model portfolio may perform better or worse than any single Fund,
allocation option or any other combination of Funds or allocation options.
In addition, the timing of your investment and automatic rebalancing may
affect performance. Quarterly rebalancing and periodic updating of model
portfolios can cause their component Funds to incur transactional expenses
to raise cash for money flowing out of Funds or to buy securities with money
flowing into the Funds. Moreover, large outflows of money from the Funds may
increase the expenses attributable to the assets remaining in the Funds.
These expenses can adversely affect the performance of the relevant Funds
and of the model portfolios. In addition, these inflows and outflows may
cause a Fund to hold a large portion of its assets in cash, which could
detract from the achievement of the Fund's investment objective,
particularly in periods of rising market prices. For additional information
regarding the risks of investing in a particular fund, see that Fund's
prospectus.
- Additional considerations apply for qualified Contracts with respect to
Static Asset Allocation Model programs. Neither we, nor any third party
service provider, nor any of their respective affiliates, is acting as a
fiduciary under The Employee Retirement Income Security Act of 1974, as
amended (ERISA) or the Code, in providing any information or other
communication contemplated by any Program, including, without limitation,
any model portfolios. That information and communications are not intended,
and may not serve as a primary basis for your investment decisions with
respect to your participation in a Program. Before choosing to participate
in a Program, you must determine that you are capable of exercising control
and management of the assets of the plan and of making an independent and
informed decision concerning your participation in the Program. Also, you
are solely responsible for determining whether and to what extent the
Program is appropriate for you and the assets contained in the qualified
Contract. Qualified Contracts are subject to additional rules regarding
participation in these Programs. It is your responsibility to ensure
compliance of any recommendation in connection with any model portfolio with
governing plan documents.
- These Programs may be adversely affected by Fund trading policies.
OTHER INFORMATION
ASSIGNMENT -- A Non-Qualified Contract may be assigned. We must be properly
notified in writing of an assignment. Any Annuity Payouts or Surrenders
requested or scheduled before we record an assignment will be made according to
the instructions we have on record. We are not responsible for determining the
validity of an assignment. Assigning a Non-Qualified Contract may require the
payment of income taxes and certain penalty taxes. Please consult a qualified
tax adviser before assigning your Contract.
A Qualified Contract may not be transferred or otherwise assigned, unless
allowed by applicable law.
CONTRACT MODIFICATION -- The Annuitant may not be changed. However, if the
Annuitant is still living, the Contingent
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Annuitant may be changed at any time prior to the Annuity Commencement Date by
sending us written notice.
We may modify the Contract, but no modification will affect the amount or term
of any Contract unless a modification is required to conform the Contract to
applicable federal or state law. No modification will effect the method by which
Contract Values are determined.
HOW CONTRACTS ARE SOLD -- Woodbury Financial Services ("WFS") serves as
principal underwriter for the Contracts. WFS is registered with the Securities
and Exchange Commission under the Securities Exchange Act of 1934 as a
broker-dealer and is a member of Financial Industry Regulatory Authority
(FINRA). The principal business address of WFS is 7755 3rd Street North,
Oakdale, MN 55128.
Contracts will be sold by individuals who have been appointed by us as insurance
agents and who are registered representatives of broker-dealers that have
entered into selling agreements with Woodbury. We generally bear the expenses of
providing services pursuant to Contracts, including the payment of expenses
relating to the distribution of prospectuses for sales purposes as well as any
advertising or sales literature (provided, however, we may offset some or all of
these expenses by, among other things, administrative service fees received from
Fund complexes).
Commissions -- We pay compensation to broker-dealers, financial institutions and
other affiliated broker-dealers ("Financial Intermediaries") for the sale of the
Contracts according to selling agreements with Financial Intermediaries.
Affiliated broker-dealers also employ wholesalers in the sales process.
Wholesalers typically receive commissions based on the type of Contract or
optional benefits sold. Commissions are based on a specified amount of Premium
Payments or Contract Value. Your Registered Representative may be compensated on
a fee for services and/or commission basis.
We pay an up-front commission of up to 7% of your Contract Value at the time of
sale to the Financial Intermediary that your Registered Representative is
associated with. Your Registered Representative's Financial Intermediary may
also receive on-going or trail commissions of generally not more than 1% of your
Contract Value. Registered Representatives may have multiple options on how they
wish to allocate their commissions and/or compensation. Compensation paid to
your Registered Representative may also vary depending on the particular
arrangements between your Registered Representative and their Financial
Intermediary. We are not involved in determining your Registered
Representative's compensation. You are encouraged to ask your Registered
Representative about the basis upon which he or she will be personally
compensated for the advice or recommendations provided in connection with this
transaction.
Additional Payments -- In addition to commissions and any Rule 12b-1 fees, we or
our affiliates pay significant additional compensation ("Additional Payments")
to some Financial Intermediaries (who may or may not be affiliates), in
connection with the promotion, sale and distribution of our variable annuities.
Additional Payments are generally based on average net assets (or on aged
assets) of the Contracts attributable to a particular Financial Intermediary; on
sales of the Contracts attributable to a particular Financial Intermediary
and/or on reimbursement of sales expenses. Additional Payments may take the form
of, among other things: (1) sponsorship of due diligence meetings to educate
Financial Intermediaries about our variable products; (2) payments for providing
training and information relating to our variable products; (3) expense
allowances and reimbursements; (4) override payments and bonuses; (5) personnel
education or training; (6) marketing support fees (or allowances) for providing
assistance in promoting the sale of our variable products; and/or (7)
shareholder services, including sub-accounting and the preparation of account
statements and other communications.
We are among several insurance companies that pay Additional Payments to certain
Financial Intermediaries to receive "preferred" or recommended status. These
privileges include our ability to gain additional or special access to sales
staff, provide and/or attend training and other conferences; placement of our
products on customer lists ("shelf-space arrangements"); and otherwise improve
sales by featuring our products over others. We also may pay Additional Payments
to certain key Financial Intermediaries based on assets under management.
Consistent with FINRA Conduct Rules, we provide cash and non-cash compensation
in the form of: (1) occasional meals and entertainment; (2) occasional tickets
to sporting events; (3) nominal gifts (not to exceed $100 annually); (4)
sponsorship of sales contests and/or promotions in which participants receive
prizes such as travel awards, merchandise and recognition; (5) sponsorship of
training and educational events; and/or (6) due diligence meetings. In addition
to FINRA rules governing limitations on these payments, we also follow our
guidelines and those of Financial Intermediaries which may be more restrictive
than FINRA rules.
Additional Payments create a potential conflict of interest in the form of an
additional financial incentive to the Registered Representative and/or Financial
Intermediary to recommend the purchase of this Contract over another variable
annuity or another investment option.
As of December 31, 2009, we have entered into arrangements to make Additional
Payments (excluding Marketing Expense Allowances) to the following Financial
Intermediaries:
AIG Advisors Group, Inc. (FSC Securities Corporation, Royal Alliance Associates,
Inc., Sagepoint Financial, Inc.) and Woodbury Financial Services, Inc.
Inclusion on this list does not imply that these sums necessarily constitute
"special cash compensation" as defined by FINRA Conduct Rule 2830(l)(4). We will
endeavor to update this listing annually and interim arrangements may not be
reflected. We assume no duty to notify any investor whether their Registered
Representative is or should be included in any such listing.
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For the fiscal year ended December 31, 2009, Additional Payments did not in the
aggregate exceed approximately $428 thousand (excluding corporate-sponsorship
related perquisites) or approximately 0.04% based on average assets.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -- The consolidated financial
statements of Union Security Insurance Company as of December 31, 2009 and 2008
and for each of the three years in the period ended December 31, 2009 included
in this Registration Statement have been audited by PricewaterhouseCoopers LLP
and are included in reliance on the report of PricewaterhouseCoopers LLP, an
independent registered public accounting firm, given on the authority of said
firm as experts in auditing and accounting. The business address of
PricewaterhouseCoopers LLP is 300 Madison Avenue, New York, NY 10017.
LEGAL PROCEEDINGS
Union Security is regularly involved in litigation in the ordinary course of
business, both as a defendant and as a plaintiff. We may from time to time be
subject to a variety of legal and regulatory actions relating to our current and
past business operations. While we cannot predict the outcome of any pending or
future litigation, examination, or investigation and although no assurances can
be given, we do no believe that any pending matter will have a material adverse
effect on our financial condition or results of operations.
On January 21, 2010, the SEC filed a civil complaint in the United States
District Court for the Southern District of New York in connection with the
previously disclosed SEC investigation into a finite reinsurance arrangement
entered into by the Parent. In the complaint, the SEC charged the Parent with
violating Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange
Act of 1934, as amended, and Rules 12b-20, 13a-11 and 13a-13 thereunder. As
previously disclosed by the Parent in a Current Report on Form 8-K on January
21, 2010, the Parent entered into a settlement with the SEC in which the Parent
consented, without admitting or denying the allegations in the complaint, to the
entry of a judgment requiring payment of a civil penalty of $3.5 million and
enjoining the Parent from violating the aforementioned federal securities laws.
The court approved the settlement in a final judgment entered on January 25,
2010 and the Parent has paid the penalty.
As part of the settlement, the SEC granted permanent relief to the Company,
exempting it from limitations on serving as depositor to investment companies
under Section 9(a) of the Investment Company Act of 1940.
The validity of the securities offered in this prospectus is being passed upon
for us by in house counsel. Advice on certain federal securities law issues was
provided by Sullivan & Cromwell LLP, New York, NY.
MORE INFORMATION
You may call your Registered Representative if you have any questions or write
or call us at the address below:
P.O. Box 5085
Hartford, Connecticut 06102-5085.
Telephone: 1-800-862-6668 (Contract Owners)
1-800-862-7155 (Registered Representatives)
FINANCIAL STATEMENTS
You can find financial statements of the Separate Account and Union Security in
the Statement of Additional Information. To receive a copy of the Statement of
Additional Information free of charge, call your representative or complete the
form at the end of this prospectus and mail the form to us at the address
indicated on the form.
As of May 1, 2009, Union Security intends to rely on the exemption provided by
Rule 12h-7 under the Securities Exchange Act of 1934, as amended, and
accordingly does not intend to file with the U.S. Securities Exchange Commission
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, or any other reports under such Act.
FEDERAL TAX CONSIDERATIONS
A. INTRODUCTION
The following summary of tax rules does not provide or constitute any tax
advice. It provides only a general discussion of certain of the expected federal
income tax consequences with respect to amounts contributed to, invested in or
received from a Contract, based on our understanding of the existing provisions
of the Internal Revenue Code ("Code"), Treasury Regulations thereunder, and
public interpretations thereof by the IRS (e.g., Revenue Rulings, Revenue
Procedures or Notices) or by published court decisions. This summary discusses
only certain federal income tax consequences to United States Persons, and does
not discuss state, local or foreign tax consequences. The term United States
Persons means citizens or residents of the United States, domestic corporations,
domestic partnerships, trust or estates that are subject to United States
federal income tax, regardless of the source of their income. See "Annuity
Purchases by Nonresident Aliens and Foreign Corporations," regarding annuity
purchases by non-U.S. Persons or residents.
This summary has been prepared by us after consultation with tax counsel, but no
opinion of tax counsel has been obtained. We do not make any guarantee or
representation regarding any tax status (e.g., federal, state, local or foreign)
of any Contract or any transaction involving a Contract. In addition, there is
always a possibility that the tax treatment of an annuity contract could change
by legislation or other means (such as regulations, rulings or judicial
decisions). Moreover, it is always possible that any such change in tax
treatment could be made retroactive (that is, made effective prior to the date
of the change). Accordingly, you should consult a qualified tax adviser for
complete information and advice before purchasing a Contract.
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In addition, although this discussion addresses certain tax consequences if you
use the Contract in various arrangements, including Charitable Remainder Trusts,
tax-qualified retirement arrangements, deferred compensation plans, split-dollar
insurance arrangements, or other employee benefit arrangements, this discussion
is not exhaustive. The tax consequences of any such arrangement may vary
depending on the particular facts and circumstances of each individual
arrangement and whether the arrangement satisfies certain tax qualification or
classification requirements. In addition, the tax rules affecting such an
arrangement may have changed recently, e.g., by legislation or regulations that
affect compensatory or employee benefit arrangements. Therefore, if you are
contemplating the use of a Contract in any arrangement the value of which to you
depends in part on its tax consequences, you should consult a qualified tax
adviser regarding the tax treatment of the proposed arrangement and of any
Contract used in it.
Pursuant to Section 3 of the federal Defense of Marriage Act ("DOMA"), same-sex
marriages currently are not recognized for purposes of federal law. Therefore,
the favorable income-deferral options afforded by federal tax law to an
opposite-sex spouse under Internal Revenue Code sections 72(s) and 401(a)(9) are
currently NOT available to a same-sex spouse. Same-sex spouses who own or are
considering the purchase of annuity products that provide benefits based upon
status as a spouse should consult a tax advisor. To the extent that an annuity
contract or certificate accords to spouses other rights or benefits that are not
affected by DOMA, same-sex spouses remain entitled to such rights or benefits to
the same extent as any annuity holder's spouse.
The federal, as well as state and local, tax laws and regulations require the
Company to report certain transactions with respect to Your contract (such as an
exchange of or a distribution from the contract) to the Internal Revenue Service
and state and local tax authorities, and generally to provide You with a copy of
what was reported. This copy is not intended to supplant Your own records. It is
Your responsibility to ensure that what You report to the Internal Revenue
Service and other relevant taxing authorities on your income tax returns is
accurate based on Your books and records. You should review whatever is reported
to the taxing authorities by the Company against your own records, and in
consultation with your own tax advisor, and should notify the Company if You
find any discrepancies in case corrections have to be made.
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL PURPOSES ONLY. SPECIAL
TAX RULES MAY APPLY WITH RESPECT TO CERTAIN SITUATIONS THAT ARE NOT DISCUSSED
HEREIN. EACH POTENTIAL PURCHASER OF A CONTRACT IS ADVISED TO CONSULT WITH A
QUALIFIED TAX ADVISER AS TO THE CONSEQUENCES OF ANY AMOUNTS INVESTED IN A
CONTRACT UNDER APPLICABLE FEDERAL, STATE, LOCAL OR FOREIGN TAX LAW.
B. TAXATION OF THE COMPANY AND THE SEPARATE ACCOUNT
The Separate Account is taxed as part of the Company which is taxed as a life
insurance company under Subchapter L of Chapter 1 of the Code. Accordingly, the
Separate Account will not be taxed as a "regulated investment company" under
Subchapter M of Chapter 1 of the Code. Investment income and any realized
capital gains on assets of the Separate Account are reinvested and taken into
account in determining the value of the Accumulation and Annuity Units. As a
result, such investment income and realized capital gains are automatically
applied to increase reserves under the Contract.
Currently, no taxes are due on interest, dividends and short-term or long-term
capital gain earned by the Separate Account with respect to the Contracts. The
Company is entitled to certain tax benefits related to the investment of company
assets, including assets of the Separate Account. These tax benefits, which may
include the foreign tax credit and the corporate dividends received deduction,
are not passed back to you since the Company is the owner of the assets from
which the tax benefits are derived.
C. TAXATION OF ANNUITIES -- GENERAL PROVISIONS AFFECTING CONTRACTS NOT HELD IN
TAX-QUALIFIED RETIREMENT PLANS
Section 72 of the Code governs the taxation of annuities in general.
1. NON-NATURAL PERSONS AS OWNERS
Pursuant to Code Section 72(u), an annuity contract held by a taxpayer other
than a natural person generally is not treated as an annuity contract under the
Code. Instead, such a non-natural Contract Owner generally could be required to
include in gross income currently for each taxable year the excess of (a) the
sum of the Contract Value as of the close of the taxable year and all previous
distributions under the Contract over (b) the sum of net premiums paid for the
taxable year and any prior taxable year and the amount includable in gross
income for any prior taxable year with respect to the Contract under Section
72(u). However, Section 72(u) does not apply to:
- A contract the nominal owner of which is a non-natural person but the
beneficial owner of which is a natural person (e.g., where the non-natural
owner holds the contract as an agent for the natural person),
- A contract acquired by the estate of a decedent by reason of such decedent's
death,
- Certain contracts acquired with respect to tax-qualified retirement
arrangements,
- Certain contracts held in structured settlement arrangements that may
qualify under Code Section 130, or
- A single premium immediate annuity contract under Code Section 72(u)(4),
which provides for substantially equal periodic payments and an annuity
starting date that is no later than 1 year from the date of the contract's
purchase.
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A non-natural Contract Owner that is a tax-exempt entity for federal tax
purposes (e.g., a tax-qualified retirement trust or a Charitable Remainder
Trust) generally would not be subject to federal income tax as a result of such
current gross income under Code Section 72(u). However, such a tax-exempt
entity, or any annuity contract that it holds, may need to satisfy certain tax
requirements in order to maintain its qualification for such favorable tax
treatment. See, e.g., IRS Tech. Adv. Memo. 9825001 for certain Charitable
Remainder Trusts.
Pursuant to Code Section 72(s), if the Contract Owner is a non-natural person,
the primary annuitant is treated as the "holder" in applying the required
distribution rules described below. These rules require that certain
distributions be made upon the death of a "holder." In addition, for a
non-natural owner, a change in the primary annuitant is treated as the death of
the "holder." However, the provisions of Code Section 72(s) do not apply to
certain contracts held in tax-qualified retirement arrangements or structured
settlement arrangements.
2. OTHER CONTRACT OWNERS (NATURAL PERSONS).
A Contract Owner is not taxed on increases in the value of the Contract until an
amount is received or deemed received, e.g., in the form of a lump sum payment
(full or partial value of a Contract) or as Annuity payments under the
settlement option elected.
The provisions of Section 72 of the Code concerning distributions are summarized
briefly below. Also summarized are special rules affecting distributions from
Contracts obtained in a tax-free exchange for other annuity contracts or life
insurance contracts which were purchased prior to August 14, 1982.
a. DISTRIBUTIONS PRIOR TO THE ANNUITY COMMENCEMENT DATE.
i. Total premium payments less amounts received which were not includable in
gross income equal the "investment in the contract" under Section 72 of the
Code.
ii. To the extent that the value of the Contract (ignoring any surrender
charges except on a full surrender) exceeds the "investment in the
contract," such excess constitutes the "income on the contract." It is
unclear what value should be used in determining the "income on the
contract." We believe that the current Contract Value (determined without
regard to surrender charges) generally is an appropriate measure. However,
in some instances the IRS could take the position that the value should be
the current Contract Value (determined without regard to surrender charges)
increased by some measure of the value of certain future cash-value type
benefits.
iii. Any amount received or deemed received prior to the Annuity Commencement
Date (e.g., upon a withdrawal or partial surrender) is deemed to come
first from any such "income on the contract" and then from "investment in
the contract," and for these purposes such "income on the contract" shall
be computed by reference to any aggregation rule in subparagraph 2.c.
below. As a result, any such amount received or deemed received (1) shall
be includable in gross income to the extent that such amount does not
exceed any such "income on the contract," and (2) shall not be includable
in gross income to the extent that such amount does exceed any such
"income on the contract." If at the time that any amount is received or
deemed received there is no "income on the contract" (e.g., because the
gross value of the Contract does not exceed the "investment in the
contract" and no aggregation rule applies), then such amount received or
deemed received will not be includable in gross income, and will simply
reduce the "investment in the contract."
iv. The receipt of any amount as a loan under the Contract or the assignment or
pledge of any portion of the value of the Contract shall be treated as an
amount received for purposes of this subparagraph a. and the next
subparagraph b.
v. In general, the transfer of the Contract, without full and adequate
consideration, will be treated as an amount received for purposes of this
subparagraph a. and the next subparagraph b. This transfer rule does not
apply, however, to certain transfers of property between Spouses or
incident to divorce.
vi. In general, any amount actually received under the Contract as a Death
Benefit, including an optional Death Benefit, if any, will be treated as an
amount received for purposes of this subparagraph a. and the next
subparagraph b.
b. DISTRIBUTIONS AFTER ANNUITY COMMENCEMENT DATE.
Annuity payments made periodically after the Annuity Commencement Date are
includable in gross income to the extent the payments exceed the amount
determined by the application of the ratio of the "investment in the contract"
to the total amount of the payments to be made after the Annuity Commencement
Date (the "exclusion ratio").
i. When the total of amounts excluded from income by application of the
exclusion ratio is equal to the investment in the contract as of the
Annuity Commencement Date, any additional payments (including surrenders)
will be entirely includable in gross income.
ii. If the annuity payments cease by reason of the death of the Annuitant and,
as of the date of death, the amount of annuity payments excluded from gross
income by the exclusion ratio does not exceed the investment in the
contract as of the Annuity Commencement Date, then the remaining portion of
unrecovered investment shall be allowed as a deduction for the last taxable
year of the Annuitant.
iii. Generally, non-periodic amounts received or deemed received after the
Annuity Commencement Date are not
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entitled to any exclusion ratio and shall be fully includable in gross
income. However, upon a full surrender after such date, only the excess of
the amount received (after any surrender charge) over the remaining
"investment in the contract" shall be includable in gross income (except
to the extent that the aggregation rule referred to in the next
subparagraph c. may apply).
c. AGGREGATION OF TWO OR MORE ANNUITY CONTRACTS.
Contracts issued after October 21, 1988 by the same insurer (or affiliated
insurer) to the same owner within the same calendar year (other than certain
contracts held in connection with tax-qualified retirement arrangements) will be
aggregated and treated as one annuity contract for the purpose of determining
the taxation of distributions prior to the Annuity Commencement Date. An annuity
contract received in a tax-free exchange for another annuity contract or life
insurance contract may be treated as a new contract for this purpose. We believe
that for any Contracts subject to such aggregation, the values under the
Contracts and the investment in the contracts will be added together to
determine the taxation under subparagraph 2.a., above, of amounts received or
deemed received prior to the Annuity Commencement Date. Withdrawals will be
treated first as withdrawals of income until all of the income from all such
Contracts is withdrawn. In addition, the Treasury Department has specific
authority under the aggregation rules in Code Section 72(e)(12) to issue
regulations to prevent the avoidance of the income-out-first rules for
non-periodic distributions through the serial purchase of annuity contracts or
otherwise. As of the date of this prospectus, there are no regulations
interpreting these aggregation provisions.
d. 10% PENALTY TAX -- APPLICABLE TO CERTAIN WITHDRAWALS AND ANNUITY
PAYMENTS.
i. If any amount is received or deemed received on the Contract (before or
after the Annuity Commencement Date), the Code applies a penalty tax equal
to ten percent of the portion of the amount includable in gross income,
unless an exception applies.
ii. The 10% penalty tax will not apply to the following distributions:
1. Distributions made on or after the date the recipient has attained
the age of 59 1/2.
2. Distributions made on or after the death of the holder or where the
holder is not an individual, the death of the primary annuitant.
3. Distributions attributable to a recipient's becoming disabled.
4. A distribution that is part of a scheduled series of substantially
equal periodic payments (not less frequently than annually) for the
life (or life expectancy) of the recipient (or the joint lives or
life expectancies of the recipient and the recipient's designated
Beneficiary).
5. Distributions made under certain annuities issued in connection with
structured settlement agreements.
6. Distributions of amounts which are allocable to the "investment in
the contract" prior to August 14, 1982 (see next subparagraph e.).
7. Distributions purchased by an employer upon termination of certain
qualified plans and held by the employer until the employee
separates from service.
If the taxpayer avoids this 10% penalty tax by qualifying for the substantially
equal periodic payments exception and later such series of payments is modified
(other than by death or disability), the 10% penalty tax will be applied
retroactively to all the prior periodic payments (i.e., penalty tax plus
interest thereon), unless such modification is made after both (a) the taxpayer
has reached age 59 1/2 and (b) 5 years have elapsed since the first of these
periodic payments.
e. SPECIAL PROVISIONS AFFECTING CONTRACTS OBTAINED THROUGH A TAX-FREE
EXCHANGE OF OTHER ANNUITY OR LIFE INSURANCE CONTRACTS PURCHASED
PRIOR TO AUGUST 14, 1982.
If the Contract was obtained by a tax-free exchange of a life insurance or
annuity Contract purchased prior to August 14, 1982, then any amount received or
deemed received prior to the Annuity Commencement Date shall be deemed to come
(1) first from the amount of the "investment in the contract" prior to August
14, 1982 ("pre-8/14/82 investment") carried over from the prior Contract, (2)
then from the portion of the "income on the contract" (carried over to, as well
as accumulating in, the successor Contract) that is attributable to such
pre-8/14/82 investment, (3) then from the remaining "income on the contract" and
(4) last from the remaining "investment in the contract." As a result, to the
extent that such amount received or deemed received does not exceed such
pre-8/14/82 investment, such amount is not includable in gross income. In
addition, to the extent that such amount received or deemed received does not
exceed the sum of (a) such pre-8/14/82 investment and (b) the "income on the
contract" attributable thereto, such amount is not subject to the 10% penalty
tax. In all other respects, amounts received or deemed received from such
post-exchange Contracts are generally subject to the rules described in this
subparagraph e.
f. REQUIRED DISTRIBUTIONS
i. Death of Contract Owner or Primary Annuitant
Subject to the alternative election or Spouse beneficiary provisions in ii
or iii below:
1. If any Contract Owner dies on or after the Annuity Commencement Date
and before the entire interest in the Contract has been distributed,
the remaining portion of such interest shall be distributed at least
as rapidly as under the method of distribution being used as of the
date of such death;
2. If any Contract Owner dies before the Annuity Commencement Date, the
entire interest in the
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Contract shall be distributed within 5 years after such death; and
3. If the Contract Owner is not an individual, then for purposes of 1.
or 2. above, the primary annuitant under the Contract shall be
treated as the Contract Owner, and any change in the primary
annuitant shall be treated as the death of the Contract Owner. The
primary annuitant is the individual, the events in the life of whom
are of primary importance in affecting the timing or amount of the
payout under the Contract.
ii. Alternative Election to Satisfy Distribution Requirements
If any portion of the interest of a Contract Owner described in i. above
is payable to or for the benefit of a designated beneficiary, such
beneficiary may elect to have the portion distributed over a period that
does not extend beyond the life or life expectancy of the beneficiary.
Such distributions must begin within a year of the Contract Owner's death.
iii. Spouse Beneficiary
If any portion of the interest of a Contract Owner is payable to or for
the benefit of his or her Spouse, and the Annuitant or Contingent
Annuitant is living, such Spouse shall be treated as the Contract Owner of
such portion for purposes of section i. above. This spousal contract
continuation shall apply only once for this Contract.
iv. Civil Union or Domestic Partner
Upon the death of the Contract Owner prior to the Annuity Commencement
Date, if the designated beneficiary is the surviving civil union or
domestic partner of the Contract Owner pursuant to a civil union or
domestic partnership recognized under state law, then such designated
beneficiary's right to continue the Contract as the succeeding Contract
Owner will be contingent, among other things, upon the treatment of such
designated beneficiary as the spouse of the Contract Owner under Code
Section 72(s) (or any successor provision). Currently, Federal tax law
only recognizes spouses if they are married individuals of the opposite
sex. Consequently, such designated beneficiary who is not recognized as a
"spouse" under Federal tax law will not be able to continue the Contract
and the entire interest in the Contract must be distributed within five
years of the Contract Owner's death or under the Alternative Election.
g. ADDITION OF RIDER OR MATERIAL CHANGE.
The addition of a rider to the Contract, or a material change in the Contract's
provisions, could cause it to be considered newly issued or entered into for tax
purposes, and thus could cause the Contract to lose certain grandfathered tax
status. Please contact your tax adviser for more information.
h. PARTIAL EXCHANGES.
The IRS in Rev. Rul. 2003-76 confirmed that the owner of an annuity contract can
direct its insurer to transfer a portion of the contract's cash value directly
to another annuity contract (issued by the same insurer or by a different
insurer), and such a direct transfer can qualify for tax-free exchange treatment
under Code Section 1035 (a "partial exchange"). However, Rev. Rul. 2003-76 also
refers to caveats and additional guidance in the companion Notice 2003-51, which
discusses cases in which a partial exchange is followed by a surrender,
withdrawal or other distribution from either the old contract or the new
contract. Notice 2003-51 specifically indicates that the IRS is considering (1)
under what circumstances it should treat a partial exchange followed by such a
distribution within 24 months as presumptively for "tax avoidance" purposes
(e.g., to avoid the income-out-first rules on amounts received under Code
Section 72) and (2) what circumstances it should treat as rebutting such a
presumption (e.g., death, disability, reaching age 59 1/2, divorce or loss of
employment). Notice 2003-51 was superseded by Revenue Procedure 2008-24,
effective for partial exchanges completed on or after June 30, 2008. Partial
exchanges completed on or after this date will qualify for tax free treatment
if: (1) no amounts are withdrawn from, or received in surrender of, either of
the contracts involved in the exchange during the 12 months beginning on the
date on which amounts are treated as received as premiums or other consideration
paid for the contract received in the exchange (the date of transfer); or (2)
the taxpayer demonstrates that certain conditions (e.g., death, disability,
reaching age 59 1/2, divorce, loss of employment) occurred between the date of
transfer and the date of the withdrawal or surrender. A transfer within the
scope of the revenue procedure, but not treated as a tax-free exchange, will be
treated as a taxable distribution, followed by a payment for a second contract.
Two annuity contracts that are the subject of a tax-free exchange pursuant to
the revenue procedure will not be aggregated, even if issued by the same
insurance company. We advise you to consult with a qualified tax adviser as to
potential tax consequences before attempting any partial exchange.
The applicability of the IRS's partial exchange guidance to the splitting of an
annuity contract is not clear. You should consult with a tax adviser if you plan
to split an annuity contract as part of an exchange of annuity contracts.
3. DIVERSIFICATION REQUIREMENTS.
The Code requires that investments supporting your Contract be adequately
diversified. Code Section 817(h) provides that a variable annuity contract will
not be treated as an annuity contract for any period during which the
investments made by the separate account or Fund are not adequately diversified.
If a contract is not treated as an annuity contract, the contract owner will be
subject to income tax on annual increases in cash value.
The Treasury Department's diversification regulations under Code Section 817(h)
require, among other things, that:
- no more than 55% of the value of the total assets of the segregated asset
account underlying a variable contract is represented by any one investment,
- no more than 70% is represented by any two investments,
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- no more than 80% is represented by any three investments, and
- no more than 90% is represented by any four investments.
In determining whether the diversification standards are met, all securities of
the same issuer, all interests in the same real property project, and all
interests in the same commodity are each treated as a single investment. In the
case of government securities, each government agency or instrumentality is
treated as a separate issuer.
A separate account must be in compliance with the diversification standards on
the last day of each calendar quarter or within 30 days after the quarter ends.
If an insurance company inadvertently fails to meet the diversification
requirements, the company may still comply within a reasonable period and avoid
the taxation of contract income on an ongoing basis. However, either the insurer
or the contract owner must agree to make adjustments or pay such amounts as may
be required by the IRS for the period during which the diversification
requirements were not met.
Fund shares may also be sold to tax-qualified plans pursuant to an exemptive
order and applicable tax laws. If Fund shares are sold to non-qualified plans,
or to tax-qualified plans that later lose their tax-qualified status, the
affected Funds may fail the diversification requirements of Code Section 817(h),
which could have adverse tax consequences for Contract Owners with premiums
allocated to affected Funds. In order to prevent a Fund diversification failure
from such an occurrence, the Company obtained a private letter ruling ("PLR")
from the IRS. As long as the Funds comply with certain terms and conditions
contained in the PLR, Fund diversification will not be prevented if purported
tax-qualified plans invest in the Funds. The Company and the Funds will monitor
the Funds' compliance with the terms and conditions contained in the PLR.
4. TAX OWNERSHIP OF THE ASSETS IN THE SEPARATE ACCOUNT.
In order for a variable annuity contract to qualify for tax income deferral,
assets in the separate account supporting the contract must be considered to be
owned by the insurance company, and not by the contract owner, for tax purposes.
The IRS has stated in published rulings that a variable contract owner will be
considered the "owner" of separate account assets for income tax purposes if the
contract owner possesses sufficient incidents of ownership in those assets, such
as the ability to exercise investment control over the assets. In circumstances
where the variable contract owner is treated as the "tax owner" of certain
separate account assets, income and gain from such assets would be includable in
the variable contract owner's gross income. The Treasury Department indicated in
1986 that it would provide guidance on the extent to which contract owners may
direct their investments to particular Sub-Accounts without being treated as tax
owners of the underlying shares. Although no such regulations have been issued
to date, the IRS has issued a number of rulings that indicate that this issue
remains subject to a facts and circumstances test for both variable annuity and
life insurance contracts.
Rev. Rul. 2003-92, amplified by Rev. Rul. 2007-7, indicates that, where
interests in a partnership offered in an insurer's separate account are not
available exclusively through the purchase of a variable insurance contract
(e.g., where such interests can be purchased directly by the general public or
others without going through such a variable contract), such "public
availability" means that such interests should be treated as owned directly by
the contract owner (and not by the insurer) for tax purposes, as if such
contract owner had chosen instead to purchase such interests directly (without
going through the variable contract). None of the shares or other interests in
the fund choices offered in our Separate Account for your Contract are available
for purchase except through an insurer's variable contracts or by other
permitted entities.
Rev. Rul. 2003-91 indicates that an insurer could provide as many as 20 fund
choices for its variable contract owners (each with a general investment
strategy, e.g., a small company stock fund or a special industry fund) under
certain circumstances, without causing such a contract owner to be treated as
the tax owner of any of the Fund assets. The ruling does not specify the number
of fund options, if any, that might prevent a variable contract owner from
receiving favorable tax treatment. As a result, although the owner of a Contract
has more than 20 fund choices, we believe that any owner of a Contract also
should receive the same favorable tax treatment. However, there is necessarily
some uncertainty here as long as the IRS continues to use a facts and
circumstances test for investor control and other tax ownership issues.
Therefore, we reserve the right to modify the Contract as necessary to prevent
you from being treated as the tax owner of any underlying assets.
D. FEDERAL INCOME TAX WITHHOLDING
The portion of an amount received under a Contract that is taxable gross income
to the Payee is also subject to federal income tax withholding, pursuant to Code
Section 3405, which requires the following:
1. Non-Periodic Distributions. The portion of a non-periodic
distribution that is includable in gross income is subject to
federal income tax withholding unless an individual elects not to
have such tax withheld ("election out"). We will provide such an
"election out" form at the time such a distribution is requested. If
the necessary "election out" form is not submitted to us in a timely
manner, generally we are required to withhold 10 percent of the
includable amount of distribution and remit it to the IRS.
2. Periodic Distributions (payable over a period greater than one
year). The portion of a periodic distribution that is includable in
gross income is generally subject to federal income tax withholding
as if the Payee were a married individual claiming 3 exemptions,
unless the individual elects otherwise. An individual
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generally may elect out of such withholding, or elect to have income
tax withheld at a different rate, by providing a completed election
form. We will provide such an election form at the time such a
distribution is requested. If the necessary "election out" forms are
not submitted to us in a timely manner, we are required to withhold
tax as if the recipient were married claiming 3 exemptions, and remit
this amount to the IRS.
Generally no "election out" is permitted if the distribution is delivered
outside the United States and any possession of the United States. Regardless of
any "election out" (or any amount of tax actually withheld) on an amount
received from a Contract, the Payee is generally liable for any failure to pay
the full amount of tax due on the includable portion of such amount received. A
Payee also may be required to pay penalties under estimated income tax rules, if
the withholding and estimated tax payments are insufficient to satisfy the
Payee's total tax liability.
E. GENERAL PROVISIONS AFFECTING QUALIFIED RETIREMENT PLANS
The Contract may be used for a number of qualified retirement plans. If the
Contract is being purchased with respect to some form of qualified retirement
plan, please refer to the section entitled "Information Regarding Tax-Qualified
Retirement Plans" for information relative to the types of plans for which it
may be used and the general explanation of the tax features of such plans.
F. ANNUITY PURCHASES BY NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
The discussion above provides general information regarding U.S. federal income
tax consequences to annuity purchasers that are U.S. citizens or residents.
Purchasers that are not U.S. citizens or residents will generally be subject to
U.S. federal income tax and mandatory withholding on U.S. source taxable annuity
distributions at a 30% rate, unless a lower treaty rate applies and any required
tax forms are submitted to us. If withholding applies, we are required to
withhold tax at the 30% rate, or a lower treaty rate if applicable, and remit it
to the IRS. In addition, purchasers may be subject to state premium tax, other
state and/or municipal taxes, and taxes that may be imposed by the purchaser's
country of citizenship or residence.
G. ESTATE, GIFT AND GENERATION-SKIPPING TAX AND RELATED TAX CONSIDERATIONS
Any amount payable upon a Contract Owner's death, whether before or after the
Annuity Commencement Date, is generally includable in the Contract Owner's
estate for federal estate tax purposes. Similarly, prior to the Contract Owner's
death, the payment of any amount from the Contract, or the transfer of any
interest in the Contract, to a beneficiary or other person for less than
adequate consideration may have federal gift tax consequences. In addition, any
transfer to, or designation of, a non-Spouse beneficiary who either is (1) 37
1/2 or more years younger than a Contract Owner or (2) a grandchild (or more
remote further descendent) of a Contract Owner may have federal
generation-skipping-transfer ("GST") tax consequences under Code Section 2601.
Regulations under Code Section 2662 may require us to deduct any such GST tax
from your Contract, or from any applicable payment, and pay it directly to the
IRS. However, any federal estate, gift or GST tax payment with respect to a
Contract could produce an offsetting income tax deduction for a beneficiary or
transferee under Code Section 691(c) (partially offsetting such federal estate
or GST tax) or a basis increase for a beneficiary or transferee under Code
Section 691(c) or Section 1015(d). In addition, as indicated above in
"Distributions Prior to the Annuity Commencement Date," the transfer of a
Contract for less than adequate consideration during the Contract Owner's
lifetime generally is treated as producing an amount received by such Contract
Owner that is subject to both income tax and the 10% penalty tax. To the extent
that such an amount deemed received causes an amount to be includable currently
in such Contract Owner's gross income, this same income amount could produce a
corresponding increase in such Contract Owner's tax basis for such Contract that
is carried over to the transferee's tax basis for such Contract under Code
Section 72(e)(4)(C)(iii) and Section 1015.
H. TAX DISCLOSURE OBLIGATIONS
In some instances certain transactions must be disclosed to the IRS or penalties
could apply. See, for example, IRS Notice 2004-67. The Code also requires
certain "material advisers" to maintain a list of persons participating in such
"reportable transactions," which list must be furnished to the IRS upon request.
It is possible that such disclosures could be required by The Company, the
Owner(s) or other persons involved in transactions involving annuity contracts.
It is the responsibility of each party, in consultation with their tax and legal
advisers, to determine whether the particular facts and circumstances warrant
such disclosures.
INFORMATION REGARDING TAX-QUALIFIED RETIREMENT PLANS
This summary does not attempt to provide more than general information about the
federal income tax rules associated with use of a Contract by a tax-qualified
retirement plan. State income tax rules applicable to tax-qualified retirement
plans often differ from federal income tax rules, and this summary does not
describe any of these differences. Because of the complexity of the tax rules,
owners, participants and beneficiaries are encouraged to consult their own tax
advisors as to specific tax consequences.
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The Contracts are available to a variety of tax-qualified retirement plans and
arrangements (a "Qualified Plan" or "Plan"). Tax restrictions and consequences
for Contracts or accounts under each type of Qualified Plan differ from each
other and from those for Non-Qualified Contracts. In addition, individual
Qualified Plans may have terms and conditions that impose additional rules.
Therefore, no attempt is made herein to provide more than general information
about the use of the Contract with the various types of Qualified Plans.
Participants under such Qualified Plans, as well as Contract Owners, annuitants
and beneficiaries, are cautioned that the rights of any person to any benefits
under such Qualified Plans may be subject to terms and conditions of the Plans
themselves or limited by applicable law, regardless of the terms and conditions
of the Contract issued in connection therewith. Qualified Plans generally
provide for the tax deferral of income regardless of whether the Qualified Plan
invests in an annuity or other investment. You should consider if the Contract
is a suitable investment if you are investing through a Qualified Plan.
THE FOLLOWING IS ONLY A GENERAL DISCUSSION ABOUT TYPES OF QUALIFIED PLANS FOR
WHICH THE CONTRACTS MAY BE AVAILABLE. WE ARE NOT THE PLAN ADMINISTRATOR FOR ANY
QUALIFIED PLAN. THE PLAN ADMINISTRATOR OR CUSTODIAN, WHICHEVER IS APPLICABLE,
(BUT NOT US) IS RESPONSIBLE FOR ALL PLAN ADMINISTRATIVE DUTIES INCLUDING, BUT
NOT LIMITED TO, NOTIFICATION OF DISTRIBUTION OPTIONS, DISBURSEMENT OF PLAN
BENEFITS, HANDLING ANY PROCESSING AND ADMINISTRATION OF QUALIFIED PLAN LOANS,
COMPLIANCE WITH REGULATORY REQUIREMENTS AND FEDERAL AND STATE TAX REPORTING OF
INCOME/DISTRIBUTIONS FROM THE PLAN TO PLAN PARTICIPANTS AND, IF APPLICABLE,
BENEFICIARIES OF PLAN PARTICIPANTS AND IRA CONTRIBUTIONS FROM PLAN PARTICIPANTS.
OUR ADMINISTRATIVE DUTIES ARE LIMITED TO ADMINISTRATION OF THE CONTRACT AND ANY
DISBURSEMENTS OF ANY CONTRACT BENEFITS TO THE OWNER, ANNUITANT OR BENEFICIARY OF
THE CONTRACT, AS APPLICABLE. OUR TAX REPORTING RESPONSIBILITY IS LIMITED TO
FEDERAL AND STATE TAX REPORTING OF INCOME/DISTRIBUTIONS TO THE APPLICABLE PAYEE
AND IRA CONTRIBUTIONS FROM THE OWNER OF A CONTRACT, AS RECORDED ON OUR BOOKS AND
RECORDS. IF YOU ARE PURCHASING A CONTRACT THROUGH A QUALIFIED PLAN, YOU SHOULD
CONSULT WITH YOUR PLAN ADMINISTRATOR AND/OR A QUALIFIED TAX ADVISER. YOU ALSO
SHOULD CONSULT WITH A QUALIFIED TAX ADVISER AND/OR PLAN ADMINISTRATOR BEFORE YOU
WITHDRAW ANY PORTION OF YOUR CONTRACT VALUE.
The tax rules applicable to Qualified Contracts and Qualified Plans, including
restrictions on contributions and distributions, taxation of distributions and
tax penalties, vary according to the type of Qualified Plan, as well as the
terms and conditions of the Plan itself. Various tax penalties may apply to
contributions in excess of specified limits, plan distributions (including
loans) that do not comply with specified limits, and certain other transactions
relating to such Plans. Accordingly, this summary provides only general
information about the tax rules associated with use of a Qualified Contract in
such a Qualified Plan. In addition, some Qualified Plans are subject to
distribution and other requirements that are not incorporated into our
administrative procedures. Owners, participants, and beneficiaries are
responsible for determining that contributions, distributions and other
transactions comply with applicable tax (and non-tax) law and any applicable
Qualified Plan terms. Because of the complexity of these rules, Owners,
participants and beneficiaries are advised to consult with a qualified tax
adviser as to specific tax consequences.
We do not currently offer the Contracts in connection with all of the types of
Qualified Plans discussed below, and may not offer the Contracts for all types
of Qualified Plans in the future.
1. INDIVIDUAL RETIREMENT ANNUITIES ("IRAS").
In addition to "traditional" IRAs governed by Code Sections 408(a) and (b)
("Traditional IRAs"), there are Roth IRAs governed by Code Section 408A, SEP
IRAs governed by Code Section 408(k), and SIMPLE IRAs governed by Code Section
408(p). Also, Qualified Plans under Code Section 401, 403(b) or 457(b) that
include after-tax employee contributions may be treated as deemed IRAs subject
to the same rules and limitations as Traditional IRAs. Contributions to each of
these types of IRAs are subject to differing limitations. The following is a
very general description of each type of IRA for which a Contract is available.
a. TRADITIONAL IRAS
Traditional IRAs are subject to limits on the amounts that may be contributed
each year, the persons who may be eligible, and the time when minimum
distributions must begin. Depending upon the circumstances of the individual,
contributions to a Traditional IRA may be made on a deductible or non-deductible
basis. Failure to make required minimum distributions ("RMDs") when the Owner
reaches age 70 1/2 or dies, as described below, may result in imposition of a
50% penalty tax on any excess of the RMD amount over the amount actually
distributed. In addition, any amount received before the Owner reaches age 59
1/2 or dies is subject to a 10% penalty tax on premature distributions, unless a
special exception applies, as described below. Under Code Section 408(e), an IRA
may not be used for borrowing (or as security for any loan) or in certain
prohibited transactions, and such a transaction could lead to the complete tax
disqualification of an IRA.
You (or your surviving spouse if you die) may rollover funds tax-free from
certain existing Qualified Plans (such as proceeds from existing insurance
contracts, annuity contracts or securities) into a Traditional IRA under certain
circumstances, as indicated below. However, mandatory tax withholding of 20% may
apply to any eligible rollover distribution from certain types of Qualified
Plans if the distribution is not transferred directly to the Traditional IRA. In
addition, under Code Section 402(c)(11) a non-spouse "designated beneficiary" of
a deceased Plan participant may make a tax-free "direct rollover" (in the form
of a direct transfer between Plan fiduciaries, as described below in "Rollover
Distributions") from certain Qualified Plans to a Traditional IRA for such
beneficiary, but such Traditional IRA must be designated and treated as an
"inherited IRA" that remains subject to applicable RMD rules (as if such IRA had
been inherited from the deceased Plan participant). In addition, such a Plan is
not required to permit such a rollover.
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IRAs generally may not invest in life insurance contracts. However, an annuity
contract that is used as an IRA may provide a death benefit that equals the
greater of the premiums paid or the contract's cash value. The Contract offers
an enhanced death benefit that may exceed the greater of the Contract Value or
total premium payments. The tax rules are unclear as to what extent an IRA can
provide a death benefit that exceeds the greater of the IRA's cash value or the
sum of the premiums paid and other contributions into the IRA. Please note that
the IRA rider for the Contract has provisions that are designed to maintain the
Contract's tax qualification as an IRA, and therefore could limit certain
benefits under the Contract (including endorsement, rider or option benefits) to
maintain the Contract's tax qualification.
b. SEP IRAS
Code Section 408(k) provides for a Traditional IRA in the form of an
employer-sponsored defined contribution plan known as a Simplified Employee
Pension ("SEP") or a SEP IRA. A SEP IRA can have employer, and in limited
circumstances employee and salary reduction contributions, as well as higher
overall contribution limits than a Traditional IRA, but a SEP is also subject to
special tax-qualification requirements (e.g., on participation,
nondiscrimination and withdrawals) and sanctions. Otherwise, a SEP IRA is
generally subject to the same tax rules as for a Traditional IRA, which are
described above. Please note that the IRA rider for the Contract has provisions
that are designed to maintain the Contract's tax qualification as an IRA, and
therefore could limit certain benefits under the Contract (including
endorsement, rider or option benefits) to maintain the Contract's tax
qualification.
c. SIMPLE IRAS
The Savings Incentive Match Plan for Employees of small employers ("SIMPLE
Plan") is a form of an employer-sponsored Qualified Plan that provides IRA
benefits for the participating employees ("SIMPLE IRAs"). Depending upon the
SIMPLE Plan, employers may make plan contributions into a SIMPLE IRA established
by each eligible participant. Like a Traditional IRA, a SIMPLE IRA is subject to
the 50% penalty tax for failure to make a full RMD, and to the 10% penalty tax
on premature distributions, as described below. In addition, the 10% penalty tax
is increased to 25% for amounts received during the 2-year period beginning on
the date you first participated in a qualified salary reduction arrangement
pursuant to a SIMPLE Plan maintained by your employer under Code Section
408(p)(2). Contributions to a SIMPLE IRA may be either salary deferral
contributions or employer contributions, and these are subject to different tax
limits from those for a Traditional IRA. Please note that the SIMPLE IRA rider
for the Contract has provisions that are designed to maintain the Contract's tax
qualification as an SIMPLE IRA, and therefore could limit certain benefits under
the Contract (including endorsement, rider or option benefits) to maintain the
Contract's tax qualification.
A SIMPLE Plan may designate a single financial institution (a Designated
Financial Institution) as the initial trustee, custodian or issuer (in the case
of an annuity contract) of the SIMPLE IRA set up for each eligible participant.
However, any such Plan also must allow each eligible participant to have the
balance in his SIMPLE IRA held by the Designated Financial Institution
transferred without cost or penalty to a SIMPLE IRA maintained by a different
financial institution. Absent a Designated Financial Institution, each eligible
participant must select the financial institution to hold his SIMPLE IRA, and
notify his employer of this selection.
If we do not serve as the Designated Financial Institution for your employer's
SIMPLE Plan, for you to use one of our Contracts as a SIMPLE IRA, you need to
provide your employer with appropriate notification of such a selection under
the SIMPLE Plan. If you choose, you may arrange for a qualifying transfer of any
amounts currently held in another SIMPLE IRA for your benefit to your SIMPLE IRA
with us.
d. ROTH IRAS
Code Section 408A permits eligible individuals to establish a Roth IRA.
Contributions to a Roth IRA are not deductible, but withdrawals of amounts
contributed and the earnings thereon that meet certain requirements are not
subject to federal income tax. In general, Roth IRAs are subject to limitations
on the amounts that may be contributed by the persons who may be eligible to
contribute, certain Traditional IRA restrictions, and certain RMD rules on the
death of the Contract Owner. Unlike a Traditional IRA, Roth IRAs are not subject
to RMD rules during the Contract Owner's lifetime. Generally, however, upon the
Owner's death the amount remaining in a Roth IRA must be distributed by the end
of the fifth year after such death or distributed over the life expectancy of a
designated beneficiary. The Owner of a Traditional IRA or other qualified plan
assets may convert a Traditional IRA to a Roth IRA under certain circumstances.
The conversion in the year of conversion (special rules apply to 2010
conversions) of a Traditional IRA to a Roth IRA will subject the fair market
value of the converted Traditional IRA to federal income tax in the year of
conversion. In addition to the amount held in the converted Traditional IRA, the
fair market value may include the value of additional benefits provided by the
annuity contract on the date of conversion, based on reasonable actuarial
assumptions. Tax-free rollovers from a Roth IRA can be made only to another Roth
IRA under limited circumstances, as indicated below. Distributions from eligible
Qualified Plans can be "rolled over" directly (subject to tax) into a Roth IRA
under certain circumstances. Anyone considering the purchase of a Qualified
Contract as a Roth IRA or a "conversion" Roth IRA should consult with a
qualified tax adviser. Please note that the Roth IRA rider for the Contract has
provisions that are designed to maintain the Contract's tax qualification as a
Roth IRA, and therefore could limit certain benefits under the Contract
(including endorsement, rider or option benefits) to maintain the Contract's tax
qualification.
2. QUALIFIED PENSION OR PROFIT-SHARING PLAN OR SECTION 401(k) PLAN
Provisions of the Code permit eligible employers to establish a tax-qualified
pension or profit sharing plan (described in
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Section 401(a), and Section 401(k) if applicable, and exempt from taxation under
Section 501(a)). Such a Plan is subject to limitations on the amounts that may
be contributed, the persons who may be eligible to participate, the amounts of
"incidental" death benefits, and the time when RMDs must commence. In addition,
a Plan's provision of incidental benefits may result in currently taxable income
to the participant for some or all of such benefits. Amounts may be rolled over
tax-free from a Qualified Plan to another Qualified Plan under certain
circumstances, as described below. Anyone considering the use of a Qualified
Contract in connection with such a Qualified Plan should seek competent tax and
other legal advice.
In particular, please note that these tax rules provide for limits on death
benefits provided by a Qualified Plan (to keep such death benefits "incidental"
to qualified retirement benefits), and a Qualified Plan (or a Qualified
Contract) often contains provisions that effectively limit such death benefits
to preserve the tax qualification of the Qualified Plan (or Qualified Contract).
In addition, various tax-qualification rules for Qualified Plans specifically
limit increases in benefits once RMDs begin, and Qualified Contracts are subject
to such limits. As a result, the amounts of certain benefits that can be
provided by any option under a Qualified Contract may be limited by the
provisions of the Qualified Contract or governing Qualified Plan that are
designed to preserve its tax qualification.
3. TAX SHELTERED ANNUITY UNDER SECTION 403(b) ("TSA")
Code Section 403(b) permits public school employees and employees of certain
types of charitable, educational and scientific organizations described in Code
Section 501(c)(3) to purchase a "tax-sheltered annuity" ("TSA") contract and,
subject to certain limitations, exclude employer contributions to a TSA from
such an employee's gross income. Generally, total contributions may not exceed
the lesser of an annual dollar limit or 100% of the employee's "includable
compensation" for the most recent full year of service, subject to other
adjustments. There are also legal limits on annual elective deferrals that a
participant may be permitted to make under a TSA. In certain cases, such as when
the participant is age 50 or older, those limits may be increased. A TSA
participant should contact his plan administrator to determine applicable
elective contribution limits. Special provisions may allow certain employees
different overall limitations.
A TSA is subject to a prohibition against distributions from the TSA
attributable to contributions made pursuant to a salary reduction agreement,
unless such distribution is made:
a. after the employee reaches age 59 1/2;
b. upon the employee's separation from service;
c. upon the employee's death or disability;
d. in the case of hardship (as defined in applicable law and in the case of
hardship, any income attributable to such contributions may not be
distributed); or
e. as a qualified reservist distribution upon certain calls to active
duty.
An employer sponsoring a TSA may impose additional restrictions on your TSA
through its plan document.
Please note that the TSA rider for the Contract has provisions that are designed
to maintain the Contract's tax qualification as a TSA, and therefore could limit
certain benefits under the Contract (including endorsement, rider or option
benefits) to maintain the Contract's tax qualification. In particular, please
note that tax rules provide for limits on death benefits provided by a Qualified
Plan (to keep such death benefits "incidental" to qualified retirement
benefits), and a Qualified Plan (or a Qualified Contract) often contains
provisions that effectively limit such death benefits to preserve the tax
qualification of the Qualified Plan (or Qualified Contract). In addition,
various tax-qualification rules for Qualified Plans specifically limit increases
in benefits once RMDs begin, and Qualified Contracts are subject to such limits.
As a result, the amounts of certain benefits that can be provided by any option
under a Qualified Contract may be limited by the provisions of the Qualified
Contract or governing Qualified Plan that are designed to preserve its tax
qualification. In addition, a life insurance contract issued after September 23,
2007 is generally ineligible to qualify as a TSA under Reg. Section
1.403(b)-8(c)(2).
Amounts may be rolled over tax-free from a TSA to another TSA or Qualified Plan
(or from a Qualified Plan to a TSA) under certain circumstances, as described
below. However, effective for TSA contract exchanges after September 24, 2007,
Reg. 1.403(b)-10(b) allows a TSA contract of a participant or beneficiary under
a TSA Plan to be exchanged tax-free for another eligible TSA contract under that
same TSA Plan, but only if all of the following conditions are satisfied: (1)
such TSA Plan allows such an exchange, (2) the participant or beneficiary has an
accumulated benefit after such exchange that is no less than such participant's
or beneficiary's accumulated benefit immediately before such exchange (taking
into account such participant's or beneficiary's accumulated benefit under both
TSA contracts immediately before such exchange), (3) the second TSA contract is
subject to distribution restrictions with respect to the participant that are no
less stringent than those imposed on the TSA contract being exchanged, and (4)
the employer for such TSA Plan enters into an agreement with the issuer of the
second TSA contract under which such issuer and employer will provide each other
from time to time with certain information necessary for such second TSA
contract (or any other TSA contract that has contributions from such employer)
to satisfy the TSA requirements under Code Section 403(b) and other federal tax
requirements (e.g., plan loan conditions under Code Section 72(p) to avoid
deemed distributions). Such necessary information could include information
about the participant's employment, information about other Qualified Plans of
such employer, and whether a severance has occurred, or hardship rules are
satisfied, for purposes of the TSA distribution restrictions. Consequently, you
are advised to consult with a qualified tax advisor before attempting any such
TSA exchange, particularly because it requires an agreement between the employer
and issuer to provide each other with certain information. We are no longer
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accepting any incoming exchange request, or new contract application, for any
individual TSA contract.
4. DEFERRED COMPENSATION PLANS UNDER SECTION 457 ("SECTION 457 PLANS")
Certain governmental employers, or tax-exempt employers other than a
governmental entity, can establish a Deferred Compensation Plan under Code
Section 457. For these purposes, a "governmental employer" is a State, a
political subdivision of a State, or an agency or an instrumentality of a State
or political subdivision of a State. A Deferred Compensation Plan that meets the
requirements of Code Section 457(b) is called an "Eligible Deferred Compensation
Plan" or "Section 457(b) Plan." Code Section 457(b) limits the amount of
contributions that can be made to an Eligible Deferred Compensation Plan on
behalf of a participant. Generally, the limitation on contributions is the
lesser of (1) 100% of a participant's includible compensation or (2) the
applicable dollar amount ($16,500 for 2010). The Plan may provide for additional
"catch-up" contributions. In addition, under Code Section 457(d) a Section
457(b) Plan may not make amounts available for distribution to participants or
beneficiaries before (1) the calendar year in which the participant attains age
70 1/2, (2) the participant has a severance from employment (including death),
or (3) the participant is faced with an unforeseeable emergency (as determined
in accordance with regulations).
Under Code Section 457(g) all of the assets and income of an Eligible Deferred
Compensation Plan for a governmental employer must be held in trust for the
exclusive benefit of participants and their beneficiaries. For this purpose,
annuity contracts and custodial accounts described in Code Section 401(f) are
treated as trusts. This trust requirement does not apply to amounts under an
Eligible Deferred Compensation Plan of a tax-exempt (non-governmental) employer.
In addition, this trust requirement does not apply to amounts held under a
Deferred Compensation Plan of a governmental employer that is not a Section
457(b) Plan. Where the trust requirement does not apply, amounts held under a
Section 457 Plan must remain subject to the claims of the employer's general
creditors under Code Section 457(b)(6).
5. TAXATION OF AMOUNTS RECEIVED FROM QUALIFIED PLANS
Except under certain circumstances in the case of Roth IRAs or Roth accounts in
Qualified plans, amounts received from Qualified Contracts or Plans generally
are taxed as ordinary income under Code Section 72, to the extent that they are
not treated as a tax-free recovery of after-tax contributions or other
"investment in the contract." For annuity payments and other amounts received
after the Annuity Commencement Date from a Qualified Contract or Plan, the tax
rules for determining what portion of each amount received represents a tax-free
recovery of "investment in the contract" are generally the same as for
Non-Qualified Contracts, as described above.
For non-periodic amounts from certain Qualified Contracts or Plans, Code Section
72(e)(8) provides special rules that generally treat a portion of each amount
received as a tax-free recovery of the "investment in the contract," based on
the ratio of the "investment in the contract" over the Contract Value at the
time of distribution. However, in determining such a ratio, certain aggregation
rules may apply and may vary, depending on the type of Qualified Contract or
Plan. For instance, all Traditional IRAs owned by the same individual are
generally aggregated for these purposes, but such an aggregation does not
include any IRA inherited by such individual or any Roth IRA owned by such
individual.
In addition, penalty taxes, mandatory tax withholding or rollover rules may
apply to amounts received from a Qualified Contract or Plan, as indicated below,
and certain exclusions may apply to certain distributions (e.g., distributions
from an eligible Government Plan to pay qualified health insurance premiums of
an eligible retired public safety officer). Accordingly, you are advised to
consult with a qualified tax adviser before taking or receiving any amount
(including a loan) from a Qualified Contract or Plan.
6. PENALTY TAXES FOR QUALIFIED PLANS
Unlike Non-Qualified Contracts, Qualified Contracts are subject to federal
penalty taxes not just on premature distributions, but also on excess
contributions and failures to make required minimum distributions ("RMDs").
Penalty taxes on excess contributions can vary by type of Qualified Plan and
which person made the excess contribution (e.g., employer or an employee). The
penalty taxes on premature distributions and failures to make timely RMDs are
more uniform, and are described in more detail below.
a. PENALTY TAXES ON PREMATURE DISTRIBUTIONS
Code Section 72(t) imposes a penalty income tax equal to 10% of the taxable
portion of a distribution from certain types of Qualified Plans that is made
before the employee reaches age 59 1/2. However, this 10% penalty tax does not
apply to a distribution that is either:
(i) made to a beneficiary (or to the employee's estate) on or after the
employee's death;
(ii) attributable to the employee's becoming disabled under Code Section
72(m)(7);
(iii) part of a series of substantially equal periodic payments (not less
frequently than annually -- "SEPPs") made for the life (or life
expectancy) of the employee or the joint lives (or joint life
expectancies) of such employee and a designated beneficiary ("SEPP
Exception"), and for certain Qualified Plans (other than IRAs) such a
series must begin after the employee separates from service;
(iv) (except for IRAs) made to an employee after separation from service
after reaching age 55 (or made after age 50 in the case of a qualified
public safety employee separated from certain government plans);
(v) (except for IRAs) made to an alternate payee pursuant to a qualified
domestic relations order under Code Section 414(p) (a similar exception
for IRAs in Code Section 408(d)(6) covers certain transfers for the
benefit of a spouse or ex-spouse);
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(vi) not greater than the amount allowable as a deduction to the employee
for eligible medical expenses during the taxable year; or
(vii) certain qualified reservist distributions under Code Section
72(t)(2)(G) upon a call to active duty.
In addition, the 10% penalty tax does not apply to a distribution from an IRA
that is either:
(viii) made after separation from employment to an unemployed IRA owner for
health insurance premiums, if certain conditions are met;
(ix) not in excess of the amount of certain qualifying higher education
expenses, as defined by Code Section 72(t)(7); or
(x) for a qualified first-time home buyer and meets the requirements of
Code Section 72(t)(8).
If the taxpayer avoids this 10% penalty tax by qualifying for the SEPP Exception
and later such series of payments is modified (other than by death or
disability), the 10% penalty tax will be applied retroactively to all the prior
periodic payments (i.e., penalty tax plus interest thereon), unless such
modification is made after both (a) the employee has reached age 59 1/2 and (b)
5 years have elapsed since the first of these periodic payments.
For any premature distribution from a SIMPLE IRA during the first 2 years that
an individual participates in a salary reduction arrangement maintained by that
individual's employer under a SIMPLE Plan, the 10% penalty tax rate is increased
to 25%.
b. RMDS AND 50% PENALTY TAX
If the amount distributed from a Qualified Contract or Plan is less than the
amount of the required minimum distribution ("RMD") for the year, the
participant is subject to a 50% penalty tax on the amount that has not been
timely distributed.
An individual's interest in a Qualified Plan generally must be distributed, or
begin to be distributed, not later than the Required Beginning Date. Generally,
the Required Beginning Date is April 1 of the calendar year following the later
of --
(i) the calendar year in which the individual attains age 70 1/2, or
(ii) (except in the case of an IRA or a 5% owner, as defined in the Code)
the calendar year in which a participant retires from service with the
employer sponsoring a Qualified Plan that allows such a later Required
Beginning Date.
A special rule applies to individuals who attained age 70 1/2 in 2009. Such
individuals should consult with a qualified tax adviser before taking RMDs in
2010.
The entire interest of the individual must be distributed beginning no later
than the Required Beginning Date over --
(a) the life of the individual or the lives of the individual and a
designated beneficiary (as specified in the Code), or
(b) over a period not extending beyond the life expectancy of the individual
or the joint life expectancy of the individual and a designated
beneficiary.
If an individual dies before reaching the Required Beginning Date, the
individual's entire interest generally must be distributed within 5 years after
the individual's death. However, this RMD rule will be deemed satisfied if
distributions begin before the close of the calendar year following the
individual's death to a designated beneficiary and distribution is over the life
of such designated beneficiary (or over a period not extending beyond the life
expectancy of such beneficiary). If such beneficiary is the individual's
surviving spouse, distributions may be delayed until the deceased individual
would have attained age 70 1/2.
If an individual dies after RMDs have begun for such individual, any remainder
of the individual's interest generally must be distributed at least as rapidly
as under the method of distribution in effect at the time of the individual's
death.
The RMD rules that apply while the Contract Owner is alive do not apply with
respect to Roth IRAs. The RMD rules applicable after the death of the Owner
apply to all Qualified Plans, including Roth IRAs. In addition, if the Owner of
a Traditional or Roth IRA dies and the Owner's surviving spouse is the sole
designated beneficiary, this surviving spouse may elect to treat the Traditional
or Roth IRA as his or her own.
The RMD amount for each year is determined generally by dividing the account
balance by the applicable life expectancy. This account balance is generally
based upon the account value as of the close of business on the last day of the
previous calendar year. RMD incidental benefit rules also may require a larger
annual RMD amount, particularly when distributions are made over the joint lives
of the Owner and an individual other than his or her spouse. RMDs also can be
made in the form of annuity payments that satisfy the rules set forth in
Regulations under the Code relating to RMDs.
In addition, in computing any RMD amount based on a contract's account value,
such account value must include the actuarial value of certain additional
benefits provided by the contract. As a result, electing an optional benefit
under a Qualified Contract may require the RMD amount for such Qualified
Contract to be increased each year, and expose such additional RMD amount to the
50% penalty tax for RMDs if such additional RMD amount is not timely
distributed.
7. TAX WITHHOLDING FOR QUALIFIED PLANS
Distributions from a Qualified Contract or Qualified Plan generally are subject
to federal income tax withholding requirements. These federal income tax
withholding requirements, including any "elections out" and the rate at which
withholding applies, generally are the same as for periodic and non-periodic
distributions from a Non-Qualified Contract, as described above, except where
the distribution is an "eligible rollover distribution" from a Qualified Plan
(described below in "ROLLOVER DISTRIBUTIONS"). In the latter case, tax
withholding is mandatory at a rate of 20% of the taxable portion of the
"eligible rollover distribution," to the extent it is not directly rolled
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over to an IRA or other Eligible Retirement Plan (described below in "ROLLOVER
DISTRIBUTIONS"). Payees cannot elect out of this mandatory 20% withholding in
the case of such an "eligible rollover distribution."
Also, special withholding rules apply with respect to distributions from
non-governmental Section 457(b) Plans, and to distributions made to individuals
who are neither citizens nor resident aliens of the United States.
Regardless of any "election out" (or any actual amount of tax actually withheld)
on an amount received from a Qualified Contract or Plan, the payee is generally
liable for any failure to pay the full amount of tax due on the includable
portion of such amount received. A payee also may be required to pay penalties
under estimated income tax rules, if the withholding and estimated tax payments
are insufficient to satisfy the payee's total tax liability.
8. ROLLOVER DISTRIBUTIONS
The current tax rules and limits for tax-free rollovers and transfers between
Qualified Plans vary according to (1) the type of transferor Plan and transferee
Plan, (2) whether the amount involved is transferred directly between Plan (a
"direct transfer" or a "direct rollover") or is distributed first to a
participant or beneficiary who then transfers that amount back into another
eligible Plan within 60 days (a "60-day rollover"), and (3) whether the
distribution is made to a participant, spouse or other beneficiary. Accordingly,
we advise you to consult with a qualified tax adviser before receiving any
amount from a Qualified Contract or Plan or attempting some form of rollover or
transfer with a Qualified Contract or Plan.
For instance, generally any amount can be transferred directly from one type of
Qualified Plan to the same type of Plan for the benefit of the same individual,
without limit (or federal income tax), if the transferee Plan is subject to the
same kinds of restrictions as the transferor Plan and certain other conditions
to maintain the applicable tax qualification are satisfied. Such a "direct
transfer" between the same kinds of Plan is generally not treated as any form of
"distribution" out of such a Plan for federal income tax purposes.
By contrast, an amount distributed from one type of Plan into a different type
of Plan generally is treated as a "distribution" out of the first Plan for
federal income tax purposes, and therefore to avoid being subject to such tax,
such a distribution must qualify either as a "direct rollover" (made directly to
another Plan) or as a "60-day rollover." The tax restrictions and other rules
for a "direct rollover" and a "60-day rollover" are similar in many ways, but if
any "eligible rollover distribution" made from certain types of Qualified Plan
is not transferred directly to another Plan by a "direct rollover," then it is
subject to mandatory 20% withholding, even if it is later contributed to that
same Plan in a "60-day rollover" by the recipient. If any amount less than 100%
of such a distribution (e.g., the net amount after the 20% withholding) is
transferred to another Plan in a "60-day rollover", the missing amount that is
not rolled over remains subject to normal income tax plus any applicable penalty
tax.
Under Code Sections 402(f)(2)(A) and 3405(c)(3) an "eligible rollover
distribution" (which is both eligible for rollover treatment and subject to 20%
mandatory withholding absent a "direct rollover") is generally any distribution
to an employee of any portion (or all) of the balance to the employee's credit
in any of the following types of "Eligible Retirement Plan": (1) a Qualified
Plan under Code Section 401(a) ("Qualified 401(a) Plan"), (2) a qualified
annuity plan under Code Section 403(a) ("Qualified Annuity Plan"), (3) a TSA
under Code Section 403(b), or (4) a governmental Section 457(b) Plan. However,
an "eligible rollover distribution" does not include any distribution that is
either --
a. an RMD amount;
b. one of a series of substantially equal periodic payments (not less
frequently than annually) made either (i) for the life (or life
expectancy) of the employee or the joint lives (or joint life
expectancies) of the employee and a designated beneficiary, or (ii) for
a specified period of 10 years or more; or
c. any distribution made upon hardship of the employee.
Before making an "eligible rollover distribution," a Plan administrator
generally is required under Code Section 402(f) to provide the recipient with
advance written notice of the "direct rollover" and "60-day rollover" rules and
the distribution's exposure to the 20% mandatory withholding if it is not made
by "direct rollover." Generally, under Code Sections 402(c), 403(b)(8) and 457
(e)(16), a "direct rollover" or a "60-day rollover" of an "eligible rollover
distribution" can be made to a Traditional IRA or to another Eligible Retirement
Plan that agrees to accept such a rollover. However, the maximum amount of an
"eligible rollover distribution" that can qualify for a tax-free "60-day
rollover" is limited to the amount that otherwise would be includable in gross
income. By contrast, a "direct rollover" of an "eligible rollover distribution"
can include after-tax contributions as well, if the direct rollover is made
either to a Traditional IRA or to another form of Eligible Retirement Plan that
agrees to account separately for such a rollover, including accounting for such
after-tax amounts separately from the otherwise taxable portion of this
rollover. Separate accounting also is required for all amounts (taxable or not)
that are rolled into a governmental Section 457(b) Plan from either a Qualified
Section 401(a) Plan, Qualified Annuity Plan, TSA or IRA. These amounts, when
later distributed from the governmental Section 457(b) Plan, are subject to any
premature distribution penalty tax applicable to distributions from such a
"predecessor" Qualified Plan.
Rollover rules for distributions from IRAs under Code Sections 408(d)(3) and
408A(d)(3) also vary according to the type of transferor IRA and type of
transferee IRA or other Plan. For instance, generally no tax-free "direct
rollover" or "60-day rollover" can be made between a "NonRoth IRA" (Traditional,
SEP or SIMPLE IRA) and a Roth IRA, and a transfer from NonRoth
<Page>
UNION SECURITY INSURANCE COMPANY 39
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IRA to a Roth IRA, or a "conversion" of a NonRoth IRA to a Roth IRA, is subject
to special rules. In addition, generally no tax-free "direct rollover" or
"60-day rollover" can be made between an "inherited IRA" (NonRoth or Roth) for a
beneficiary and an IRA set up by that same individual as the original owner.
Generally, any amount other than an RMD distributed from a Traditional or SEP
IRA is eligible for a "direct rollover" or a "60-day rollover" to another
Traditional IRA for the same individual. Similarly, any amount other than an RMD
distributed from a Roth IRA is generally eligible for a "direct rollover" or a
"60-day rollover" to another Roth IRA for the same individual. However, in
either case such a tax-free 60-day rollover is limited to 1 per year (365-day
period); whereas no 1-year limit applies to any such "direct rollover." Similar
rules apply to a "direct rollover" or a "60-day rollover" of a distribution from
a SIMPLE IRA to another SIMPLE IRA or a Traditional IRA, except that any
distribution of employer contributions from a SIMPLE IRA during the initial
2-year period in which the individual participates in the employer's SIMPLE Plan
is generally disqualified (and subject to the 25% penalty tax on premature
distributions) if it is not rolled into another SIMPLE IRA for that individual.
Amounts other than RMDs distributed from a Traditional or SEP IRA (or SIMPLE IRA
after the initial 2-year period) also are eligible for a "direct rollover" or a
"60-day rollover" to an Eligible Retirement Plan (e.g., a TSA) that accepts such
a rollover, but any such rollover is limited to the amount of the distribution
that otherwise would be includable in gross income (i.e., after-tax
contributions are not eligible).
Special rules also apply to transfers or rollovers for the benefit of a spouse
(or ex-spouse) or a nonspouse designated beneficiary, Plan distributions of
property, and obtaining a waiver of the 60-day limit for a tax-free rollover
from the IRS. The Katrina Emergency Tax Relief Act of 2005 (KETRA) allows
certain amounts to be recontributed within three years as a rollover
contribution to a plan from which a KETRA distribution was taken.
<Page>
40 UNION SECURITY INSURANCE COMPANY
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ACCUMULATION UNIT VALUES
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD)
The following information should be read in conjunction with the financial
statements for the Separate Account included in the Statement of Additional
Information, which is incorporated by reference in this prospectus.
<Table>
<Caption>
AS OF DECEMBER 31,
SUB-ACCOUNT 2009 2008 2007 2006 2005
-----------------------------------------------------------------------------------------------------------------
FEDERATED CAPITAL APPRECIATION FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $4.891 $7.009 $6.456 $5.622 $5.583
Accumulation Unit Value at end of
period $5.485 $4.891 $7.009 $6.456 $5.622
Number of Accumulation Units
outstanding at end of period (in
thousands) 308 336 527 764 997
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $4.809 $6.904 $6.372 $5.560 $5.532
Accumulation Unit Value at end of
period $5.381 $4.809 $6.904 $6.372 $5.560
Number of Accumulation Units
outstanding at end of period (in
thousands) 242 300 453 669 884
FEDERATED CAPITAL INCOME FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $7.300 $9.280 $9.027 $7.901 $7.523
Accumulation Unit Value at end of
period $9.253 $7.300 $9.280 $9.027 $7.901
Number of Accumulation Units
outstanding at end of period (in
thousands) 86 105 126 183 232
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $7.156 $9.114 $8.884 $7.791 $7.433
Accumulation Unit Value at end of
period $9.052 $7.156 $9.114 $8.884 $7.791
Number of Accumulation Units
outstanding at end of period (in
thousands) 133 152 216 303 413
FEDERATED CLOVER VALUE FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $7.612 $11.638 $13.039 $11.297 $10.887
Accumulation Unit Value at end of
period $8.628 $7.612 $11.638 $13.039 $11.297
Number of Accumulation Units
outstanding at end of period (in
thousands) 633 780 1,126 1,737 2,480
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $7.461 $11.430 $12.832 $11.140 $10.757
Accumulation Unit Value at end of
period $8.440 $7.461 $11.430 $12.832 $11.140
Number of Accumulation Units
outstanding at end of period (in
thousands) 888 1,081 1,535 2,385 3,387
FEDERATED EQUITY INCOME FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $8.552 $12.444 $12.341 $10.143 $9.935
Accumulation Unit Value at end of
period $9.739 $8.552 $12.444 $12.341 $10.143
Number of Accumulation Units
outstanding at end of period (in
thousands) 452 571 836 1,195 1,554
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $8.382 $12.222 $12.145 $10.002 $9.816
Accumulation Unit Value at end of
period $9.527 $8.382 $12.222 $12.145 $10.002
Number of Accumulation Units
outstanding at end of period (in
thousands) 630 743 1,086 1,625 2,238
<Caption>
AS OF DECEMBER 31,
SUB-ACCOUNT 2004 2003 2002 2001 2000
-------------------------------------- --------------------------------------------------------------------
FEDERATED CAPITAL APPRECIATION FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $5.261 $4.297 $5.645 $7.622 $10.000
Accumulation Unit Value at end of
period $5.583 $5.261 $4.297 $5.645 $7.622
Number of Accumulation Units
outstanding at end of period (in
thousands) 1,105 1,057 994 630 291
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $5.224 $4.275 $5.628 $7.613 $10.000
Accumulation Unit Value at end of
period $5.532 $5.224 $4.275 $5.628 $7.613
Number of Accumulation Units
outstanding at end of period (in
thousands) 1,058 1,084 1,045 620 253
FEDERATED CAPITAL INCOME FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $6.922 $5.805 $7.721 $9.063 $10.067
Accumulation Unit Value at end of
period $7.523 $6.922 $5.805 $7.721 $9.063
Number of Accumulation Units
outstanding at end of period (in
thousands) 233 232 247 308 286
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $6.853 $5.759 $7.675 $9.027 $10.047
Accumulation Unit Value at end of
period $7.433 $6.853 $5.759 $7.675 $9.027
Number of Accumulation Units
outstanding at end of period (in
thousands) 479 489 545 653 817
FEDERATED CLOVER VALUE FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $10.037 $7.955 $10.091 $10.666 $10.535
Accumulation Unit Value at end of
period $10.887 $10.037 $7.955 $10.091 $10.666
Number of Accumulation Units
outstanding at end of period (in
thousands) 2,749 2,988 3,094 3,103 2,672
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $9.937 $7.891 $10.031 $10.624 $10.514
Accumulation Unit Value at end of
period $10.757 $9.937 $7.891 $10.031 $10.624
Number of Accumulation Units
outstanding at end of period (in
thousands) 3,943 4,309 4,545 4,717 4,426
FEDERATED EQUITY INCOME FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $8.910 $7.086 $9.048 $10.291 $11.723
Accumulation Unit Value at end of
period $9.935 $8.910 $7.086 $9.048 $10.291
Number of Accumulation Units
outstanding at end of period (in
thousands) 1,730 1,863 1,961 2,167 1,822
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $8.822 $7.029 $8.994 $10.250 $11.700
Accumulation Unit Value at end of
period $9.816 $8.822 $7.029 $8.994 $10.250
Number of Accumulation Units
outstanding at end of period (in
thousands) 2,539 2,733 2,931 3,390 3,152
</Table>
<Page>
UNION SECURITY INSURANCE COMPANY 41
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<Table>
<Caption>
AS OF DECEMBER 31,
SUB-ACCOUNT 2009 2008 2007 2006 2005
-----------------------------------------------------------------------------------------------------------------
FEDERATED FUND FOR U.S. GOVERNMENT
SECURITIES II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $14.278 $13.857 $13.195 $12.824 $12.720
Accumulation Unit Value at end of
period $14.842 $14.278 $13.857 $13.195 $12.824
Number of Accumulation Units
outstanding at end of period (in
thousands) 37 35 37 54 72
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $13.995 $13.610 $12.985 $12.645 $12.569
Accumulation Unit Value at end of
period $14.519 $13.995 $13.610 $12.985 $12.645
Number of Accumulation Units
outstanding at end of period (in
thousands) 79 92 110 125 182
FEDERATED HIGH INCOME BOND FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $9.951 $13.609 $13.317 $12.163 $11.991
Accumulation Unit Value at end of
period $15.029 $9.951 $13.609 $13.317 $12.163
Number of Accumulation Units
outstanding at end of period (in
thousands) 80 98 144 217 291
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $9.754 $13.366 $13.105 $11.994 $11.848
Accumulation Unit Value at end of
period $14.702 $9.754 $13.366 $13.105 $11.994
Number of Accumulation Units
outstanding at end of period (in
thousands) 166 185 255 343 482
FEDERATED INTERNATIONAL EQUITY FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $7.686 $14.332 $13.241 $11.272 $10.458
Accumulation Unit Value at end of
period $10.728 $7.686 $14.332 $13.241 $11.272
Number of Accumulation Units
outstanding at end of period (in
thousands) 159 202 275 397 492
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $7.534 $14.077 $13.031 $11.115 $10.334
Accumulation Unit Value at end of
period $10.494 $7.534 $14.077 $13.031 $11.115
Number of Accumulation Units
outstanding at end of period (in
thousands) 156 191 269 398 483
FEDERATED MID CAP GROWTH STRATEGIES
FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $9.277 $16.616 $14.249 $13.324 $11.965
Accumulation Unit Value at end of
period $11.972 $9.277 $16.616 $14.249 $13.324
Number of Accumulation Units
outstanding at end of period (in
thousands) 318 403 565 816 1,100
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $9.093 $16.319 $14.023 $13.139 $11.822
Accumulation Unit Value at end of
period $11.711 $9.093 $16.319 $14.023 $13.139
Number of Accumulation Units
outstanding at end of period (in
thousands) 327 400 571 871 1,166
FEDERATED PRIME MONEY FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $12.110 $11.953 $11.542 $11.176 $11.013
Accumulation Unit Value at end of
period $12.020 $12.110 $11.953 $11.542 $11.176
Number of Accumulation Units
outstanding at end of period (in
thousands) 67 112 115 145 152
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $11.871 $11.739 $11.359 $11.020 $10.882
Accumulation Unit Value at end of
period $11.758 $11.871 $11.739 $11.359 $11.020
Number of Accumulation Units
outstanding at end of period (in
thousands) 57 66 84 128 178
<Caption>
AS OF DECEMBER 31,
SUB-ACCOUNT 2004 2003 2002 2001 2000
-------------------------------------- --------------------------------------------------------------------
FEDERATED FUND FOR U.S. GOVERNMENT
SECURITIES II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $12.425 $12.285 $11.401 $10.781 $9.831
Accumulation Unit Value at end of
period $12.720 $12.425 $12.285 $11.401 $10.781
Number of Accumulation Units
outstanding at end of period (in
thousands) 84 113 244 129 89
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $12.302 $12.187 $11.333 $10.738 $9.811
Accumulation Unit Value at end of
period $12.569 $12.302 $12.187 $11.333 $10.738
Number of Accumulation Units
outstanding at end of period (in
thousands) 229 289 402 328 521
FEDERATED HIGH INCOME BOND FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $10.987 $7.579 $9.081 $9.071 $10.092
Accumulation Unit Value at end of
period $11.991 $10.987 $7.579 $9.081 $9.071
Number of Accumulation Units
outstanding at end of period (in
thousands) 319 349 1,496 336 275
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $10.877 $7.579 $9.026 $9.035 $10.072
Accumulation Unit Value at end of
period $11.848 $10.877 $7.579 $9.026 $9.035
Number of Accumulation Units
outstanding at end of period (in
thousands) 567 637 1,690 720 690
FEDERATED INTERNATIONAL EQUITY FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $9.280 $7.123 $9.333 $13.413 $17.590
Accumulation Unit Value at end of
period $10.458 $9.280 $7.123 $9.333 $13.413
Number of Accumulation Units
outstanding at end of period (in
thousands) 517 547 603 768 725
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $9.187 $7.066 $9.277 $13.359 $17.556
Accumulation Unit Value at end of
period $10.334 $9.187 $7.066 $9.277 $13.359
Number of Accumulation Units
outstanding at end of period (in
thousands) 533 586 684 879 924
FEDERATED MID CAP GROWTH STRATEGIES
FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $10.491 $7.579 $10.415 $13.585 $17.144
Accumulation Unit Value at end of
period $11.965 $10.491 $7.579 $10.415 $13.585
Number of Accumulation Units
outstanding at end of period (in
thousands) 1,237 1,355 1,496 1,834 1,607
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $10.386 $7.519 $10.353 $13.531 $17.110
Accumulation Unit Value at end of
period $11.822 $10.386 $7.519 $10.353 $13.531
Number of Accumulation Units
outstanding at end of period (in
thousands) 1,370 1,506 1,690 2,135 1,967
FEDERATED PRIME MONEY FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $11.056 $11.113 $11.088 $10.818 $10.332
Accumulation Unit Value at end of
period $11.013 $11.056 $11.113 $11.088 $10.818
Number of Accumulation Units
outstanding at end of period (in
thousands) 227 210 252 162 53
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $10.946 $11.025 $11.022 $10.775 $10.312
Accumulation Unit Value at end of
period $10.882 $10.946 $11.025 $11.022 $10.775
Number of Accumulation Units
outstanding at end of period (in
thousands) 237 192 222 231 124
</Table>
<Page>
42 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
<Table>
<Caption>
AS OF DECEMBER 31,
SUB-ACCOUNT 2009 2008 2007 2006 2005
-----------------------------------------------------------------------------------------------------------------
FEDERATED QUALITY BOND FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $12.774 $13.945 $13.392 $13.013 $12.998
Accumulation Unit Value at end of
period $15.201 $12.774 $13.945 $13.392 $13.013
Number of Accumulation Units
outstanding at end of period (in
thousands) 41 39 59 79 91
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $12.558 $13.736 $13.218 $12.870 $12.881
Accumulation Unit Value at end of
period $14.914 $12.558 $13.736 $13.218 $12.870
Number of Accumulation Units
outstanding at end of period (in
thousands) 87 93 117 114 123
<Caption>
AS OF DECEMBER 31,
SUB-ACCOUNT 2004 2003 2002 2001 2000
-------------------------------------- --------------------------------------------------------------------
FEDERATED QUALITY BOND FUND II
ALL CONTRACT OWNERS UNDER 61
Accumulation Unit Value at beginning
of period $12.696 $12.278 $11.368 $10.652 $10.000
Accumulation Unit Value at end of
period $12.998 $12.696 $12.278 $11.368 $10.652
Number of Accumulation Units
outstanding at end of period (in
thousands) 89 93 110 73 6
ONE OR MORE CONTRACT OWNERS 61 OR
OLDER
Accumulation Unit Value at beginning
of period $12.606 $12.216 $11.333 $10.641 $10.000
Accumulation Unit Value at end of
period $12.881 $12.606 $12.216 $11.333 $10.641
Number of Accumulation Units
outstanding at end of period (in
thousands) 132 135 150 89 26
</Table>
<Page>
UNION SECURITY INSURANCE COMPANY 43
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FURTHER INFORMATION ABOUT UNION SECURITY INSURANCE COMPANY
ITEM 3. RISK FACTORS
Certain factors may have a material adverse effect on our business, financial
condition and results of operations and you should carefully consider them. It
is not possible to predict or identify all such factors.
Amounts in this section are presented in U.S. dollars and in thousands, except
for number of shares.
GENERAL ECONOMIC, FINANCIAL MARKET AND POLITICAL CONDITIONS MAY ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS.
General economic, financial market and political conditions may have a material
adverse effect on our results of operations and financial condition. These may
include, among others, insurance industry cycles, fluctuations in industry
rates, monetary policy, demographics, and legislative and competitive factors.
Recently, concerns over inflation, energy costs, geopolitical issues, the
availability and cost of credit, the declining global mortgage and real estate
markets, the loss of consumer confidence and a reduction in consumer spending
have contributed to increased volatility and diminished expectations for the
economy and the markets going forward. These factors, combined with increased
unemployment, have precipitated an economic slowdown and fears of a global
recession. This may affect our operational results in various ways, including
but not limited to the following:
- individuals and businesses (i) may choose not to purchase our insurance
products and other related products and services, (ii) may terminate
existing policies or contracts or permit them to lapse, (iii) may choose to
reduce the amount of coverage purchased, or (iv) in the case of business
customers of Assurant Employee Benefits, may have fewer employees requiring
insurance coverage due to reductions in their staffing levels;
- disability insurance claims and claims on other specialized insurance
products tend to rise; or
- clients are more likely to experience financial distress or to declare
bankruptcy or liquidation, which could have a material and adverse impact on
the remittance of premiums and the collection of receivables such as
unearned premiums.
For the fiscal year ended on December 31, 2009, the Company recognized net
realized losses on fixed maturity and equity securities totaling $13,931 after
tax and reported gross unrealized losses on fixed maturity and equity securities
of $66,061. If the recent economic downturn continues to negatively affect
companies, industry sectors or countries, the Company may have additional
investment losses and further increases in other-than-temporary impairments. As
part of the Parent's process, our investment portfolio is regularly monitored to
ensure investments that may be other-than-temporarily impaired are identified in
a timely fashion, properly valued, and any impairments are charged against
earnings in the proper period. Assessment factors include, but are not limited
to, the length of time and the extent to which the market value has been less
than cost, the financial condition and rating of the issuer, whether any
collateral is held, and the intent and ability of the Company to retain the
investment for a period of time sufficient to allow for recovery. However, the
determination that a security has incurred an other-than-temporary decline in
value requires the judgment of management. Inherently, there are risks and
uncertainties involved in making these judgments. Therefore, changes in facts
and circumstances and critical assumptions could also result in management's
decision that further impairments have occurred.
A.M. BEST, MOODY'S, AND S&P RATE THE FINANCIAL STRENGTH OF THE COMPANY, AND A
DECLINE IN THESE RATINGS COULD AFFECT OUR STANDING IN THE INSURANCE INDUSTRY AND
CAUSE OUR SALES AND EARNINGS TO DECREASE.
Ratings are an increasingly important factor in establishing the competitive
position of insurance companies. A.M. Best, Moody's and S&P ratings reflect
their opinions of our financial strength, operating performance, strategic
position and ability to meet our obligations to policyholders. These ratings are
subject to periodic review by A.M. Best, Moody's, and S&P, and we cannot assure
you that we will be able to retain these ratings. In 2008, A.M. Best downgraded
our financial strength ratings and issuer credit ratings from "A" to "A-" and
from "a" to "a-", respectively. Additionally, S&P lowered our counterparty
credit and financial strength ratings from "A" to "A-". Given recent economic
developments that have negatively affected the entire insurance industry, we
believe that we could be more susceptible to ratings downgrades.
If our ratings are lowered from their current levels by A.M. Best, Moody's, or
S&P, our competitive position in the respective insurance industry segments
could be negatively impacted and it could be more difficult for us to market our
products. Rating agencies may take action to lower our ratings in the future due
to, among other things, perceived concerns about our liquidity or solvency, the
competitive environment in the insurance industry, which may adversely affect
our revenues, the inherent uncertainty in determining reserves for future
claims, which may cause us to increase our reserves for claims, the outcome of
pending litigation and regulatory investigations, which may adversely affect our
financial position and reputation and possible changes in the methodology or
criteria applied by the rating agencies. In addition, rating agencies have come
under recent scrutiny over their ratings on various mortgage-backed products. As
a result, they may have become more conservative in their methodology and
criteria, which could adversely affect our ratings. Finally, rating agencies or
regulators could increase capital requirements for the Company or its
subsidiaries, which in turn could negatively affect our financial position as
well.
<Page>
44 UNION SECURITY INSURANCE COMPANY
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As customers and their advisors place importance on our financial strength
ratings, we may lose customers and compete less successfully if we are
downgraded. In addition, ratings impact our ability to attract investment
capital on favorable terms. If our financial strength ratings are reduced from
their current levels by A.M. Best, Moody's, or S&P, our cost of borrowing would
likely increase, our sales and earnings could decrease and our results of
operations and financial condition could be materially adversely affected.
As of December 31, 2009, contracts representing approximately 4% of the
Company's net earned premiums contain provisions requiring the Company to
maintain minimum A.M. Best financial strength ratings of "A-" or better. The
Company's clients may terminate the agreements and in some instances recapture
in force business if the Company's ratings fall below "A-".
OUR EARNINGS COULD BE MATERIALLY AFFECTED BY AN IMPAIRMENT OF GOODWILL.
If we experience a decline in our results of operations and cash flows, or other
indicators of impairment exist, we may incur a material non-cash charge to
earnings relating to impairment of our goodwill, which could have a material
adverse effect on our results.
In the fourth quarter of 2009, we conducted our annual assessment of goodwill
using the methodologies discussed above. After completing the Step 1 analysis,
we determined that the Company had an estimated fair value less than its net
book value. Accordingly, Management performed a Step 2 test for the Company.
Step 2 utilizes acquisition accounting guidance and requires the fair value
calculation of all individual assets and liabilities of the Company (excluding
goodwill, but including any unrecognized intangible assets). The net fair value
of assets less liabilities was then compared to the Company's total estimated
fair value as calculated in Step 1. The excess of fair value over the net asset
value equals the implied fair value of goodwill. The implied fair value of
goodwill was then compared to the carrying value of goodwill to determine the
Company's impairment. Based on our Step 2 test it was determined that $75,244 of
goodwill of the Company was impaired, resulting in a non-cash charge. This
impairment reflects the challenging near term growth environment for the Company
and an increased net book value, primarily related to its investment portfolio.
Please see the section entitled "Management's Discussion & Analysis -- Valuation
and Recoverability of Goodwill" for more information.
Union Security is also subject to additional risks associated with its business.
These risks include, among others:
- RELIANCE ON RELATIONSHIPS WITH SIGNIFICANT CLIENTS, DISTRIBUTORS AND OTHER
PARTIES. If our significant clients, distributors and other parties with
which we do business decline to renew or seek to terminate our relationships
or contractual arrangements, our results of operations and financial
condition could be materially adversely affected. We are also subject to the
risk that these parties may face financial difficulties, reputational issues
or problems with respect to their own products and services, which may lead
to decreased sales of products and services.
- FAILURE TO ATTRACT AND RETAIN SALES REPRESENTATIVES OR DEVELOP AND MAINTAIN
DISTRIBUTION SOURCES. Our sales representatives interface with clients and
third party distributors. Our inability to attract and retain our sales
representatives or an interruption in, or changes to, our relationships with
various third-party distributors could impair our ability to compete and
market our insurance products and services and materially adversely affect
our results of operations and financial condition. In addition, our ability
to market our products and services depends on our ability to tailor our
channels of distribution to comply with changes in the regulatory
environment.
- FAILURE TO ACCURATELY PREDICT BENEFITS AND OTHER COSTS AND CLAIMS. We may
be unable to accurately predict benefits, claims and other costs or to
manage such costs through our loss limitation methods, which could have a
material adverse effect on our results of operations and financial condition
if claims substantially exceed our expectations.
- CHANGES IN REGULATION. Legislation or other regulatory reform that
increases the regulatory requirements imposed on us or that changes the way
we are able to do business may significantly harm our business or results of
operations in the future.
During 2009 and early 2010, health care reform was a major initiative of
President Obama and the U.S. Congress. Certain health reform legislation that
would address the affordability and availability of health insurance and reduce
the number of uninsureds was passed by the Senate in 2009 and by the House of
Representatives on March 21, 2010. President Obama subsequently signed the
"Patient Protection and Affordable Care Act" on March 23, 2010. While Assurant
is still assessing the exact impact of this reform, we believe it could
materially affect Assurant's business, particularly the health and employee
benefits businesses, by, among other things, increasing costs, affecting our
distribution, exposing us to expanded liability, requiring us to modify the way
in which we conduct business or putting us at risk for loss of business.
Additionally, our operating results and financial condition could be materially
and adversely affected by this reform.
- REINSURERS' FAILURE TO FULFILL OBLIGATIONS. In the past, the Parent has
sold, and in the future the Parent may sell, businesses through reinsurance
ceded to third parties. For example, in 2001 the Parent sold the insurance
operations of its FFG division to The Hartford and in 2000 we sold our LTC
division to John Hancock, now a subsidiary of Manulife Financial
Corporation. Most of the assets backing reserves coinsured under these sales
are held in trusts or separate accounts. However, if the reinsurers become
insolvent, we would be exposed to the risk that the assets in the trust
and/or the separate accounts would be insufficient to support the
liabilities that would revert to us.
<Page>
UNION SECURITY INSURANCE COMPANY 45
-------------------------------------------------------------------------------
The A.M. Best ratings of The Hartford and John Hancock are currently A and A+,
respectively. A.M. Best maintains a negative outlook on the issuer credit and
financial strength ratings of The Hartford. The A.M. Best ratings of John
Hancock are stable.
We also have the risk of becoming responsible for administering these businesses
in the event of reinsurer insolvency. We do not currently have the
administrative systems and capabilities to process this business. Accordingly,
we would need to obtain those capabilities in the event of an insolvency of one
or more of the reinsurers of these businesses. We might be forced to obtain such
capabilities on unfavorable terms with a resulting material adverse effect on
our results of operations and financial condition.
- CREDIT RISK OF SOME OF OUR AGENTS. We advance agents' commissions as part
of our preneed insurance product offerings. These advances are a percentage
of the total face amount of coverage as opposed to a percentage of the
first-year premium paid, the formula that is more common in other life
insurance markets. There is a one-year payback provision against the agency
if death or lapse occurs within the first policy year.
- RISKS RELATED TO LITIGATION AND REGULATORY ACTIONS. From time to time we
may be involved in various regulatory investigations and examinations
relating to our insurance and other related business operations. We are
subject to comprehensive regulation and oversight by insurance departments
in jurisdictions in which we do business. These insurance departments have
broad administrative powers with respect to all aspects of the insurance
business and, in particular, monitor the manner in which an insurance
company offers, sells and administers its products. Therefore, we may from
time to time be subject to a variety of legal and regulatory actions
relating to our current and past business operations and practices.
The prevalence and outcomes of any such actions cannot be predicted, and no
assurances can be given that such actions or any litigation would not materially
adversely affect our results of operations and financial condition. In addition,
if we were to experience difficulties with our relationship with a regulatory
body in a given jurisdiction, it could have a material adverse effect on our
ability to do business in that jurisdiction.
One particular area of focus which has affected our parent, Assurant, Inc., has
been the accounting treatment for finite reinsurance or other non-traditional or
loss mitigation insurance products. On January 21, 2010, the SEC filed a civil
complaint in the United States District Court for the Southern District of New
York in connection with the previously disclosed SEC investigation into a finite
reinsurance arrangement entered into by the parent. In the complaint, the SEC
charged the Parent with violating Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of
the Securities Exchange Act of 1934, as amended, and Rules 12b-20, 13a-11 and
13a-13 thereunder. As previously disclosed by the Parent in a Current Report on
Form 8-K on January 21, 2010, the Parent entered into a settlement with the SEC
in which the Company consented, without admitting or denying the allegations in
the complaint, to the entry of a judgment requiring payment of a civil penalty
of $3,500 and enjoining the Parent from violating the aforementioned federal
securities laws. The court approved the settlement in a final judgment entered
on January 25, 2010 and the Parent has paid the penalty.
As part of the settlement, the SEC granted permanent relief to the Company,
exempting it from limitations on serving as depositor to investment companies
under Section 9(a) of the Investment Company Act of 1940. If the Company fails
to continue to meet the conditions in the application for permanent relief, then
the Company could lose its ability to act as depositor of the separate accounts
related to the FFG businesses sold to the Hartford in 2001. This could result in
significant costs to restructure the modified coinsurance structure currently in
place.
We depend on our parent, Assurant, for certain administrative, strategic and
operational support. We cannot predict at this time the effect that current
litigation, investigations and regulatory activity will have on Assurant or our
business, but any adverse outcome could have a material adverse affect on our
business, results of operations or financial condition.
For additional risks that relate to our business and additional detail on the
risks outlined above, please see the Risk Factors in Assurant's 2009 Annual
Report on Form 10-K filed with the SEC and available on Assurant's website at
www.assurant.com.
ITEM 10. INTERESTS OF NAMED EXPERTS AND COUNSEL.
Raj B. Dave, who has given a legal opinion as to the validity of the Contracts,
serves as Assistant Secretary of the Company.
ITEM 11. INFORMATION WITH RESPECT TO THE REGISTRANT
(A) DESCRIPTION OF THE BUSINESS
1. LEGAL ORGANIZATION
Union Security Insurance Company is a stock life insurance company formed in
1910 and organized under the laws of the State of Kansas. Since 1984, it has
been an indirect wholly owned subsidiary of Assurant, Inc. ("Assurant"), which
owns and operates companies that provide specialty insurance products and
related services in North America and selected other markets. Assurant is traded
on the New York Stock Exchange under the symbol AIZ.
<Page>
46 UNION SECURITY INSURANCE COMPANY
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In this report, references to "Union Security," the "Company" "we," "us" or
"our" refer to Union Security Insurance Company. References to the "Parent" or
"Assurant" refer to Assurant, Inc.
Amounts are presented in United States of America ("U.S.") dollars and all
amounts are in thousands, except number of shares and number of employees.
2. BUSINESS ORGANIZATION
The Company which is licensed to sell life, health and annuity insurance in the
District of Columbia and in all states except New York, writes insurance
products that are marketed by Assurant's business segments (see Assurant's
Annual Report on Form 10-K for the fiscal year ended December 31, 2009 for a
full description of each of these segments). We perform substantially all of the
operations of the Assurant Employee Benefits segment. We directly market, sell
and administer the group disability, group life and certain group dental
insurance products, and we manage other Assurant subsidiaries that provide
prepaid dental products. With respect to the Assurant Health segment, we issue
small group health insurance policies that are sold through an independent
agency. Finally, with respect to the Assurant Solutions segment, we issue
accidental death and dismemberment policies for which the segment performs the
selling, marketing, and administration functions.
As an indirect wholly owned subsidiary of Assurant, Union Security does not have
any publicly issued equity or debt securities. We are, however, subject to
certain filing requirements under the federal securities laws, because we have
issued certain variable and market value adjusted insurance contracts, which are
required to be registered under the Securities Act of 1933, as amended (the
"Securities Act"). Effective April 2001, Assurant and its subsidiaries exited
this line of business and sold the business segment, then referred to as Fortis
Financial Group ("FFG"), to The Hartford. This sale was accomplished by means of
reinsurance and modified coinsurance. As a result, The Hartford is contractually
responsible for servicing the insurance contracts, including the payment of
benefits, oversight of investment management, overall contract administration
and funding of reserves. If The Hartford fails to fulfill its obligations,
however, we will be obligated to perform the services and make the required
payments and funding for the remaining contract liabilities.
Union Security was redomesticated to Kansas from Iowa in 2009.
As of February 15, 2010, we had approximately 1,594 employees.
For additional information that relates to our business, we refer you to
Assurant's 2009 Annual Report on Form 10-K filed with the SEC and available on
the SEC website at www.sec.gov or through Assurant's website at
www.assurant.com.
(B) DESCRIPTION OF THE PROPERTY
Our principal office is in Kansas City, Missouri, where we lease office space in
a building owned by Assurant. We also lease office space in Atlanta, Georgia
which is used for our preneed and credit division. In addition, we have regional
claims and sales offices throughout the U.S. We believe that our leased
properties are adequate for our current business operations.
(C) LEGAL PROCEEDINGS
The Company is involved in litigation in the ordinary course of business, both
as a defendant and as a plaintiff. We may from time to time be subject to a
variety of legal and regulatory actions relating to our current and past
business operations. While the Company cannot predict the outcome of any pending
or future litigation, examination or investigation and although no assurances
can be given, the Company does not believe that any pending matter will have a
material adverse effect on our financial condition or results of operations.
On January 21, 2010, the SEC filed a civil complaint in the United States
District Court for the Southern District of New York in connection with the
previously disclosed SEC investigation into a finite reinsurance arrangement
entered into by the Parent. In the complaint, the SEC charged the Parent with
violating Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange
Act of 1934, as amended, and Rules 12b-20, 13a-11 and 13a-13 thereunder. As
previously disclosed by the Parent in a Current Report on Form 8-K on January
21, 2010, the Parent entered into a settlement with the SEC in which the Parent
consented, without admitting or denying the allegations in the complaint, to the
entry of a judgment requiring payment of a civil penalty of $3.5 million and
enjoining the Parent from violating the aforementioned federal securities laws.
The court approved the settlement in a final judgment entered on January 25,
2010 and the Parent has paid the penalty.
As part of the settlement, the SEC granted permanent relief to the Company,
exempting it from limitations on serving as depositor to investment companies
under Section 9(a) of the Investment Company Act of 1940.
(D) NOT APPLICABLE.
(E) FINANCIAL STATEMENTS
<Page>
UNION SECURITY INSURANCE COMPANY 47
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Union Security Insurance Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholder's equity and cash
flows present fairly, in all material respects, the financial position of Union
Security Insurance Company and its subsidiaries (the "Company"), an indirect
wholly-owned subsidiary of Assurant, Inc. at December 31, 2009 and 2008, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the accompanying financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These consolidated financial
statements and financial statement schedules are the responsibility of the
Company's management; our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits. We conducted our audits of these statements in accordance with standards
of the Public Company Accounting Oversight Board (United States), which require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the Company
changed the manner in which it accounts for other-than-temporary impairment of
debt securities on April 1, 2009.
PricewaterhouseCoopers LLP
April 23, 2010
New York, New York
<Page>
48 UNION SECURITY INSURANCE COMPANY
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UNION SECURITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2009 AND 2008
<Table>
<Caption>
DECEMBER 31, DECEMBER 31,
2009 2008
(IN THOUSANDS EXCEPT PER
SHARE AND SHARE AMOUNTS)
------------------------------------------------------------------------------------------
ASSETS
Investments:
Fixed maturity securities available for
sale, at fair value (amortized
cost -- $2,493,265 in 2009 and
$2,399,676 in 2008) $2,555,863 $2,199,547
Equity securities available for sale,
at fair value
(cost -- $160,510 in 2009 and $189,973
in 2008) 157,993 144,770
Commercial mortgage loans on real
estate, at amortized cost 772,912 838,254
Policy loans 13,981 14,422
Short-term investments 70,367 159,847
Collateral held under securities
lending 106,896 113,191
Other investments 88,736 82,628
---------- ----------
TOTAL INVESTMENTS 3,766,748 3,552,659
---------- ----------
Cash and cash equivalents 43,819 17,171
Premiums and accounts receivable, net 79,516 71,850
Reinsurance recoverables 1,434,405 1,359,251
Accrued investment income 41,476 40,610
Deferred acquisition costs 37,908 43,020
Deferred income taxes, net 56,569 179,413
Goodwill 81,573 156,817
Value of business acquired 18,783 21,461
Other assets 39,732 32,893
Assets held in separate accounts 1,740,344 1,557,313
---------- ----------
TOTAL ASSETS $7,340,873 $7,032,458
---------- ----------
LIABILITIES
Future policy benefits and expenses $2,675,069 $2,687,488
Unearned premiums 37,692 35,962
Claims and benefits payable 1,751,501 1,778,563
Commissions payable 13,242 14,998
Deferred gain on disposal of businesses 97,021 113,927
Obligations under securities lending 108,186 124,063
Accounts payable and other liabilities 188,958 188,053
Taxes payable 10,523 2,331
Liabilities related to separate
accounts 1,740,344 1,557,313
---------- ----------
TOTAL LIABILITIES 6,622,536 6,502,698
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 16)
STOCKHOLDER'S EQUITY
Common stock, par value $5 per share,
1,000,000 shares authorized, issued,
and outstanding 5,000 5,000
Additional paid-in capital 475,635 460,635
Retained earnings 203,109 229,837
Accumulated other comprehensive income
(loss) 34,593 (165,712)
---------- ----------
TOTAL STOCKHOLDER'S EQUITY 718,337 529,760
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY $7,340,873 $7,032,458
---------- ----------
</Table>
SEE THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<Page>
UNION SECURITY INSURANCE COMPANY 49
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UNION SECURITY INSURANCE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2009 2008 2007
(IN THOUSANDS)
---------------------------------------------------------------------------------------
REVENUES
Net earned premiums and other
considerations $1,092,512 $1,173,790 $1,259,930
Net investment income 216,725 238,451 286,235
Net realized losses on
investments, excluding
other-than-temporary
investment losses (13,925) (26,621) (7,093)
Total other-than-temporary
investment losses (11,330) (109,075) (21,126)
Portion of gain recognized
in other comprehensive
income, before taxes (257) -- --
------------- ------------- -------------
Net other-than-temporary
investment losses recognized
in earnings (11,587) (109,075) (21,126)
Amortization of deferred
gains on disposal of
businesses 16,906 20,680 23,548
Fees and other income 14,859 11,449 16,395
------------- ------------- -------------
TOTAL REVENUES 1,315,490 1,308,674 1,557,889
------------- ------------- -------------
BENEFITS, LOSSES AND EXPENSES
Policyholder benefits 849,531 889,498 934,609
Amortization of deferred
acquisition costs and value
of business acquired 46,398 46,678 43,575
Underwriting, general and
administrative expenses 340,342 353,774 383,106
Goodwill impairment 75,244 -- --
------------- ------------- -------------
TOTAL BENEFITS, LOSSES AND
EXPENSES 1,311,515 1,289,950 1,361,290
------------- ------------- -------------
Income before provision for
income taxes 3,975 18,724 196,599
Provision for income taxes 27,127 10,867 57,121
------------- ------------- -------------
NET (LOSS) INCOME $(23,152) $7,857 $139,478
------------- ------------- -------------
</Table>
SEE THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<Page>
50 UNION SECURITY INSURANCE COMPANY
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UNION SECURITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
<Table>
<Caption>
ACCUMULATED
COMMON ADDITIONAL OTHER
STOCK PAID-IN RETAINED COMPREHENSIVE
CAPITAL EARNINGS INCOME (LOSS) TOTAL
(IN THOUSANDS)
---------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2007 $5,000 $545,635 $286,350 $62,279 $899,264
Dividends -- -- (197,000) -- (197,000)
Cumulative effect of change
in accounting principles -- -- (4,118) -- (4,118)
Comprehensive income:
Net income -- -- 139,478 -- 139,478
Other comprehensive loss:
Net change in unrealized
gains on securities, net of
taxes -- -- -- (56,642) (56,642)
Net change in foreign
currency translation, net
of taxes -- -- -- 59 59
---------
Total other comprehensive
loss (56,583)
---------
Total comprehensive income 82,895
-------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2007 5,000 545,635 224,710 5,696 781,041
-------- --------- --------- --------- ---------
Return of capital (Note 7) -- (100,000) -- -- (100,000)
Capital contribution (Note 7) -- 15,000 -- -- 15,000
Cumulative effect of change
in accounting principles
(Note 2) -- -- (2,730) -- (2,730)
Comprehensive loss:
Net income -- -- 7,857 -- 7,857
Other comprehensive loss:
Net change in unrealized
gains on securities, net of
taxes -- -- -- (171,408) (171,408)
---------
Total other comprehensive
loss (171,408)
---------
Total comprehensive income (163,551)
-------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2008 5,000 460,635 229,837 (165,712) 529,760
-------- --------- --------- --------- ---------
Dividends -- -- (20,000) -- (20,000)
Capital contribution (Note 7) -- 15,000 -- -- 15,000
Cumulative effect of change
in accounting principles
(Note 2) -- -- 16,424 (16,424) --
Comprehensive Income:
Net loss -- -- (23,152) -- (23,152)
Other comprehensive income:
Net change in unrealized
losses on securities, net
of taxes -- -- -- 210,552 210,552
Net change in
other-than-temporary
impairment gains,
recognized in other
comprehensive income, net
of taxes -- -- -- 6,177 6,177
---------
Total other comprehensive
income 216,729
---------
Total comprehensive income 193,577
-------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2009 $5,000 $475,635 $203,109 $34,593 $718,337
-------- --------- --------- --------- ---------
</Table>
SEE THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<Page>
UNION SECURITY INSURANCE COMPANY 51
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UNION SECURITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2009 2008 2007
(IN THOUSANDS)
------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net (loss) income $(23,152) $7,857 $139,478
Adjustments to reconcile net income to
net cash provided by operating
activities:
Change in reinsurance recoverable (75,154) (51,605) (8,648)
Change in premiums and accounts
receivable (5,590) 40,739 (2,976)
Depreciation and amortization 3,418 1,173 2,124
Change in deferred acquisition costs
and value of business acquired 7,790 8,910 10,512
Change in accrued investment income (866) 1,742 3,980
Change in insurance policy reserves and
expenses (45,507) (53,850) (73,896)
Change in accounts payable and other
liabilities 3,222 (20,638) (13,212)
Change in commissions payable (1,756) (509) (681)
Change in reinsurance balances payable -- (2,706) (437)
Change in funds held under reinsurance -- (118) 11
Amortization of deferred gain on
disposal of businesses (16,906) (20,680) (23,548)
Change in income taxes 7,501 (22,869) (47,888)
Net realized losses on investments 25,512 135,696 28,219
Goodwill impairment 75,244 --
Other (5,251) (84) 302
----------- ------------ ------------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES (57,939) 23,058 13,340
----------- ------------ ------------
INVESTING ACTIVITIES
Sales of:
Fixed maturity securities available for
sale 244,094 451,988 382,557
Equity securities available for sale 27,345 96,375 116,117
Property and equipment (105) 25 --
Maturities, prepayments, and scheduled
redemption of:
Fixed maturity securities available for
sale 129,687 76,593 208,303
Purchase of:
Fixed maturity securities available for
sale (449,662) (357,887) (394,138)
Equity securities available for sale (11,750) (74,181) (116,049)
Property and equipment -- -- (25)
Subsidiary, net of cash transferred (1) 4,923 -- --
Change in other invested assets (6,108) (7,847) 12,542
Change in commercial mortgage loans on
real estate 61,242 (16,070) (72,213)
Change in short-term investments 89,480 (115,755) 4,049
Change in collateral held under
securities lending 15,877 111,102 (63,112)
Change in policy loans 441 (2,076) 116
----------- ------------ ------------
NET CASH PROVIDED BY INVESTING
ACTIVITIES 105,464 162,267 78,147
----------- ------------ ------------
FINANCING ACTIVITIES
Dividends paid (20,000) -- (197,000)
Change in obligation under securities
lending (15,877) (115,986) 63,112
Return of capital -- (100,000) --
Contributed capital 15,000 15,000 --
----------- ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (20,877) (200,986) (133,888)
----------- ------------ ------------
Change in cash and cash equivalents 26,648 (15,661) (42,401)
Cash and cash equivalents at beginning
of period 17,171 32,832 75,233
----------- ------------ ------------
Cash and cash equivalents at end of
period $43,819 $17,171 $32,832
----------- ------------ ------------
Supplemental information:
Income taxes paid, net of refunds $19,597 $33,270 $104,754
</Table>
(1) This relates to Shenandoah Life Insurance Company ("Shenandoah"), acquired
through reinsurance agreement on October 1, 2009.
SEE THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<Page>
52 UNION SECURITY INSURANCE COMPANY
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UNION SECURITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007
(IN THOUSANDS EXCEPT SHARE DATA)
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Union Security Insurance Company (the "Company") is a provider of life and
health insurance products, including group disability insurance, group dental
insurance, group life insurance, small employer group health insurance and
preneed. The Company is an indirect wholly-owned subsidiary of Assurant, Inc.
(the "Parent"). The Parent's common stock is traded on the New York Stock
Exchange under the symbol AIZ. The Company distributes its products in the
District of Columbia and in all states except New York.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). Amounts are presented in United States of America ("U.S.") dollars and
all amounts are in thousands, except for number of shares.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all of its wholly owned subsidiaries. All significant inter-company transactions
and balances are eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities. The items on the Company's balance sheet affected by the
use of estimates include but are not limited to, investments, premiums and
accounts receivable, reinsurance recoverables, deferred acquisition costs
("DAC"), deferred income taxes and associated valuation allowances, goodwill,
valuation of business acquired ("VOBA"), future policy benefits and expenses,
unearned premiums, claims and benefits payable, deferred gain on disposal of
businesses, and commitments and contingencies. The estimates are sensitive to
market conditions, investment yields, mortality, morbidity, commissions and
other acquisition expenses, policyholder behavior and other factors. Actual
results may differ from the estimates reported. The Company believes the amounts
reported are reasonable and adequate.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income, net unrealized gains and
losses on foreign currency translation, net unrealized gains and losses on
securities classified as available-for-sale and net unrealized gains and losses
on other-than-temporarily impaired securities, less deferred income taxes.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the 2009
presentation.
REVENUE RECOGNITION
The Company recognizes revenue when realized or realizable and earned. Revenue
generally is realized or realizable and earned when persuasive evidence of an
arrangement exists, services have been rendered, the price is fixed or
determinable, and collectability is reasonably assured.
FOREIGN CURRENCY TRANSLATION
For those foreign affiliates where the local currency is the functional
currency, unrealized foreign currency translation gains and losses net of
deferred income taxes have been reflected in accumulated other comprehensive
income (loss) ("AOCI").
FAIR VALUE
The Company uses an exit price for its fair value measurements. An exit price is
defined as the amount received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
In measuring fair value, the Company gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs. Please see Note 4 for more information
on the Company's fair value policies.
INVESTMENTS
Fixed maturity and equity securities are classified as available-for-sale, as
defined in the investments guidance, which is included within the Financial
Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC")
Topic 320, INVESTMENTS -- DEBT AND EQUITY SECURITIES and reported at fair value.
If the fair value is higher than the amortized cost for fixed
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maturity securities or the purchase cost for equity securities, the excess is an
unrealized gain; and, if lower than cost, the difference is an unrealized loss.
The net unrealized gains and losses, less deferred income taxes, are included in
AOCI.
Commercial mortgage loans on real estate are reported at unpaid balances,
adjusted for amortization of premium or discount, less allowance for losses. The
allowance is based on management's analysis of factors including actual loan
loss experience, specific events based on geographical, political or economic
conditions, industry experience, loan groupings that have probable and estimable
losses and individually impaired loan loss analysis. A loan is considered
individually impaired when it becomes probable the Company will be unable to
collect all amounts due, including principal and interest, according to the
contractual terms of the loan agreement. Indicative factors of impairment
include, but are not limited to, whether the loan is current, the value of the
collateral and the financial position of the borrower. If a loan is individually
impaired, the Company uses one of the following valuation methods based on the
individual loans facts and circumstances to measure the impairment amount: (1)
the present value of expected future cash flows, (2) the loan's observable
market price, or (3) the fair value of collateral. Changes in the allowance for
loan losses are recorded in net realized losses on investments, excluding
other-than-temporary impairment ("OTTI") losses.
The Company has determined that a loan be placed on non-accrual status after 90
days of delinquent payments (unless the loan is both well secured and in the
process of collection). A loan may be placed on non-accrual status before this
time if information is available that suggests it is probable a loan may be
impaired.
Policy loans are reported at unpaid principal balances, which do not exceed the
cash surrender value of the underlying policies.
Short-term investments include money market funds and short maturity
investments. These amounts are reported at cost, which approximates fair value.
The collateral held under securities lending is reported at fair value. The
obligation under securities lending is reported at the amount of the collateral
received.
Other investments consist primarily of investments in joint ventures and
partnerships. The joint ventures and partnerships are valued according to the
equity method of accounting.
The Company monitors its investment portfolio to identify investments that may
be other-than-temporarily impaired. In addition, securities, aggregated by
issuer, whose market price is equal to 80% or less of their original purchase
price or which had a discrete credit event resulting in the debtor defaulting or
seeking bankruptcy protection are added to a potential write-down list, which is
discussed at quarterly meetings attended by members of the Company's investment,
accounting and finance departments. Please see Note 3 for more information.
Realized gains and losses on sales of investments are recognized on the specific
identification basis.
Investment income is recorded as earned net of investment expenses. The Company
uses the interest method to recognize interest income on its commercial mortgage
loans.
The Company anticipates prepayments of principal in the calculation of the
effective yield for mortgage-backed securities and structured securities. The
retrospective method is used to adjust the effective yield.
CASH AND CASH EQUIVALENTS
The Company considers cash on hand, all operating cash and working capital cash
to be cash equivalents. These amounts are carried at cost, which approximates
fair value. Cash balances are reviewed at the end of each reporting period to
determine if negative cash balances exist. If negative cash balances do exist,
the cash accounts are netted with other positive cash accounts of the same bank
provided the right of offset exists between the accounts. If the right of offset
does not exist, the negative cash balances are reclassified to accounts payable.
RECEIVABLES
The Company records a receivable when revenue has been earned but the cash has
not been collected. The Company maintains allowances for doubtful accounts for
probable losses resulting from the inability to collect payments.
REINSURANCE
Reinsurance recoverables include amounts related to paid benefits and estimated
amounts related to unpaid policy and contract claims, future policyholder
benefits and policyholder contract deposits. The cost of reinsurance is
recognized over the terms of the underlying reinsured policies using assumptions
consistent with those used to account for the policies. Amounts recoverable from
reinsurers are estimated in a manner consistent with claim and claim adjustment
expense reserves or future policy benefits reserves and are reported in the
consolidated balance sheets. The cost of reinsurance related to long-duration
contracts is recognized over the life of the underlying reinsured policies. The
ceding of insurance does not discharge the Company's primary liability to
insureds. An allowance for doubtful accounts is recorded on the basis
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of periodic evaluations of balances due from reinsurers, reinsurer solvency,
management's experience and current economic conditions.
Reinsurance balances payable include amounts related to ceded premiums and
estimated amounts related to assumed paid or incurred losses, which are reported
based upon ceding entities' estimations.
Funds held under reinsurance represent amounts contractually held from assuming
companies in accordance with reinsurance agreements.
Reinsurance premiums assumed are calculated based upon payments received from
ceding companies together with accrual estimates, which are based on both
payments received and in-force policy information received from ceding
companies. Any subsequent differences arising on such estimates are recorded in
the period in which they are determined.
INCOME TAXES
The Company reports its taxable income in a consolidated federal income tax
return along with other affiliated subsidiaries of the Parent. Income tax
expense or benefit is allocated among the affiliated subsidiaries by applying
corporate income tax rates to taxable income or loss determined on a separate
return basis according to a tax allocation agreement.
Current federal income taxes are recognized based upon amounts estimated to be
payable or recoverable as a result of taxable operations for the current year.
Deferred income taxes are recorded for temporary differences between the
financial reporting basis and income tax basis of assets and liabilities, based
on enacted tax laws and statutory tax rates applicable to the periods in which
the Company expects the temporary differences to reverse. A valuation allowance
is established for deferred tax assets when it is more likely than not that an
amount will not be realized.
The Company classifies net interest expense related to tax matters and any
applicable penalties as a component of income tax expense.
DEFERRED ACQUISITION COSTS
The costs of acquiring new business that vary with and are primarily related to
the production of new business are deferred to the extent that such costs are
deemed recoverable from future premiums or gross profits. Acquisition costs
primarily consist of commissions, policy issuance expenses, premium taxes and
certain direct marketing expenses.
Premium deficiency testing is performed annually and generally reviewed
quarterly. Such testing involves the use of best estimate assumptions including
the anticipation of interest income to determine if anticipated future policy
premiums are adequate to recover all DAC and related claims, benefits and
expenses. To the extent a premium deficiency exists, it is recognized
immediately by a charge to the consolidated statement of operations and a
corresponding reduction in DAC. If the premium deficiency is greater than
unamortized DAC, a liability will be accrued for the excess deficiency.
Long Duration Contracts
Acquisition costs for preneed life insurance policies and life insurance
policies (no longer offered) are deferred and amortized in proportion to
anticipated premiums over the premium-paying period. These acquisition costs
consist primarily of first year commissions paid to agents and sales and policy
issue costs.
Acquisition costs relating to group worksite insurance products consist
primarily of first year commissions to brokers and one time policy transfer fees
and costs of issuing new certificates. These acquisition costs are front-end
loaded, thus they are deferred and amortized over the estimated terms of the
underlying contracts.
For preneed investment-type annuities, DAC is amortized in proportion to the
present value of estimated gross profits from investment, mortality, expense
margins and surrender charges over the estimated life of the policy or contract.
The assumptions used for the estimates are consistent with those used in
computing the policy or contract liabilities.
Acquisition costs on Fortis Financial Group ("FFG") and Long-Term Care ("LTC")
disposed businesses were written off when the businesses were sold.
Short Duration Contracts
Acquisition costs relating to monthly pay credit insurance business consist
mainly of direct marketing costs and are deferred and amortized over the
estimated average terms and balances of the underlying contracts.
Acquisition costs relating to group term life, group disability and group dental
consist primarily of compensation to sales representatives. These acquisition
costs are front-end loaded; thus, they are deferred and amortized over the
estimated terms of the underlying contracts.
Acquisition costs on small group medical contracts consist primarily of
commissions to agents and brokers and compensation to representatives. These
contracts are considered short duration because the terms of the contracts are
not fixed at issue and they are not guaranteed renewable. As a result, these
costs are not deferred, but rather they are recorded in the consolidated
statement of operations in the period in which they are incurred.
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PROPERTY AND EQUIPMENT
Property and equipment are reported at cost less accumulated depreciation.
Depreciation is calculated on a straight-line basis over estimated useful lives
with a maximum of 39.5 years for buildings, a maximum of 7 years for furniture
and a maximum of 5 years for equipment. Expenditures for maintenance and repairs
are charged to income as incurred. Expenditures for improvements are capitalized
and depreciated over the remaining useful life of the asset.
Property and equipment also includes capitalized software costs, which represent
costs directly related to obtaining, developing or upgrading internal use
software. Such costs are capitalized and amortized using the straight-line
method over their estimated useful lives.
GOODWILL
Goodwill represents the excess of acquisition costs over the net fair value of
identifiable assets acquired and liabilities assumed in a business combination.
Goodwill is deemed to have an indefinite life and is not amortized, but rather
is tested at least annually for impairment. The Company reviews goodwill
annually in the fourth quarter for impairment, or more frequently if indicators
of impairment exist. The Company regularly assesses whether any indicators of
impairment exist. Such indicators include, but are not limited to: a significant
decline in expected future cash flows due to changes in company-specific factors
or the broader business climate. The evaluation of such factors requires
considerable management judgment.
The goodwill impairment test has two steps. The Company first compares its
estimated fair value with its net book value. If the estimated fair value
exceeds its net book value, goodwill is deemed not to be impaired, and no
further testing is necessary. If the net book value exceeds its estimated fair
value, the Company would perform a second test to measure the amount of
impairment if any. To determine the amount of any impairment, the Company would
determine the implied fair value of goodwill in the same manner as if the
Company were being acquired in a business combination. Specifically, the Company
would determine the fair value of all of the assets and liabilities, including
any unrecognized intangible assets, in a hypothetical calculation that would
yield the implied fair value of goodwill. If the implied fair value of goodwill
were less than the recorded goodwill, the Company would record an impairment
charge for the difference.
In the fourth quarters of 2009 and 2008, the Company conducted annual
assessments of goodwill. Based on the results of the 2009 assessment, the
Company concluded that the net book value of its goodwill exceeded the estimated
fair value and therefore performed a Step 2 test. Based on the results of the
Step 2 test, the Company recorded a $75,244 impairment charge. Based on the
results of the 2008 assessment, the Company concluded that its estimated fair
value exceeded its net book value and therefore goodwill was not impaired. See
Note 4 and 13 for further information.
VALUE OF BUSINESSES ACQUIRED
VOBA is the identifiable intangible asset representing the value of the
insurance businesses acquired. The amount is determined using best estimates for
mortality, lapse, maintenance expenses and investment returns at date of
purchase. The amount determined represents the purchase price paid to the seller
for producing the business. Similar to the amortization of DAC, the amortization
of VOBA is over the premium payment period for traditional life insurance
policies and preneed limited payment policies. For preneed annuities, the
amortization of VOBA is over the expected lifetime of the policies.
VOBA is tested for recoverability annually. If it is determined that future
policy premiums and investment income or gross profits are not adequate to cover
related losses or loss expenses, then an expense is reported in current
earnings. Based on 2009 and 2008 testing, future policy premiums and investment
income or gross profits were deemed adequate to cover related losses or loss
expenses.
OTHER ASSETS
Other assets primarily include prepaid items and intangible assets. Intangible
assets that have finite lives, including but not limited to, customer
relationships, customer contracts and other intangible assets, are amortized
over their estimated useful lives. Intangible assets deemed to have indefinite
useful lives, primarily certain state licenses, are not amortized and are
subject to at least annual impairment tests. Impairment exists if the carrying
amount of the indefinite-lived intangible asset exceeds its fair value. For
other intangible assets subject to amortization, impairment is recognized if the
carrying amount is not recoverable and exceeds the fair value of the intangible
asset. There were no impairments of finite-lived or indefinite-lived intangible
assets in either 2009 or 2008.
SEPARATE ACCOUNTS
Assets and liabilities associated with separate accounts relate to premium and
annuity considerations for variable life and annuity products for which the
contract-holder, rather than the Company, bears the investment risk. Separate
account assets (with matching liabilities) are reported at fair value. Revenues
and expenses related to the separate account assets and liabilities, to the
extent of benefits paid or provided to the separate account policyholders, are
excluded from the amounts reported in the accompanying consolidated statements
of operations because the accounts are administered by reinsurers.
Prior to April 2, 2001, FFG had issued variable insurance products registered as
securities under the Securities Act of 1933, as amended. These products featured
fixed premiums, a minimum death benefit, and policyholder returns linked to an
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underlying portfolio of securities. The variable insurance products issued by
FFG have been 100% reinsured with The Hartford Financial Services Group, Inc.
and certain of its subsidiaries ("The Hartford").
RESERVES
Reserves are established in accordance with GAAP, using generally accepted
actuarial methods and are based on a number of factors. These factors include
experience derived from historical claim payments and actuarial assumptions.
Such assumptions and other factors include trends, the incidence of incurred
claims, the extent to which all claims have been reported, and internal claims
processing charges. The process used in computing reserves cannot be exact,
since actual claim costs are dependent upon such complex factors as inflation,
changes in doctrines of legal liabilities and damage awards. The methods of
making such estimates and establishing the related liabilities are periodically
reviewed and updated.
Reserves do not represent an exact calculation of exposure, but instead
represent our best estimates, generally involving actuarial projections at a
given time, of what we expect the ultimate settlement and administration of a
claim or group of claims will cost based on our assessment of facts and
circumstances then known. The adequacy of reserves will be impacted by future
trends in claims severity, frequency, judicial theories of liability and other
factors. These variables are affected by both external and internal events,
including but not limited to: changes in the economic cycle, changes in the
social perception of the value of work, emerging medical perceptions regarding
physiological or psychological causes of disability, emerging health issues and
new methods of treatment or accommodation, inflation, judicial trends,
legislative changes and claims handling procedures.
Many of these items are not directly quantifiable, particularly on a prospective
basis. Reserve estimates are refined as experience develops. Adjustments to
reserves, both positive and negative, are reflected in the consolidated
statement of operations in the period in which such estimates are updated.
Because establishment of reserves is an inherently uncertain process involving
estimates of future losses, there can be no certainty that ultimate losses will
not exceed existing claims reserves. Future loss development could require
reserves to be increased, which could have a material adverse effect on our
earnings in the periods in which such increases are made. However, based on
information currently available, we believe our reserve estimates are adequate.
Long Duration Contracts
The Company's long duration contracts include Canadian pre-funded funeral
("preneed") life insurance policies and annuity contracts, traditional life
insurance policies (no longer offered), FFG and LTC contracts disposed. Future
policy benefits and expense reserves on preneed life insurance and, life
insurance policies (no longer offered) are reported at the present value of
future benefits to be paid to policyholders and related expenses less the
present value of the future net premiums. These amounts are estimated and
include assumptions as to the expected investment yield, inflation, mortality,
morbidity, expenses, and withdrawal rates as well as other assumptions that are
based on the Company's experience. These assumptions reflect anticipated trends
and include provisions for possible adverse deviations. An unearned revenue
reserve is also recorded for these contracts which represents the balance of the
excess of gross premiums over net premiums that is still to be recognized in
future years' income in a constant relationship to insurance in force.
Future policy benefits and expense reserves for preneed investment-type
annuities consist of policy account balances before applicable surrender charges
and certain deferred policy initiation fees that are being recognized in income
over the terms of the policies. Policy benefits charged to expense during the
period include amounts paid in excess of policy account balances and interest
credited to policy account balances.
For worksite group disability, which typically has high front-end costs and are
expected to remain in-force for an extended period of time, the case reserves
and incurred but not reported ("IBNR") reserves are recorded at an amount equal
to the net present value of the expected future claims payments. Worksite group
long term disability reserves are discounted to the valuation date at the
valuation interest rate. The valuation interest rate is reviewed quarterly by
taking into consideration actual and expected earned rates on our asset
portfolio.
Changes in the estimated liabilities are reported as a charge or credit to
policyholder benefits as the estimates are revised.
Short Duration Contracts
The Company's short duration contracts include group term life contracts, group
disability contracts, medical contracts, dental contracts, credit life and
disability contracts. For short duration contracts, claims and benefits payable
reserves are recorded when insured events occur. The liability is based on the
expected ultimate cost of settling the claims. The claims and benefits payable
reserves include (1) case reserves for known but unpaid claims as of the balance
sheet date; (2) IBNR reserves for claims where the insured event has occurred
but has not been reported to the Company as of the balance sheet date; and (3)
loss adjustment expense reserves for the expected handling costs of settling the
claims.
For group disability, the case reserves and IBNR reserves are recorded at an
amount equal to the net present value of the expected future claims payments.
Group long-term disability and group term life waiver of premiums reserves are
discounted to the valuation date at the valuation interest rate. The valuation
interest rate is reviewed quarterly by taking into
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consideration actual and expected earned rates on our asset portfolio. Group
long term disability and group term life reserve adequacy studies are performed
annually, and morbidity and mortality assumptions are adjusted where
appropriate.
Changes in the estimated liabilities are recorded as a charge or credit to
policyholder benefits as estimates are revised.
DEFERRED GAIN ON DISPOSAL OF BUSINESSES
The Company recorded a deferred gain on disposal of businesses utilizing
reinsurance. On March 1, 2000, the Company sold its LTC business using a
coinsurance contract. On April 2, 2001, the Company sold its FFG business using
coinsurance and a modified coinsurance contract. Since the form of sale did not
discharge the Company's primary liability to the insureds, the gain on these
disposals was deferred and reported as a liability. The liability is decreased
and recognized as revenue over the estimated life of the contracts' terms. The
Company reviews and evaluates the estimates affecting the deferred gain on
disposal of businesses annually or when significant information affecting the
estimates becomes known to the Company.
PREMIUMS
Long Duration Contracts
Currently, the Company's long duration contracts being sold are group worksite
disability and life insurance. Revenues are recognized when earned on group
worksite insurance products.
For life insurance policies previously sold by the preneed business (no longer
offered), revenue is recognized when due from policyholders.
For investment-type annuity contracts previously sold by the preneed business
(no longer offered), revenues consist of charges assessed against policy
balances.
Premiums for LTC insurance and traditional life insurance contracts within FFG
are recognized as revenue when due from the policyholder. For universal life
insurance and investment-type annuity contracts within FFG, revenues consist of
charges assessed against policy balances. For the FFG and LTC businesses
previously sold, all revenue is ceded.
Short Duration Contracts
The Company's short duration contracts are those on which the Company recognizes
revenue on a pro-rata basis over the contract term. The Company's short duration
contracts primarily include group term life, group disability, medical, dental,
and credit life and disability.
TOTAL OTHER-THAN-TEMPORARY IMPAIRMENT LOSSES
For debt securities with credit losses and non-credit losses or gains, total
other-than-temporary impairment losses is the total of the decline in fair value
from either the most recent OTTI determination or a prior period end in which
the fair value declined until the current period end valuation date. This amount
does not include any securities that had fair value increases. For equity
securities and debt securities that the Company has the intent to sell or if it
is more likely than not that it will be required to sell, for equity securities
that have an OTTI or for debt securities if there are only credit losses, total
other-than-temporary impairment losses is the total amount by which the fair
value of the security is less than its amortized cost basis at the period end
valuation date and the decline in fair value is deemed to be other-
than-temporary.
FEE AND OTHER INCOME
The Company derives fee and other income primarily from providing administrative
services. Fee income is recognized when services are performed.
UNDERWRITING, GENERAL AND ADMINISTRATIVE EXPENSES
Underwriting, general and administrative expenses consist primarily of
commissions, premium taxes, licenses, fees, salaries and personnel benefits and
other general operating expenses.
LEASES
The Company records expenses for operating leases on a straight-line basis over
the lease term.
CONTINGENCIES
The Company follows the guidance on contingencies, which is included within ASC
Topic 450, CONTINGENCIES, which requires the Company to evaluate each contingent
matter separately. A loss contingency is recorded if reasonably estimable and
probable. The Company establishes reserves for these contingencies at the best
estimate, or if no one estimated number within the range of possible losses is
more probable than any other, the Company records an estimated reserve at the
low end of the estimated range. Contingencies affecting the Company primarily
relate to litigation matters which are inherently difficult to evaluate and are
subject to significant changes. The Company believes the contingent amounts
recorded are adequate and reasonable.
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RECENT ACCOUNTING PRONOUNCEMENTS -- ADOPTED
On July 1, 2009, the Company adopted the new guidance on GAAP, which is within
ASC Topic 105, GAAP. The new guidance establishes a single source of
authoritative accounting and reporting guidance recognized by the FASB for
nongovernmental entities (the "Codification"). The Codification does not change
current GAAP, but is intended to simplify user access to all authoritative GAAP
by providing all the authoritative literature related to a particular topic in
one place. All existing accounting standard documents will be superseded and all
other accounting literature not included in the Codification will be considered
non-authoritative. The adoption of the new guidance did not have an impact on
the Company's financial position or results of operations. References to
accounting guidance contained in the Company's consolidated financial statements
and disclosures have been updated to reflect terminology consistent with the
Codification. Plain English references to the accounting guidance have been made
along with references to the ASC topic number and name.
On October 1, 2009, the Company adopted the new guidance on measuring the fair
value of liabilities, which is within ASC Topic 820, FAIR VALUE MEASUREMENTS AND
DISCLOSURES. When the quoted price in an active market for an identical
liability is not available, this new guidance requires that either the quoted
price of the identical or similar liability when traded as an asset or another
valuation technique that is consistent with the fair value measurements and
disclosures guidance be used to fair value the liability. The adoption of this
new guidance did not have an impact on the Company's financial position or
results of operations.
On June 30, 2009, the Company adopted the new subsequent events guidance, which
is within ASC Topic 855, SUBSEQUENT EVENTS. This new guidance establishes
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The adoption of the new guidance did not have an impact
on the Company's financial position or results of operations. See Note 18.
On April 1, 2009, the Company adopted the new OTTI guidance, which is within ASC
Topic 320. This new guidance amends the previous guidance for debt securities
and modifies the presentation and disclosure requirements for debt and equity
securities. In addition, it amends the requirement for an entity to positively
assert the intent and ability to hold a debt security to recovery to determine
whether an OTTI exists and replaces this provision with the assertion that an
entity does not intend to sell or it is not more likely than not that the entity
will be required to sell a security prior to recovery of its amortized cost
basis. Additionally, this new guidance modifies the presentation of certain OTTI
debt securities to only present the impairment loss within the results of
operations that represents the credit loss associated with the OTTI with the
remaining impairment loss being presented within other comprehensive income
(loss) ("OCI"). At adoption, the Company recorded a cumulative effect adjustment
to reclassify the non-credit component of previously recognized OTTI securities
which resulted in an increase of $16,424 (after-tax) in retained earnings and a
decrease of $16,424 (after-tax) in AOCI. See Note 3 for further information.
On April 1, 2009, the Company adopted the new guidance on determining fair value
in illiquid markets, which is within ASC Topic 820. This new guidance clarifies
how to estimate fair value when the volume and level of activity for an asset or
liability have significantly decreased. This new guidance also clarifies how to
identify circumstances indicating that a transaction is not orderly. Under this
new guidance, significant decreases in the volume and level of activity of an
asset or liability, in relation to normal market activity, requires further
evaluation of transactions or quoted prices and exercise of significant judgment
in arriving at fair values. This new guidance also requires additional interim
and annual disclosures. The adoption of this new guidance did not have an impact
on the Company's financial position or results of operations.
On January 1, 2009, the Company adopted the revised business combinations
guidance, which is within ASC Topic 805, BUSINESS COMBINATIONS. The revised
guidance retains the fundamental requirements of the previous guidance in that
the acquisition method of accounting be used for all business combinations, that
an acquirer be identified for each business combination and for goodwill to be
recognized and measured as a residual. The revised guidance expands the
definition of transactions and events that qualify as business combinations to
all transactions and other events in which one entity obtains control over one
or more other businesses. The revised guidance broadens the fair value
measurement and recognition of assets acquired, liabilities assumed and
interests transferred as a result of business combinations. It also increases
the disclosure requirements for business combinations in the consolidated
financial statements. The adoption of the revised guidance did not have an
impact on the Company's financial position or results of operations. However,
should the Company enter into any business combination in 2010 or beyond, our
financial position or results of operations could incur a significantly
different impact than had it recorded the acquisition under the previous
business combinations guidance. Earnings volatility could result, depending on
the terms of the acquisition.
On January 1, 2009, the Company adopted the new consolidations guidance, which
is within ASC Topic 810, CONSOLIDATION. The new guidance requires that a
noncontrolling interest in a subsidiary be separately reported within equity and
the amount of consolidated net income attributable to the noncontrolling
interest be presented in the statement of operations. The new guidance also
calls for consistency in reporting changes in the parent's ownership interest in
a subsidiary and necessitates fair value measurement of any noncontrolling
equity investment retained in a deconsolidation. The adoption of the new
guidance did not have an impact on the Company's financial position or results
of operations.
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On January 1, 2009, the Company applied the fair value measurements and
disclosures guidance, which is within ASC Topic 820, FAIR VALUE MEASUREMENTS AND
DISCLOSURES, for all non-financial assets and liabilities measured at fair value
on a non-recurring basis. The application of this guidance for those assets and
liabilities did not have an impact on the Company's financial position or
results of operations. The Company's non-financial assets measured at fair value
on a non-recurring basis include goodwill and intangible assets. In a business
combination, the non-financial assets and liabilities of the acquired company
would be measured at fair value in accordance with the fair value measurements
and disclosures guidance. The requirements of this guidance include using an
exit price based on an orderly transaction between market participants at the
measurement date assuming the highest and best use of the asset by market
participants. To perform a market valuation, the Company is required to use a
market, income or cost approach valuation technique(s). The Company performed
its annual impairment analyses of goodwill and indefinite-lived intangible
assets in the fourth quarter of 2009. Step 1 of the impairment test indicated
that the net book value of the Company's goodwill was greater than its estimated
fair value. Based on the results of the Step 1 test, the Company was required to
measure the fair value of its goodwill in Step 2 of the impairment test. As
mentioned above, the application of this guidance which was used to measure the
fair value of goodwill in Step 2 of the impairment test did not have an impact
on the Company's financial position or results of operations during 2009.
On January 1, 2008, the Company adopted the fair value measurements and
disclosures guidance, which is within ASC Topic 820. This guidance defined fair
value, addressed how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure purposes under GAAP
and expanded disclosures about fair value measurements. This guidance was
applied prospectively for financial assets and liabilities measured on a
recurring basis as of January 1, 2008 except for certain financial assets that
were measured at fair value using a transaction price. For these financial
instruments, which the Company has, this guidance required limited retrospective
adoption and thus the difference between the fair values using a transaction
price and the fair values using an exit price of the relevant financial
instruments was shown as a cumulative-effect adjustment to the January 1, 2008
retained earnings balance. At adoption, the Company recognized a $4,200 decrease
to other assets, and a corresponding decrease of $2,730 (after-tax) to retained
earnings. See Notes 3 and 4 for further information regarding these financial
instruments and the fair value disclosures, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS -- NOT YET ADOPTED
In June 2009, the FASB issued new guidance on transfers of financial assets,
which is within ASC Topic 860, TRANSFERS AND SERVICING. This new guidance amends
the derecognition guidance in the Codification and eliminates the exemption from
consolidation for qualifying special-purpose entities. This new guidance is
effective for transfers of financial assets occurring in fiscal years beginning
after November 15, 2009 and in interim periods within those fiscal years.
Therefore, the Company is required to adopt this guidance on January 1, 2010.
The adoption of this new guidance will not have an impact on the Company's
financial position or results of operations.
In June 2009, the FASB issued new guidance on the accounting for a variable
interest entity ("VIE"), which is within ASC Topic 810, CONSOLIDATION. This new
guidance amends the consolidation guidance applicable to VIEs to require a
qualitative assessment in the determination of the primary beneficiary of the
VIE, to require an ongoing reconsideration of the primary beneficiary, to amend
the events that trigger a reassessment of whether an entity is a VIE and to
change the consideration of kick-out rights in determining if an entity is a
VIE. This new guidance provides two transition alternatives: (i) retrospective
application with a cumulative-effect adjustment to retained earnings as of the
beginning of the first year adjusted; or (ii) application as of the date of
adoption with a cumulative-effect adjustment to retained earnings recognized on
that date. This new guidance is effective as of the beginning of the Company's
first fiscal year beginning after November 15, 2009, and for interim periods
within those fiscal years. Therefore, the Company is required to adopt this
guidance on January 1, 2010. The adoption of this new guidance will not have a
material impact on the Company's financial position and results of operations.
<Page>
60 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
3. INVESTMENTS
The following table shows the amortized cost, gross unrealized gains and losses,
fair value and OTTI of our fixed maturity and equity securities as of the dates
indicated.
<Table>
<Caption>
DECEMBER 31, 2009
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED OTTI IN
COST GAINS LOSSES FAIR VALUE AOCI (1)
---------------------------------------------------------------------------------------------------------------------------------
FIXED MATURITY SECURITIES:
United States Government and
government agencies and
authorities $2,888 $124 $ -- $3,012 $ --
States, municipalities and
political subdivisions 58,962 1,194 (1,762) 58,394 --
Foreign governments 34,969 1,984 (1,825) 35,128 --
Asset-backed 3,782 56 (58) 3,780 --
Commercial mortgage-backed 20,369 121 (168) 20,322 --
Residential mortgage-backed 122,036 5,947 (454) 127,529 (132)
Corporate 2,250,259 107,017 (49,578) 2,307,698 6,218
------------ ---------- --------- ------------ -------
TOTAL FIXED MATURITY
SECURITIES $2,493,265 $116,443 $(53,845) $2,555,863 $6,086
------------ ---------- --------- ------------ -------
EQUITY SECURITIES:
Non-redeemable preferred
stocks $160,510 $9,699 $(12,216) $157,993 $ --
------------ ---------- --------- ------------ -------
</Table>
(1) Represents the amount of other-than-temporary impairment (losses) gains in
AOCI, which, from April 1, 2009, were not included in earnings under the
new OTTI guidance for debt securities.
<Table>
<Caption>
DECEMBER 31, 2008
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------------------------------------------------------------------------------------------------------------------
FIXED MATURITY SECURITIES:
United States Government and government
agencies and authorities $3,276 $386 $ -- $3,662
States, municipalities and political
subdivisions 53,580 568 (2,671) 51,477
Foreign governments 40,202 2,019 (1,941) 40,280
Asset-backed 7,036 33 (397) 6,672
Commercial mortgage-backed 19,409 19 (3,348) 16,080
Residential mortgage-backed 148,097 5,460 (354) 153,203
Corporate 2,128,076 42,478 (242,381) 1,928,173
------------- --------- ------------ -------------
TOTAL FIXED MATURITY SECURITIES $2,399,676 $50,963 $(251,092) $2,199,547
------------- --------- ------------ -------------
EQUITY SECURITIES:
Non-redeemable preferred stocks $189,973 $3,938 $(49,141) $144,770
------------- --------- ------------ -------------
</Table>
The cost or amortized cost and fair value of fixed maturity securities at
December 31, 2009 by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because issuers of the securities may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<Table>
<Caption>
COST OR
AMORTIZED
COST FAIR VALUE
--------------------------------------------------------------------
Due in one year or less $26,443 $27,130
Due after one year through five years 409,189 424,109
Due after five years through ten years 433,202 448,572
Due after ten years 1,478,244 1,504,421
------------ ------------
TOTAL 2,347,078 2,404,232
Asset-backed 3,782 3,780
Commercial mortgage-backed 20,369 20,322
Residential mortgage-backed 122,036 127,529
------------ ------------
TOTAL $2,493,265 $2,555,863
------------ ------------
</Table>
<Page>
UNION SECURITY INSURANCE COMPANY 61
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Major categories of net investment income were as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2009 2008 2007
----------------------------------------------------------------------------------------------
Fixed maturity securities $158,678 $165,334 $177,108
Equity securities 12,522 15,860 20,997
Commercial mortgage loans on real estate 51,287 54,535 52,990
Policy loans 830 806 459
Short-term investments 1,207 2,888 4,060
Other investments 603 6,351 38,140
Cash and cash equivalents 95 1,208 1,928
----------- ----------- -----------
INVESTMENT INCOME 225,222 246,982 295,682
Investment expenses (8,497) (8,531) (9,447)
----------- ----------- -----------
NET INVESTMENT INCOME $216,725 $238,451 $286,235
----------- ----------- -----------
</Table>
No material investments of the Company were non-income producing for the years
ended December 31, 2009, 2008, and 2007.
The following table summarizes the proceeds from sales of available-for-sale
securities and the gross realized gains and gross realized losses that have been
included in earnings as a result of those sales.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2009 2008 2007
--------------------------------------------------------------------------------
Proceeds from sales $271,086 $548,341 $490,403
Gross realized gains 10,045 20,231 11,155
Gross realized losses 20,503 44,001 18,121
</Table>
For securities sold at a loss during 2009, the average period of time these
securities were trading continuously at a price below book value was
approximately 13 months.
After a period of declining market values in the fixed maturity and equity
security markets, the credit markets have shown continued improvement throughout
2009. This is primarily due to specific U.S. government intervention which
resulted in a lower threat of systemic collapse, enhanced liquidity in the
market, and improved economic prospects. As a result, many securities in the
portfolio have shown improved market values throughout the year.
We recorded net realized (losses) gains, including other-than-temporary
impairments, in the statement of operations as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2009 2008 2007
--------------------------------------------------------------------------------
Net realized (losses) gains
related to sales:
Fixed maturity securities $(198) $(5,350) $(2,495)
Equity securities (9,647) (16,153) (4,471)
Commercial mortgage loans
on real estate (4,100) (234) (312)
Other investments 20 -- 185
Collateral held under
securities lending -- (4,884) --
---------- ----------- ----------
TOTAL NET REALIZED LOSSES
RELATED TO SALES (13,925) (26,621) (7,093)
---------- ----------- ----------
Net realized losses related
to other-than-temporary
impairments:
Fixed maturity securities (6,990) (57,271) (13,757)
Equity securities (4,597) (51,804) (7,369)
---------- ----------- ----------
TOTAL NET REALIZED LOSSES
RELATED TO
OTHER-THAN-TEMPORARY
IMPAIRMENTS (11,587) (109,075) (21,126)
---------- ----------- ----------
TOTAL NET REALIZED LOSSES $(25,512) $(135,696) $(28,219)
---------- ----------- ----------
</Table>
OTHER-THAN-TEMPORARY IMPAIRMENTS
Adoption of the New OTTI Guidance
On April 1, 2009, the Company adopted the new OTTI guidance, which is within ASC
Topic 320. See Note 2 for further information. The new OTTI guidance requires
entities to separate an OTTI of a debt security into two components when there
are credit related losses associated with the impaired debt security for which
the Company asserts that it does not have the intent to sell, and it is more
likely than not that it will not be required to sell before recovery of its cost
basis. Prior to April 1, 2009, the Company had to determine whether it had the
intent and ability to hold the investment for a sufficient period of time for
the value to recover. When the analysis of the above factors resulted in the
Company's conclusion that declines in market values were other-than-temporary,
the cost of the securities was written down to market value and the
<Page>
62 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
reduction in value was reflected as a realized loss in the statement of
operations. Under the new OTTI guidance, the amount of the OTTI related to a
credit loss is recognized in earnings, and the amount of the OTTI related to
other, non-credit, factors (E.G., interest rates, market conditions, etc.) is
recorded as a component of other comprehensive income. In instances where no
credit loss exists but it is more likely than not that the Company will have to
sell the debt security prior to the anticipated recovery, the decline in market
value below amortized cost is recognized as an OTTI in earnings. In periods
after the recognition of an OTTI on debt securities, the Company accounts for
such securities as if they had been purchased on the measurement date of the
OTTI at an amortized cost basis equal to the previous amortized cost basis less
the OTTI recognized in earnings. For debt securities for which OTTI were
recognized in earnings, the difference between the new amortized cost basis and
the cash flows expected to be collected will be accreted or amortized into net
investment income.
The new OTTI guidance required that the Company record, as of April 1, 2009, the
date of adoption, a cumulative effect adjustment to reclassify the noncredit
component of a previously recognized OTTI from retained earnings to other
comprehensive income. For purposes of calculating the cumulative effect
adjustment, the Company reviewed OTTI it had recorded through realized losses on
securities held at March 31, 2009, which were $64,705, and estimated the portion
related to credit losses (I.E., where the present value of cash flows expected
to be collected are lower than the amortized cost basis of the security) and the
portion related to all other factors. The Company determined that $36,462 of the
OTTI previously recorded related to specific credit losses and $28,243 related
to all other factors. Under the new OTTI guidance, the Company increased the
amortized cost basis of these debt securities by $25,268 and recorded a
cumulative effect adjustment, net of tax, in its shareholder's equity section.
The cumulative effect adjustment had no effect on total shareholder's equity as
it increased retained earnings and reduced accumulated other comprehensive
income.
For the twelve months ended December 31, 2009, the Company recorded $11,330 of
OTTI of which $11,587 was related to credit losses and recorded as net OTTI
losses recognized in earnings, while the remaining $(257) related to all other
factors was recorded as an unrealized gain component of AOCI.
The following table sets forth the amount of credit loss impairments recognized
within the results of operations on fixed maturity securities held by the
Company as of the dates indicated, for which a portion of the OTTI loss was
recognized in AOCI, and the corresponding changes in such amounts.
<Table>
BALANCE, APRIL 1, 2009 $ 36,462
Additions for credit loss impairments recognized in the
current period on securities not previously impaired 681
Additions for credit loss impairments recognized in the
current period on securities previously impaired 680
Reductions for increases in cash flows expected to be
collected that are recognized over the remaining life of
the security (275)
Reductions for credit loss impairments previously
recognized on securities which matured, paid down,
prepaid, or were sold during the period (8,301)
---------
BALANCE, DECEMBER 31, 2009 $29,247
---------
</Table>
We regularly monitor our investment portfolio to ensure investments that may be
other-than-temporarily impaired are identified in a timely fashion, properly
valued, and charged against earnings in the proper period. The determination
that a security has incurred an other-than-temporary decline in value requires
the judgment of management. Assessment factors include, but are not limited to,
the length of time and the extent to which the market value has been less than
cost, the financial condition and rating of the issuer, whether any collateral
is held, the intent and ability of the Company to retain the investment for a
period of time sufficient to allow for recovery for equity securities and the
intent to sell or whether it is more likely than not that the Company will be
required to sell for fixed maturity securities. Inherently, there are risks and
uncertainties involved in making these judgments. Changes in circumstances and
critical assumptions such as a continued weak economy, a more pronounced
economic downturn or unforeseen events which affect one or more companies,
industry sectors, or countries could result in additional impairments in future
periods for other-than-temporary declines in value. Any equity security whose
price decline is deemed other-than-temporary is written down to its then current
market value with the amount of the impairment reported as a realized loss in
that period. The impairment of a fixed maturity security that the Company has
the intent to sell or that it is more likely than not that the Company will be
required to sell is deemed other-than-temporary and is written down to its
market value at the balance sheet date with the amount of the impairment
reported as a realized loss in that period. For all other-than-temporarily
impaired fixed maturity securities that do not meet either of these two
criteria, the Company is required to analyze its ability to recover the
amortized cost of the security by calculating the net present value of projected
future cash flows. For these other-than-temporarily impaired fixed maturity
securities, the net amount recognized in earnings is equal to the difference
between the amortized cost of the fixed maturity security and its net present
value.
The Company considers different factors to determine the amount of projected
future cash flows and discounting methods for corporate debt and residential and
commercial mortgage-backed or asset-backed securities. For corporate debt
securities, the split between the credit and non-credit losses is driven
principally by assumptions regarding the amount and timing of projected future
cash flows. The net present value is calculated by discounting the Company's
best estimate of projected future cash flows at the effective interest rate
implicit in the security at the date of acquisition. For residential and
<Page>
UNION SECURITY INSURANCE COMPANY 63
-------------------------------------------------------------------------------
commercial mortgage-backed and asset-backed securities, cash flow estimates,
including prepayment assumptions, are based on data from widely accepted
third-party data sources or internal estimates. In addition to prepayment
assumptions, cash flow estimates vary based on assumptions regarding the
underlying collateral including default rates, recoveries and changes in value.
The net present value is calculated by discounting the Company's best estimate
of projected future cash flows at the effective interest rate implicit in the
fixed maturity security prior to impairment at the balance sheet date. The
discounted cash flows become the new amortized cost basis of the fixed maturity
security.
In periods subsequent to the recognition of an other-than-temporary impairment,
the Company generally accretes the discount (or amortize the reduced premium)
into net investment income, up to the non-discounted amount of projected future
cash flows, resulting from the reduction in cost basis, based upon the amount
and timing of the expected future cash flows over the estimated period of cash
flows.
Realized gains and losses on sales of investments are recognized on the specific
identification basis.
The investment category and duration of the Company's gross unrealized losses on
fixed maturity securities and equity securities at December 31, 2009 and 2008
were as follows:
<Table>
<Caption>
DECEMBER 31, 2009
LESS THAN 12 MONTHS 12 MONTHS OR MORE
FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES
----------------------------------------------------------------------------------------------------------------------
FIXED MATURITY SECURITIES:
States, municipalities and political
subdivisions $8,053 $(347) $13,143 $(1,415)
Foreign governments 653 (28) 12,874 (1,797)
Asset-backed 1,499 (21) 1,005 (37)
Commercial mortgage-backed 10,342 (64) 1,070 (104)
Residential mortgage-backed 2,284 (289) 1,184 (165)
Corporate 249,368 (8,761) 389,551 (40,817)
---------- -------- ---------- ---------
TOTAL FIXED MATURITY SECURITIES $272,199 $(9,510) $418,827 $(44,335)
---------- -------- ---------- ---------
EQUITY SECURITIES:
Non-redeemable preferred stocks $505 $(39) $83,260 $(12,177)
---------- -------- ---------- ---------
<Caption>
DECEMBER 31, 2009
TOTAL
FAIR UNREALIZED
VALUE LOSSES
-------------------------------------- -----------------------------------------
FIXED MATURITY SECURITIES:
States, municipalities and political
subdivisions $21,196 $(1,762)
Foreign governments 13,527 (1,825)
Asset-backed 2,504 (58)
Commercial mortgage-backed 11,412 (168)
Residential mortgage-backed 3,468 (454)
Corporate 638,919 (49,578)
---------- ---------
TOTAL FIXED MATURITY SECURITIES $691,026 $(53,845)
---------- ---------
EQUITY SECURITIES:
Non-redeemable preferred stocks $83,765 $(12,216)
---------- ---------
</Table>
<Table>
<Caption>
DECEMBER 31, 2008
LESS THAN 12 MONTHS 12 MONTHS OR MORE
FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES
------------------------------------------------------------------------------------------------------------
FIXED MATURITY SECURITIES:
States, municipalities and political
subdivisions $19,525 $(1,534) $11,085 $(1,137)
Foreign governments 15,043 (1,446) 7,443 (495)
Asset-backed 2,156 (98) 2,387 (299)
Commercial mortgage-backed 8,780 (2,042) 6,631 (1,306)
Residential mortgage-backed 1,210 (93) 1,067 (261)
Corporate 783,894 (111,976) 498,897 (130,405)
---------- ----------- ---------- -----------
TOTAL FIXED MATURITY SECURITIES $830,608 $(117,189) $527,510 $(133,903)
---------- ----------- ---------- -----------
EQUITY SECURITIES:
Non-redeemable preferred stocks $54,750 $(21,217) $65,285 $(27,924)
---------- ----------- ---------- -----------
<Caption>
DECEMBER 31, 2008
TOTAL
FAIR UNREALIZED
VALUE LOSSES
-------------------------------------- -----------------------------------
FIXED MATURITY SECURITIES:
States, municipalities and political
subdivisions $30,610 $(2,671)
Foreign governments 22,486 (1,941)
Asset-backed 4,543 (397)
Commercial mortgage-backed 15,411 (3,348)
Residential mortgage-backed 2,277 (354)
Corporate 1,282,791 (242,381)
------------ -----------
TOTAL FIXED MATURITY SECURITIES $1,358,118 $(251,092)
------------ -----------
EQUITY SECURITIES:
Non-redeemable preferred stocks $120,035 $(49,141)
------------ -----------
</Table>
Total gross unrealized losses represent less than 9% and 21% of the aggregate
fair value of the related securities at December 31, 2009 and 2008,
respectively. Approximately 14% and 46% of these gross unrealized losses have
been in a continuous loss position for less than twelve months at December 31,
2009 and 2008, respectively. The total gross unrealized losses are comprised of
328 and 677 individual securities at December 31, 2009 and 2008, respectively.
In accordance with its policy described above, the Company concluded that for
these securities an adjustment to its results of operations for
other-than-temporary impairments of the gross unrealized losses was not
warranted at December 31, 2009 and 2008. These conclusions are based on a
detailed analysis of the underlying credit and expected cash flows of each
security. As of December 31, 2009, the gross unrealized losses that have been in
a continuous loss position for twelve months or more were concentrated in
non-redeemable preferred stocks and in the financial, energy and industrial
industries of the Company's corporate fixed maturity securities. For these
concentrations, gross unrealized losses of twelve months or more were $43,794,
or 77%, of the total. The gross unrealized losses are primarily attributable to
widening credit spreads associated with an underlying shift in overall credit
risk premium. As of December 31, 2009, the Company did not intend to sell the
securities and it was not more likely than not that the Company would be
required to sell the securities before the anticipated recovery of their
amortized cost basis.
<Page>
64 UNION SECURITY INSURANCE COMPANY
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The cost or amortized cost and fair value of available for sale fixed maturity
securities in an unrealized loss position at December 31, 2009, by contractual
maturity, is shown below:
<Table>
<Caption>
COST OR
AMORTIZED COST FAIR VALUE
--------------------------------------------------------------------------------
Due in one year or less $563 $549
Due after one year through five years 52,031 49,938
Due after five years through ten years 116,070 110,073
Due after ten years 558,145 513,082
---------- ----------
TOTAL 726,809 673,642
Asset-backed 2,561 2,504
Commercial mortgage-backed 11,579 11,412
Residential mortgage-backed 3,922 3,468
---------- ----------
TOTAL $744,871 $691,026
---------- ----------
</Table>
The Company has exposure to sub-prime and related mortgages within our fixed
maturity security portfolio. At December 31, 2009, approximately 3.1% of the
residential mortgage-backed holdings had exposure to sub-prime mortgage
collateral. This represented approximately 1.5% of the total fixed income
portfolio and 0.6% of the total unrealized loss position. Of the securities with
sub-prime exposure, approximately 51% are rated as investment grade. All
residential mortgage-backed securities, including those with sub-prime exposure,
are reviewed as part of the ongoing other-than-temporary impairment monitoring
process.
The Company has made commercial mortgage loans, collateralized by the underlying
real estate, on properties located throughout the U.S. and Canada. At December
31, 2009, approximately 39% of the outstanding principal balance of commercial
mortgage loans was concentrated in the states of California, New York and Utah.
Although the Company has a diversified loan portfolio, an economic downturn
could have an adverse impact on the ability of its debtors to repay their loans.
The outstanding balance of commercial mortgage loans range in size from $54 to
$13,926 at December 31, 2009 and from $7 to $14,345 at December 31, 2008. The
mortgage loan valuation allowance for losses was $8,552 and $3,252 at December
31, 2009 and 2008, respectively.
At December 31, 2009, there are no outstanding mortgage loan commitments. At
December 31, 2009, the Company is committed to fund additional capital
contributions of $3,500 to joint ventures and to certain investments in limited
partnerships.
The Company has short term investments and fixed maturities of $7,378 and $4,937
at December 31, 2009 and 2008, respectively, on deposit with various
governmental authorities as required by law.
Securities Lending
The Company engages in transactions in which fixed maturity securities,
especially bonds issued by the U.S. government, government agencies and
authorities, and U.S. corporations, are loaned to selected broker/dealers.
Collateral, greater than or equal to 102% of the fair value of the securities
lent, plus accrued interest, is received in the form of cash and cash
equivalents held by a custodian bank for the benefit of the Company. The use of
cash collateral received is unrestricted. The Company reinvests the cash
collateral received, generally in investments of high credit quality that are
designated as available-for-sale under the debt and equity securities guidance,
which is within ASC Topic 320. The Company monitors the fair value of securities
loaned and the collateral received, with additional collateral obtained, as
necessary. The Company is subject to the risk of loss to the extent there is a
loss on the re-investment of cash collateral.
As of December 31, 2009 and 2008, our collateral held under securities lending,
of which its use is unrestricted, was $106,896 and $113,191, respectively, while
our liability to the borrower for collateral received was $108,186 and $124,063,
respectively. The difference between the collateral held and obligations under
securities lending is recorded as an unrealized loss and is included as part of
AOCI. All securities with unrealized losses have been in a continuous loss
position for twelve months or longer as of December 31, 2009 and December 31,
2008. The Company has actively reduced the size of the securities lending to
mitigate counter-party exposure. The Company includes the available-for-sale
investments purchased with the cash collateral in its evaluation of
other-than-temporary impairments.
Cash proceeds that the Company receives as collateral for the securities it
lends and subsequent repayment of the cash are regarded by the Company as cash
flows from financing activities, since the cash received is considered a
borrowing. Since the Company reinvests the cash collateral generally in
investments that are designated as available-for-sale, the reinvestment is
presented as cash flows from investing activities.
<Page>
UNION SECURITY INSURANCE COMPANY 65
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4. FAIR VALUE DISCLOSURES
Inputs and Valuation Techniques for Financial Assets and Liabilities Disclosures
The fair value measurements and disclosures guidance, which is within ASC Topic
820, defines fair value, establishes a framework for measuring fair value,
creates a fair value hierarchy based on the quality of inputs used to measure
fair value and enhances disclosure requirements for fair value measurements.
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. In accordance with this guidance, the
Company has categorized its recurring basis financial assets and liabilities
into a three-level fair value hierarchy based on the priority of the inputs to
the valuation technique.
The fair value hierarchy gives the highest priority to quoted prices in active
markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). The inputs used to measure fair value may fall
into different levels of the fair value hierarchy. In such cases, the level in
the fair value hierarchy within which the fair value measurement in its entirety
falls has been determined based on the lowest level input that is significant to
the fair value measurement in its entirety. The Company's assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset or liability.
The levels of the fair value hierarchy and its application to the Company's
financial assets and liabilities are described below:
- Level 1 inputs utilize quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Company has the ability to access.
Financial assets and liabilities utilizing Level 1 inputs include certain
U.S. mutual funds, money market funds and certain foreign securities.
- Level 2 inputs utilize other than quoted prices included in Level 1 that are
observable for the asset, either directly or indirectly, for substantially
the full term of the asset. Level 2 inputs include quoted prices for similar
assets in active markets, quoted prices for identical or similar assets in
markets that are not active and inputs other than quoted prices that are
observable in the marketplace for the asset. The observable inputs are used
in valuation models to calculate the fair value for the asset. Financial
assets utilizing Level 2 inputs include corporate, municipal, foreign
government and private placement bonds, U.S. Government and agency
securities, residential and commercial mortgage-backed securities,
asset-backed securities, non-redeemable preferred stocks and certain U.S.
and foreign mutual funds.
- Level 3 inputs are unobservable but are significant to the fair value
measurement for the asset, and include situations where there is little, if
any, market activity for the asset. These inputs reflect management's own
assumptions about the assumptions a market participant would use in pricing
the asset. Financial assets utilizing Level 3 inputs include certain
non-redeemable preferred stocks, foreign government and corporate bonds, and
commercial mortgage-backed securities that were quoted by brokers and could
not be corroborated by Level 2 inputs and derivatives.
A review of fair value hierarchy classifications is conducted on a quarterly
basis. Changes in the observability of valuation inputs may result in a
reclassification of levels for certain securities within the fair value
hierarchy.
The following tables present the Company's fair value hierarchy for those
recurring basis assets and liabilities as of December 31, 2009 and 2008.
<Table>
<Caption>
DECEMBER 31, 2009
FINANCIAL ASSETS Total Level 1 Level 2 Level 3
---------------------------------------------------------------------------------------------------------------
Fixed maturity securities:
United States government and government
agencies and authorities $3,012 $ -- $3,012 $ --
States, municipalities and political
subdivisions 58,394 -- 58,394 --
Foreign governments 35,128 -- 34,613 515
Asset-backed 3,780 -- 3,780 --
Commercial mortgage-backed 20,322 -- 18,130 2,192
Residential mortgage-backed 127,529 -- 127,529 --
Corporate 2,307,698 -- 2,275,987 31,711
Non-redeemable preferred stocks 157,993 -- 154,774 3,219
Short-term investments 70,367 65,875 4,492 --
Collateral held under securities
lending 66,896(b) 27,833 39,063 --
Cash equivalents 32,491(b) 32,491 -- --
Other assets 10,406(c) -- -- 10,406
Assets held in separate accounts 1,738,969(b) 1,653,588(a) 85,381 --
------------- ------------- ------------- ---------
TOTAL FINANCIAL ASSETS $4,632,985 $1,779,787 $2,805,155 $48,043
------------- ------------- ------------- ---------
</Table>
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66 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
<Table>
<Caption>
DECEMBER 31, 2008
FINANCIAL ASSETS Total Level 1 Level 2 Level 3
---------------------------------------------------------------------------------------------------------------
Fixed maturity securities:
United States government and government $3,662 $ -- $3,662 $ --
agencies and authorities
States, municipalities and political 51,477 -- 51,477 --
subdivisions
Foreign governments 40,280 -- 33,952 6,328
Asset-backed 6,672 -- 6,672 --
Commercial mortgage-backed 16,080 -- 14,156 1,924
Residential mortgage backed securities 153,203 -- 153,203 --
Corporate 1,928,173 -- 1,902,538 25,635
Non-redeemable preferred stocks 144,770 -- 140,126 4,644
Short-term investments 159,847 159,398 449 --
Collateral held under securities 76,916 (b) 26,211 50,705 --
lending
Cash equivalents 11,724 (b) 11,724 -- --
Other assets 4,821 (c) -- -- 4,821
Assets held in separate accounts 1,556,089 (b) 1,490,877 (a) 65,212 --
------------- --- ------------- --- ------------- ---------
TOTAL FINANCIAL ASSETS $4,153,714 $1,688,210 $2,422,152 $43,352
------------- ------------- ------------- ---------
</Table>
(a) Mainly includes mutual fund investments
(b) The amounts presented differ from the amounts presented in the consolidated
balance sheets because certain cash equivalent investments are not measured
at estimated fair value (e.g., certificates of deposit, etc.).
(c) The amounts presented differ from the amounts presented in the consolidated
balance sheets because only certain assets or liabilities within these line
items are measured at estimated fair value (e.g., debt and equity
securities and derivatives, etc.).
The following table summarizes the change in balance sheet carrying value
associated with Level 3 financial assets carried at fair value during the years
ended December 31, 2009 and 2008:
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2009
TOTAL FIXED MATURITY SECURITIES
LEVEL 3 FOREIGN COMMERCIAL
ASSETS GOVERNMENT MORTGAGE-BACKED CORPORATE
-------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $43,352 $6,328 $1,924 $25,635
Total gains (losses)
(realized/unrealized) included in
earnings 5,039 147 24 (717)
Net unrealized gains (losses)
included in stockholder's equity 4,079 (1,335) 308 4,748
Purchases, issuances, (sales) and
(settlements) 10,816 -- (64) 10,880
Net transfers out (15,243) (4,625) -- (8,835)
--------- -------- -------- ---------
BALANCE, END OF PERIOD $48,043 $515 $2,192 $31,711
--------- -------- -------- ---------
<Caption>
YEAR ENDED DECEMBER 31, 2009
EQUITY SECURITIES
NON-REDEEMABLE OTHER
PREFERRED ASSETS
-------------------------------------- ----------------------------------
Balance, beginning of period $4,644 $4,821
Total gains (losses)
(realized/unrealized) included in
earnings -- 5,585
Net unrealized gains (losses)
included in stockholder's equity 358 --
Purchases, issuances, (sales) and
(settlements) -- --
Net transfers out (1,783) --
-------- ---------
BALANCE, END OF PERIOD $3,219 $10,406
-------- ---------
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2008
TOTAL FIXED MATURITY SECURITIES
LEVEL 3 FOREIGN COMMERCIAL
ASSETS GOVERNMENT MORTGAGE-BACKED CORPORATE
------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $67,436 $499 $1,247 $58,429
Total (losses) gains
(realized/unrealized) included in
earnings (1,324) 196 22 (3,928)
Net unrealized (losses) gains
included in stockholder's equity (7,919) 536 (411) (6,939)
Purchases, issuances, (sales) and
(settlements) 1,652 2,898 1,066 (2,797)
Net transfers (out) in (16,493) 2,199 -- (19,130)
--------- -------- -------- ---------
BALANCE, END OF PERIOD $43,352 $6,328 $1,924 $25,635
--------- -------- -------- ---------
<Caption>
YEAR ENDED DECEMBER 31, 2008
EQUITY SECURITIES
NON-REDEEMABLE OTHER
PREFERRED ASSETS
-------------------------------------- ---------------------------------
Balance, beginning of period $4,826 $2,435
Total (losses) gains
(realized/unrealized) included in
earnings -- 2,386
Net unrealized (losses) gains
included in stockholder's equity (1,105) --
Purchases, issuances, (sales) and
(settlements) 485 --
Net transfers (out) in 438 --
-------- --------
BALANCE, END OF PERIOD $4,644 $4,821
-------- --------
</Table>
<Page>
UNION SECURITY INSURANCE COMPANY 67
-------------------------------------------------------------------------------
Three different valuation techniques can be used in determining fair value for
financial assets and liabilities: the market, income or cost approaches. The
three valuation techniques described in the fair value measurements and
disclosures guidance, which is within ASC Topic 820, are consistent with
generally accepted valuation methodologies. The market approach valuation
techniques use prices and other relevant information from market transactions
involving identical or comparable assets or liabilities. When possible, quoted
prices (unadjusted) in active markets are used as of the period-end date.
Otherwise, valuation techniques consistent with the market approach including
matrix pricing and comparables are used. Matrix pricing is a mathematical
technique employed principally to value debt securities without relying
exclusively on quoted prices for those securities but rather by relying on the
securities' relationship to other benchmark quoted securities. Market approach
valuation techniques often use market multiples derived from a set of
comparables. Multiples might lie in ranges with a different multiple for each
comparable. The selection of where within the range the appropriate multiple
falls requires judgment, considering both qualitative and quantitative factors
specific to the measurement.
Income approach valuation techniques convert future amounts, such as cash flows
or earnings, to a single present amount, or a discounted amount. These
techniques rely on current market expectations of future amounts as of the
period-end date. Examples of income approach valuation techniques include
present value techniques, option-pricing models, binomial or lattice models that
incorporate present value techniques, and the multi-period excess earnings
method.
Cost approach valuation techniques are based upon the amount that would be
required to replace the service capacity of an asset at the period-end date, or
the current replacement cost. That is, from the perspective of a market
participant (seller), the price that would be received for the asset is
determined based on the cost to a market participant (buyer) to acquire or
construct a substitute asset of comparable utility, adjusted for obsolescence.
While not all three approaches are applicable to all financial assets or
liabilities, where appropriate, one or more valuation techniques may be used.
For all the financial assets and liabilities included in the above hierarchy,
excluding derivatives and private placement bonds, the market valuation
technique is generally used. For private placement bonds and derivatives, the
income valuation technique is generally used. For the years ended December 31,
2009 and 2008, the application of the valuation technique applied to similar
assets and liabilities has been consistent.
Level 1 and Level 2 securities are valued using various observable market inputs
obtained from a pricing service. The pricing service prepares estimates of fair
value measurements for our Level 2 securities using proprietary valuation models
based on techniques such as matrix pricing which include observable market
inputs. The fair value measurements and disclosures guidance, defines observable
market inputs as the assumptions market participants would use in pricing the
asset or liability developed on market data obtained from sources independent of
the Company. The extent of the use of each observable market input for a
security depends on the type of security and the market conditions at the
balance sheet date. Depending on the security, the priority of the use of
observable market inputs may change as some observable market inputs may not be
relevant or additional inputs may be necessary. The following observable market
inputs, listed in the approximate order of priority, are utilized in the pricing
evaluation of Level 2 securities: benchmark yields, reported trades,
broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities,
bids, offers and reference data. The pricing service also evaluates each
security based on relevant market information including: relevant credit
information, perceived market movements and sector news. Valuation models can
change period to period, depending on the appropriate observable inputs that are
available at the balance sheet date to price a security. When market observable
inputs are unavailable, the remaining unpriced securities are submitted to
independent brokers who provide non-binding broker quotes or are priced by other
qualified sources and are categorized as Level 3 securities.
Management evaluates the following factors in order to determine whether the
market for a financial asset is inactive. The factors include, but are not
limited to:
- There are few recent transactions,
- Little information is released publicly,
- The available prices vary significantly over time or among market
participants,
- The prices are stale (i.e., not current), and
- The magnitude of the bid-ask spread.
Illiquidity did not have a material impact in the fair value determination of
the Company's financial assets.
The Company generally obtains one price for each financial asset. The Company
performs a monthly analysis to assess if the evaluated prices represent a
reasonable estimate of their fair value. This process involves quantitative and
qualitative analysis and is overseen by investment and accounting professionals.
Examples of procedures performed include, but are not limited to, initial and
on-going review of pricing service methodologies, review of the prices received
from the pricing service, review of pricing statistics and trends, and
comparison of prices for certain securities with two different appropriate price
sources for reasonableness. Following this analysis, the Company generally uses
the best estimate of fair value based upon all available inputs. On infrequent
occasions, a non-pricing service source may be more familiar with the market
activity for a
<Page>
68 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
particular security than the pricing service. In these cases the price used is
taken from the non-pricing service source. The pricing service provides
information to indicate which securities were priced using market observable
inputs so that the Company can properly categorize our financial assets in the
fair value hierarchy.
Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring
Basis
The Company also measures the fair value of certain assets on a non-recurring
basis, generally on an annual basis, or when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. These
assets include goodwill and finite-lived intangible assets. In accordance with
the provisions of ASC Topic 350, INTANGIBLES -- GOODWILL AND OTHER, since the
carrying amount of the Company was greater than its fair value as determined in
Step 1 of the impairment test, the Company was required to measure the estimated
fair value of goodwill in Step 2 of the impairment test. Goodwill of the Company
with a carrying amount of $156,817 was written down to its implied fair value of
$81,573, resulting in an impairment charge of $75,244, which was included in
earnings for the period. See Note 13 for further information.
To estimate the fair value, the Company utilized both the income and market
valuation approaches. Under the income approach, the Company determined the fair
value considering distributable earnings which were estimated from operating
plans. The resulting cash flows were then discounted using a market participant
weighted average cost of capital estimated for the Company. After discounting
the future discrete earnings to their present value, the Company estimated the
terminal value attributable to the years beyond the discrete operating plan
period. The discounted terminal value was then added to the aggregate discounted
distributable earnings from the discrete operating plan period to estimate the
fair value of Company. Under the market approach, the Company derived the fair
value based on various financial multiples, including but not limited to: price
to tangible book value of equity, price to estimated 2009 earnings and price to
estimated 2010 earnings which were estimated based on publicly available data
related to comparable guideline companies. In addition, financial multiples were
also estimated from publicly available purchase price data for acquisitions of
companies operating in the insurance industry. The estimated fair value of the
Company was more heavily weighted towards the income approach because the
earnings capacity of a business is generally considered the most important
factor in the valuation of a business enterprise. This fair value determination
was categorized as Level 3 (unobservable) in the fair value hierarchy.
The following tables present the Company's fair value hierarchy for goodwill
measured at fair value on a non-recurring basis on which an impairment charge
was recorded, and the related impairment charge as of December 31, 2009:
<Table>
<Caption>
ASSETS AT FAIR VALUE
NON-RECURRING BASIS
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
---------------------------------------------------------------------------------------------------
At December 31, 2009
Goodwill- $ -- $ -- $81,573 $81,573
---- ---- --------- ---------
</Table>
<Table>
<Caption>
IMPAIRMENT CHARGES
TWELVE MONTHS ENDED
DECEMBER 31,
2009 2008
--------------------------------------------------------------------------------
Goodwill- $75,244 $ --
--------- ----
</Table>
Fair Value of Financial Instruments Disclosures
The financial instruments guidance, which is within ASC Topic 825, requires
disclosure of fair value information about financial instruments, as defined
therein, for which it is practicable to estimate such fair value. Therefore, it
requires fair value disclosure for financial instruments that are not recognized
in the consolidated balance sheets. However, this guidance excludes certain
financial instruments, including those related to insurance contracts and those
accounted for under the equity method and joint ventures guidance, which is
within ASC Topic 323, INVESTMENTS -- EQUITY METHOD AND JOINT VENTURES (such as
real estate joint ventures).
Please refer to the INPUTS AND VALUATION TECHNIQUES FOR FINANCIAL AND
LIABILITIES DISCLOSURE section above for the methods and assumptions used to
estimate fair value for the following assets and liabilities:
- Fixed maturity securities
- Equity securities
- Short-term investments
- Other assets
Fair values for collateral held and obligations under securities lending and for
separate account assets (with matching liabilities) are obtained from an
independent pricing service which uses observable market information.
<Page>
UNION SECURITY INSURANCE COMPANY 69
-------------------------------------------------------------------------------
In estimating the fair value of the financial instruments presented, the Company
used the following methods and assumptions:
CASH AND CASH EQUIVALENTS: the carrying value reported approximates fair value
because of the short maturity of the instruments.
COMMERCIAL MORTGAGE LOANS AND POLICY LOANS: the fair values of mortgage loans
are estimated using discounted cash flow analyses, based on interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. Mortgage loans with similar characteristics are aggregated for purposes
of the calculations. The carrying value of policy loans reported in the balance
sheets approximates fair value.
OTHER INVESTMENTS: the carrying value of the other investments approximates fair
value.
COLLATERAL AND OBLIGATIONS UNDER SECURITIES LENDING: the invested assets of the
collateral held under securities lending are reported at their estimated fair
values, which are primarily based on matrix pricing models and quoted market
prices. The obligations under securities lending are reported at the amount
received from the selected broker/dealers.
POLICY RESERVES UNDER INVESTMENT PRODUCTS: the fair values for the Company's
policy reserves under the investment products are determined using discounted
cash flow analysis.
SEPARATE ACCOUNT ASSETS AND LIABILITIES: separate account assets and liabilities
are reported at their estimated fair values, which are primarily based on quoted
market prices.
The following table demonstrates the carrying value and fair value of our
financial assets and liabilities as of December 31, 2009 and December 31, 2008.
<Table>
<Caption>
DECEMBER 31, 2009 DECEMBER 31, 2008
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and cash equivalents $43,819 $43,819 $17,171 $17,171
Fixed maturities securities 2,555,863 2,555,863 2,199,547 2,199,547
Equity securities 157,993 157,993 144,770 144,770
Commercial mortgage loans on real estate 772,912 782,922 838,254 843,128
Policy loans 13,981 13,981 14,422 14,422
Short-term investments 70,367 70,367 159,847 159,847
Other investments 3,123 3,123 3,938 3,938
Other assets 10,406 10,406 4,821 4,821
Assets held in separate accounts 1,740,344 1,740,344 1,557,313 1,557,313
Collateral held under securities lending 106,896 106,896 113,191 113,191
FINANCIAL LIABILITIES
Policy reserves under investment products (Individual and group $262,990 $245,356 $282,175 $261,661
annuities, subject to discretionary withdrawal)
Liabilities related to separate accounts 1,740,344 1,740,344 1,557,313 1,557,313
Obligations under securities lending 108,186 108,186 124,063 124,063
------------ ------------ ------------ ------------
</Table>
The fair value of the Company's liabilities for insurance contracts other than
investment-type contracts are not required to be disclosed. However, the fair
values of liabilities under all insurance contracts are taken into consideration
in the Company's overall management of interest rate risk, such that the
Company's exposure to changing interest rates is minimized through the matching
of investment maturities with amounts due under insurance contracts.
5. INCOME TAXES
The Company is subject to U.S. tax and files a U.S. consolidated federal income
tax return with its parent, Assurant Inc. Information about the Company's
current and deferred tax expense follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2009 2008 2007
-------------------------------------------------------------------------
Current expense:
Federal and state $28,000 $37,814 $39,405
Deferred (benefit) expense:
Federal and state (873) (26,947) 17,716
--------- --------- ---------
TOTAL INCOME TAX EXPENSE $27,127 $10,867 $57,121
--------- --------- ---------
</Table>
<Page>
70 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
A reconciliation of the federal income tax rate to the Company's effective
income tax rate follows:
<Table>
<Caption>
DECEMBER 31,
2009 2008 2007
--------------------------------------------------------------------------
FEDERAL INCOME TAX RATE: 35.0% 35.0% 35.0%
RECONCILING ITEMS:
Goodwill impairment* 662.5 -- --
Change in liability for prior
years' taxes 46.0 6.0 (5.0)
Permanent nondeductible
expenses 10.9 2.2 0.2
Dividends-received deduction (57.1) (21.4) (1.7)
Tax-exempt interest (4.3) (0.9) (0.1)
Change in valuation allowance -- 36.3 --
Other (10.6) 0.8 0.7
------- ------ -----
EFFECTIVE INCOME TAX RATE 682.4% 58.0% 29.1%
------- ------ -----
</Table>
* See note 13 for more information on Goodwill impairment.
The increase in the deduction for dividends received is due mainly to the
decrease in pre-tax income, partially offset by a decrease in the Company's
eligible dividends.
A reconciliation of the beginning and ending amounts of unrecognized tax
benefits for the years ended December 31, 2009 and 2008 is as follows:
<Table>
<Caption>
2009 2008
------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $ (4,723) $ (7,271)
Additions for tax positions related to
the current year (536) (733)
Reductions for tax positions related to
the current year 7,838 3,717
Additions for tax positions related to
prior years (8,039) (467)
Reductions for tax positions related to
prior years 416 31
--------- ---------
BALANCE AT END OF YEAR $(5,044) $(4,723)
--------- ---------
</Table>
Of the total unrecognized tax benefit, $6,064, $5,260 and $8,249, for 2009, 2008
and 2007, respectively, which includes interest, if recognized, would impact the
Company's consolidated effective tax rate. The liability for unrecognized tax
benefits is included in the Company's tax payable on its balance sheet.
The Company's continuing practice is to recognize interest related to income tax
matters in income tax expense. During the years ended December 31, 2009, 2008
and 2007, the Company recognized $464 and $372 of interest expense, and $4,880
of interest income, respectively, related to income tax matters. The Company had
$2,099 and $1,635 of interest accrued at December 31, 2009 and 2008,
respectively.
The Company files income tax returns in the U.S. and various state
jurisdictions. The Company has substantially concluded all U.S. federal income
tax matters for years through 2004. Substantially all state and non-U.S. income
tax matters have been concluded for the years through 2002.
<Page>
UNION SECURITY INSURANCE COMPANY 71
-------------------------------------------------------------------------------
The tax effects of temporary differences that result in significant deferred tax
assets and deferred tax liabilities are as follows:
<Table>
<Caption>
DECEMBER 31,
2009 2008 (1)
----------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Deferred gains on reinsurance $33,957 $39,875
Investments 25,535 40,229
Capital loss carryforwards 24,034 14,446
Deferred acquisition costs 19,293 22,350
Compensation related 1,182 970
Accrued liabilities 1,735 1,863
Net unrealized depreciation on
securities -- 90,493
Employee and post-retirement benefits -- 1,417
----------- -----------
TOTAL DEFERRED TAX ASSET 105,736 211,643
Less: valuation allowance (10,415) (7,195)
----------- -----------
Deferred tax assets net of valuation
allowance $95,321 $204,448
----------- -----------
DEFERRED TAX LIABILITIES:
Net unrealized appreciation on
securities $20,588 $ --
Policyholder and separate account
reserves 5,238 11,110
Employee and post-retirement benefits 361 --
Other 12,565 13,925
----------- -----------
TOTAL DEFERRED TAX LIABILITY 38,752 25,035
----------- -----------
NET DEFERRED INCOME TAX ASSET $56,569 $179,413
----------- -----------
</Table>
(1) Components of the 2008 net deferred income tax asset have been reclassified
to conform to the 2009 presentation. These reclassifications had no effect
on the overall net deferred income tax asset.
The Company's total valuation allowance against deferred tax assets increased
$3,220, from $7,195 at December 31, 2008 to $10,415 at December 31, 2009,
respectively, through other comprehensive income and retained earnings. The
calculation of the valuation allowance is made at the consolidated return group
level. A portion of the valuation allowance has been assigned to the Company
based on the provisions of the tax sharing agreement. A cumulative valuation
allowance of $10,415 has been recorded because it is management's assessment
that it is more likely than not that deferred tax assets of $10,415 will not be
realized.
The Company's ability to realize deferred tax assets depends on its ability to
generate sufficient taxable income of the same character within the carryback or
carryforward periods. In assessing future GAAP taxable income, the Company has
considered all sources of taxable income available to realize the deferred tax
asset, including the future reversal of existing temporary differences, future
taxable income exclusive of reversing temporary differences and carry forwards,
taxable income in carryback years and tax-planning strategies. If changes occur
in the assumptions underlying the Company's tax planning strategies or in the
scheduling of the reversal of the Company's deferred tax liabilities, the
valuation allowance may need to be adjusted in the future.
At December 31, 2009, the Company had no net operating loss carryforwards for
U.S. federal income tax purposes. At December 31, 2009, the Company had a
capital loss carryover for U.S. federal income tax purposes in the amount of
$68,670. The 2008 capital loss carryovers which represent $39,439 will expire if
not utilized in 2013, while the 2009 capital loss carryovers of $29,231 will
expire if not utilized in 2014.
6. PREMIUMS AND ACCOUNTS RECEIVABLE
Receivables are reported net of an allowance for uncollectible items. A summary
of such receivables is as follows:
<Table>
<Caption>
DECEMBER 31,
2009 2008
--------------------------------------------------------------
Insurance premiums receivable $64,906 $60,991
Other receivables 19,421 15,699
Allowance for uncollectible (4,811) (4,840)
items
--------- ---------
TOTAL $79,516 $71,850
--------- ---------
</Table>
7. STOCKHOLDER'S EQUITY
The Board of Directors of the Company has authorized 1,000,000 shares of common
stock with a par value of $5.00 per share. All the shares are issued and
outstanding as of December 31, 2009 and 2008. All the outstanding shares at
December 31, 2009 are owned by the Parent (see Note 1). The Company paid
dividends of $20,000 and $197,000 at December 31, 2009 and 2007, respectively.
No dividends were paid during 2008.
<Page>
72 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
The maximum amount of dividends which can be paid by the Company to its
shareholder without prior approval of the Insurance Commissioner is subject to
restrictions relating to statutory surplus (see Note 8).
The Company received contributed capital of $15,000 at December 31, 2009 and
2008. No contributed capital was received during 2007.
In 2008, based on operating lines of business, management determined that the
Company was over capitalized. As a result, with the approval of the Iowa
Insurance Division, on June 27, 2008, the Company returned $100,000 of
contributed capital to its parent company, Interfinancial Inc.
8. STATUTORY INFORMATION
The Company prepares consolidated financial statements on the basis of statutory
accounting principles ("SAP") prescribed or permitted by the Kansas Department
of Commerce. Prescribed SAP includes the Accounting Practices and Procedures
Manual of the National Association of Insurance Commissioners ("NAIC") as well
as state laws, regulations and administrative rules.
The principal differences between SAP and GAAP are: 1) policy acquisition costs
are expensed as incurred under SAP, but are deferred and amortized under GAAP;
2) the value of business acquired is not capitalized under SAP but is under
GAAP; 3) amounts collected from holders of universal life-type and annuity
products are recognized as premiums when collected under SAP, but are initially
recorded as contract deposits under GAAP, with cost of insurance recognized as
revenue when assessed and other contract charges recognized over the periods for
which services are provided; 4) the classification and carrying amounts of
investments in certain securities are different under SAP than under GAAP; 5)
the criteria for providing asset valuation allowances, and the methodologies
used to determine the amounts thereof, are different under SAP than under GAAP;
6) the timing of establishing certain reserves, and the methodologies used to
determine the amounts thereof, are different under SAP than under GAAP; 7)
certain assets are not admitted for purposes of determining surplus under SAP;
8) methodologies used to determine the amounts of deferred taxes and goodwill
are different under SAP than under GAAP; and 9) the criteria for obtaining
reinsurance accounting treatment is different under SAP than under GAAP.
The Company's statutory net income and capital and surplus are as follows:
<Table>
<Caption>
YEARS ENDED AND AT
DECEMBER 31,
2009 2008 2007
----------------------------------------------------------------------------
Statutory net income $59,863 $1,754 (1) $138,496
---------- ---------- --- ----------
Statutory capital and surplus $418,397 $350,383 $438,924
---------- ---------- ----------
</Table>
(1) The $1,754 net income in 2008 includes realized capital losses on
investments of $135,094 due to other-than-temporary impairments in our
investment portfolio of $108,913 in 2008 compared to $21,291 in 2007.
Insurance enterprises are required by state insurance departments to adhere to
minimum risk-based capital ("RBC") requirements developed by the NAIC. The
Company exceeds the minimum RBC requirements.
Dividend distributions to the Parent are restricted as to the amount by state
regulatory requirements. A dividend is extraordinary when combined with all
other dividends and distributions made within the preceding 12 months exceeds
the greater of 10% of the insurers surplus as regards to policyholders on
December 31 of the next preceding year, or the net gain from operations. In
2009, the Company declared and paid dividends of $20,000, all of which were
ordinary. There were no dividends declared and paid during 2008. Dividends may
only be paid out of earned surplus. In 2007, the Company declared and paid
dividends of $197,000, of which $30,442 was ordinary and $166,558 was
extraordinary. The Company has the ability, under state regulatory requirements,
to dividend up to $50,830 to its parent in 2010 without permission from Kansas
regulators.
9. REINSURANCE
In the ordinary course of business, the Company is involved in both the
assumption and cession of reinsurance with non-affiliated companies. The
following table provides details of the reinsurance recoverables balance for the
years ended December 31:
<Table>
<Caption>
DECEMBER 31,
2009 2008
--------------------------------------------------------------------------------
Ceded future policyholder benefits and
expenses $1,300,352 $1,248,756
Ceded unearned premium 18,942 18,502
Ceded claims and benefits payable 105,900 80,414
Ceded paid losses 9,211 11,579
------------- -------------
TOTAL $1,434,405 $1,359,251
------------- -------------
</Table>
<Page>
UNION SECURITY INSURANCE COMPANY 73
-------------------------------------------------------------------------------
The effect of reinsurance on premiums earned and benefits incurred was as
follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2009
LONG SHORT
DURATION DURATION TOTAL
---------------------------------------------------------------------------------
Direct earned
Premiums and other
considerations $248,457 $909,099 $1,157,556
Premiums assumed 8,419 128,425 136,844
Premiums ceded (190,555) (11,333) (201,888)
--------- ---------- ----------
NET EARNED PREMIUMS AND OTHER
CONSIDERATIONS $66,321 $1,026,191 $1,092,512
--------- ---------- ----------
Direct policyholder Benefits $492,058 $644,290 $1,136,348
Benefits assumed 28,667 114,577 143,244
Benefits ceded (424,066) (5,995) (430,061)
--------- ---------- ----------
NET POLICYHOLDER BENEFITS $96,659 $752,872 $849,531
--------- ---------- ----------
<Caption>
YEARS ENDED DECEMBER 31,
2008
LONG SHORT
DURATION DURATION TOTAL
------------------------------- ------------------------------------------------
Direct earned
Premiums and other
considerations $270,883 $980,899 $1,251,782
Premiums assumed 9,599 127,656 137,255
Premiums ceded (204,503) (10,744) (215,247)
--------- ---------- ----------
NET EARNED PREMIUMS AND OTHER
CONSIDERATIONS $75,979 $1,097,811 $1,173,790
--------- ---------- ----------
Direct policyholder Benefits $614,911 $658,421 $1,273,332
Benefits assumed 33,913 117,260 151,173
Benefits ceded (531,732) (3,275) (535,007)
--------- ---------- ----------
NET POLICYHOLDER BENEFITS $117,092 $772,406 $889,498
--------- ---------- ----------
<Caption>
YEARS ENDED DECEMBER 31,
2007
LONG SHORT
DURATION DURATION TOTAL
------------------------------- ------------------------------------------------
Direct earned
Premiums and other
considerations $293,346 $1,003,971 $1,297,317
Premiums assumed 9,732 179,395 189,127
Premiums ceded (219,490) (7,024) (226,514)
--------- ---------- ----------
NET EARNED PREMIUMS AND OTHER
CONSIDERATIONS $83,588 $1,176,342 $1,259,930
--------- ---------- ----------
Direct policyholder Benefits $756,784 $643,161 $1,399,945
Benefits assumed 31,002 177,909 208,911
Benefits ceded (671,497) (2,750) (674,247)
--------- ---------- ----------
NET POLICYHOLDER BENEFITS $116,289 $818,320 $934,609
--------- ---------- ----------
</Table>
The Company had $843,194 and $714,556 of assets held in trusts as of December
31, 2009 and 2008, respectively, for the benefit of others related to certain
reinsurance arrangements.
The Company utilizes ceded reinsurance for loss protection and capital
management, business divestitures, client risk and profit sharing.
LOSS PROTECTION AND CAPITAL MANAGEMENT
As part of the Company's overall risk and capacity management strategy, the
Company purchases reinsurance for certain risks underwritten by the Company,
including significant individual or catastrophic claims, which enables the
Company to free up capital to write additional business.
Under indemnity reinsurance transactions in which the Company is the ceding
insurer, the Company remains liable for policy claims if the assuming company
fails to meet its obligations. To mitigate this risk, the Company has control
procedures to evaluate the financial condition of reinsurers and to monitor the
concentration of credit risk. The selection of reinsurance companies is based on
criteria related to solvency and reliability and, to a lesser degree,
diversification as well as developing strong relationships with the Company's
reinsurers for the sharing of risks. A.M. Best ratings for The Hartford and John
Hancock Life Insurance Company ("John Hancock"), the reinsurers we have the most
exposure to, are A and A+, respectively, although A.M. Best recently placed a
negative outlook on the issuer credit and financial strength ratings of The
Hartford and a stable outlook for John Hancock.
BUSINESS DIVESTITURES
The Company has used reinsurance to exit certain businesses.
In 2005, the Parent signed an agreement with Forethought whereby the Company
agreed to discontinue writing new preneed insurance policies in the United
States via independent funeral homes and funeral homes other than those owned
and operated by SCI for a period of ten years.
In 2001, the Parent entered into a reinsurance agreement with The Hartford for
the sale of the FFG division. In 2000, the Company divested its LTC operations
to John Hancock. Assets supporting liabilities ceded relating to these
businesses are held in trusts and the separate accounts relating to FFG are
still reflected in the Company's balance sheet. If the reinsurers became
insolvent, we would be exposed to the risk that the assets in the trusts and/or
the separate accounts would be insufficient to support the liabilities that
would revert back to us. The reinsurance recoverable from The Hartford was
$648,919 and $677,836 as of December 31, 2009 and 2008, respectively. The
reinsurance recoverable from John Hancock was $669,407 and $561,342 as of
December 31, 2009 and 2008, respectively.
The reinsurance agreement associated with the FFG sale also stipulates that The
Hartford contribute funds to increase the value of the separate account assets
relating to Modified Guaranteed Annuity business sold if such value declines
below the value of the associated liabilities. If The Hartford fails to fulfill
these obligations, the Company will be obligated to make these payments.
In addition, the Company would be responsible for administering this business in
the event of reinsurer insolvency. We do not currently have the administrative
systems and capabilities to process this business. Accordingly, we would need to
obtain those capabilities in the event of an insolvency of one or more of the
reinsurers of these businesses. We might be forced to obtain such capabilities
on unfavorable terms with a resulting material adverse effect on our results of
operations and financial condition.
<Page>
74 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
As of December 31, 2009, we were not aware of any regulatory actions taken with
respect to the solvency of the insurance subsidiaries of The Hartford or John
Hancock that reinsure the FFG and LTC businesses, and the Company has not been
obligated to fulfill any such reinsurers' obligations.
On April 1, 2008, the Company and United Family Life Insurance Company ("UFLIC")
amended an existing Agreement of Reinsurance (the"Agreement") between the two
companies. Under the terms of the amendment, UFLIC will cede to the Company 100%
of its remaining reinsured liabilities, as defined in the Agreement, on a
coinsurance basis. No gain or loss was recognized as a result of this amendment
to the Agreement, and the Company paid a ceding fee of $8,159 to UFLIC.
10. RESERVES
The following table provides reserve information of our major product lines at
the dates shown:
<Table>
<Caption>
DECEMBER 31, 2009 CLAIMS AND BENEFITS
FUTURE PAYABLE INCURRED
POLICY BUT NOT
BENEFITS AND UNEARNED CASE REPORTED
EXPENSES PREMIUMS RESERVES RESERVES
--------------------------------------------------------------------------------------------------------------
LONG DURATION CONTRACTS:
Pre-funded funeral life
insurance policies and
investment-type annuity
contracts $1,185,901 $1,105 $3,737 $1,192
Life insurance no longer
offered 287,590 627 1,036 33
FFG and LTC disposed
businesses 1,196,373 19,056 6,851 89,323
All other 5,205 335 8,084 18,792
SHORT DURATION CONTRACTS:
Group term life -- 3,501 36,977 202,823
Group disability -- 6,716 137,402 1,209,968
Medical -- 2,582 3,245 7,603
Dental -- 3,769 18,297 4,722
Credit life and disability -- 1 -- 1,416
---------- ------- --------- ----------
TOTAL $2,675,069 $37,692 $215,629 $1,535,872
---------- ------- --------- ----------
<Caption>
DECEMBER 31, 2008 CLAIMS AND BENEFITS
FUTURE PAYABLE INCURRED
POLICY BUT NOT
BENEFITS AND UNEARNED CASE REPORTED
EXPENSES PREMIUMS RESERVES RESERVES
------------------------------- -----------------------------------------------------------------------------
LONG DURATION CONTRACTS:
Pre-funded funeral life
insurance policies and
investment-type annuity
contracts $1,237,749 $1,316 $4,076 $1,168
Life insurance no longer
offered 303,660 673 932 31
FFG and LTC disposed
businesses 1,141,011 18,277 8,451 62,945
All other 5,068 290 20,499 7,767
SHORT DURATION CONTRACTS:
Group term life -- 5,988 196,875 41,470
Group disability -- 2,104 1,256,171 138,956
Medical -- 3,315 5,537 9,494
Dental -- 3,995 2,600 20,207
Credit life and disability -- 4 -- 1,384
---------- ------- ---------- ---------
TOTAL $2,687,488 $35,962 $1,495,141 $283,422
---------- ------- ---------- ---------
</Table>
<Page>
UNION SECURITY INSURANCE COMPANY 75
-------------------------------------------------------------------------------
The following table provides a roll forward of the Company's product lines with
the most significant short duration claims and benefits payable balances: group
term life and group disability lines of business. Claims and benefits payable is
comprised of case and IBNR reserves.
<Table>
<Caption>
GROUP GROUP
TERM LIFE DISABILITY
--------------------------------------------------------------------------------
BALANCE AS OF JANUARY 1, 2007, GROSS OF
REINSURANCE $276,995 $1,448,571
Less: Reinsurance ceded and other (1) (412) (10,054)
----------- -------------
Balance as of January 1, 2007, net of
reinsurance 276,583 1,438,517
Incurred losses related to:
Current year 168,613 367,871
Prior year's interest 9,150 62,073
Prior year(s) (51,190) (93,096)
----------- -------------
TOTAL INCURRED LOSSES 126,573 336,848
Paid losses related to:
Current year 107,361 71,413
Prior year(s) 34,609 289,046
----------- -------------
TOTAL PAID LOSSES 141,970 360,459
Balance as of December 31, 2007, net of
reinsurance 261,186 1,414,906
Plus: Reinsurance ceded and other (1) 955 34,237
----------- -------------
BALANCE AS OF DECEMBER 31, 2007, GROSS OF
REINSURANCE $ 262,141 $ 1,449,143
Less: Reinsurance ceded and other (1) (955) (34,237)
----------- -------------
Balance as of January 1, 2008, net of
reinsurance 261,186 1,414,906
Incurred losses related to:
Current year 158,899 317,328
Prior year's interest 8,358 62,678
Prior year(s) (54,593) (85,403)
----------- -------------
TOTAL INCURRED LOSSES 112,664 294,603
Paid losses related to:
Current year 104,535 77,684
Prior year(s) 32,204 268,345
----------- -------------
TOTAL PAID LOSSES 136,739 346,029
Balance as of December 31, 2008, net of
reinsurance 237,111 1,363,480
Plus: Reinsurance ceded and other (1) 1,234 31,647
----------- -------------
BALANCE AS OF DECEMBER 31, 2008, GROSS OF
REINSURANCE $ 238,345 $ 1,395,127
Less: Reinsurance ceded and other (1) (1,234) (31,647)
Balance as of January 1, 2009, net of
reinsurance 237,111 1,363,480
Incurred losses related to:
Current year 138,168 300,046
Prior year's interest 8,299 60,625
Prior year(s) (22,243) (75,016)
----------- -------------
TOTAL INCURRED LOSSES 124,224 285,655
Paid losses related to:
Current year 83,520 69,424
Prior year(s) 39,399 264,809
----------- -------------
TOTAL PAID LOSSES 122,919 334,233
Balance as of December 31, 2009, net of
reinsurance 238,416 1,314,902
Plus: Reinsurance ceded and other (1) 1,384 32,468
----------- -------------
BALANCE AS OF DECEMBER 31, 2009, GROSS OF
REINSURANCE $239,800 $1,347,370
----------- -------------
</Table>
(1) Reinsurance ceded and other includes claims and benefits payable balances
that have either been (a) reinsured to third parties, (b) established for
claims related expenses whose subsequent payment is not recorded as a paid
claim, or (c) reserves established for obligations that would persist even
if contracts were cancelled (such as extension of benefits), which cannot
be analyzed appropriately under a roll-forward approach.
SHORT DURATION CONTRACTS
The Company's short duration contracts are comprised of group term life, group
disability, medical, dental, and credit life and disability. The principal
products and services included in these categories are described in the summary
of significant accounting polices. See note 2 for further information.
<Page>
76 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
Case and IBNR reserves are developed using actuarial principles and assumptions
that consider, among other things, contractual requirements, historical
utilization trends and patterns, benefits changes, medical inflation,
seasonality, membership, product mix, legislative and regulatory environment,
economic factors, disabled life mortality and claim termination rates and other
relevant factors. The Company consistently applies the principles and
assumptions listed above from year to year, while also giving due consideration
to the potential variability of these factors.
Since case and IBNR reserves include estimates developed from various actuarial
methods, the Company's actual losses incurred may be more or less than the
Company's previously developed estimates. As shown in the table above, if the
amounts listed on the line labeled "Incurred losses related to: Prior year" are
negative (redundant) this means that the Company's actual losses incurred
related to prior years for these lines were less than the estimates previously
made by the Company. If the line labeled "Incurred losses related to: Prior
year" are positive (deficient) this means that the Company's actual losses
incurred related to prior years for these lines were greater than the estimates
previously made by the Company.
The Group Term Life case and IBNR reserves redundancies in all years are due to
actual mortality rates running below those assumed in prior year reserves, and
actual recovery rates running higher than those assumed in prior year reserves.
Group Disability case and IBNR reserves show redundancies in all years due to
actual claim recovery rates exceeding those assumed in prior year reserves.
The Company's short duration group disability category includes short and long
term disability products. Case and IBNR reserves for long-term disability have
been discounted at 5.25%. The December 31, 2009 and 2008 liabilities net of
reinsurance include $1,288,589 and $1,334,794, respectively, of such reserves.
The amount of discounts deducted from outstanding reserves as of December 31,
2009 and 2008 are $451,267 and $465,786, respectively
LONG DURATION CONTRACTS
The Company's long duration contracts are comprised of preneed funeral life
insurance policies and annuity contracts, life insurance policies (no longer
offered), and FFG and LTC disposed businesses. The principal products and
services included in these categories are described in the summary of
significant accounting polices. See note 2 for further information.
PRENEED BUSINESS
Interest and discount rates for preneed life insurance vary by year of issuance
and product, are based on pricing assumptions and modified to allow for
provisions for adverse deviation. During 2009 and 2008, interest and discount
rates ranged between 4.7% and 7.3%.
Interest and discount rates for traditional life insurance (no longer offered)
vary by year of issuance and products and were 7.5% grading to 5.3% over 20
years in 2009 and 2008 with the exception of a block of pre-1980 business which
had a level 8.8% discount rate in both 2009 and 2008.
Mortality assumptions are based upon pricing assumptions and modified to allow
provisions for adverse deviation. Surrender rates vary by product and are based
upon pricing assumptions.
Future policy benefit increases on preneed life insurance policies ranged from
1.0% to 7.0% in 2009 and 2008. Some policies have future policy benefit
increases that are guaranteed or tied to equal some measure of inflation. The
inflation assumption for most of these inflation-linked benefits was 3.0% in
both 2009 and 2008 with the exception of most policies issued in 2005 and later
where the assumption was 2.3%.
The reserves for annuities are based on credited interest rates, which vary by
year of issue, and ranged from 1.5% to 5.5% in 2009 and 2008. Withdrawal
charges, if any, generally range from 7.0% to 0.0% and grade to zero over a
period of seven years.
FFG AND LTC
The reserves for FFG and LTC are included in the Company's reserves in
accordance with the insurance guidance, which is within ASC Topic 944. The
Company maintains an offsetting reinsurance recoverable related to these
reserves. See note 9 for further information.
11. RETIREMENT AND OTHER EMPLOYEE BENEFITS
The Parent sponsors a defined benefit pension plan and certain other post
retirement benefits covering employees who meet eligibility requirements as to
age and length of service. Plan assets of the defined benefit plans are not
specifically identified by each participating subsidiary. Therefore, a breakdown
of plan assets is not reflected in these consolidated financial statements. The
Company has no legal obligation for benefits under these plans. The benefits are
based on years of service and career compensation. The Parent's pension plan
funding policy is to contribute amounts to the plan sufficient to meet the
minimum funding requirements set forth in the Employee Retirement Income
Security Act of 1974, plus additional amounts as the Parent may determine to be
appropriate from time to time up to the maximum permitted, and to charge
<Page>
UNION SECURITY INSURANCE COMPANY 77
-------------------------------------------------------------------------------
each subsidiary an allocable amount based on its employee census. Pension costs
allocated to the Company amounted to $6,349, $5,327 and $6,902 for 2009, 2008
and 2007, respectively.
The Parent sponsors a defined contribution plan covering substantially all
employees. The defined contribution plan provides benefits payable to
participants on retirement or disability and to beneficiaries of participants in
the event of the participant's death. The amounts expensed by the Company
related to this plan were $6,206, $5,927 and $5,853 for 2009, 2008 and 2007,
respectively.
With respect to retirement benefits, the Company participates in other health
care and life insurance benefit plans (postretirement benefits) for retired
employees, sponsored by the Parent. Heath care benefits, either through the
Parent's sponsored retiree plan for retirees under age 65 or through a cost
offset for individually purchased Medigap policies for retirees over age 65, are
available to employees who retire on or after January 1, 1993, at age 55 or
older, with 10 years or more service. Life insurance, on a retiree pay all
basis, is available to those who retire on or after January 1, 1993. The Company
made contributions to the postretirement benefit plans of $1,500, $1,152 and
$1,108 in 2009, 2008 and 2007, respectively, as claims were incurred. During
2009, 2008 and 2007 the Company incurred expenses related to retirement benefits
of $981, $1,284 and $1,522, respectively.
12. DEFERRED POLICY ACQUISITION COSTS
Information about deferred policy acquisition costs follows:
<Table>
<Caption>
DECEMBER 31,
2009 2008 2007
----------------------------------------------------------------------------------------
Beginning balance $43,020 $50,575 $63,571
Costs deferred 38,608 35,680 33,063
Amortization (43,720) (43,235) (39,724)
Cumulative effect of change in
accounting principle -- -- (6,335)
--------- --------- ---------
ENDING BALANCE $37,908 $43,020 $50,575
--------- --------- ---------
</Table>
13. GOODWILL, VOBA AND INTANGIBLES
Information about goodwill is as follows:
<Table>
<Caption>
GOODWILL FOR THE YEARS ENDED
DECEMBER 31,
2009 2008 2007
----------------------------------------------------------------------------------------
Balance as of January 1: $156,817 $156,817 $156,817
Impairments* (75,244) -- --
---------- ----------- -----------
Goodwill 156,817 156,817 156,817
Accumulated impairment losses (75,244) -- --
---------- ----------- -----------
BALANCE AS OF DECEMBER 31: $81,573 $156,817 $156,817
---------- ----------- -----------
</Table>
* See Notes 2 and 4 for further information.
In accordance with ASC Topic 350, goodwill is deemed to have an indefinite life
and should not be amortized, but rather must be tested, at least annually, for
impairment. In addition, goodwill should be tested for impairment between annual
tests if an event occurs or circumstances change that would "more likely than
not" reduce the fair value of the reporting unit below its net book value.
The goodwill impairment test has two steps. Step 1 of the test identifies
potential impairments, by comparing the estimated fair value of the Company to
its net book value. If the estimated fair value exceeds its net book value,
there is no impairment of goodwill and Step 2 is unnecessary. However, if the
net book value exceeds the estimated fair value, then Step 1 is failed, and Step
2 is performed to determine the amount of the potential impairment.
Since the Company failed the Step 1 test, we were required to perform a Step 2
test to determine the amount of the potential impairment. Step 2 utilizes
acquisition accounting guidance and requires the fair value calculation of all
individual assets and liabilities of the Company (excluding goodwill, but
including any unrecognized intangible assets). The net fair value of assets less
liabilities is then compared to the total estimated fair value as calculated in
Step 1. The excess of estimated fair value over the net asset value equals the
implied fair value of goodwill. The implied fair value of goodwill is then
compared to the carrying value of goodwill to determine the Company's goodwill
impairment. Based on our Step 2 test it was determined that 48% of the goodwill
of the Company was impaired, resulting in a non-cash charge of $75,244. This
impairment reflects the challenging near term growth environment for the Company
and an increased net book value, primarily related to its investment portfolio.
Management remains confident in the long-term prospects of the Company.
<Page>
78 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
Information about VOBA and intangibles are as follows:
<Table>
<Caption>
VOBA FOR THE YEARS ENDED
DECEMBER 31,
2009 2008 2007
----------------------------------------------------------------------------
Beginning Balance $21,461 $22,816 $26,667
Acquisitions -- 2,088 --
Amortization, net of interest (2,678) (3,443) (3,851)
accrued
--------- --------- ---------
ENDING BALANCE $18,783 $21,461 $22,816
--------- --------- ---------
<Caption>
INTANGIBLES FOR THE YEARS ENDED
DECEMBER 31,
2009 2008 2007
--------------------------------- ---------------------------------------------------
Beginning Balance $25,485 $27,273 $29,061
Acquisitions -- -- --
Amortization, net of interest (1,788) (1,788) (1,788)
accrued
--------- --------- ---------
ENDING BALANCE $23,697 $25,485 $27,273
--------- --------- ---------
</Table>
As of December 31, 2009, the majority of the outstanding balance of VOBA relates
to the Company's preneed business. VOBA in this segment assumes an interest rate
ranging from 5.4% to 7.5%.
At December 31, 2009 the estimated amortization of VOBA for the next five years
and thereafter is as follows:
<Table>
<Caption>
YEAR AMOUNT
--------------------------------------------------------------------------------
2010 $2,086
2011 1,863
2012 1,729
2013 1,550
2014 1,425
Thereafter 10,130
---------
TOTAL $18,783
---------
</Table>
Intangibles assets that have finite lives, including customer relationships,
customer contracts and other intangible assets are amortized over their
estimated useful lives. At December 31, 2009, the estimated amortization of
intangibles with finite lives for the next five years is as follows:
<Table>
<Caption>
YEAR AMOUNT
--------------------------------------------------------------------------------
2010 $1,788
2011 1,788
2012 1,788
2013 1,788
2014 1,788
Thereafter 14,757
---------
TOTAL $23,697
---------
</Table>
14.OTHER COMPREHENSIVE INCOME (LOSS)
The Company's components of other comprehensive income (loss) net of tax at
December 31 are as follows:
<Table>
<Caption>
UNREALIZED ACCUMULATED OTHER
GAINS (LOSSES) ON COMPREHENSIVE
SECURITIES OTTI INCOME (LOSS)
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007 $5,696 $ -- $5,696
Activity in 2008 (171,408) -- (171,408)
----------- -------- -----------
Balance at December 31, 2008 (165,712) -- (165,712)
----------- -------- -----------
Cumulative effect of change in accounting principle (14,203) (2,221) (16,424)
(after-tax) (1)
----------- -------- -----------
Activity in 2009 210,552 6,177 216,729
----------- -------- -----------
BALANCE AT DECEMBER 31, 2009 $30,637 $3,956 $34,593
----------- -------- -----------
</Table>
(1) Related to the adoption of the new OTTI guidance for debt securities. See
Notes 3 and 4 for further information.
The amounts in the unrealized gains (losses) on securities column are net of
reclassification adjustments of $(14,951), $(82,824) and $(13,827), net of tax,
in 2009, 2008 and 2007, respectively, for net realized gains (losses) on sales
of securities included in net income. The amounts in the OTTI column are net of
reclassification adjustments of $(753), net of tax, in 2009, for net realized
gains (losses) on sales of securities included in net income.
15.RELATED PARTY TRANSACTIONS
The Company receives various services from the Parent and its affiliates. These
services include assistance in benefit plan administration, corporate insurance,
accounting, tax, auditing, investment, information technology and other
administrative functions. The fees paid to the Parent for these services for
years ended December 31, 2009, 2008 and 2007, were $33,398, $28,525 and $27,581,
respectively. Net expenses paid to affiliates were $12,986, $25,324 and $26,714,
for the years ended
<Page>
UNION SECURITY INSURANCE COMPANY 79
-------------------------------------------------------------------------------
December 31, 2009, 2008 and 2007. Information technology expenses were $20,309,
$22,451and $43,369 for years ended December 31, 2009, 2008 and 2007,
respectively.
Administrative expenses allocated for the Company may be greater or less than
the expenses that would be incurred if the Company were operating on its own.
In, 2008, the Company assumed the remaining business not already reinsured
through an existing, but amended agreement with its affiliate, UFLIC. Later in
2008, Assurant sold UFLIC to IA American Life Insurance Company. The Company has
assumed premiums from IA American Life Insurance Company of $8,157 and $9,450
and reserves of $473,088 and $498,663 for the years ended December 31, 2009 and
2008 respectively. In 2007, premiums and reserves assumed from UFLIC were $8,146
and $520,904, respectively.
The Company assumes group disability business from its affiliate, Union Security
Life Insurance Company of New York ("USLICONY"). The Company assumed $4,777,
$7,806 and $6,813 of premiums from USLICONY in 2009, 2008 and 2007,
respectively. The Company assumed $30,149, $30,802 and $29,569 of reserves in
2009, 2008 and 2007, respectively, from USLICONY. This agreement between the
Company and its affiliate USICONY was discontinued effective January 1st, 2010,
for new incurrals.
16.COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease office space and equipment under
operating lease arrangements. Certain facility leases contain escalation clauses
based on increases in the lessors' operating expenses. At December 31, 2009, the
aggregate future minimum lease payments under these operating lease agreements
that have initial or non-cancelable terms in excess of one year are:
<Table>
2010 $8,463
2011 7,158
2012 2,196
2013 1,109
2014 503
Thereafter 769
---------
TOTAL MINIMUM FUTURE LEASE PAYMENTS $20,198
---------
</Table>
Rent expense was $8,760, $7,961 and $8,277 for 2009, 2008 and 2007,
respectively.
The Company is involved in litigation in the ordinary course of business, both
as a defendant and as a plaintiff. The Company may from time to time be subject
to a variety of legal and regulatory actions relating to the Company's current
and past business operations. While the Company cannot predict the outcome of
any pending or future litigation, examination or investigation and although no
assurances can be given, the Company does not believe that any pending matter
will have a material adverse effect individually or in the aggregate, on the
Company's financial condition, results of operations or cash flows.
On January 21, 2010, the SEC filed a civil complaint in the United States
District Court for the Southern District of New York in connection with the
previously disclosed SEC investigation into a finite reinsurance arrangement
entered into by the Parent. In the complaint, the SEC charged the Parent with
violating Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange
Act of 1934, as amended, and Rules 12b-20, 13a-11 and 13a-13 thereunder. As
previously disclosed by the Parent in a Current Report on Form 8-K on January
21, 2010, the Parent entered into a settlement with the SEC in which the Parent
consented, without admitting or denying the allegations in the complaint, to the
entry of a judgment requiring payment of a civil penalty of $3,500 and enjoining
the Parent from violating the aforementioned federal securities laws. The court
approved the settlement in a final judgment entered on January 25, 2010 and the
Parent has paid the penalty.
As part of the settlement, the SEC granted permanent relief to the Company,
exempting it from limitations on serving as depositor to investment companies
under Section 9(a) of the Investment Company Act of 1940.
In the course of implementing procedures for compliance with the new mandatory
reporting requirements under the Medicare, Medicaid, and SCHIP Extension Act of
2007, the Parent's Health segment identified a possible ambiguity in the
Medicare Secondary Payer Act and related regulations about which the Company has
since had a meeting with representatives of the Centers for Medicare and
Medicaid Services ("CMS"). The Parent believes that its historical
interpretation and application of such laws and regulations is correct and has
requested that CMS issue a written determination to that effect. CMS has not
made a determination. The Company does not believe that any loss relating to
this issue is probable, nor can the Company make any estimate of any possible
loss or range of possible loss associated with this issue.
<Page>
80 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
17. BUSINESS COMBINATIONS
On October 1, 2009, the Company acquired, through a reinsurance agreement, a
block of business from Shenandoah Life Insurance Company ("Shenandoah"). The
Company will assume, on a coinsurance basis, 100% of the group life, disability,
dental and vision insurance business in force with Shenandoah. There were no
goodwill or intangible assets associated with this agreement.
18. SUBSEQUENT EVENTS
On March 23, 2010, President Obama signed the Patient Protection and Affordable
Care Act into law. The Company is in the process of evaluating the law's impact
on its operations, which may be materially adverse.
(F) SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
<Table>
<Caption>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
2009 2008 2007 2006 2005
(IN THOUSANDS)
---------------------------------------------------------------------------------------------------------------------------------
REVENUES
Net earned premiums and other
considerations $1,092,512 $1,173,790 $1,259,930 $1,366,820 $1,710,771
Net investment income 216,725 238,451 286,235 286,974 293,910
Net realized (losses) gains on
investments (1) (25,512) (135,696) (28,219) 8,490 (1,651)
Amortization of deferred gains on
disposal of businesses 16,906 20,680 23,548 14,929 33,098
Fees and other income 14,859 11,449 16,395 73,183 10,427
------------- ------------- ------------- ------------- -------------
TOTAL REVENUES 1,315,490 1,308,674 1,557,889 1,750,396 2,046,555
------------- ------------- ------------- ------------- -------------
BENEFITS, LOSSES AND EXPENSES
Policyholder benefits 849,531 889,498 934,609 1,023,627 1,291,384
Amortization of deferred
acquisition costs and value of
business acquired 46,398 46,678 43,575 47,972 78,258
Underwriting, general and
administrative expenses 340,342 353,774 383,106 425,589 492,150
Goodwill impairment (2) 75,244 -- -- -- --
------------- ------------- ------------- ------------- -------------
TOTAL BENEFITS, LOSSES AND
EXPENSES 1,311,515 1,289,950 1,361,290 1,497,188 1,861,792
------------- ------------- ------------- ------------- -------------
Income before provision for
income taxes 3,975 18,724 196,599 253,208 184,763
Provision for income taxes 27,127 10,867 57,121 106,576 68,792
------------- ------------- ------------- ------------- -------------
NET (LOSS) INCOME $(23,152) $7,857 $139,478 $146,632 $115,971
------------- ------------- ------------- ------------- -------------
ASSETS
Cash and cash equivalents and
investments $3,810,567 $3,569,830 $4,145,303 $4,381,113 $5,119,810
Total assets $7,340,873 $7,032,458 $8,807,658 $9,196,832 $10,111,429
Policy liabilities (3) $4,464,262 $4,502,013 $4,555,863 $4,629,759 $5,131,168
Total stockholder's equity $718,337 $529,760 $781,041 $899,264 $1,001,929
</Table>
(1) Included in net realized losses are other-than-temporary impairments of
$11,587, $109,075 and $21,126 for 2009, 2008 and 2007 respectively.
(2) During the fourth quarter of 2009, following the completion of our annual
goodwill impairment analysis, we recorded an impairment charge of $75,244.
The impairment charge resulted in a decrease to net income but did not have
any related tax benefit.
(3) Policy Liabilities include future policy benefits and expenses, unearned
premiums and claims and benefits payable.
(G) SUPPLEMENTAL FINANCIAL DATA. NOT APPLICABLE.
(H) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<Page>
UNION SECURITY INSURANCE COMPANY 81
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FORWARD-LOOKING STATEMENTS
Some of the statements under "Business," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and elsewhere in this
registration statement may contain forward-looking statements which reflect our
current views with respect to, among other things, future events, financial
performance, business prospects, growth and operating strategies and similar
matters. You can identify these statements by the fact that they may use words
such as "will," "may," "anticipates," "expects," "estimates," "projects,"
"intends," "plans," "believes," "targets," "forecasts," "potential,"
"approximately," or the negative version of those words and other words and
terms with a similar meaning. Any forward-looking statements contained in this
registration statement are based upon our historical performance and on current
plans, estimates and expectations. The inclusion of this forward-looking
information should not be regarded as a representation by us or any other person
that the future plans, estimates or expectations contemplated by us will be
achieved. Our actual results might differ materially from those projected in the
forward-looking statements. The Company undertakes no obligation to update or
review any forward-looking statement, whether as a result of new information,
future events or other developments.
In addition to other factors described in this statement, the following risk
factors could cause our actual results to differ materially from those currently
estimated by management: (i) general global economic, financial market and
political conditions (including difficult conditions in financial markets and
the global economic slowdown, fluctuations in interest rates, mortgage rates,
monetary policies and inflationary pressure); (ii) failure to maintain
significant client relationships, distribution sources and contractual
arrangements; (iii) failure to attract and retain sales representatives; (iv)
deterioration in the Company's market capitalization compared to its book value
that could impair the Company's goodwill; (v) negative publicity and impact on
our business due to unfavorable outcomes in litigation and/or regulatory
investigations; (vi) current or new laws and regulations, including recently
passed legislation relating to health care reform, that could increase our costs
and/or decrease our revenues; (vii) inadequacy of reserves established for
future claims losses; (viii) failure to predict or manage benefits, claims and
other costs; (ix) diminished value of invested assets in our investment
portfolio (due to, among other things, recent volatility in financial markets,
other-than-temporary impairments, the global economic slowdown, credit and
liquidity risk, and inability to assume an appropriate overall risk level); (x)
inability of reinsurers to meet their obligations; (xi) insolvency of third
parties to whom we have sold or may sell businesses through reinsurance or
modified co-insurance; (xii) a decline in our credit or financial strength
ratings (including the risk of ratings downgrades in the insurance industry);
(xiii) credit risk of some of our agents; (xiv) failure to protect client
information and privacy; and (xv) significant competitive pressures in our
businesses and cyclicality of the insurance industry. These risk factors should
not be construed as exhaustive and should be read in conjunction with the other
cautionary statements that are included in this report. For a more detailed
discussion of the risk factors that could affect our actual results, please
refer to the section entitled "Risk Factors" in this registration statement.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and accompanying notes which appear elsewhere in this report. It
contains forward-looking statements that involve risks and uncertainties. Please
see "Forward-Looking Statements" and "Risk Factors" for more information. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those
discussed below and elsewhere in this report, particularly under the sections
entitled "Risk Factors" and "Forward-Looking Statements."
CRITICAL FACTORS AFFECTING RESULTS
Our results depend on the adequacy of our product pricing, underwriting and the
accuracy of our methodology for the establishment of reserves for future
policyholder benefits and claims, returns on invested assets and our ability to
manage our expenses. Therefore, factors affecting these items may have a
material adverse effect on our results of operations or financial condition. For
a listing of those factors see the section entitled "Risk Factors."
REVENUES
We generate our revenues primarily from the sale of our insurance policies, fee
income by providing administrative services to certain clients and investment
income from the securities we own. Sales of insurance policies are recognized in
revenue as earned premiums while sales of administrative services are recognized
as fee income.
Our premium and fee income is supplemented by income earned from our investment
portfolio. We recognize revenue from interest payments, dividends and sales of
investments. Currently, our investment portfolio is primarily invested in fixed
maturity securities. Both investment income and realized capital gains on these
investments can be significantly impacted by changes in interest rates.
Interest rate volatility can increase or reduce unrealized gains (losses) in our
portfolio. Interest rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international economic and
political conditions and other factors beyond our control. Fluctuations in
interest rates affect our returns on, and the market value of, fixed maturity
securities and short-term investments.
<Page>
82 UNION SECURITY INSURANCE COMPANY
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The fair market value of the fixed maturity securities in our portfolio and the
investment income from these securities fluctuate depending on general economic
and market conditions. The fair market value generally increases or decreases in
an inverse relationship with fluctuations in interest rates, while net
investment income realized by us from future investments in fixed maturity
securities will generally increase or decrease with interest rates. We also have
investments that carry pre-payment risk, such as mortgage-backed and
asset-backed securities. Actual net investment income and/or cash flows from
investments that carry prepayment risk may differ from estimates at the time of
investment as a result of interest rate fluctuations. In periods of declining
interest rates, mortgage prepayments generally increase and mortgage-backed
securities, commercial mortgage obligations and bonds are more likely to be
prepaid or redeemed as borrowers seek to borrow at lower interest rates.
Therefore, we may be required to reinvest those funds in lower interest-bearing
investments.
EXPENSES
Our expenses are primarily policyholder benefits, selling, underwriting and
general expenses.
Our profitability depends in part on accurately predicting policyholder
benefits, claims and other costs. It also depends on our ability to manage
future policyholder benefits and other costs through product design,
underwriting criteria, and in health and dental insurance, negotiation of
favorable provider contracts. Changes in the composition of the kinds of work
available in the economy, market conditions and numerous other factors may also
materially adversely affect our ability to manage claim costs. As a result of
one or more of these factors or other factors, claims could substantially exceed
our expectations, which could have a material adverse effect on our business,
results of operations and financial condition.
Selling, underwriting and general expenses consist primarily of commissions,
premium taxes, licenses, fees, amortization of deferred acquisition costs
("DAC") and value of business acquired ("VOBA") and general operating expenses.
For a description of DAC and VOBA, see Notes 2 and 12 to the Notes to
Consolidated Financial Statements included elsewhere in this registration
statement.
CRITICAL ACCOUNTING ESTIMATES
There are certain accounting policies that we consider to be critical due to the
amount of judgment and uncertainty inherent in the application of those
policies. In calculating financial statement estimates, the use of different
assumptions could produce materially different estimates. In addition, if
factors such as those described above or in the section entitled "Risk Factors"
cause actual events to differ from the assumptions used in applying the
accounting policies and calculating financial estimates, there could be a
material adverse effect on our results of operations, financial condition and
liquidity.
The following critical accounting policies require significant estimates. The
actual amounts realized could ultimately be materially different from the
amounts currently provided for in our consolidated financial statements.
RESERVES
Reserves are established according to GAAP using generally accepted actuarial
methods and are based on a number of factors. These factors include experience
derived from historical claim payments and actuarial assumptions to arrive at
loss development factors. Such assumptions and other factors include trends, the
incidence of incurred claims, and the extent to which all claims have been
reported and internal claims processing charges. The process used in computing
reserves cannot be exact since actual claim costs are dependent upon such
complex factors as inflation, changes in doctrines of legal liabilities and
damage awards. The methods of making such estimates and establishing the related
liabilities are periodically reviewed and updated.
Reserves do not represent an exact calculation of exposure, but instead
represent our best estimates, generally involving actuarial projections at a
given time of what we expect the ultimate settlement and administration of a
claim or group of claims will cost based on our assessment of facts and
circumstances then known. The adequacy of reserves will be impacted by future
trends in claims severity, frequency, judicial theories of liability and other
factors. These variables are affected by both external and internal events,
including but not limited to: changes in the economic cycle, changes in the
social perception of the value of work, emerging medical perceptions regarding
physiological or psychological causes of disability, emerging health issues and
new methods of treatment or accommodation, inflation, judicial trends,
legislative changes and claims handling procedures.
Many of these items are not directly quantifiable, particularly on a prospective
basis. Reserve estimates are refined as experience develops. Adjustments to
reserves, both positive and negative, are reflected in the statement of
operations of the period in which such estimates are updated. Because
establishment of reserves is an inherently uncertain process involving estimates
of future losses, there can be no certainty that ultimate losses will not exceed
existing claims reserves. Future loss development could require reserves to be
increased, which could have a material adverse effect on our earnings in the
periods in which such increases are made.
<Page>
UNION SECURITY INSURANCE COMPANY 83
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The following table provides reserve information of our major product lines for
the years ended December 31, 2009 and 2008:
<Table>
<Caption>
CLAIMS AND BENEFITS
DECEMBER 31, 2009 PAYABLE
FUTURE INCURRED
POLICY BUT NOT
BENEFITS AND UNEARNED CASE REPORTED
EXPENSES PREMIUMS RESERVES RESERVES
-----------------------------------------------------------------------------------------------------------
LONG DURATION CONTRACTS:
Preneed funeral life
insurance policies and
investment-type annuity
contracts $1,185,901 $1,105 $3,737 $1,192
Life insurance no longer
offered 287,590 627 1,036 33
FFG, LTC and other disposed
businesses 1,196,373 19,056 6,851 89,323
All other 5,205 335 8,084 18,792
SHORT DURATION CONTRACTS:
Group term life -- 3,501 36,977 202,823
Group disability -- 6,716 137,402 1 ,209,968
Medical -- 2,582 3,245 7,603
Dental -- 3,769 18,297 4,722
Credit Life and Disability -- 1 -- 1,416
---------- ------- --------- ----------------
TOTAL $2,675,069 $37,692 $215,629 $1,535,872
---------- ------- --------- ----------------
<Caption>
CLAIMS AND BENEFITS
DECEMBER 31, 2008 PAYABLE
FUTURE INCURRED
POLICY BUT NOT
BENEFITS AND UNEARNED CASE REPORTED
EXPENSES PREMIUMS RESERVES RESERVES
----------------------------- ----------------------------------------------------------------------------
LONG DURATION CONTRACTS:
Preneed funeral life
insurance policies and
investment-type annuity
contracts $1,237,749 $1,316 $4,076 $1,168
Life insurance no longer
offered 303,660 673 932 31
FFG, LTC and other disposed
businesses 1,141,011 18,277 8,451 62,945
All other 5,068 290 20,499 7,767
SHORT DURATION CONTRACTS:
Group term life -- 5,988 196,875 41,470
Group disability -- 2,104 1,256,171 138,956
Medical -- 3,315 5,537 9,494
Dental -- 3,995 2,600 20,207
Credit Life and Disability -- 4 -- 1,384
---------- ------- ---------- ---------------
TOTAL $2,687,488 $35,962 $1,495,141 $283,422
---------- ------- ---------- ---------------
</Table>
For a description of our reserving methodology, see Notes 2 and 10 to the Notes
to Consolidated Financial Statements included elsewhere in this registration
statement
The following discusses the reserving process for our runoff preneed operations
and reserves recorded for our significant discontinued operations, FFG and LTC.
LONG DURATION CONTRACTS
Reserves for future policy benefits are recorded as the present value of future
benefits to policyholders and related expenses less the present value of future
net premiums. Reserve assumptions are selected using best estimates for expected
investment yield, inflation, mortality, morbidity, expenses and withdrawal
rates. These assumptions reflect current trends, are based on our experience and
may include a provision for possible adverse deviation. We also record an
unearned revenue reserve which represents the balance of the excess of gross
premiums over net premiums that is still to be recognized in future years'
income in a constant relationship to either estimated gross profits or insurance
in force.
Premium deficiency testing is performed annually. Such testing involves the use
of best estimate assumptions to determine if the net liability position (all
liabilities less DAC) exceeds the minimum liability needed to meet our
obligations. Any premium deficiency would first be addressed by removing the
provision for adverse deviation, if any. To the extent a premium deficiency
still remains, it would be recognized immediately by a charge to the statement
of operations and a corresponding reduction in DAC. Any additional deficiency
would be recognized as a premium deficiency reserve.
Historically, premium deficiency testing has not resulted in a material
adjustment to DAC or reserves. Such adjustments would occur only if economic or
mortality conditions significantly deteriorated.
Risks related to the reserves recorded for contracts from FFG and LTC disposed
businesses have been 100% ceded via reinsurance. While the Company has not been
released from the contractual obligation to the policyholders, changes in and
deviations from economic and mortality assumptions used in the calculation of
these reserves will not directly affect our results of operations unless there
is a default by the assuming reinsurer.
SHORT DURATION CONTRACTS
For short duration contracts, claims and benefits payable reserves are reported
when insured events occur. The liability is based on the expected ultimate cost
of settling the claims. The claims and benefits payable reserves include (1)
case reserves for known but unpaid claims as of the balance sheet date; (2) IBNR
reserves for claims where the insured event has occurred but has not been
reported to us as of the balance sheet date; and (3) loss adjustment expense
reserves for the expected handling costs of settling the claims. Periodically,
we review emerging experience and make adjustments to our case reserves and
assumptions where necessary. Below are further discussions on the reserving
process for our major short duration products.
The Company's short duration contracts are comprised of group term life, group
disability, medical, dental, and credit life and disability. The principal
products and services included in these categories are described in the summary
of significant accounting polices. See note 2 to the Notes to Consolidated
Financial Statements included elsewhere in this report for further information.
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84 UNION SECURITY INSURANCE COMPANY
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Case and IBNR reserves are developed using actuarial principles and assumptions
that consider, among other things, contractual requirements, historical
utilization trends and patterns, benefits changes, medical inflation,
seasonality, membership, product mix, legislative and regulatory environment,
economic factors, disabled life mortality and claim termination rates and other
relevant factors. The Company consistently applies the principles and
assumptions listed above from year to year, while also giving due consideration
to the potential variability of these factors.
Case or claim reserves are set for active individual claims on group long term
disability policies and for disability waiver of premium benefits on group term
life policies. Assumptions considered in setting such reserves include disabled
life mortality and claim recovery rates, claim management practices, awards for
social security and other benefit offsets and yield rates earned on assets
supporting the reserves. Group long term disability and group term life waiver
of premium reserves are discounted because the payment pattern and ultimate cost
are fixed and determinable on an individual claim basis.
Factors considered for when setting IBNR reserves include patterns in elapsed
time from claim incidence to claim reporting, and elapsed time from claims
reporting to claim payment.
Since case and IBNR reserves include estimates developed from various actuarial
methods, the Company's actual losses incurred may be more or less than the
Company's previously developed estimates. As shown in the table above, if the
amounts listed on the line labeled "Incurred losses related to: Prior year" are
negative (redundant) this means that the Company's actual losses incurred
related to prior years for these lines were less than the estimates previously
made by the Company. If the line labeled "Incurred losses related to: Prior
year" are positive (deficient) this means that the Company's actual losses
incurred related to prior years for these lines were greater than the estimates
previously made by the Company.
The Group Term Life case and IBNR reserves redundancies in all years are due to
actual mortality rates running below those assumed in prior year reserves, and
actual recovery rates running higher than those assumed in prior year reserves.
Group Disability case and IBNR reserves show redundancies in all years due to
actual claim recovery rates exceeding those assumed in prior year reserves.
The Company's short duration group disability category includes short and long
term disability products. Case and IBNR reserves for long-term disability have
been discounted at 5.25%. The December 31, 2009 and 2008 liabilities net of
reinsurance include $1,288,589 and $1,334,794, respectively, of such reserves.
The amount of discounts deducted from outstanding reserves as of December 31,
2009 and 2008 are $451,267 and $465,786, respectively
DAC
The costs of acquiring new business that vary with and are primarily related to
the production of new business are deferred to the extent that such costs are
deemed recoverable from future premiums or gross profits. Acquisition costs
primarily consist of commissions, policy issuance expenses, premium tax and
certain direct marketing expenses.
Premium deficiency testing is performed annually. Such testing involves the use
of best estimate assumptions, including the anticipation of interest income to
determine if anticipated future policy premiums are adequate to recover all DAC
and related claims, benefits and expenses. To the extent a premium deficiency
exists, it is recognized immediately by a charge to the statement of operations
and a corresponding reduction in DAC. If the premium deficiency is greater than
unamortized DAC, a liability will be accrued for the excess deficiency.
Long Duration Contracts
Acquisition costs for preneed life insurance policies and life insurance
policies (no longer offered) are deferred and amortized in proportion to
anticipated premiums over the premium-paying period. These acquisition costs
consist primarily of first year commissions paid to agents and sales and policy
issue costs.
For preneed investment-type annuities, DAC is amortized in proportion to the
present value of estimated gross profits from investment, mortality, expense
margins and surrender charges over the estimated life of the policy or contract.
The assumptions used for the estimates are consistent with those used in
computing the policy or contract liabilities.
Acquisition costs relating to worksite group life and disability consist
primarily of first year commissions to brokers and one time policy transfer fees
and costs of issuing new certificates. These acquisition costs are front-end
loaded, thus they are deferred and amortized over the estimated terms of the
underlying contracts.
Acquisition costs on FFG and LTC disposed businesses were written off when the
businesses were sold.
Short Duration Contracts
Acquisition costs relating to monthly pay credit insurance business consist
mainly of direct marketing costs and are deferred and amortized over the
estimated average terms and balances of the underlying contracts.
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UNION SECURITY INSURANCE COMPANY 85
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Acquisition costs relating to group term life, group disability and group dental
consist primarily of compensation to sales representatives. These acquisition
costs are front-end loaded; thus, they are deferred and amortized over the
estimated terms of the underlying contracts.
Acquisition costs on small group medical contracts consist primarily of
commissions to agents and brokers and compensation to representatives. These
contracts are considered short duration because the terms of the contract are
not fixed at issue and they are not guaranteed renewable. As a result, these
costs are not deferred, but rather are recorded in the statement of operations
in the period in which they are incurred.
INVESTMENTS
We regularly monitor our investment portfolio to ensure investments that may be
other-than-temporarily impaired are identified in a timely fashion, properly
valued, and charged against earnings in the proper period. The determination
that a security has incurred an other-than-temporary decline in value requires
the judgment of management. Assessment factors include, but are not limited to,
the length of time and the extent to which the market value has been less than
cost, the financial condition and rating of the issuer, whether any collateral
is held, the intent and ability of the Company to retain the investment for a
period of time sufficient to allow for recovery for equity securities and the
intent to sell or whether it is more likely than not that the Company will be
required to sell for fixed maturity securities. Inherently, there are risks and
uncertainties involved in making these judgments. Changes in circumstances and
critical assumptions such as a continued weak economy, a more pronounced
economic downturn or unforeseen events which affect one or more companies,
industry sectors, or countries could result in additional impairments in future
periods for other-than-temporary declines in value. Any equity security whose
price decline is deemed other-than-temporary is written down to its then current
market value with the amount of the impairment reported as a realized loss in
that period. The impairment of a fixed maturity security that the Company has
the intent to sell or that it is more likely than not that the Company will be
required to sell is deemed other-than-temporary and is written down to its
market value at the balance sheet date, with the amount of the impairment
reported as a realized loss in that period. For all other-than-temporarily
impaired fixed maturity securities that do not meet either of these two
criteria, the Company is required to analyze its ability to recover the
amortized cost of the security by calculating the net present value of projected
future cash flows. For these other-than-temporarily impaired fixed maturity
securities, the net amount recognized in earnings is equal to the difference
between the amortized cost of the fixed maturity security and its net present
value. See also "Investments" in Note 3 to the Notes to Consolidated Financial
Statements included elsewhere in this report.
REINSURANCE
Reinsurance recoverables include amounts related to paid benefits and estimated
amounts related to unpaid policy and contract claims, future policyholder
benefits and policyholder contract deposits. The cost of reinsurance is
accounted for over the terms of the underlying reinsured policies using
assumptions consistent with those used to account for the policies. Amounts
recoverable from reinsurers are estimated in a manner consistent with claim and
claim adjustment expense reserves or future policy benefits reserves and are
reported in our consolidated balance sheets. The ceding of insurance does not
discharge our primary liability to our insureds. An estimated allowance for
doubtful accounts is recorded on the basis of periodic evaluations of balances
due from reinsurers, reinsurer solvency, management's experience and current
economic conditions.
The following table sets forth our reinsurance recoverables as of the dates
indicated:
<Table>
<Caption>
AS OF AS OF
DECEMBER 31, 2009 DECEMBER 31, 2008
--------------------------------------------------------------------------------
Reinsurance recoverables $1,434,405 $1,359,251
</Table>
We have used reinsurance to exit certain businesses, such as the dispositions of
FFG and LTC. The reinsurance recoverables relating to these dispositions
amounted to $1,318,326 and $1,239,178 at December 31, 2009 and 2008,
respectively.
In the ordinary course of business, we are involved in both the assumption and
cession of reinsurance with non-affiliated companies. The following table
provides details of the reinsurance recoverables balance for the years ended
December 31:
<Table>
<Caption>
2009 2008
--------------------------------------------------------------------------------
Ceded future policyholder benefits and expense $1,300,352 $1,248,756
Ceded unearned premium 18,942 18,502
Ceded claims and benefits payable 105,900 80,414
Ceded paid losses 9,211 11,579
------------ ------------
TOTAL $1,434,405 $1,359,251
------------ ------------
</Table>
We utilize reinsurance for loss protection and capital management and business
dispositions. See also section entitled "Quantitative and Qualitative
Disclosures About Market Risk -- Credit Risk."
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86 UNION SECURITY INSURANCE COMPANY
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Liquidity and Capital Resources
The primary sources of funds for the Company consist of premiums and fees
collected, the proceeds from the sales and maturity of investments and
investment income. Cash is primarily used to pay insurance claims, agent
commissions, operating expenses and taxes. We generally invest our excess funds
in order to generate investment income. We also have the ability to receive
capital infusions from our Parent, if needed. Please see Assurant's Annual
Report on Form 10-K for the fiscal year ended December 31, 2009 for additional
information related to our Parent.
RETIREMENT AND OTHER EMPLOYEE BENEFITS
The Parent sponsors a defined benefit pension plan and certain other post
retirement benefits covering employees who meet eligibility requirements as to
age and length of service. Plan assets of the defined benefits plans are not
specifically identified by each participating subsidiary. Therefore, a breakdown
of plan assets is not reflected in these consolidated financial statements. The
Company has no legal obligation for benefits under these plans. The benefits are
based on years of service and career compensation. The Parent's pension plan
funding policy is to contribute amounts to the plan sufficient to meet the
minimum funding requirements set forth in the Employee Retirement Income
Security Act of 1974, plus additional amounts as the Parent may determine to be
appropriate from time to time up to the maximum permitted, and to charge each
subsidiary an allocable amount based on its employee census. Pension costs
allocated to the Company amounted to $6,349, $5,327and $6,902 for 2009, 2008 and
2007, respectively. See Note 11 to the Notes to Consolidated Financial
Statements included elsewhere in this report for additional information.
CONTINGENCIES
We follow the requirements of the contingencies guidance, which is included
within ASC Topic 450, CONTINGENCIES. This requires management to evaluate each
contingent matter separately. A loss is reported if reasonably estimable and
probable. We establish reserves for these contingencies at the best estimate,
or, if no one estimated number within the range of possible losses is more
probable than any other, we report an estimated reserve at the low end of the
estimated range. Contingencies affecting the Company include litigation matters
which are inherently difficult to evaluate and are subject to significant
changes.
DEFERRED TAXES
Deferred income taxes are recorded for temporary differences between the
financial reporting and income tax bases of assets and liabilities, based on
enacted tax laws and statutory tax rates applicable to the periods in which the
Company expects the temporary differences to reverse. A valuation allowance is
established for deferred tax assets when it is more likely than not that an
amount will not be realized. The Company has significant deferred tax assets
resulting from capital loss carry forwards and other temporary differences that
may reduce taxable income in future periods. The detailed components of our
deferred tax assets, liabilities and valuation allowance are included in Note 5
to the Notes to Consolidated Financial Statements included elsewhere in this
report.
ASC Topic 740 states that a deferred tax asset should be reduced by a valuation
allowance if, based on the weight of all available evidence, it is more likely
than not that some portion or all of the deferred tax asset will not be
realized. The valuation allowance should be sufficient to reduce the deferred
tax asset to the amount that is more likely than not to be realized. In
determining whether the Company's deferred tax asset is realizable, the Company
considered all available evidence, including both positive and negative
evidence. The realization of deferred tax assets depends upon the existence of
sufficient taxable income of the same character during the carryback or
carryforward period. The Company considered all sources of taxable income
available to realize the deferred tax asset, including the future reversal of
existing temporary differences, future taxable income exclusive of reversing
temporary differences and carry forwards, taxable income in carry back years and
tax-planning strategies.
The Company has concluded that it is not more likely than not that it will
generate sufficient taxable income of the same character in the foreseeable
future to realize all of its deferred tax assets related to capital loss
carryovers.
The realization of deferred tax assets depends upon the existence of sufficient
taxable income of the same character during the carry back or carryforward
period. U.S. tax rules mandate that capital losses can only be recovered against
capital gains. An example of capital gains would be gains from the sale of
investments. The Company is dependent upon the consolidated group, of which it
is a member, having capital gain income in the foreseeable future to use the
capital loss carryforward in its entirety. To support the capital deferred tax
asset, the Company is able to rely on future taxable capital gain income from
unrealized gains in the group's investment portfolios, which increased from the
prior year's unprecedented market declines. The Company is also able to rely on
the use of various tax planning strategies to forecast taxable capital gains in
the foreseeable future.
ASC Topic 740 indicates that a tax planning strategy is an action that
management ordinarily might not take, but would take, if necessary, to realize a
tax benefit for a carryforward before it expires. These are actions that are
prudent and feasible and would result in the realization of deferred tax assets.
Examples include, but are not limited to, changing the character of taxable or
deductible amounts from ordinary income or loss to capital gain or loss or
accelerating taxable amounts.
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The Company's total valuation allowance against deferred tax assets increased
$3,220, from $7,195 at December 31, 2008 to $10,415 at December 31, 2009,
respectively, through other comprehensive income and retained earnings. The
calculation of the valuation allowance is made at the consolidated return group
level. A portion of the valuation allowance has been assigned to the Company
based on the provisions of the tax sharing agreement. Accordingly, a cumulative
valuation allowance of $10,415 has been recorded because it is management's
assessment that it is more likely than not that deferred tax assets of $10,415
will not be realized.
The Company believes it is more likely than not that the remainder of its
deferred tax assets will be realized in the foreseeable future. Accordingly,
other than noted herein for capital loss carryovers, a valuation allowance has
not been established.
Future reversal of the valuation allowance will be recognized either when the
benefit is realized or when it has been determined that it is more likely than
not that the benefit will be realized. Depending on the nature of the taxable
income that results in a reversal of the valuation allowance, and on
management's judgment, the reversal will be recognized either through other
comprehensive income (loss) or through continuing operations in the statement of
operations. Likewise, if the Company determines that it is not more likely than
not that it would be able to realize all or part of the deferred tax asset in
the future, an adjustment to the deferred tax asset valuation allowance would be
recorded through a charge to continuing operations in the statement of
operations in the period such determination is made.
In determining the appropriate valuation allowance, certain judgments are made
by management relating to recoverability of deferred tax assets, use of tax loss
and tax credit carryforwards, levels of expected future taxable income and
available tax planning strategies. The assumptions in making these judgments are
updated periodically by management based on current business conditions that
affect the Company and overall economic conditions. These management judgments
are therefore subject to change based on factors that include, but are not
limited to, changes in expected capital gain income in the foreseeable future
and the ability of the Company to successfully execute its tax planning
strategies.
VALUATION AND RECOVERABILITY OF GOODWILL
Goodwill represented $81,573 and $156,817 of our $7,342,413 and $7,032,458 total
assets as of December 31, 2009 and 2008, respectively. We review our goodwill
annually in the fourth quarter for impairment or more frequently if indicators
of impairment exist. We regularly assess whether any indicators of impairment
exist. Such indicators include, but are not limited to: a significant decline in
our expected future cash flows due to changes in company-specific factors or the
broader business climate. The evaluation of such factors requires considerable
management judgment. Any adverse change in these factors could have a
significant impact on the recoverability of goodwill and could have a material
impact on our consolidated financial statements.
The goodwill impairment test has two steps. The Company first compares its
estimated fair value with its net book value. If the estimated fair value
exceeds its net book value, goodwill is deemed not to be impaired, and no
further testing is necessary. If the net book value exceeds its estimated fair
value, we then perform a second test to measure the amount of impairment, if
any. To determine the amount of any impairment, we would determine the implied
fair value of goodwill in the same manner as if the Company were being acquired
in a business combination. Specifically, we would determine the fair value of
all of the assets and liabilities of the Company, including any unrecognized
intangible assets, in a hypothetical calculation that would yield the implied
fair value of goodwill. If the implied fair value of goodwill were less than the
recorded goodwill, we would record an impairment charge for the difference.
The following describes the valuation methodologies used in both 2009 and 2008
to derive the fair value of the Company.
For the Company we identify a group of peer companies, which have operations
that are as similar as possible. A Guideline Company Method is used to value the
Company based upon its relative performance to its peer companies, based on
several measures, including price to trailing 12 month earnings, price to
projected earnings, price to tangible net worth and return on equity.
A Dividend Discount Method ("DDM") is used to value the Company based upon the
expected earnings available for distribution over future periods. The Company
determined the estimated fair value considering distributable earnings which
were estimated from operating plans. Operating plan cash flows were then
discounted using a market participant weighted average cost of capital estimated
for the Company. After discounting the future discrete earnings to their present
value, the Company estimated the terminal value attributable to the years beyond
the discrete operating plan period. The discounted terminal value was then added
to the aggregate discounted distributable earnings from the discrete operating
plan period to estimate the fair value of the Company.
A Guideline Transaction Method values the Company based on available data
concerning the purchase prices paid in acquisitions of companies operating in
the insurance industry. The application of certain financial multiples
calculated from these transactions provides an indication of estimated fair
value of the Company.
While all three valuation methodologies are considered in assessing fair value,
the DDM received the highest weighting of the three methodologies, since it uses
the earnings capacity of a business which is generally considered the most
important
<Page>
88 UNION SECURITY INSURANCE COMPANY
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factor in the valuation of a business enterprise. Also, the DDM received the
highest weight given recent dislocations in the economy, the scarcity of M&A
transactions in the insurance marketplace and the relative lack of directly
comparable companies.
In the fourth quarter, we conducted our annual assessment of goodwill using the
methodologies discussed above. After completing the Step 1 analysis, we
determined that the Company had an estimated fair value less than its net book
value. Accordingly, Management performed a Step 2 test for the Company. Step 2
utilizes acquisition accounting guidance and requires the fair value calculation
of all individual assets and liabilities of the Company (excluding goodwill, but
including any unrecognized intangible assets). The net fair value of assets less
liabilities is then compared to the Company's total estimated fair value as
calculated in Step 1. The excess of fair value over the net asset value equals
the implied fair value of goodwill. The implied fair value of goodwill is then
compared to the carrying value of goodwill to determine the Company's
impairment. Based on our Step 2 test it was determined that $75,244 of goodwill
of the Company was impaired, resulting in a non-cash charge. This impairment
reflects the challenging near term growth environment for the Company and an
increased net book value, primarily related to its investment portfolio.
Management remains confident in the long-term prospects of the Company.
The determination of fair value of the Company requires us to make significant
estimates and assumptions. These estimates and assumptions primarily include,
but are not limited to, earnings and required capital projections discussed
above, discount rates, terminal growth rates, operating income and dividend
forecasts and the weighting assigned to the results of each of the three
valuation methods described above. Due to the inherent uncertainty involved in
making these estimates, actual results could differ materially from those
estimates. We evaluated the significant assumptions used to determine the fair
values of the Company, both individually and in the aggregate and concluded they
are reasonable.
Changes in certain assumptions could have a significant impact on the goodwill
impairment assessment.
Should weak market conditions continue for an extended period, or should the
operating results decline substantially compared to projected results, we could
determine that we need to record an additional non-cash impairment charge
related to goodwill. Any such charge would have no effect on either the
Company's cash balance or future cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS -- ADOPTED
See Note 2 to the Notes to Consolidated Financial Statements included elsewhere
in this registration statement.
RECENT ACCOUNTING PRONOUNCEMENTS -- NOT YET ADOPTED
See Note 2 to the Notes to Consolidated Financial Statements included elsewhere
in this registration statement.
RESULTS OF OPERATIONS
The table below presents information regarding our consolidated results of
operations:
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
2009 2008 2007
---------------------------------------------------------------------------------------------------------------------------------
REVENUES:
Net earned premiums and other considerations (2) $1,092,512 $1,173,790 $1,259,930
Net investment income 216,725 238,451 286,235
Net realized losses on investments (25,512) (135,696) (28,219)
Amortization of deferred gains on disposal of businesses 16,906 20,680 23,548
Fees and other income 14,859 11,449 16,395
------------- ------------- -------------
TOTAL REVENUES 1,315,490 1,308,674 1,557,889
------------- ------------- -------------
BENEFITS, LOSSES AND EXPENSES:
Policyholder benefits 849,531 889,498 934,609
Selling, underwriting and general expenses (1) 386,740 400,452 426,681
Total benefits, losses and expenses 1,236,271 1,289,950 1,361,290
INCOME BEFORE PROVISION FOR INCOME TAXES AND GOODWILL IMPAIRMENT 79,219 18,724 196,599
Provision for income taxes 27,127 10,867 57,121
------------- ------------- -------------
NET INCOME BEFORE GOODWILL IMPAIRMENT 52,092 7,857 139,478
Goodwill impairment 75,244 -- --
------------- ------------- -------------
NET (LOSS) INCOME $(23,152) $7,857 $139,478
------------- ------------- -------------
</Table>
(1) Includes amortization of deferred acquisition costs ("DAC") and value of
business acquired ("VOBA") and underwriting, general and administrative
expenses.
(2) Includes single premiums on closed blocks of group disability business. For
closed blocks of business we receive a single, upfront premium and in turn
we record a virtual equal amount of claim reserves. We then manage the
claims using our claim management practices.
<Page>
UNION SECURITY INSURANCE COMPANY 89
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The following discussion provides a general overall analysis of the consolidated
results for the twelve months ended December 31, 2009 ("Twelve Months 2009") and
twelve months ended December 31, 2008 ("Twelve Months 2008"). Please see the
discussion that follows for a more detailed analysis of the fluctuations.
YEAR ENDED DECEMBER 31, 2009 COMPARED TO DECEMBER 31, 2008
NET (LOSS) INCOME
Net (loss) income decreased $31,009, or 395% to a net loss of $(23,152) for
Twelve Months 2009 from net income of $7,857 for Twelve Months 2008. This was
mainly due to a non-cash goodwill impairment charge of $75,244 that was recorded
for Twelve Months 2009. The decrease in net income was also driven by lower net
earned premiums and less favorable life, dental and disability loss experience.
In addition, lower net investment income of $14,122 (after-tax) due to decreased
average invested assets and lower investment yields contributed to the overall
decrease in net income. This was partially offset by lower net realized losses
on investments of $73,160 (after-tax). Other-than-temporary impairments included
in net realized losses on investments were $7,532 (after-tax) in Twelve Months
2009 compared with $70,899 (after-tax) in Twelve Months 2008.
Total Revenues
Total revenues increased $6,816, or 1%, to $1,315,490 for Twelve Months 2009
from $1,308,674 for Twelve Months 2008. The increase was primarily due to lower
net realized losses on investments of $112,554 driven by the write-down of
other-than-temporary impairments in our investment portfolio of $11,587 in
Twelve Months 2009 compared to $109,075 in Twelve Months 2008. This was
partially offset by a decrease in net earned premiums of $81,278 due primarily
to increased lapses and fewer covered lives due to higher unemployment, along
with a difficult sales environment which presents a challenge to revenue growth.
Although we added two new clients in the fourth quarter of 2009, assumed
premiums from our Disability RMS distribution channel decreased for Twelve
Months 2009 compared to the prior year, excluding single premiums from closed
blocks of business. The decrease in assumed premium was partially offset by the
acquisition of a block of group business from Shenandoah Life Insurance Company.
In addition, net investment income decreased by $21,726 due to decreased average
invested assets and lower investment yields.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased $53,679, or 4%, to $1,236,271 for
Twelve Months 2009 from $1,289,950 for Twelve Months 2008. This was primarily
due to a decrease in policyholder benefits resulting from a decline in our small
employer group health business and a decline in our prefunded funeral business
due to run-off of closed blocks of business. Selling, underwriting and general
expenses decreased as a result of lower net earned premiums.
Income Taxes
Income taxes increased $16,260, or 150% to $27,127 for Twelve Months 2009 from
$10,867 for Twelve Months 2008. The change in income taxes was not proportionate
to pretax income due to an increase in 2008 income taxes for the establishment
of a tax valuation allowance against deferred taxes, which is primarily
attributable to capital losses resulting from dispositions of investments of
$7,195.
YEAR ENDED DECEMBER 31, 2008 COMPARED TO DECEMBER 31, 2007
NET INCOME
Net income decreased $131,621, or 94%, to $7,857 for the Twelve Months 2008 from
$139,478 for the Twelve Months 2007. The decrease in net income was primarily
due to an increase in net realized losses on investments of $69,860 (after-tax)
driven by the write-down of other-than-temporary impairments in our investment
portfolio of $70,899 (after-tax) in 2008 compared to $13,732 (after-tax) in
2007. Also contributing to the decrease was a reduction in net investment income
of $31,060 (after-tax) of which $22,425 was from real estate joint venture
partnerships, a $9,881 favorable tax settlement in 2007 and less favorable group
dental experience. The decrease in real estate joint venture partnership income
is due to greater sales of underlying properties in 2007 compared to 2008 given
the more favorable real estate market conditions in 2007.
Total Revenues
Total revenues decreased $249,215, or 16%, to $1,308,674 for Twelve Months 2008
from $1,557,889 for Twelve Months 2007. The decrease was primarily due to an
increase in net realized losses on investments of $107,477, driven by the
write-down of other-than-temporary impairments in our investment portfolio of
$109,075 in 2008 compared to $21,126 in 2007. Net investment income decreased
$47,784 of which $34,500 was due to lower distributions from real estate joint
venture partnerships. Net earned premiums decreased $86,140, primarily due to a
decline in our small employer group health business, a decrease in disability
net earned premiums due to the transfer of a closed block of business in the
prior year and a decrease in group life net earned premiums. Also contributing
to the decrease was a reduction in fees and other income due to contract
settlement fee income recorded in the prior year related to the sale of
marketing rights for our Independent -- U.S. channel in our prefunded funeral
business. These decreases were partially offset by an increase in net earned
premiums in our group dental business.
<Page>
90 UNION SECURITY INSURANCE COMPANY
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Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased $71,340, or 5%, to $1,289,950 for
Twelve Months 2008 from $1,361,290 for Twelve Months 2007. This decrease was
primarily due to a decline in our small employer group health business, a
reduction in disability policyholder benefits due to the transfer of a closed
block of business in the prior year, favorable experience in our group life
business and a decline in our prefunded funeral business due to run-off of
closed blocks of business. These decreases were partially offset by less
favorable group dental experience.
Income Taxes
Income taxes decreased $46,254, or 81%, to $10,867 for Twelve Months 2008 from
$57,121 for Twelve Months 2007. The change in income taxes was not proportionate
to pretax income, primarily due to a $9,881 favorable tax settlement in 2007 and
an increase in 2008 income taxes due to the establishment of a tax valuation
allowance against deferred taxes, which is primarily attributable to capital
losses resulting from dispositions of investments of $7,195.
INVESTMENTS
See Note 3 (Investments) and Note 4 (Fair Value Disclosures) to the Notes to
Consolidated Financial Statements included elsewhere in this report.
CASH FLOWS
We monitor cash flows, and forecasts are provided on a monthly basis. Trend and
variance analyses are used to project future cash needs making adjustments to
the forecasts when needed.
The table below shows our recent net cash flows:
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
2009 2008 2007
--------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED
IN):
Operating activities $(57,939) $23,058 $13,340
Investing activities 105,464 162,267 78,147
Financing activities (20,877) (200,986) (133,888)
---------- ----------- -----------
NET CHANGE IN CASH $26,648 $(15,661) $(42,401)
---------- ----------- -----------
</Table>
CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
Operating activities:
Net cash (used in) provided by operating activities was $ (57,939) and $23,058
for the years ended December 31, 2009 and 2008, respectively. The decrease in
cash provided by operating activities between years is primarily due to lower
gross written premiums in 2009 as well as lower net investment income due to
decreased average invested assets and lower investment yields.
Net cash provided by operating activities was $23,058 and $13,340 for the years
ended December 31, 2008 and 2007, respectively. The increase in cash provided by
operating activities between years was mainly due to a decrease in total
policyholder benefits paid out, as well as a decrease in taxes paid.
Investing activities:
Net cash provided by investing activities was $105,464 and $162,267 for the
years ended December 31, 2009 and 2008, respectively. The decrease in cash
between years is primarily due to increased purchase of fixed maturity
securities, partially offset by a decrease in sales of fixed maturity and equity
securities.
Net cash provided by investing activities was $162,267 and $78,172 for the years
ended December 31, 2008 and 2007, respectively. The increase in cash between
years was mainly due to a change in collateral held under securities lending, a
decrease in purchases of fixed maturity and equity securities, partially offset
by an overall decrease of sales/redemptions of Fixed Maturities securities.
Financing activities:
Net cash used in financing activities was $20,877 and $200,986 for the years
ended December 31, 2009 and 2008, respectively. The decrease in cash used in
financing activities is primarily due to the change in obligation under
securities lending, a $100,000 return of capital to the parent in 2008,
partially offset by $20,000 of dividends paid to the parent in 2009.
Net cash used in financing activities was $200,986 and $133,888 for the years
ended December 31, 2008 and 2007, respectively. The increase in net cash used in
financing activities was mainly due to a change in obligation under securities
lending, offset by a net decrease in dividends/return of capital paid to the
parent.
<Page>
UNION SECURITY INSURANCE COMPANY 91
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COMMITMENTS AND CONTINGENCIES
We have obligations and commitment to third parties as a result of our
operations. These obligations and commitments, as of December 31, 2009, are
detailed in the table below by maturity date as of the dates indicated:
<Table>
<Caption>
AS OF DECEMBER 31, 2009
LESS THAN 1 1-3 3-5 MORE THAN 5
TOTAL YEAR YEARS YEARS YEARS
-------------------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS :
Insurance liabilities (1) $6,651,571 $593,109 $808,299 $695,287 $4,554,876
Operating leases 20,198 8,463 9,354 1,612 769
COMMITMENTS:
Liability for unrecognized tax
benefit 6,064 -- 5,529 535 --
----------- --------- --------- --------- -----------
TOTAL OBLIGATIONS AND
COMMITMENTS $6,677,833 $601,572 $823,182 $697,434 $4,555,645
----------- --------- --------- --------- -----------
</Table>
(1) Insurance liabilities, reflected in the commitments and contingencies table
above, include products for which we are currently making periodic payments
and products for which we are not making periodic payments, but for which
we believe the amount and timing of future payments is essentially fixed
and determinable. Amounts included in insurance liabilities reflect
estimated cash payments to be made to policyholders.
Liabilities for future policy benefits and expenses of $2,675,069 and claims and
benefits payable of $1,751,501 have been included in the commitments and
contingencies table. Significant uncertainties relating to these liabilities
include mortality, morbidity, expenses, persistency, investment returns,
inflation, contract terms and the timing of payments.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that are reasonably
likely to have a material effect on the financial condition, results of
operations, liquidity, or capital resources of the Company.
(I) CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS. NONE
(J) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a provider of insurance products, effective risk management is fundamental to
our ability to protect both our customers' and our stockholder's interests. We
are exposed to potential loss from various market risks, in particular interest
rate risk, credit risk and inflation risk.
Interest rate risk is the possibility that the fair value of liabilities will
change more or less than the market value of investments in response to changes
in interest rates, including changes in the slope or shape of the yield curve
and changes in spreads due to credit risks and other factors.
Credit risk is the possibility that counterparties may not be able to meet
payment obligations when they become due. We assume counterparty credit risk in
many forms. A counterparty is any person or entity from which cash or other
forms of consideration are expected to extinguish a liability or obligation to
us. Primarily, our credit risk exposure is concentrated in our fixed maturity
securities portfolio and, to a lesser extent, in our reinsurance recoverables.
Inflation risk is the possibility that a change in domestic price levels
produces an adverse effect on earnings. This typically happens when only one of
invested assets or liabilities is indexed to inflation.
INTEREST RATE RISK
Interest rate risk arises as we invest substantial funds in interest-sensitive
fixed maturity securities, such as fixed maturity investments, mortgage-backed
and asset-backed securities and commercial mortgage loans. There are two forms
of interest rate risk -- price risk and reinvestment risk. Price risk occurs
when fluctuations in interest rates have a direct impact on the market valuation
of these investments. As interest rates rise, the market value of these
investments falls, and conversely, as interest rates fall, the market value of
these investments rises. Reinvestment risk occurs when fluctuations in interest
rates have a direct impact on expected cash flows from mortgage-backed and
asset-backed securities. As interest rates fall, an increase in prepayments on
these assets results in earlier than expected receipt of cash flows forcing us
to reinvest the proceeds in an unfavorable lower interest rate environment.
Conversely as interest rates rise, a decrease in prepayments on these assets
results in later than expected receipt of cash flows forcing us to forgo
reinvesting in a favorable higher interest rate environment. As of December 31,
2009, we held $2,555,863 of fixed maturity securities at fair market value and
$772,912 of commercial mortgages at amortized cost for a combined total of 88%
of total invested assets. As of December 31, 2008 we held $2,199,547 of fixed
maturity securities at fair market value and $838,254 of commercial mortgages at
amortized cost for a combined total of 86% of total invested assets.
We manage interest rate risk by selecting investments with characteristics such
as duration, yield, currency and liquidity tailored to the anticipated cash
outflow characteristics of our insurance and reinsurance liabilities.
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92 UNION SECURITY INSURANCE COMPANY
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Our group long-term disability reserves are also sensitive to interest rates.
Group long-term disability and group term life waiver of premium reserves are
discounted to the valuation date at the valuation interest rate. The valuation
interest rate is determined by taking into consideration actual and expected
earned rates on our asset portfolio.
The interest rate sensitivity relating to price risk of our fixed maturity
security assets is assessed using hypothetical scenarios that assume several
positive and negative parallel shifts of the yield curves. We have assumed that
the United States and Canadian yield curve shifts are of equal direction and
magnitude. The individual securities are repriced under each scenario using a
valuation model. For investments such as callable bonds and mortgage-backed and
asset-backed securities, a prepayment model was used in conjunction with a
valuation model. Our actual experience may differ from the results noted below
particularly due to assumptions utilized or if events occur that were not
included in the methodology. The following table summarizes the results of this
analysis for bonds, mortgage-backed and asset-backed securities held in our
investment portfolio:
INTEREST RATE MOVEMENT ANALYSIS OF MARKET VALUE
OF FIXED MATURITY SECURITIES INVESTMENT PORTFOLIO
AS OF DECEMBER 31, 2009
<Table>
<Caption>
-100 -50 0 50 100
---------------------------------------------------------------------------------------------------------------------------------
Total market value $2,780,930 $2,665,282 $2,555,863 $2,452,931 $2,356,612
% Change in market value from base 8.81% 4.28% --% (4.03)% (7.80)%
case
$ Change in market value from base $225,067 $109,419 $ -- $(102,933) $(199,252)
case
</Table>
CREDIT RISK
We have exposure to credit risk primarily from our customers, as a holder of
fixed maturity securities and by entering into reinsurance cessions.
Our risk management strategy and investment policy is to invest in debt
instruments of high credit quality issuers and to limit the amount of credit
exposure with respect to any one issuer. We attempt to limit our credit exposure
by imposing fixed maturity portfolio limits on individual issuers based upon
credit quality. Currently our portfolio limits are 1.5% for issuers rated AA-
and above, 1% for issuers rated A- to A+, 0.75% for issuers rated BBB- to BBB+
and 0.38% for issuers rated BB- to BB+. These portfolio limits are further
reduced for certain issuers with whom we have credit exposure on reinsurance
agreements. We use the lower of Moody's or Standard & Poor's ratings to
determine an issuer's rating.
We are also exposed to the credit risk of our reinsurers. When we reinsure, we
are still liable to our insureds regardless of whether we get reimbursed by our
reinsurer. As part of our overall risk and capacity management strategy, we
purchase reinsurance for certain risks that we underwrite.
For at least 50% of our $1,434,405 of reinsurance recoverables at December 31,
2009, we are protected from the credit risk by using various types of risk
mitigation mechanisms such as a trusts, letters of credit or by withholding the
assets in a modified coinsurance or co-funds-withheld arrangement. For example,
reserves of $648,919 and $669,407 as of December 31, 2009 relating to two large
coinsurance arrangements with The Hartford and John Hancock, respectively,
related to sales of businesses are held in trusts. If the value of the assets in
these trusts falls below the value of the associated liabilities, The Hartford
and John Hancock, as the case may be, will be required to put more assets in the
trusts. We may be dependent on the financial condition of The Hartford and John
Hancock, whose A.M. Best ratings are currently A and A+, respectively. However,
A.M. Best recently placed a negative outlook on the issuer credit ratings and
financial strength ratings of The Hartford and a stable outlook for John
Hancock. For recoverables that are not protected by these mechanisms, we are
dependent solely on the credit of the reinsurer. Occasionally, the
creditworthiness of the reinsurer becomes questionable. See the section entitled
"Risk Factors -- Reinsurers' Failure to Fulfill Obligations" for further
information. A majority of our reinsurance exposure has been ceded to companies
rated A- or better by A.M. Best.
INFLATION RISK
Inflation risk arises as we invest substantial funds in nominal assets which are
not indexed to the level of inflation, whereas the underlying liabilities are
indexed to the level of inflation. Approximately 21% of our preneed policies
with reserves of approximately $285,000 as of December 31, 2009 have death
benefits that are guaranteed to grow with the Consumer Price Index. In times of
rapidly rising inflation the credited death benefit growth on these liabilities
increases relative to the investment income earned on the nominal assets
resulting in an adverse impact on earnings. We have partially mitigated this
risk by purchasing a contract with payments tied to the Consumer Price Index.
See " -- Derivatives."
In addition, we have inflation risk in our individual and small employer group
health insurance businesses to the extent that medical costs increase with
inflation and we have not been able to increase premiums to keep pace with
inflation.
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UNION SECURITY INSURANCE COMPANY 93
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DERIVATIVES
Derivatives are financial instruments whose values are derived from interest
rates, foreign exchange rates, financial indices or the prices of securities or
commodities. Derivative financial instruments may be exchange-traded or
contracted in the over-the-counter market and include swaps, futures, options
and forward contracts.
Under insurance statutes, our insurance companies may use derivative financial
instruments to hedge actual or anticipated changes in their assets or
liabilities, to replicate cash market instruments or for certain
income-generating activities. These statutes generally prohibit the use of
derivatives for speculative purposes. We generally do not use derivative
financial instruments.
We have purchased a contract to partially hedge the inflation risk exposure
inherent in some of our preneed insurance policies.
(K) EXECUTIVE OFFICERS
The table below sets forth certain information, as of April 30, 2010, concerning
each person deemed to be an Executive Officer of the Company. There are no
arrangements or understandings between any Executive Officer and any other
person pursuant to which the officer was selected.
<Table>
<Caption>
NAME AGE POSITIONS
-------------------------------------------------------------------------------------------------------------------------------
John S. Roberts 54 President, Chief Executive Officer and Director; Executive Vice President, Assurant, Inc.
Kenneth D. Bowen 56 Vice President, General Counsel and Secretary
Dianna D. Duvall 49 Senior Vice President
Matthew K. Gilligan 57 Senior Vice President
Timothy W. Knott 48 Senior Vice President
Sheryle L. Ohme 60 Senior Vice President
Rosemary Polk 56 Senior Vice President
Karla Schacht 50 Senior Vice President
Joseph A. Sevcik 51 Senior Vice President
Joi A. Tillman 38 Vice President
J. Marc Warrington 42 Senior Vice President
Miles B. Yakre 41 Senior Vice President, Chief Financial Officer and Treasurer
</Table>
JOHN S. ROBERTS, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR; EXECUTIVE VICE
PRESIDENT, ASSURANT, INC. Please see Mr. Roberts' biography in the section
below entitled "DIRECTORS".
KENNETH D. BOWEN, VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY. Mr. Bowen has
served as Vice President, General Counsel and Secretary of the Company since May
2008, having previously served as Vice President and Assistant Secretary of the
Company. Mr. Bowen has served in various in-house legal roles at Assurant
Employee Benefits since 1983.
DIANNA D. DUVALL, SENIOR VICE PRESIDENT. Ms. Duvall has served as Senior Vice
President of the Company since January 2004. Ms. Duvall has served in various
management positions at Assurant Employee Benefits since its acquisition,
including customer service, Life and Disability Underwriting, True Group and
Dental Health Alliance networks.
MATTHEW K. GILLIGAN, SENIOR VICE PRESIDENT. Mr. Gilligan has served as Senior
Vice President of the Company since February 2009. He also currently serves as
President of Disability RMS, having served in various management positions at
Disability RMS since 2003.
TIMOTHY W. KNOTT, SENIOR VICE PRESIDENT. Mr. Knott has served as Senior Vice
President of the Company since February 2009, having previously served as Vice
President since July 2008. Prior to this, he served as Vice President of
Specialty Benefits Products and Operations for Principal Financial from April
2004 to July 2008.
SHERYLE L. OHME, SENIOR VICE PRESIDENT. Ms. Ohme has served as Senior Vice
President of the Company since July 2008. Since the acquisition of Assurant
Employee Benefits, Ms. Ohme has served in various management-related roles,
including as Vice President, Claims of Assurant Employee Benefits from 2000 to
2008.
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ROSEMARY POLK, SENIOR VICE PRESIDENT. Ms. Polk has served as Senior Vice
President of the Company, where she oversees human resources and development,
since April 2009. She has served in the human resources and development areas of
Assurant Employee Benefits since its acquisition, previously serving as Vice
President beginning in 2000.
KARLA J. SCHACHT, SENIOR VICE PRESIDENT. Ms. Schacht has served as Senior Vice
President of the Company since 2004. She also has served as Chief Information
Officer of Assurant Employee Benefits since 2004 and as Chief Service Officer of
Assurant Employee Benefits since 2008.
JOSEPH A. SEVCIK, SENIOR VICE PRESIDENT. Mr. Sevcik has served as Senior Vice
President of the Company since July 2008. He leads Assurant Employee Benefits'
marketing efforts and previously served as Vice President, Marketing from August
2007 to July 2008 and Second Vice President, Voluntary Marketing from August
2005 to August 2007. Prior to joining Assurant Employee Benefits, Mr. Sevcik was
Assistant Vice President, Marketing and Client Experience at H&R Block.
JOI A. TILLMAN, VICE PRESIDENT. Ms. Tillman has served as Vice President since
May 2008. Since she joined Assurant Employee Benefits in 1989, Ms. Tillman has
held a variety of progressively senior roles at Assurant Employee Benefits,
including officer and manager in 2005, Second Vice President and Regional Team
Leader of Underwriting from 2006 to August 2007, Second Vice President and
co-lead of the Easy To Do Business With team from August 2007 to January 2008
and Vice President, Voluntary Growth Initiative from January 2008 to January
2009 and Vice President, Customer Advocacy from January 2009 to the present.
J. MARC WARRINGTON, SENIOR VICE PRESIDENT. Mr. Warrington has served as Senior
Vice President of the Company since 2005, and as Senior Vice President, Sales of
Assurant Employee Benefits since 2005. Prior to that, Mr. Warrington served as
Vice President of Sales at Assurant Employee Benefits since 2003.
MILES B. YAKRE, SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND
TREASURER. Mr. Yakre has served as Senior Vice President of the Company since
August 2007 and as Chief Financial Officer and Treasurer of the Company since
November 2009. He has also served as Chief Financial Officer of Assurant
Employee Benefits since April 2008, having previously served as Senior Vice
President and Chief Actuary of Assurant Employee Benefits from August 2007 to
April 2008and Senior Vice President, Corporate Actuary and Treasurer of
Assurant, Inc. from January 2005 to August 2007.
DIRECTORS
We currently have five directors. The biographies of each of the directors below
contain information regarding the person's service as a director, business
experience and director positions held currently and/or during the last five
years.
Each individual was selected to serve as a director of the Company because of
his or her leadership position at the Company, Assurant, Inc., or the Assurant
Employee Benefits division of Assurant, and the valuable experience with, and
knowledge of, Assurant's operations and business lines that he or she brings to
the Company's Board.
MICHAEL J. PENINGER, CHAIRMAN OF THE BOARD. Mr. Peninger, age 55, has served as
Executive Vice President of the Company since January 2008 and as Chairman of
the Board since January 15, 2010. He has served as Executive Vice President and
Chief Financial Officer of Assurant, Inc. since March 2009, having served as
Executive Vice President and Interim Chief Financial Officer since July 2007.
Prior to this, he served as President and Chief Executive Officer of Assurant
Employee Benefits since January 1999.
S. CRAIG LEMASTERS, DIRECTOR. Mr. Lemasters, 49, has served as a director of
the Company since July 2006. He has also served as President and Chief Executive
Officer of Assurant Solutions, a division of Assurant, and Executive Vice
President of Assurant, Inc. since July 2005. From 2003 to 2005, Mr. Lemasters
served as Executive Vice President and Chief Operating Officer for the consumer
protection business line of Assurant Solutions.
CHRISTOPHER J. PAGANO, DIRECTOR. Mr. Pagano, 46, has served as a director of
the Company since April 2009. He also has served as Executive Vice President,
Treasurer and Chief Investment Officer of Assurant, Inc. since July 2007 and
President of Assurant Asset Management, a division of Assurant, Inc., since
January 2005.
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JOHN S. ROBERTS, DIRECTOR. Mr. Roberts currently serves as President and Chief
Executive Officer of the Company and of Assurant Employee Benefits, and
Executive Vice President of Assurant, Inc. He served as on an interim basis as
President and Chief Executive Officer of Assurant Employee Benefits from July
2007 to March 2009. He has served as a director of the Company since March 2009.
Prior to that, he served as Senior Vice President of Assurant Employee Benefits
and President of Disability RMS, an affiliate of the Company, since 2003.
SYLVIA R. WAGNER, DIRECTOR. Ms. Wagner, 61, was appointed as a director of the
Company in January 2010. She has also served as Executive Vice President, Human
Resources and Development of Assurant, Inc. since April 2009. She has previously
served as Senior Vice President, Human Resources and Development of Assurant
Employee Benefits since May 1995, where she was responsible for overseeing human
resources and development, employee communications, clinical and behavioral
health services, and community relations.
(L) EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
I. EXECUTIVE SUMMARY
INTRODUCTION
This Compensation Discussion and Analysis ("CD&A") provides a detailed review of
the compensation principles and strategic objectives governing the compensation
of the following individuals, who were serving as our named executive officers
during 2009:
John S. Roberts President and Chief Executive Officer; Executive Vice
President, Assurant, Inc.
Miles B. Yakre Senior Vice President, Chief Financial Officer and
Treasurer
Stacia N. Almquist Vice President (formerly Treasurer)
Michael J. Peninger Executive Vice President; Executive Vice President and
Chief Financial Officer, Assurant, Inc.
Sylvia R. Wagner Senior Vice President; Executive Vice President, Human
Resources and Development, Assurant, Inc.
J. Marc Warrington Senior Vice President
Throughout this CD&A, we refer to the above-named individuals as our "named
executive officers" or "NEOs," and to Mr. Roberts as our "Chief Executive
Officer" or "CEO." Ms. Almquist served as Treasurer until November 2009 and
currently serves as Vice President, Dental Division of Assurant Employee
Benefits.
Because the Company is a wholly-owned subsidiary of Assurant, Inc. (hereafter,
"Assurant" or the "Parent") and each of the NEOs have roles at the Parent (or a
division of the Parent) in addition to serving as officers of the Company, our
compensation programs, awards and measures are primarily based on and part of
the compensation program of the Parent.
The 2009 compensation of Mr. Peninger and Ms. Wagner, each of whom serves on the
Parent's Management Committee, (1) was based on the Parent's compensation
program, goals and objectives. The 2009 compensation of Messrs. Warrington and
Yakre and Ms. Almquist was based on a compensation program focused principally
on the goals and objectives of Assurant Employee Benefits, a division of
Assurant. The Company comprises a large majority of Assurant Employee Benefits'
business. Because Mr. Roberts serves as both the Chief Executive Officer of
Assurant Employee Benefits and an Executive Vice President of the Parent, his
2009 compensation was based on a combination of both Assurant- and Assurant
Employee Benefits-specific goals and objectives. All of our NEOs participate in
the Parent's long-term equity incentive program.
For more detailed information on Assurant's 2009 compensation programs, awards
and objectives, please see Assurant's Proxy Statement, as filed with the SEC on
April 8, 2010.
OUR EXECUTIVE COMPENSATION PRINCIPLES
Our core executive compensation principles are based on the principles of
Assurant and are set forth below:
- Executive compensation opportunities at the Company should be sufficiently
competitive to attract and retain talented executives who can successfully
execute the Company's business strategy while remaining at levels that are
aligned with the long-term interests of shareholders. (2)
------------
(1) The Management Committee of Assurant, Inc. consists of the President and
Chief Executive Officer, all of the Executive Vice Presidents of Assurant
and the Chief Executive Officers of each of Assurant's operating segments.
The Management Committee is ultimately responsible for setting the
policies, strategy and direction of Assurant, subject to the overall
discretion and supervision of the Assurant Board of Directors.
(2) Union Security Insurance Company does not have securities that are traded
publicly and therefore, all references to shares and shareholders in this
CD&A refer to those of the Parent.
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96 UNION SECURITY INSURANCE COMPANY
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- Annual incentive and long-term equity incentive programs at Assurant,
including at the Company, should support both Assurant's and the Company's
business strategy and motivate our executives to deliver above-average
results over a sustained period.
- A substantial portion of target total direct compensation provided to our
named executive officers should be tied to business performance.
- Our executive compensation programs should reinforce a culture of
accountability that views risk management as a priority.
II. THE COMPENSATION DECISION MAKING PROCESS
The Compensation Committee of the Parent's Board of Directors (the "Assurant
Compensation Committee") oversees Assurant's executive compensation program and
advises the full Board on general aspects of Assurant's compensation and benefit
policies.
The Assurant Compensation Committee determined the compensation of Messrs.
Peninger and Roberts and Ms. Wagner because they served as executive officers of
the Parent during 2009. Mr. Roberts is not involved in the Assurant Compensation
Committee's determination of his own compensation, or that of Mr. Peninger or
Ms. Wagner.
As part of its process, the Assurant Compensation Committee evaluates the
recommendations of Assurant's Chief Executive Officer along with information and
analysis provided by Towers Watson & Co. ("Towers Watson"), its independent
compensation consultant. The Assurant Compensation Committee exercises its
discretion in evaluating, modifying, approving or rejecting the Chief Executive
Officer's recommendations, and makes all final decisions with regard to base
salary, short term incentives and long-term incentives for Assurant's executive
officers. The Assurant Compensation Committee meets periodically in executive
session without any members of management present to discuss recommendations and
make decisions with respect to compensation of Assurant's executive officers
(including Messrs. Peninger and Roberts and Ms. Wagner).
The compensation of Mr. Yakre is determined through a process whereby the Chief
Financial Officer of Assurant, Inc. annually reviews Mr. Yakre's performance in
consultation with Mr. Roberts as President and Chief Executive Officer of
Assurant Employee Benefits, and makes decisions regarding his compensation. The
compensation of Mr. Warrington is determined through a process whereby Mr.
Roberts annually reviews the performance and compensation of his direct reports
in consultation with Company's Senior Vice President, Human Resources and
Development, and makes decisions regarding their compensation. The compensation
of Ms. Almquist is determined through a process whereby Ms. Almquist's immediate
supervisor annually reviews her performance and compensation in consultation
with the Company's Senior Vice President, Human Resources and Development, and
makes decisions regarding her compensation. The Chief Executive Officer also
provides input, in consultation with the Company's Chief Financial Officer and
Senior Vice President, Human Resources and Development, on the annual incentive
plan performance goals that apply to the Company's NEOs other than those who
serve as executive officers of the Parent.
LEVEL OF COMPENSATION PROVIDED
MARKET POSITIONING. Assurant and the Company believe that the best way to
attract and retain top talent while maintaining appropriate levels of
compensation is to provide target total direct compensation opportunities to our
NEOs at levels and on terms that are competitive with the market and/or peer
companies, as further described below. The relative levels of each element of
total direct compensation (base salary, annual incentive and long-term equity
incentive) are also determined by reference to these benchmarks.
MANAGEMENT COMMITTEE-LEVEL NAMED EXECUTIVE OFFICERS -- ASSURANT'S COMPENSATION
PEER GROUP. Assurant's goal is to provide target total direct compensation for
its executive officers at levels and on terms consistent with those of a select
group of publicly traded companies that it views as its peers (its "compensation
peer group"). Assurant aims to set target total direct compensation for each
Management Committee-level NEO at approximately the median level provided to
executives with similar responsibilities at companies in the Parent's
compensation peer group. While Assurant faces competition in each of its
businesses, it does not believe that any single competitor directly competes in
all of its business lines. Additionally, the business lines in which Assurant
operate are generally characterized by a limited number of competitors. Assurant
believes that the following companies collectively represent the best match for
Assurant because they operate in the insurance or financial services sector and
may share one or more of the following characteristics : similar product lines;
similar services and business models; similar revenues and assets and a similar
talent pool for recruiting new employees:
<Table>
- Aetna Inc. - Coventry Health Care, Inc. - Stancorp Financial Group, Inc.
- Aflac Incorporated - Genworth Financial, Inc. - Sunlife Financial, Inc.
- Cigna Corporation - Hanover Insurance Group Inc. - Torchmark Corporation
- Conseco, Inc. - Humana Inc. - Unum Group
- CAN Financial Corporation - Markel Corporation - W.R. Berkley Corporation
- Principal Financial Group, Inc.
</Table>
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COMPANY-LEVEL NAMED EXECUTIVE OFFICERS -- COMPANY MARKET SURVEY DATA. The
Company is not a publicly-traded company and does not have a compensation peer
group, however, it does rely on certain market survey data to set target total
direct compensation that is competitive with the market. The Company targets
base compensation at the 50th percentile of market. Compensation levels for
total direct compensation (including mix of base pay, short-term incentive
compensation and long-term incentive compensation) is established based upon
market data for comparable positions at comparable companies in the insurance
and financial services industries. Short-term incentive compensation and
long-term incentive compensation are aligned with recommended targets for each
NEO's grade and scope of responsibility.
III. ELEMENTS OF OUR EXECUTIVE COMPENSATION PROGRAM
BASE SALARIES
MANAGEMENT COMMITTEE-LEVEL NAMED EXECUTIVE OFFICERS. In December 2008, Towers
Watson presented to the Assurant Compensation Committee peer group proxy
statement data on annual base salaries for certain Assurant executive officers.
Based on that information and its desire to compensate Mr. Roberts at the same
level paid to his Management Committee peers ($500,000), Mr. Roberts' base
salary was increased to $500,000. Additionally, upon Ms. Wagner's promotion to
the position of Executive Vice President, Human Resources and Development of
Assurant, her base salary increased to $400,000, effective March 1, 2009.
Although the data indicated that base salaries for Assurant's named executive
officers remained below median levels for comparable positions in the
compensation peer group, in light of the extraordinary economic environment, the
Assurant Compensation Committee did not approve any increases in base salary for
these named executive officers, other than to increase Mr. Roberts' base salary
to a level commensurate with that of his peers, and to increase Ms. Wagner's
base salary upon her promotion. Mr. Peninger did not receive a base salary
increase in 2009.
COMPANY-LEVEL NAMED EXECUTIVE OFFICERS. The base salaries for Messrs.
Warrington and Yakre and Ms. Almquist are intended to be competitive with that
of available market data reviewed by the Company. In 2009, base salaries for
these NEOs were increased to the amounts shown in column (c) of the Summary
Compensation Table below.
ANNUAL INCENTIVE COMPENSATION
OVERVIEW. Since Assurant's inception as a public company, and consistent with
its sustainable growth strategy, it has allocated 40% of the target annual
incentive opportunity provided to its executives to profitability measures and
40% to top-line revenue growth for specified areas. As further described below,
Assurant uses operating measures for these financial targets because they
exclude the impact of net realized gains (losses) on investments and other
unusual and/or non-recurring or infrequent items. The remaining 20% of the
target opportunity is allocated to strategic development goals that, in 2009 and
2010, focus on specific risk management objectives. Management takes a number of
factors into account when developing recommended performance goals. In any given
year, these factors may include analyst expectations, results from prior years,
opportunities for strategic growth and economic trends that may impact our
business (E.G., levels of consumer spending, unemployment rates, mortgage
default rates or prevailing conditions in the credit markets).
MANAGEMENT COMMITTEE-LEVEL NAMED EXECUTIVE OFFICERS. For Mr. Peninger and Ms.
Wagner, top-line revenue growth is measured by a weighted average of the
performance results of the business segments, and profitability is measured
using consolidated operating earnings per share ("EPS") and operating return on
equity ("ROE"). Consolidated operating EPS is determined by dividing net
operating income ("NOI") for Assurant as a whole by the weighted average number
of diluted shares of Assurant Common Stock outstanding during the year.
Operating ROE for Assurant is determined by dividing NOI for Assurant as a whole
by average stockholders' equity for the year, excluding accumulated other
comprehensive income ("AOCI"). For additional information regarding these
measures, please see the earnings release and financial supplement furnished as
Exhibits 99.1 and 99.2, respectively, to Assurant's Current Report on Form 8-K
filed with the SEC on February 4, 2010.
For Mr. Roberts, financial targets apply to the Assurant Employee Benefits
business segment. Top-line growth is measured through a combination of gross or
net earned premiums and fees and gross written premium/new sales of designated
products. Profitability is measured using NOI and operating return on equity ROE
for the segment. NOI is determined by excluding net realized gains or losses on
investments and unusual and/or infrequent items from net income. Operating ROE
for the business segment is determined by dividing NOI for the segment by
average stockholders' equity for the segment. For additional information
regarding these measures, please see the earnings release and financial
supplement furnished as Exhibits 99.1 and 99.2, respectively, to Assurant's
Current Report on Form 8-K filed with the SEC on February 4, 2010.
Performance against strategic development goals was evaluated for Messrs.
Peninger and Roberts and Ms. Wagner in 2009 based on a composite of
business-level results.
2009 PERFORMANCE GOALS AND RESULTS.
- FINANCIAL METRICS. In setting performance goals for 2009 for Messrs.
Peninger and Roberts and Ms. Wagner, the Assurant Compensation Committee
sought to establish challenging goals while recognizing the need to
implement strategies for
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containing risk in a highly volatile market environment. The Assurant
Compensation Committee anticipated that many financial services organizations
would continue to experience fallout from the 2008 financial crisis in 2009.
Accordingly, certain financial targets were adjusted downward from 2008 levels
to encourage prudent deployment of available capital.
- ENTERPRISE RISK MANAGEMENT. To reinforce a culture that views risk
management as a priority, in 2009 the Assurant Compensation Committee
approved the following enterprise risk management objectives as our
strategic development goals: (i) (a) establishing a structure for
identifying material enterprise risks, and (b) defining parameters for
catastrophe and portfolio risk and incorporating these parameters into
strategic decision making, (ii) development and achievement of specified
goals under a compliance plan for each business segment and (iii) retention
of individuals identified as key contributors and potential future senior
executives. Each goal was weighted equally.
The following table sets forth performance goals applicable to Messrs. Peninger
and Roberts and Ms. Wagner for 2009, along with the resulting multipliers:
MANAGEMENT COMMITTEE-LEVEL NEOS
2009 ANNUAL INCENTIVE PERFORMANCE TARGETS AND RESULTS (1)
<Table>
<Caption>
(DOLLAR AMOUNTS EXPRESSED IN MILLIONS)
------------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
2009
WEIGHT PERFORMANCE METRIC 0.0 0.5 1.0 1.5 2.0 RESULTS
---------------------------------------------------------------------------------------------------------------------------------
ASSURANT ENTERPRISE
(25%) EPS $4.50 $4.70 $4.90 $5.10 $5.30 $3.9
(15%) Annualized operating Return on Equity (ROE) 11.50 % 12.00 % 12.50 % 13.00 % 13.50 % 10.06
(40%) Revenue Growth (2) N/A
(20%) Enterprise Risk Management (3) N/A
ASSURANT EMPLOYEE BENEFITS
(25%) Net Operating Income (NOI) $56 $60 $64 $68 $72 $42.2
(15%) Operating Return on Equity (ROE) 10.75 % 11.50 % 12.25 % 13.00 % 13.75 % 8.11
(40%) Revenue Growth
25% Net earned premium $740 $770 $800 $830 $860 $747.0
75% New sales $145 $155 $165 $175 $185 $130.9
(20%) Enterprise Risk Management (3) N/A
<Caption>
PERFORMANCE COMPOSITE
WEIGHT MULTIPLIER MULTIPLIER
------
(25%) 0.00
(15%) % 0.00 0.76
(40%) 0.91
(20%) 1.97
(25%) 0.00
(15%) % 0.00 0.41
(40%)
0.12
0.00
(20%) 1.97
</Table>
(1) Dollar amounts applicable to performance metrics other than EPS are
expressed in millions.
(2) The corporate-level revenue growth multiplier is determined based on a
weighted average of the performance multipliers applicable to each business
segment, which are weighted as follows: Assurant Specialty Property -- 25%;
Assurant Solutions -- 30%; Assurant Health -- 25%; and Assurant Employee
Benefits -- 20%. The revenue growth multiplier for Assurant Health was
1.47, based on weighted targets of $1.38 billon for net earned premium and
fee income (25%) and $460 million for new sales (75%), and results of $1.42
billion for net earned premium and fee income and $490.9 million for new
sales. The revenue growth multiplier for Assurant Solutions was 1.17, based
on weighted targets of $2.1 billion for net earned premium and fee income
(25%) and $2.9 billion for gross written premium (75%) and results of $2.29
billion for net earned premium and fee income and $2.86 billion for gross
written premium. The revenue growth multiplier for Assurant Specialty
Property was 0.75, based on weighted targets of $1.38 billion for net
earned premium and fee income (25%) and $2.2 billion for gross earned
written premium (75%) and results of $1.46 billion for net earned premium
and fee income and $2.1 billion for gross written premium.
(3) The corporate-level enterprise risk management multiplier of 1.97 was
determined based on the average of the multipliers for the following
objectives, which were weighted equally: (i) (a) establishing a structure
for identifying material enterprise risks, and (b) defining parameters for
catastrophe and portfolio risk and incorporating these parameters into
strategic decision making (2.0), (ii) development and achievement of
specified goals under a compliance plan for each business segment (1.92)
and (iii) retention of individuals identified as key contributors and
future senior executives (2.0).
The performance targets included in the table above are disclosed only to assist
investors and other readers in understanding executive compensation provided to
certain of the Company's executive officers. They are not intended to provide
guidance on, and should not be relied on as predictive of, Assurant's future
performance or the future performance of the Company or any of Assurant's
operating segments.
The following table shows target annual incentive compensation, the weighted
average multipliers for each Management Committee-level NEO and the resulting
annual incentive award payout for 2009:
MANAGEMENT COMMITTEE-LEVEL NAMED EXECUTIVE OFFICERS:
2009 ANNUAL INCENTIVE PAYMENTS
<Table>
<Caption>
2009 TARGET 2009 2009 ANNUAL
NAMED EXECUTIVE OFFICER ANNUAL INCENTIVE MULTIPLIER INCENTIVE PAYMENT
------------------------------------------------------------------------------------------------------------------
Michael J. Peninger $400,000 0.76 $304,000
(Assurant Enterprise)
John S. Roberts $400,000 0.41 $164,000
(Assurant Employee Benefits)
Sylvia Wagner $287,507 0.76 $218,506
(Assurant Enterprise)
</Table>
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2009 TARGET ANNUAL INCENTIVE AWARDS. Mr. Roberts' target annual incentive award
opportunity was increased to the same level awarded to his Assurant Management
Committee peers (80% of base salary). Upon her promotion to the position of
Executive Vice President of the Parent, Ms. Wagner received an increase in
annual incentive opportunity from 45% to 75% of base salary. Target annual
incentive award levels remained at 80% of base salary for Mr. Peninger.
COMPANY-LEVEL NAMED EXECUTIVE OFFICERS. Financial targets for Messrs. Yakre and
Warrington and Ms. Almquist apply to the Assurant Employee Benefits business
segment. Top-line growth is measured through a combination of net earned
premiums and new sales of designated products. Profitability is measured using
NOI and operating return on equity ROE for the segment. NOI is determined by
excluding net realized gains or losses on investments and unusual and/or
infrequent items from net income. Operating ROE for the business segment is
determined by dividing NOI for the segment by average stockholders' equity for
the segment. For additional information regarding these measures, please see the
earnings release and financial supplement furnished as Exhibits 99.1 and 99.2,
respectively, to Assurant's Current Report on Form 8-K filed with the SEC on
February 4, 2010.
Performance against strategic development goals was evaluated for Messrs.
Warrington and Yakre and Ms. Almquist based on division-level results at
Assurant Employee Benefits.
2009 PERFORMANCE GOALS AND RESULTS.
- FINANCIAL METRICS. Financial metrics for Assurant Employee Benefits were
determined on the same basis that financial metrics were determined for each
of the Assurant's business segments, as described above under the heading "
-- ANNUAL INCENTIVE COMPENSATION -- MANAGEMENT COMMITTEE-LEVEL NAMED
EXECUTIVE OFFICERS --2009 PERFORMANCE GOALS AND RESULTS" above.
- ENTERPRISE RISK MANAGEMENT. For Messrs Warrington and Yakre, the components
of the Enterprise Risk Management goal are based largely upon the components
described above for the Management Committee-level NEOs, with objectives for
the Assurant Employee Benefits segment's compliance-based sub-component that
relate to: (i) the establishment of an ongoing compliance program for
contract preparation and processing; (ii) oversight of third party
administrators and (iii) information privacy and security.
The 20% strategic development goal applicable to Ms. Almquist is comprised of
two equally weighted components: (i) achievement of customer service results
and (ii) level of completion of business specific training.
The following table sets forth performance goals applicable to Messrs.
Warrington and Yakre and Ms. Almquist for 2009, along with the resulting
multipliers:
COMPANY-LEVEL NAMED EXECUTIVE OFFICERS
2009 ANNUAL INCENTIVE PERFORMANCE TARGETS AND RESULTS
<Table>
(dollar amounts expressed in millions)
</Table>
<Table>
<Caption>
PERFORMANCE
WEIGHT METRIC 0.0 0.5 1.0 1.5 2.0
----------------------------------------------------------------------------------------------------------------------------------
ASSURANT EMPLOYEE BENEFITS
(25%) Net Operating Income (NOI) $56 $60 $64 $68 $72
(15%) Operating Return on Equity) 10.75% 11.50% 12.25% 13.00% 13.75%
(ROE
(40%) Revenue Growth
25%Netearnedpremium $740 $770 $800 $830 $860
75%Newsales $145 $155 $165 $175 $185
(20%) Enterprise Risk Management
<Caption>
2009 PERFORMANCE COMPOSITE ADJUSTED
WEIGHT RESULTS MULTIPLIER MULTIPLIER MULTIPLIER
------
(25%) $42.2 0.00
(15%) 8.11% 0.00
(40%) 0.41 0.70
$747.0 0.12
$130.9 0.00
(20%) N/A 2.00
</Table>
(1) Dollar amounts expressed in millions.
The annual incentive compensation result for Messrs. Warrington and Yakre and
Ms. Almquist is based on an adjusted multiplier of 0.70 in light of increased
revenues at Disability RMS, a division of Assurant Employee Benefits, and as a
result of the acquisition of policies from the Shenandoah Life Insurance Company
during 2009. In approving the adjusted multiplier, the Assurant Compensation
Committee determined that it was appropriate to include the revenue from these
two lines of business in the overall revenue growth component for Assurant
Employee Benefits.
The performance targets included in the table above are disclosed only to assist
investors and other readers in understanding executive compensation provided to
certain of the Company's executive officers. They are not intended to provide
guidance on, and should not be relied on as predictive of, Assurant's future
performance or the future performance of the Company or any of Assurant's
operating segments.
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The following table shows target annual incentive compensation, the weighted
average multipliers for each Company-level NEO and the resulting annual
incentive award payout for 2009:
COMPANY-LEVEL NAMED EXECUTIVE OFFICERS:
2009 ANNUAL INCENTIVE PAYMENTS
<Table>
<Caption>
2009 TARGET 2009 2009 ANNUAL
NAMED EXECUTIVE OFFICER ANNUAL INCENTIVE MULTIPLIER INCENTIVE PAYMENT
---------------------------------------------------------------------------------------------------------------------------------
0.70
Stacia Almquist $41,663 (Assurant Employee Benefits) $29,164
0.70
J. Marc. Warrington $140,400 (Assurant Employee Benefits) $98,280
0.70
Miles B. Yakre $130,275 (Assurant Employee Benefits) $91,193
</Table>
2009 TARGET ANNUAL INCENTIVE AWARDS. Ms. Almquist's target annual incentive
award opportunity was increased from 20% to 25% of base salary and Mr. Yakre's
target annual incentive award opportunity was increased from 40% to 45% of base
salary. Mr. Warrington's target annual incentive award opportunity remained at
45% of base salary in 2009.
LONG-TERM EQUITY INCENTIVE COMPENSATION
Both Management Committee- and Company-level NEOs participate in Assurant's
long-term equity incentive compensation program.
INTRODUCTION OF RSUS AND PSUS IN 2009. In connection with the adoption of the
Assurant, Inc. Long Term Equity Incentive Plan (the "ALTEIP") in 2008, the
Assurant Compensation Committee reviewed Assurant's long-term equity
compensation program. All of the Company's NEOs participated in the program in
2009. The purpose of the review was to select a new vehicle that would:
- Encourage executives to focus on long-term decision making rather than on
short-term changes in our stock price
- Enable us to measure our performance with respect to key financial measures
(in addition to stock price) over an extended period relative to our
competitors
- Promote collaboration and cooperation across the global enterprise
At the conclusion of its review process, the Assurant Compensation Committee
approved the use of RSUs and PSUs as Assurant's equity compensation vehicles. A
stock unit represents the right to receive a share of common stock at a
specified date in the future, subject, in the case of PSUs, to the attainment of
pre-established performance criteria. Because stock units reflect the
performance of actual shares of stock, the Assurant Compensation Committee
determined that RSUs and PSUs were best suited to the promotion of an ownership
culture. In addition, the relatively uniform tax treatment afforded to stock
units internationally provides an effective platform for collaboration and
cooperation throughout the global enterprise. The Assurant Compensation
Committee also believes that a 50/50 split between RSU and PSU components of our
long-term equity compensation program provides an appropriate balance between
direct alignment with shareholders through equity holdings and
performance-weighted equity compensation.
PSUS -- MEASURING RELATIVE PERFORMANCE. The Assurant Compensation Committee
selected PSUs as an equity compensation vehicle to ensure that a portion of
long-term equity compensation would be paid only if the Assurant made tangible
progress with respect to key financial measures over an extended period. For
each year in the applicable performance cycle, Assurant's performance with
respect to selected metrics is compared against the performance of the other
companies in the A.M. Best U.S. Insurance Index and assigned a percentile
ranking. These rankings are then averaged to determine the composite percentile
ranking for the performance period.
The Assurant Compensation Committee established the following metrics for the
2009 - 2011 PSU performance cycle:
<Table>
<Caption>
METRIC DEFINITION WEIGHTING
----------------------------------------------------------------------------------------------------------------------------
Growth in EPS Year-over-year growth in Assurant's GAAP EPS 1/3
Growth in Revenue Year-over-year growth in total Assurant's GAAP revenue 1/3
Total Shareholder Return Percent change in Assurant stock price plus dividend yield percentage 1/3
</Table>
As indicated in the chart below, executives do not receive any payout if the
Parent's composite percentile ranking falls below the 25th percentile. If the
composite percentile ranking is at or above the 75th percentile, the maximum
payout is attained. Payouts for performance between the 25th and the 75th
percentiles are determined on a straight-line basis using linear interpolation.
<Page>
UNION SECURITY INSURANCE COMPANY 101
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2009 TARGET LONG-TERM EQUITY INCENTIVE AWARDS.
MANAGEMENT COMMITTEE-LEVEL NEOS. In February 2009, Towers Watson presented data
to the Assurant Compensation Committee demonstrating that target total direct
compensation was low compared to Assurant's compensation peer group,
particularly with respect to long-term equity compensation. To bring the target
total direct compensation opportunity for these NEOs to between the 25th and
50th percentiles of Assurant's compensation peer group, the Assurant
Compensation Committee approved an increase in the target long-term incentive
opportunity from 125% of base salary to 150% of base salary for Mr. Peninger and
from 65% of base salary to 150% of base salary for Mr. Roberts. Additionally,
upon Ms. Wagner's promotion to the position of Executive Vice President, Human
Resources and Development of Assurant, the Assurant Compensation Committee
approved an increase in her target long-term incentive opportunity from 40% of
base salary to 75% of base salary.
COMPANY-LEVEL NEOS. Ms. Almquist's target long-term incentive opportunity was
increased from 20% of base salary to 25% of base salary and Mr. Yakre's target
long-term incentive opportunity was increased from 45% to 50% of base salary.
Mr. Warrington's target long-term incentive opportunity remained the same at 40%
of base salary for 2009.
CHANGES FOR 2010 - 2012 PSU PERFORMANCE CYCLE.
- SHIFT TO BOOK VALUE. In light of the significant volatility in EPS across
the financial services sector, and in response to comments from our
investors, the Assurant Compensation Committee decided to replace growth in
GAAP EPS with growth in Assurant's book value per diluted share excluding
AOCI as a performance metric for the 2010 - 2012 PSU performance cycle. The
Assurant Compensation Committee believes that this change will provide a
more consistent basis for comparing the Assurant's long-term financial
performance to that of our competitors. The other metrics (growth in revenue
and total shareholder return) remain the same for PSUs awarded in 2010.
- ADJUSTMENTS TO INDEX. The Assurant Compensation Committee also approved a
change to the group of competitors used in the determination of our
composite percentile ranking. For the 2010 - 2012 performance cycle,
Assurant's performance will be measured against companies in the A.M. Best
U.S. Insurance Index, excluding those with revenues of less than $1 billion
or that are not in the health or insurance Global Industry Classification
Standard codes. This change will enable us to more accurately benchmark our
performance against the performance of companies of comparable size that
operate one or more businesses similar to ours.
Payments in respect of PSUs awarded under the ALTEIP are intended to be
deductible, to the maximum extent possible, as "performance based compensation"
within the meaning of Section 162(m). Additional information regarding the terms
and conditions of RSUs and PSUs awarded under the ALTEIP is provided under the
heading "NARRATIVE TO THE SUMMARY COMPENSATION TABLE AND GRANTS OF PLAN-BASED
AWARDS TABLE -- LONG TERM INCENTIVE AWARDS" below.
STOCK OWNERSHIP GUIDELINES. Ownership of Assurant stock is an important vehicle
for aligning the interests of executives and the Parent's shareholders. For this
reason, Assurant has implemented ownership requirements that apply to those NEOs
who serve on Assurant's Management Committee (Messrs. Peninger and Roberts and
Ms. Wagner). If any of them fails to comply with the guidelines by the later of
July 1, 2011 or five years following the date of his or her permanent
appointment to a specified position, he or she will be prohibited from selling
any shares of Assurant stock until compliance is achieved. Additional
information about Assurant's Stock Ownership Guidelines is provided under the
heading " -- STOCK OWNERSHIP GUIDELINES" below.
COMPENSATION LEVELS AND PAY MIX FOR 2010
MANAGEMENT COMMITTEE-LEVEL NAMED EXECUTIVE OFFICERS
In January 2010, Towers Watson presented data to the Assurant Compensation
Committee demonstrating that the target total direct compensation opportunity
provided to the Management Committee-level NEOs continued to fall below median
levels for similarly-situated executives at companies in Assurant's compensation
peer group. The Assurant Compensation Committee approved compensation increases
designed to bring target total direct compensation opportunities closer to
median levels for each position. To ensure that the interests of the Management
Committee-level NEOs and Assurant's shareholders remain aligned, adjustments
were made primarily to the long-term incentive pay component for Messrs.
Peninger and Roberts and Ms. Wagner, as detailed below:
- CEO COMPENSATION. To reflect Mr. Roberts' permanent appointment as Chief
Executive Officer of Assurant Employee Benefits, Mr. Roberts's annual
incentive opportunity for 2010 increased from 80% to 90% of base salary. The
Assurant Compensation Committee approved an increase in the long-term
incentive component of Mr. Roberts's compensation from 150% to 175% of base
salary.
<Page>
102 UNION SECURITY INSURANCE COMPANY
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- MR. PENINGER'S COMPENSATION. To reflect Mr. Peninger's permanent
appointment as the Assurant's Chief Financial Officer, the Assurant
Compensation Committee approved an increase in base salary from $500,000 to
$550,000, an increase in annual incentive opportunity from 80% to 100% of
base salary and an increase in long-term incentive opportunity from 150% to
200% of base salary.
- MS. WAGNER'S COMPENSATION. To bring Ms. Wagner's compensation closer to
that of her Management Committee peers, the Assurant Compensation Committee
approved an increase in base salary from $400,000 to $440,000, an increase
in annual incentive opportunity from 75% to 90% of base salary and an
increase in long-term incentive opportunity from 75% to 125% of base salary.
Ms. Wagner was also awarded a transition bonus of $65,000 to provide
assistance with travel expenses incurred by Ms. Wagner in commuting between
the Company's offices in Kansas City and the Parent's offices in New York.
COMPANY-LEVEL NAMED EXECUTIVE OFFICERS. Other NEOs. For 2010, Ms. Almquist, Mr.
Yakre and Mr. Warrington received increases in base salary to $185,000, $295,300
and $318,240, respectively. Mr. Yakre also received an increase in his annual
incentive opportunity from 45% to 50% of base salary.
IV. BENEFITS AND PERQUISITES
The Company's named executive officers participate in the same health care,
disability, life insurance, pension and 401(k) benefit plans made available
generally to the Assurant's U.S. employees. In addition, some of these
executives are eligible for certain change of control benefits, supplemental
retirement plans and limited perquisites described below.
CHANGE OF CONTROL BENEFITS. Assurant is party to a change of control agreement
(each, a "COC Agreement") with Messrs Peninger, Roberts, Warrington and Yakre
and Ms. Wagner. The purpose of these COC Agreements is to enable these
executives to focus on maximizing shareholder value in the context of a control
transaction without regard to personal concerns related to job security. COC
Agreements with Messrs. Peninger and Ms. Wagner apply in the context of a change
of control of Assurant (as defined in the COC Agreement); COC Agreements with
Messrs. Roberts, Warrington and Yakre apply in the context of a change of
control of Assurant Employee Benefits (as defined in the COC Agreement).
During 2009, the COC Agreements with all applicable NEOs included tax gross-up
provisions intended to mitigate the impact of the federal excise tax imposed on
certain payments under IRC Section 280G. However, effective as of February 1,
2010, Messrs. Peninger and Roberts and Ms. Wagner, who serve as members of
Assurant's Management Committee, entered into an amendment eliminating the
excise tax gross up provisions in his or her COC Agreement with Assurant.
Accordingly, they are entitled to receive either (i) the full benefits payable
in connection with a change of control (whether under the COC Agreement or
otherwise) or (ii) a reduced amount that falls below the applicable safe harbor
provided under the IRC, whichever amount generates the greater after-tax value
for the executive.
Tax gross-up provisions in the COC Agreement with Messrs. Warrington and Yakre
still exist. These agreements provide that, in the event that change of control
payments are subject to an excise tax under IRC Section 4999, the executive will
be entitled to receive an additional payment such that he is placed in the same
after-tax position as if no excise tax had been imposed. However, if the change
of control payments exceeded the maximum amount that the executive could have
received without being subject to the tax by five percent or less, then the
executive will not receive the gross-up payment and instead the change of
control payments will be reduced to the maximum amount that the executive could
have received without being subject to the tax.
The COC Agreement with each NEO contains a "double trigger," meaning that
benefits are generally payable only upon a termination of employment "without
cause" or for "good reason" within two years following a change of control.
Executives who have COC Agreements are also subject to non-compete and
non-solicitation provisions. Additional information regarding the terms and
conditions of the COC Agreements is provided under the heading "NARRATIVE TO THE
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL TABLE -- CHANGE OF
CONTROL AGREEMENTS" below.
RETIREMENT PLANS. Certain NEOs participate in the Supplemental Executive
Retirement Plan (the "SERP"), the Assurant Executive Pension Plan (the
"Executive Pension Plan"), the Assurant Executive 401(k) Plan (the "Executive
401(k) Plan") and/or the Assurant Pension Plan (the "Pension Plan"). The goals
of these retirement plans are to provide certain senior executives with
competitive levels of income replacement upon retirement and provide a package
that will both attract and retain talented executives in key positions. The
Executive Pension Plan is designed to replace income levels capped under the
Pension Plan by the compensation limit of IRC Section 401(a)(17) ($245,000 for
2009). The SERP is designed to supplement the pension benefits provided under
the Pension Plan, Executive Pension Plan and Social Security so that total
income replacement from these programs will equal up to 50% of an NEO's base
salary plus his or her annual incentive target. Additional information regarding
the terms and conditions of these plans is provided under the headings
"NARRATIVE TO THE PENSION BENEFITS TABLE" below and "NARRATIVE TO THE
NONQUALIFIED DEFINED CONTRIBUTION AND OTHER NONQUALIFIED DEFERRED COMPENSATION
PLANS TABLE" below.
<Page>
UNION SECURITY INSURANCE COMPANY 103
-------------------------------------------------------------------------------
DEFERRED COMPENSATION PLANS. Certain NEOs are also eligible to participate in
the Amended and Restated Assurant Deferred Compensation Plan (the "ADC Plan").
The ADC Plan provides key employees the ability to defer a portion of their
eligible compensation which is then notionally invested in a variety of mutual
funds. Deferrals and withdrawals under the ADC Plan are intended to be fully
compliant with IRC Section 409A ("Section 409A"). Prior to the adoption of
Section 409A and the establishment of the ADC Plan in 2005, some of the NEOs
were eligible to participate in the Assurant Investment Plan (the "AIP").
However, after the enactment of Section 409A, the AIP was frozen as of January
1, 2005 and, currently, only withdrawals may be made.
Additional information regarding the terms and conditions of these plans is
provided under the heading "NARRATIVE TO THE NONQUALIFIED DEFINED CONTRIBUTION
AND OTHER NONQUALIFIED DEFERRED COMPENSATION PLANS TABLE" below.
HEALTH AND WELFARE BENEFITS. As part of Assurant's general benefits program, it
provides Long-Term Disability ("LTD") coverage for all benefits-eligible
employees under a group policy. LTD benefits replace 60% of employees' monthly
plan pay (which is generally defined as base salary plus the annual incentive
target award amount), up to a maximum monthly benefit of $15,000. As an
additional benefit, NEOs who are members of Assurant's Management Committee are
eligible for Executive LTD coverage, subject to underwriting for amounts in
excess of a guaranteed benefit of $3,000. Executive LTD supplements benefits
payable under the standard coverage and provides a maximum monthly benefit of
$25,000, less amounts payable under the group policy. (3) This coverage is
provided through the purchase of individual policies on a bi-annual basis and is
fully paid for by Assurant.
COMMUTING EXPENSES. In 2009 and prior years, Assurant reimbursed Messrs.
Peninger and Roberts for commuting expenses incurred in connection with their
services as Interim Chief Financial Officer and Interim President and Chief
Executive Officer, Assurant Employee Benefits, respectively. Additionally, the
Company reimbursed Ms. Wagner during 2009 for commuting expenses incurred in
connection with her transition from Kansas City to New York.
FINANCIAL PLANNING. In 2009 and prior years, certain NEOs and directors were
entitled to financial planning services (and may have received a tax gross-up
for such expenses). As part of Assurant's cost reduction initiatives, this
benefit was eliminated for Management Committee-level NEOs effective January 1,
2010.
Additional information regarding executive LTD, commuting and financial planning
benefits is provided in footnote 4 to the Summary Compensation Table below.
V. 2009 SPECIAL PROMOTION AWARDS
2009 was a transition year for Assurant's management team. Lesley Silvester,
formerly the Company's Executive Vice President, retired on July 1, 2009, and
Ms. Wagner was promoted to Executive Vice President, Human Resources and
Development effective April 1, 2009. Effective as of March 15, 2009, Michael
Peninger was promoted to the position of Executive Vice President and Chief
Financial Officer of Assurant, Inc., a position he had held on an interim basis
since July 18, 2007, and John Roberts was promoted to the position of President
and Chief Executive Officer, Assurant Employee Benefits, a position he had held
on an interim basis while Mr. Peninger was serving as Assurant's Interim Chief
Financial Officer. Special promotion arrangements entered into in connection
with these transitions are addressed below.
2009 SPECIAL PROMOTION AWARDS. Effective as of March 15, 2009, Mr. Peninger was
promoted to Executive Vice President and Chief Financial Officer of Assurant and
Mr. Roberts was promoted to President and Chief Executive Officer, Assurant
Employee Benefits. In recognition of their respective appointments, and to
facilitate Mr. Peninger's transition to Assurant's headquarters in New York, on
July 13, 2009, the Assurant Compensation Committee awarded one-time special
bonuses equal to 100% of base salary, or $500,000, in the case of Mr. Peninger
and 60% of base salary, or $300,000, in the case of Mr. Roberts. Each award was
paid in a cash lump sum on July 31, 2009.
2009 SPECIAL RSU AWARD. In recognition of Ms. Wagner's promotion to Executive
Vice President, Human Resources and Development of Assurant, the Assurant
Compensation Committee awarded her a grant of 40,000 RSUs that vest in five
equal annual installments on each of the first five anniversaries of the grant
date.
<Page>
104 UNION SECURITY INSURANCE COMPANY
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VII. RELATED POLICIES AND CONSIDERATIONS
PARENT STOCK OWNERSHIP GUIDELINES
As noted above, Assurant believes that a sustained level of Assurant stock
ownership is critical to ensuring that the creation of long-term value for its
shareholders remains a primary objective for its executives (some of whom are
NEOs of the Company) and non-employee directors. Accordingly, in 2006 Assurant
adopted the following Stock Ownership Guidelines and holding requirements for
Assurant's non-employee directors and senior executives:
Assurant, Inc. Non-Employee Director Must own Assurant stock with a market
value equal to 5 times the annual base
cash retainer
Assurant, Inc. Chief Executive Officer Must own Assurant stock with a market
value equal to 5 times current base
salary
Assurant, Inc. Executive Vice Must own Assurant stock with a market
President (including Chief Financial value equal to 3 times current base
Officer and operating segment Chief salary
Executive Officers)
Individuals have five years from the later of July 1, 2006 or the date of their
permanent appointment to a specified position to acquire the required holdings.
These requirements only apply to Messrs. Peninger and Roberts and Ms. Wagner who
serve as members of Assurant's Management Committee. Mr. Peninger has a
compliance date of July 1, 2011. Compliance dates for Messrs. Roberts and Wagner
are March 15, 2014 and April 1, 2014 respectively. Eligible sources of Assurant
shares include personal holdings, restricted stock, RSUs, 401(k) holdings and
Assurant's Employee Stock Purchase Plan shares. The Assurant Compensation
Committee tracks the ownership amount of Assurant's non-employee directors and
Management Committee on an annual basis. Individuals who do not comply with the
guidelines as of the applicable compliance date will be prohibited from selling
shares of Assurant stock until they achieve compliance.
TIMING OF EQUITY GRANTS
Assurant does not coordinate the timing of equity awards with the release of
material non-public information. Under Assurant's Equity Grant Policy, equity
awards granted by the Assurant Compensation Committee pursuant to the ALTEIP
must be granted on the second Thursday in March each year. If the Assurant
Compensation Committee decides that a second grant in the same calendar year is
necessary for, among other reasons, salary adjustments, promotions or new hires,
additional awards under the ALTEIP may be granted on the second Thursday in
November.
TAX AND ACCOUNTING IMPLICATIONS
Under Section 162(m), certain compensation amounts in excess of $1million paid
to a public corporation's chief executive officer and the three other most
highly-paid executive officers (other than the chief financial officer) is not
deductible for federal income tax purposes unless the executive compensation is
awarded under a performance-based plan approved by shareholders. The Assurant
Compensation Committee continues to emphasize performance-based compensation for
Assurant's executives and seeks to minimize the impact of Section 162(m).
However, because the Assurant Compensation Committee believes that its primary
responsibility is to provide a compensation program that attracts, retains and
rewards the executives necessary to successfully execute the Company's business
strategy, in any year the Assurant Compensation Committee may approve
non-performance based compensation (as defined for purposes of Section 162(m))
in excess of $1 million.
The compensation that Assurant pays to the NEOs is reflected in our financial
statements as required by U.S. generally accepted accounting principles. The
Assurant Compensation Committee considers the financial statement impact, along
with other factors, in determining the amount and form of compensation provided
to executive officers of Assurant. We account for stock-based compensation under
the ALTEIP and all predecessor plans in accordance with the requirements of FASB
ASC Topic 718.
<Page>
UNION SECURITY INSURANCE COMPANY 105
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COMPENSATION OF NAMED EXECUTIVE OFFICERS
SUMMARY COMPENSATION
The following table sets forth the cash and other compensation earned by the
NEOs for all services in all capacities during 2009, 2008 and 2007, as
applicable.
SUMMARY COMPENSATION TABLE FOR FISCAL YEARS 2009, 2008 AND 2007
<Table>
<Caption>
NON-EQUITY
NAME AND STOCK OPTION INCENTIVE PLAN
PRINCIPAL SALARY BONUS (3) AWARDS (1) AWARDS (1) COMPENSATION
POSITION YEAR ($) ($) ($) ($) ($)
(A) (B) (C) (D) (E) (F) (G)
-------------------------------------------------------------------------------------------------------------------------
John S. Roberts,
President and Chief 2009 500,000 300,000 752,391 (4) -- 164,000
Executive Officer; 2008 415,000 67,438 444,610 283,307 310,213
Executive Vice 2007 340,998 0 35,618 130,415 317,250
President, Assurant, Inc.
Miles Yakre,
Senior Vice President, 2009 289,500 0 145,202 0 91,193
Chief Financial Officer 2008 276,196 28,000 45,759 125,051 127,050
and Treasurer 2007 254,600 0 269,381 131,010 190,441
Stacia Almquist,
Vice President 2009 166,561 0 40,894 0 29,164
and former Treasurer 2008 157,850 7,893 7,885 33,912 36,305
2007 142,313 0 0 15,824 53,225
Michael J. Peninger,
Executive Vice President; 2009 500,000 500,000 752,391 -- 304,000
Executive Vice President 2008 500,000 100,000 406,242 649,274 460,000
and Chief Financial 2007 470,000 500,000 105,730 386,480 658,000
Officer, Assurant, Inc.
Sylvia Wagner,
Senior Vice President; 2009 383,343 0 1,111,373 0 218,506
Executive Vice 2008 287,000 32,288 28,687 122,225 148,522
President, Human 2007 275,828 0 33,180 100,640 206,319
Resources and
Development,
Assurant, Inc.
J. Marc Warrington,
Senior Vice President 2009 312,000 125,202 0 98,280
2008 300,000 33,750 30,022 127,877 155,250
2007 284,625 0 42,411 104,213 239,512
<Caption>
CHANGE IN
PENSION
VALUE AND
NONQUALIFIED ALL
NAME AND DEFERRED OTHER
PRINCIPAL COMPENSATION COMPENSATION (4) TOTAL
POSITION EARNINGS (2)($) ($) ($)
(A) (H) (I) (J)
----------------------------- ------------------------------------------------
John S. Roberts,
President and Chief 242,105 139,797 2,098,293
Executive Officer; 0 64,192 1,584,760
Executive Vice 0 38,425 862,706
President, Assurant, Inc.
Miles Yakre,
Senior Vice President, 39,994 32,423 598,312
Chief Financial Officer 51,974 37,683 691,713
and Treasurer 43,150 55,246 943,828
Stacia Almquist,
Vice President 10,401 14,717 261,737
and former Treasurer 9,894 15,384 269,123
6,386 11,325 229,073
Michael J. Peninger,
Executive Vice President; 602,190 228,301 2,886,882
Executive Vice President 422,417 198,915 2,736,848
and Chief Financial 296,736 152,379 2,569,325
Officer, Assurant, Inc.
Sylvia Wagner,
Senior Vice President; 205,843 107,120 2,026,185
Executive Vice 207,110 40,631 866,463
President, Human 106,435 28,653 751,055
Resources and
Development,
Assurant, Inc.
J. Marc Warrington,
Senior Vice President 40,911 80,920 657,313
46,350 74,557 767,806
20,825 72,148 763,734
</Table>
(1) The amounts reported in column (e) for 2009 represent awards of PSUs and
RSUs, and for 2008 and 2007 represent awards of restricted stock. These
amounts are consistent with the grant date fair values of each award
computed in accordance with FASB ASC Topic 718.
The 2009 PSU values included in column (e) are computed based on the
achievement of target level performance for each award. Assuming the
achievement of maximum level performance for each NEO, the amounts in
column (e)(representing both RSUs and PSUs) would be as follows: for Mr.
Peninger, $941,090; for Mr Yakre $181,619; for Mr. Roberts, $941,090; and
for Ms. Almquist $51,151; for Ms. Wagner $1,186,856 and for Mr. Warrington,
$156,603. The grant date fair value of PSUs was estimated on the grant date
using a Monte Carlo simulation model. Please see Footnote 18, "STOCK BASED
COMPENSATION -- PERFORMANCE SHARE UNITS", of the Assurant Annual Report on
Form 10-K for the fiscal year ended December 31, 2009, as filed with the
SEC (the "Assurant 2009 Form 10-K") for a discussion of the Monte Carlo
simulation model and the assumptions used in this valuation.
The SARs amounts reported in column (f) for 2008 and 2007 are consistent
with the grant date fair value computed in accordance with FASB ASC Topic
718. The fair value of each outstanding SAR was estimated on the grant date
using a Black-Scholes option-pricing model and expense is amortized over
the applicable vesting period. Please see Footnote 18, "STOCK BASED
COMPENSATION -- STOCK APPRECIATION RIGHTS", of the Assurant 2009 Form 10-K
for a discussion of the Black-Scholes option-pricing model and the
assumptions used in this valuation.
(2) The change in pension value is the aggregate change in the actuarial
present value of the respective NEO's accumulated benefit under the
Parent's three defined benefit pension plans (the Assurant SERP, the
Assurant Executive Pension Plan and the Assurant Pension Plan) from
December 31, 2008 to December 31, 2009, from December 31, 2007 to December
31, 2008 and from December 31, 2006 to December 31, 2007. For each plan,
the change in the pension value is determined as the present value of the
NEO's accumulated benefits at December 31, 2007, December 31, 2008 or
December 31, 2009 plus the amount of any benefits paid from the plan during
the year less the present value of the accumulated benefits at December 31,
2006, December 31, 2007 or December 31, 2008, as applicable. Present values
of accumulated benefits at December 31, 2006, December 31, 2007, December
31, 2008 and December 31, 2009 use the same assumptions as included in the
financial statements in Assurant's Annual Reports on Form 10-K for the
fiscal years ending December 31, 2006, December 31, 2007, December 31, 2008
and December 31, 2009, respectively, as filed with the SEC.
(3) The amounts in column (d) for each of Messrs. Peninger and Roberts reflect
special promotion bonuses awarded on July 13, 2009. Mr. Peninger received a
special bonus equal to 100% of his base salary, or $500,000, in recognition
of his promotion to Executive Vice President and Chief Financial Officer of
the Parent, and Mr. Roberts received a special bonus equal to 60% of his
base salary, or $300,000, in recognition of his promotion to President and
Chief Executive Officer, Assurant Employee Benefits. The 2008 amounts in
column (d) for each NEO represent a one-time special
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106 UNION SECURITY INSURANCE COMPANY
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appreciation bonus, equal to 25% of the NEO's 2008 annual short term
incentive program target award, paid by the Parent to express its special
appreciation for the NEO's efforts during 2007. The 2007 amount in column
(d) represents a discretionary bonus of $500,000 granted to Mr. Peninger in
2007 recognition of his increased responsibilities as Interim Chief
Financial Officer and because his compensation was not adjusted at the time
of his appointment.
(4) The table below details the amounts reported in the "All Other
Compensation" column, which include premiums paid for Executive Long Term
Disability, Parent contributions to the Executive 401(k) Plan, Parent
contributions to the Assurant 401(k) Plan, perquisites and other personal
benefits, dividends and dividend equivalents; and certain other amounts
during 2009:
<Table>
<Caption>
PARENT PARENT PERQUISITES
CONTRIBUTIONS CONTRIBUTIONS AND OTHER
EXECUTIVE TO EXECUTIVE TO ASSURANT PERSONAL
NAME LTD 401(K) 401(K) BENEFITS
---------------------------------------------------------------------------------------------------------
John S. Roberts $817 $60,566 $17,150 $45,315 (2)
Miles Yakre $0 $12,009 $17,150
Stacia Almquist $0 $0 $14,207
Michael J. Peninger $4,533 $85,050 $17,150 $105,183 (3)
Sylvia Wagner $633 $20,081 $17,150 $47,564 (4)
J. Marc Warrington $0 $15,558 $17,150 40,361 (5)
<Caption>
DIVIDENDS AND
DIVIDEND TAX GROSS-UP
NAME EQUIVALENTS (1) PAYMENTS TOTAL
----------------------------- ---------------------------------------------
John S. Roberts $15,949 -- $139,797
Miles Yakre $3,264 -- $32,423
Stacia Almquist $510 -- $14,717
Michael J. Peninger $16,385 -- $228,301
Sylvia Wagner $21,692 -- $107,120
J. Marc Warrington $1,760 $6,091 (6) $80,920
</Table>
(1) The amounts in this column reflect the dollar value of dividends and
dividend equivalents paid in 2009 on unvested awards of restricted stock
and RSUs, respectively, that were not factored into the grant date fair
value required to be reported for these awards in column (e). The amounts
in column (i) for each of 2008 and 2007 also reflect the dollar value of
dividends paid on restricted stock that were not factored into the grant
date fair values reported in column (e). No dividends or dividend
equivalents were paid on PSUs in 2009.
(2) This amount includes (1) Parent paid expenses totaling $32,301 for Mr.
Roberts' commuting expenses to Kansas City, including lease payments,
incidental expenses and related payments in connection with his service as
Interim President and Chief Executive Officer of Assurant Employee
Benefits; and (2) expenses totaling $13,000 for Mr. Roberts' use of
financial planning services.
(3) This amount includes (1) Parent paid expenses totaling $20,697 for airfare
and related commuting expenses incurred by Mr. Peninger in traveling to and
from his primary residence in Kansas; and (2) Parent paid expenses relating
to spousal travel in connection with his service as Interim Chief Financial
Officer
(4) This amount includes (1) Parent paid expenses totaling $38,899 for airfare
and related commuting expenses incurred by Ms. Wagner in traveling to and
from her primary residence in Kansas City and (2) Ms. Wagner's use of
financial planning services totaling $8,665 offered by the Parent.
(5) This amount includes (1) expenses paid totaling $30,611 for club membership
dues and (2) $9,750 for Mr. Warrington's use of financial planning
services. While only a portion of the club membership dues listed above may
have been for personal use by Mr. Warrington, the Company has elected to
list the full amount as a perquisite.
(6) This amount represents a gross-up of taxes for Mr. Warrington's use of
financial planning services.
GRANTS OF PLAN-BASED AWARDS
The table below sets forth individual grants of awards made to each NEO during
2009.
GRANTS OF PLAN-BASED AWARDS TABLE FOR FISCAL YEAR 2009
<Table>
<Caption>
ESTIMATED FUTURE
PAYOUTS UNDER NON-EQUITY
INCENTIVE PLAN AWARDS (1)
THRESHOLD TARGET MAXIMUM
NAME GRANT DATE ($) ($) ($)
(A) (B) (C) (D) (E)
---------------------------------------------------------------------------------------------
John S. Roberts 3/12/2009 -- -- --
3/12/2009 -- -- --
-- 0 400,000 800,000
Miles B. Yakre 3/12/2009 -- -- --
3/12/2009 -- -- --
-- 0 130,275 260,550
Stacia N. Almquist 3/12/2009 -- -- --
3/12/2009 -- -- --
-- 0 41,663 83,325
Michael J. Peninger 3/12/2009 -- -- --
3/12/2009 -- -- --
-- 0 400,000 800,000
Sylvia R. Wagner 3/12/2009 -- -- --
3/12/2009 -- -- --
3/12/2009 -- -- --
-- 0 287,507 575,014
J. Marc Warrington 3/12/2009 -- -- --
3/12/2009 -- -- --
-- 0 140,400 280,800
<Caption>
ESTIMATED FUTURE
PAYOUTS UNDER EQUITY
INCENTIVE PLAN AWARDS
THRESHOLD TARGET MAXIMUM
NAME (#) (#) (#)
(A) (F) (G) (H)
------------------- ---------------------------------------------------
John S. Roberts -- -- --
9,255 18,509 27,764
-- -- --
Miles B. Yakre -- -- --
1,786 3,572 5,358
-- -- --
Stacia N. Almquist -- -- --
503 1,006 1,509
-- -- --
Michael J. Peninger -- -- --
9,255 18,509 27,764
-- -- --
Sylvia R. Wagner -- -- --
3,702 7,404 11,106
-- -- --
-- -- --
J. Marc Warrington -- -- --
1,540 3,080 4,620
-- -- --
<Caption>
ALL OTHER ALL OTHER
STOCK OPTION
AWARDS: AWARDS: EXERCISE GRANT
NUMBER OF NUMBER OF OR BASE DATE FAIR
SHARES SECURITIES PRICE OF STOCK AND
OF STOCK UNDERLYING OPTION OPTION
OR UNITS OPTIONS AWARDS AWARDS
NAME (#) (#) ($/SH) (2) ($) (2)
(A) (I) (J) (K) (L)
------------------- ----------------------------------------------------------------------
John S. Roberts 18,509 -- 20.26 $374,992
-- -- 20.39 $377,399
-- -- -- --
Miles B. Yakre 3,572 -- 20.26 $72,369
-- -- 20.39 $72,833
-- -- -- --
Stacia N. Almquist 1,006 -- 20.26 $20,382
-- -- 20.39 $20,512
-- -- -- --
Michael J. Peninger 18,509 -- 20.26 $374,992
-- -- 20.39 $377,399
-- -- -- --
Sylvia R. Wagner 7,404 -- 20.26 $150,005
-- -- 20.39 $150,968
40,000 -- 20.26 $810,400
-- -- -- --
J. Marc Warrington 3,080 -- 20.26 $62,401
-- -- 20.39 $62,801
-- -- -- --
</Table>
<Page>
UNION SECURITY INSURANCE COMPANY 107
-------------------------------------------------------------------------------
(1) The values in columns (c), (d), and (e) are based on multiplying a 0
(threshold), 1 (target), and 2 (maximum) multiplier times each NEO's annual
incentive target award percentage. The actual annual incentive award earned
by each NEO for 2009 performance is reported in the column entitled
"Non-Equity Incentive Plan Compensation" in the Summary Compensation Table.
(2) The base price of 2009 RSU awards is equal to the closing price of
Assurant, Inc. Common Stock on the grant date. The grant date fair value of
each RSU award was computed in accordance with FASB ASC Topic 718 using the
closing price of Assurant, Inc. Common Stock on the grant date.
The base price of 2009 PSU awards and the grant date fair value of each PSU
award were computed in accordance with FASB ASC Topic 718 based on
achievement of target performance and estimated on the grant date using a
Monte Carlo simulation model. Please see Footnote 18, "STOCK BASED
COMPENSATION --PERFORMANCE SHARE UNITS", of the Assurant 2009 Form 10-K for
a discussion of the Monte Carlo simulation model and the assumptions used
in this valuation.
NARRATIVE TO THE SUMMARY COMPENSATION TABLE AND GRANTS OF PLAN-BASED AWARDS
TABLE
ANNUAL INCENTIVE AWARDS
Annual incentive awards for Messrs. Peninger and Roberts are paid pursuant to
the Assurant, Inc. Executive Short Term Incentive Plan, a plan intended to meet
the requirements of IRC Section 162(m). The aggregate payments to all ESTIP
participants for any performance period cannot exceed 5% of the Parent's net
income (as defined in the ESTIP). At the end of each year, the Compensation
Committee of the Parent's Board of Directors (the "Parent Compensation
Committee") certifies the amount of the Parent's net income and the maximum
award amounts that can be paid under the ESTIP. The Parent Compensation
Committee then has discretion to pay an incentive award that is less than the
applicable maximum. In 2009, the Parent Compensation Committee exercised
negative discretion to reduce participants' awards by applying the performance
goals described in the CD&A under the heading " -- ANNUAL INCENTIVE
COMPENSATION" above. The threshold, target and maximum payout amounts disclosed
in the Grants of Plan-Based Awards Table reflect the application of these
performance goals.
Annual incentive payments for Messrs. Warrington and Yakre and Ms. Wagner and
Ms. Almquist were paid pursuant to the annual incentive program applicable to
the Parent or Assurant Employee Benefits, as applicable. For more information
regarding the performance criteria applicable to each of our NEOs, please see
the section entitled "CD&A -- ANNUAL INCENTIVE COMPENSATION."
LONG TERM EQUITY INCENTIVE AWARDS
The Parent's outstanding equity-based awards have been granted under two
long-term incentive compensation plans, the ALTEIP and the Assurant, Inc. 2004
Long-Term Incentive Plan (the "ALTIP"). The ALTEIP was approved by the Parent's
stockholders in May 2008. Since that time, equity grants to our named executive
officers have been awarded pursuant to the ALTEIP. In 2009, 50% of each NEO's
target long-term equity incentive award was provided in the form of RSUs, and
50% in the form of PSUs. The RSUs vest in three equal annual installments on
each of the first three anniversaries of the grant date. Dividend equivalents on
RSUs are paid in cash during the vesting period. Participants do not have voting
rights with respect to RSUs. PSUs vest on the third anniversary of the grant
date, subject to a participant's continuous employment through the vesting date
and the level of performance achieved. Dividend equivalents on PSUs are accrued
and paid in cash at the end of the performance period in accordance with the
level of performance achieved. Participants do not have voting rights with
respect to PSUs.
Prior to the adoption of the ALTEIP, our named executive officers were awarded
stock appreciation rights ("SARs") and shares of restricted stock under the
ALTIP. No additional equity awards may be granted under the ALTIP. Restricted
stock awards granted under the ALTIP also vest in three equal installments on
each of the first three anniversaries of the grant date. Restricted stock award
recipients, as beneficial owners of the shares, have full voting and dividend
rights with respect to the shares during and after the restricted period.
Dividends are paid in cash and are not eligible for reinvestment during the
restricted period. SARs granted under the ALTIP vest on the third anniversary of
the grant date. To the extent not previously exercised, SARs are automatically
exercised on the earliest of (i) the fifth anniversary of the grant date, (ii)
the second anniversary of the participant's termination of employment for reason
of death or disability or (iii) ninety days following the participant's
termination of employment for reasons other than retirement, disability or
death.
<Page>
108 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The table below provides information concerning unexercised options and stock
that has not vested for each NEO outstanding as of December 31, 2009.
OUTSTANDING EQUITY AWARDS TABLE FOR FISCAL YEAR 2009
<Table>
OPTION AWARDS (1) STOCK AWARDS (1)
------------------------------ ------------------------------
</Table>
<Table>
<Caption>
EQUITY
INCENTIVE
PLAN
AWARDS:
NUMBER OF NUMBER OF NUMBER OF
SECURITIES SECURITIES SECURITIES
UNDERLYING UNDERLYING UNDERLYING
UNEXERCISED UNEXERCISED UNEXERCISED
OPTIONS OPTIONS UNEARNED OPTION EXERCISE
(#) (#) OPTIONS PRICE(2) OPTION EXPIRATION
NAME EXERCISABLE(2) UNEXERCISABLE (#) ($) DATE(2)
(A) (B) (C) (D) (E) (F)
--------------------------------------------------------------------------------------------------------------------
JOHN S. ROBERTS Converted)
SARs(2
7,909 31.30 01/01/2014
All Other SARs
8,397 35.64 06/30/2010
9,595 49.25 04/01/2011
10,950 (4) 53.48 03/08/2012
20,050 (5) 60.65 03/13/2013
MILES B. YAKRE Converted)
SARs(2
-- -- -- -- --
All Other SARs
10,313 49.25 04/01/2011
11,000 (4) 53.48 03/08/2012
8,850 (5) 60.65 03/13/2013
STACIA N. ALMQUIST Converted)
SARs(2
-- -- -- -- --
All Other SARs
1,600 (4) 53.48 03/08/2010
2,400 (5) 60.65 03/13/2013
MICHAEL J. PENINGER Converted)
SARs(2
20,136 26.82 01/01/2010
14,801 22.00 01/01/2010
24,283 30.11 01/01/2011
16,053 22.00 01/01/2011
18,409 22.00 01/01/2012
24,668 30.83 01/01/2012
23,645 33.45 01/01/2013
15,746 22.00 01/01/2013
26,169 31.30 01/01/2014
12,409 22.00 01/01/2014
All Other SARs
32,893 35.64 06/30/2010
35,924 49.25 04/01/2011
32,450 (4) 53.48 03/08/2012
45,950 (5) 60.65 03/13/2013
<Caption>
EQUITY
INCENTIVE
EQUITY PLAN
INCENTIVE AWARDS:
PLAN MARKET OR
MARKET AWARDS: PAYOUT
NUMBER OF VALUE OF NUMBER OF VALUE OF
SHARES SHARES OR UNEARNED UNEARNED
OR UNITS UNITS OF SHARES, SHARES,
OF STOCK STOCK UNITS OR UNITS OR
THAT THAT OTHER OTHER
HAVE HAVE RIGHTS RIGHTS
NOT NOT THAT HAVE THAT HAVE
VESTED VESTED(3) NOT VESTED NOT VESTED(3)
NAME (#) ($) (#) ($)
(A) (G) (H) (I) (J)
----------------------------- -------------------------------------------------------------
JOHN S. ROBERTS
224 (6) 6,604
742 (7) 21,874
7,840 (8) 231,123
1,000 (9) 29,480
18,509 (10) 545,645
18,509 (11) 545,645
MILES B. YAKRE
199 (6) 5,867
1,336 (13) 39,385
328 (7) 9,669
125 (14) 3,685
3,572 (10) 105,303
3,572 (11) 105,303
STACIA N. ALMQUIST
87 (7) 2,565
1,006 (10) 29,657
1,006 (11) 29,657
MICHAEL J. PENINGER
661 (6) 19,486
1,719 (7) 50,676
7,840 (8) 231,123
18,509 (10) 545,645
18,509 (11) 545,645
</Table>
<Page>
UNION SECURITY INSURANCE COMPANY 109
-------------------------------------------------------------------------------
<Table>
<Caption>
EQUITY
INCENTIVE
PLAN
AWARDS:
NUMBER OF NUMBER OF NUMBER OF
SECURITIES SECURITIES SECURITIES
UNDERLYING UNDERLYING UNDERLYING
UNEXERCISED UNEXERCISED UNEXERCISED
OPTIONS OPTIONS UNEARNED OPTION EXERCISE
(#) (#) OPTIONS PRICE(2) OPTION EXPIRATION
NAME EXERCISABLE(2) UNEXERCISABLE (#) ($) DATE(2)
(A) (B) (C) (D) (E) (F)
--------------------------------------------------------------------------------------------------------------------
SYLVIA R. WAGNER Converted)
SARs(2
3,252 22.00 01/01/2010
4,416 26.82 01/01/2010
3,706 22.00 01/01/2011
5,603 30.11 01/01/2011
5,729 30.83 01/01/2012
4,271 22.00 01/01/2012
3,657 22.00 01/01/2013
5,494 33.45 01/01/2013
3,450 22.00 01/01/2014
7,276 31.30 01/01/2014
All Other SARs
7,717 35.64 06/30/2010
9,667 49.25 04/01/2011
8,450 (4) 53.48 03/08/2012
8,650 (5) 60.65 03/13/2013
J. MARC WARRINGTON Converted)
SARs(2
-- -- -- -- --
All Other SARs
8,572 49.25 04/01/2011
8,750 (4) 53.48 03/08/2012
9,050 (5) 60.65 03/13/2013
<Caption>
EQUITY
INCENTIVE
EQUITY PLAN
INCENTIVE AWARDS:
PLAN MARKET OR
MARKET AWARDS: PAYOUT
NUMBER OF VALUE OF NUMBER OF VALUE OF
SHARES SHARES OR UNEARNED UNEARNED
OR UNITS UNITS OF SHARES, SHARES,
OF STOCK STOCK UNITS OR UNITS OR
THAT THAT OTHER OTHER
HAVE HAVE RIGHTS RIGHTS
NOT NOT THAT HAVE THAT HAVE
VESTED VESTED(3) NOT VESTED NOT VESTED(3)
NAME (#) ($) (#) ($)
(A) (G) (H) (I) (J)
----------------------------- -------------------------------------------------------------
SYLVIA R. WAGNER
174 (6) 5,130
316 (7) 9,316
40,000 (12) 1,179,200
7,404 (10) 218,270
7,404 (11) 218,270
J. MARC WARRINGTON
178 (6) 5,247
331 (7) 9,758
3,080 (10) 90,798
3,080 (11) 90,798
</Table>
(1) These columns represent awards under the ALTEIP, ALTIP, Business Value
Rights Plan (the "BVR Plan") and their predecessor plans. Awards are either
SARs, restricted stock, RSUs or PSUs.
The BVR Plan is a subplan of the Assurant, Inc. 2004 Long-Term Incentive
Plan, under which SARs may be granted to eligible employees. SARs granted
under the BVR Plan vest and are automatically exercised (and will thereupon
expire) on the earliest of (i) the third anniversary of the grant date,
(ii) the date of grantee's retirement, disability, or death, or (iii) the
date of a Change of Control (as defined in the 2004 Long-Term Incentive
Plan"). While certain awards remain outstanding under the BVR Plan, no
grants are being made any longer under the BVR Plan.
(2) Until June 29, 2005, the Parent maintained the Assurant Appreciation
Incentive Rights Plan ("AAIR Plan"), which provided for the issuance of
Assurant, Inc. and operating segment cash settled appreciation rights
("AAIR Plan rights"). In 2005, the Parent decided to no longer issue
operating segment rights or cash settled appreciation rights. The ALTIP was
adopted to provide for the payment of appreciation to participants in the
form of Assurant, Inc. Common Stock. As a result of the adoption of the
ALTIP, the AAIR Plan rights were converted into SARs on June 30, 2005. The
intrinsic value of the converted SARs did not change from that of the AAIR
Plan rights. "Converted SARs" refers to the AAIR Plan rights (granted over
several years prior to our initial public offering) that were converted to
SARs on June 30, 2005. In delivering equivalent intrinsic value to the
converted SARs, differing base prices may have resulted. Therefore, certain
converted SARs with the same expiration date may have differing base prices
in the table above.
(3) The value was determined using the December 31, 2009 closing price of
Assurant, Inc. Common Stock of $29.48.
(4) This award vested on March 8, 2010.
(5) This award vests on March 13, 2011.
(6) This restricted stock award was granted on March 8, 2007 and vests in three
equal annual installments on each of the first three anniversaries of the
grant date.
(7) This restricted stock award was granted on March 13, 2008 and vests in
three equal annual installments on each of the first three anniversaries of
the grant date.
(8) This restricted stock award was granted on November 13, 2008 and vests in
three equal annual installments on each of the first three anniversaries of
the grant date.
(9) This restricted stock award was granted on January 8, 2008 with 1,000
shares to vest on the first anniversary of the grant date and 500 shares to
vest on each of the second and third anniversaries of the grant date.
(10) This restricted stock unit award was granted on March 12, 2009 and vests in
three equal annual installments on each of the first three anniversaries of
the grant date.
(11) This PSU award was granted on March 12, 2009 and vests on the third
anniversary of the grant date, subject to the level of achievement with
respect to the applicable performance targets. The values in columns (i)
and (j) are based on the Parent's achievement of target performance during
2009 with respect to the performance metrics as compared against the
performance of the other companies in the A.M. Best U.S. Insurance Index.
Please see the section entitled "CD&A -- LONG-TERM EQUITY INCENTIVE
COMPENSATION -- PSUS -- MEASURING RELATIVE PERFORMANCE" above for further
details.
(12) This restricted stock unit award was granted on March 12, 2009 and vests in
five equal annual installments on each of the first five anniversaries of
the grant date.
(13) This restricted stock award was granted on July 2, 2007 and vests in three
equal annual installments on each of the first three anniversaries of the
grant date.
(14) This restricted stock unit award was granted on April 1, 2008 and vested in
two equal annual installments on each of the first two anniversaries of the
grant date.
<Page>
110 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
OPTION EXERCISES AND STOCK VESTED IN LAST FISCAL YEAR
The following table provides information regarding all of the SARs that were
exercised by the NEOs during 2009, and all of the shares of restricted stock
held by the NEOs that vested during 2009 on an aggregated basis.
OPTION EXERCISES AND STOCK VESTED TABLE FOR FISCAL YEAR 2009
<Table>
<Caption>
OPTION AWARDS STOCK AWARDS
NUMBER OF NUMBER OF
SHARES VALUE SHARES VALUE
ACQUIRED ON REALIZED ON ACQUIRED ON REALIZED ON
NAME EXERCISE(#) EXERCISE($) VESTING(#) VESTING($) (1)
(A) (B) (C) (D) (E)
------------------------------------------------------------------------------------------------------------------
John S. Roberts -- -- 1,000 30,810
221 3,799
370 7,570
209 4,707
3,914 121,921
Miles B. Yakre -- -- 209 4,707
198 3,404
1,332 30,982
163 3,335
125 2,815
Stacia N. Almquist -- -- 43 880
Michael J. Peninger -- -- 658 11,311
857 17,534
655 14,751
3,914 121,921
Sylvia R. Wagner -- -- 171 2,939
157 3,212
181 4,076
J. Marc Warrington -- -- 188 4,234
177 3,043
164 3,355
</Table>
(1) The value realized on vesting was determined using the closing price of
Assurant, Inc. Common Stock on the vesting date (or prior trading day if
the vesting date fell on a weekend or holiday).
PENSION BENEFITS
The Parent maintains three defined benefit pension plans. Two are nonqualified
executive defined benefit pension plans, the Assurant Supplement Retirement Plan
(the "Assurant SERP") and the Assurant Executive Pension Plan. In addition, the
Parent maintains the Assurant Pension Plan, a broad-based, tax qualified,
defined benefit pension plan.
The table below describes each plan that provides for pension payments to the
NEOs.
PENSION BENEFITS TABLE FOR FISCAL YEAR 2009
<Table>
<Caption>
NUMBER OF PRESENT VALUE OF PAYMENTS
YEARS OF CREDITED ACCUMULATED DURING LAST
NAME PLAN NAME SERVICE (1)(#) BENEFIT($) FISCAL YEAR($)
(A) (B) (C) (D) (E)
---------------------------------------------------------------------------------------------------------------------------------
John Roberts Pension Plan 1 6,900 0
Executive Pension Plan 1 15,284 0
SERP 2.5 219,921 0
Miles Yakre Pension Plan 17.1 163,850 0
Executive Pension Plan 17.1 133,068 0
SERP -- -- 0
Stacia Almquist Pension Plan 9 43,939 0
Executive Pension Plan -- -- 0
SERP -- -- 0
Michael J Peninger Pension Plan 23 388,498 0
Executive Pension Plan 23 281,892 0
</Table>
<Page>
UNION SECURITY INSURANCE COMPANY 111
-------------------------------------------------------------------------------
<Table>
<Caption>
NUMBER OF PRESENT VALUE OF PAYMENTS
YEARS OF CREDITED ACCUMULATED DURING LAST
NAME PLAN NAME SERVICE (1)(#) BENEFIT($) FISCAL YEAR($)
(A) (B) (C) (D) (E)
---------------------------------------------------------------------------------------------------------------------------------
Sylvia Wagner SERP 20 3,677,161 0
Pension Plan 35.7 858,168 0
Executive Pension Plan 35.7 596,880 0
SERP -- -- 0
J Marc Warrington Pension Plan 12 94,920 0
Executive Pension Plan 12 89,721 0
SERP -- -- 0
</Table>
(1) None of the NEOs have more years of credited service under any of the plans
than actual years of service with the Company.
NARRATIVE TO THE PENSION BENEFITS TABLE
The following is a description of the plans and information reported in the
Pension Benefits Table.
THE ASSURANT PENSION PLAN
Eligible employees may generally participate in the Assurant Pension Plan on
January 1 or July 1 after completing one year of service with Assurant. Credited
service for determining a participant's benefit accrues after an employee begins
participating in the plan and has no limit. Eligible compensation under this
plan is subject to the applicable limit under Internal Revenue Code ("IRC")
Section 401(a)(17) (which was $245,000 for 2009). Each active plan participant
on December 31, 2000 was given the choice of continuing to have his or her
benefits calculated under the applicable prior plan formula or to have his or
her benefits determined under the current pension formula. Benefits for
employees joining (or rejoining) the plan after December 31, 2000 are determined
under the current pension formula. Mr. Peninger and Ms. Wagner are covered under
the prior plan formula. Messrs. Roberts, Warrington and Yakre and Ms. Almquist
are covered under the current plan formula.
Under the current plan formula, the lump sum value of the benefit is based on
the participant's accumulated annual accrual credits multiplied by their final
average earnings, but is not less than the present value of accrued benefits
under the prior plan formula. Final average earnings (for both the current and
prior plan formula) is defined as the highest average annual compensation for
five consecutive complete calendar years of employment during the ten
consecutive complete calendar years immediately prior to the participant's
termination of employment. As set forth below, annual accrual credits are
measured in percentages and increase as participants reach certain credited
service milestones.
<Table>
<Caption>
YEARS OF SERVICE CREDIT
--------------------------------------------------------------------------------
Years 1 through 10 3%
Years 11 through 20 6%
Years 21 through 30 9%
Years over 30 12%
</Table>
Under the current plan formula, the present value of accumulated benefits at
December 31, 2009 is determined as the lump sum value of the benefit based on
the participant's accumulated annual accrual credits and final average earnings
(which is limited by IRC Section 401(a)(17)) at December 31, 2009, but is not
less than the present value of accrued benefits under the prior plan formula.
The prior plan formula is calculated by taking (a) 0.9% multiplied by final
average earnings up to Social Security covered compensation multiplied by years
of credited service (up to 35 years) plus (b) 1.3% multiplied by final average
earnings in excess of Social Security covered compensation multiplied by years
of credited service (up to 35 years) plus (c) 1.3% multiplied by final average
earnings multiplied by years of credited service in excess of 35. Under the
prior plan formula, the present value of accumulated benefits at December 31,
2009 is determined based on the accrued plan benefit at that date and assumes
the following: (1) the executives will retire from Assurant at age 65, (2) 30%
of male executives and 60% of female executives will receive their payments in
the form of a life annuity and 70% of male executives and 40% of female
executives will receive their payments in the form of a 50% joint & survivor
annuity, and (3) the present value of annuity benefits is based on an interest
rate assumption of 5.94% and the RP 2000 generational mortality table (which is
the mortality table assumption from the plan's most recent financial statement
disclosure).
<Page>
112 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
The normal retirement age for the Assurant Pension Plan is 65. Benefits are
actuarially reduced for any payment prior to age 65. A participant covered under
the prior plan formula generally can commence his or her benefit at age 55,
provided that he or she has accrued ten years of credited service, or elect to
commence benefits at age 65. Participants covered under the current plan formula
may immediately commence their benefit at termination of employment or they may
elect to defer the commencement up to age 65. A participant becomes 100% vested
in the benefits under the current plan formula after three years of vesting
service. If the participant elected to participate in the prior plan formula,
the benefits will become vested after five years of vesting service. All of the
NEOs are 100% vested. If the participant is married, the normal form of payment
is a 50% joint and survivor annuity. If the participant is not married, the
normal form of payment is a life annuity.
THE ASSURANT EXECUTIVE PENSION PLAN
Eligible employees may generally begin participating in the Assurant Executive
Pension Plan on January 1 or July 1 after completing one year of service with
the Company and when their eligible compensation exceeds the IRC Section
401(a)(17) compensation limit (which was $245,000 for 2009). For participants
who are covered under the prior plan formula, eligible compensation was capped
for 2009 at $385,000 and this cap is adjusted annually for inflation. Eligible
compensation for participants covered under the current plan formula is not
capped. With respect to the plan formula to determine benefits, the elections
made under the Assurant Pension Plan on December 31, 2000 also apply to the
Assurant Executive Pension Plan. Mr. Peninger and Ms. Wagner are covered under
the prior plan formula. Messrs. Roberts, Warrington and Yakre are covered under
the current plan formula.
A participant's benefit under the Assurant Executive Pension Plan is equal to
the benefit he or she would have received under the Pension Plan at normal
retirement age (65), recognizing all eligible compensation (not subject to the
IRC limit) reduced by the benefit payable under the Pension Plan. The benefits
under the Assurant Executive Pension Plan are payable only in a lump sum
following termination of employment. Payments will be made following termination
of employment and are subject to the restrictions under IRC Section 409A.
Service covered under each of these formulas begins with participation in the
Assurant Executive Pension Plan and has no limit. A participant becomes vested
in the benefits under the Assurant Executive Pension Plan after three years of
service if the participant has elected to participate in the current plan
formula, and after five years of service if the participant has elected to
participate in the prior plan formula. All of the participating NEOs are
currently 100% vested in their Executive Pension Plan benefit.
The methodology for determining the present value of the accumulated benefits
under the Assurant Executive Pension Plan uses the same assumptions and
methodologies as the Assurant Pension Plan described above, except that benefits
calculated under the prior plan formula are paid as a lump sum rather than an
annuity. For current plan formula participants, the present value of accumulated
benefits at December 31, 2009 is determined as the lump sum value of the benefit
based on the participant's accumulated annual accrual credits and unlimited
final average earnings as of December 31, 2009 offset by the Assurant Pension
Plan benefits. For prior plan benefits, the present value of accumulated
benefits at December 31, 2009 is based on the benefit produced under the prior
plan formula converted to a lump sum payment (1) at the plan's normal retirement
age of 65.
THE ASSURANT SERP
To participate in the Assurant SERP, an executive is nominated by the Parent and
approved by the Parent Compensation Committee. Under the Assurant SERP, when a
participant terminates employment, he or she is entitled to a benefit equal to a
"Target Benefit" that is offset by the participant's benefit payable from the
Pension Plan, the Assurant Executive Pension Plan and the participant's
estimated Social Security benefit. The Target Benefit is equal to 50% of the
participant's eligible compensation multiplied by a fraction, not to exceed 1.0,
whose numerator is equal to the number of months of credited service at
termination, and whose denominator is equal to 240. After 20 years of credited
service and turning age 60 or 62, as applicable, a participant will earn a full
50% benefit under the Assurant SERP payable as a life annuity. Generally,
credited service is based on the participant's years of service with the
Company. If a participant was formerly employed by an acquired company, then
service with that company may be recognized under the Assurant SERP at the
discretion of the Parent Compensation Committee. In 2006, based on a study of
the market practice, the Parent Compensation Committee approved a change to the
normal retirement age from age 60 to age 62. This change is effective only for
participants joining the Assurant SERP during 2007 or later. Since Mr. Roberts
was approved for participation in the Assurant SERP after January 1, 2007, the
change in normal retirement age applies to him. For participants who join the
Assurant SERP on or after January 1, 2010, the normal retirement age has been
increased to 65. A participant commences vesting in the Assurant SERP on the
second anniversary of participation and continues to vest at the rate of 3% for
each month of employment thereafter with the Company.
------------
(1) The lump sum conversion basis at retirement consists of the greater of an
interest rate of 4.25% and the 1994 Group Annuity Mortality Table and a
blend of segmented high-quality corporate bond rates and 30 year treasury
rates using the mortality required by IRC Section 417(e), as updated by the
Pension Protection Act of 2006 (the "PPA"). Accordingly, the lump sum
values shown are based on an interest rate of 4.25%. The present value of
the lump sum payment is determined using a pre-retirement interest rate of
5.73%.
<Page>
UNION SECURITY INSURANCE COMPANY 113
-------------------------------------------------------------------------------
For benefits earned and vested as of December 31, 2004, the participant may
commence his or her vested SERP benefit at any time following termination and
the default form of payment under the Assurant SERP is a single lump sum payment
that is the actuarial equivalent of the Assurant SERP benefit payable as a life
annuity (but a participant may elect a different form of benefit). For benefits
earned or vested after December 31, 2004, the only form of payment available
under the Assurant SERP is a single lump payment that is the actuarial
equivalent of the Assurant SERP benefit payable as a life annuity.
Mr. Peninger is 100% vested in his SERP. Mr. Roberts is 0% vested in his SERP
benefit. Neither of them has attained normal retirement age as of December 31,
2009; therefore, if either had terminated employment on or prior to that date,
their SERP benefit would have been actuarially reduced to his respective age.
The present value of the accumulated benefits at December 31, 2009 was
determined based on the December 31, 2009 accrued benefit using the base salary,
target ESTIP award and credited service at December 31, 2009. The present value
of the accumulated benefits at December 31, 2009 is determined assuming the
following: (1) the executives will retire from the Company at the plan's normal
retirement age; (2) the executives will receive their benefits in accordance
with their current form of payment elections; and (3) the present value of
single lump sum benefits is determined using an interest rate of 5.73% to the
retirement date and a lump sum conversion factor (2) at retirement.
NUMBER OF YEARS OF CREDITED SERVICE
The number of years of credited service varies between plans for the following
reasons. Eligibility for the Pension Plan and Executive Pension Plan is based on
a one year waiting period from date of hire and results in the same amount of
credited service under both plans. Eligibility under the Assurant SERP generally
recognizes all service with the Company; however, if a participant was formerly
employed by an acquired company, then service with that company may or may not
be recognized under the Assurant SERP at the discretion of the Parent
Compensation Committee. Mr. Roberts has prior service that was not recognized.
For purposes of determining the amount of benefits payable under the Assurant
SERP, credited service is capped at 20 years.
NONQUALIFIED DEFINED CONTRIBUTION AND OTHER NONQUALIFIED DEFERRED COMPENSATION
PLANS
The table below sets forth, for each NEO, information with respect to each
defined contribution or other plan that provides for the deferral of
compensation on a basis that is not tax-qualified. The Parent currently
maintains the Amended and Restated Assurant Deferred Compensation Plan (the "ADC
Plan"), which provides for the deferral of compensation on a basis that is not
tax-qualified. The Assurant Investment Plan (the "AIP") was frozen in December
2004. The Assurant Executive 401(k) Plan (the "Executive 401(k) Plan") is a
nonqualified defined contribution plan. Ms. Almquist does not participate in the
ADC Plan and is not eligible to participate in the Executive 401(k) Plan.
------------
(2) The lump sum values shown for Mr. Roberts is based on December monthly bond
segment rates of 2.35% for years 0-5, 5.65% for year 5-20 and 6.45% for
years 20+. The mortality is based on the IRC Section 417(e) mortality
prescribed by the PPA.
<Page>
114 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
NONQUALIFIED DEFINED CONTRIBUTION AND OTHER NONQUALIFIED
DEFERRED COMPENSATION PLANS TABLE FOR FISCAL YEAR 2009
<Table>
<Caption>
EXECUTIVE REGISTRANT AGGREGATE AGGREGATE AGGREGATE
CONTRIBUTIONS IN CONTRIBUTIONS IN EARNINGS IN WITHDRAWALS/ BALANCE AT
LAST FY LAST FY (1),(2) LAST FY (1) DISTRIBUTIONS LAST FYE (1)
NAME ($) ($) ($) ($) ($)
(A) PLAN (B) (C) (D) (E) (F)
------------------------------------------------------------------------------------------------------------------------------------
John Roberts ADC Plan 0 0 (3) 0 0 0
AIP 0 (4) 0 (4) 0 0 0
Executive 401(k) 0 (4) 60,566 33,024 0 179,510
---------------- --- ---------------- ------------- ------------- -------------
TOTAL 0 60,566 33,024 0 179,510
Miles Yakre ADC Plan 0 0 (3) 0 0 0
AIP 0 (4) 0 (4) 0 0 0
Executive 401(k) 0 (4) 12,009 21,528 0 105,138
TOTAL 0 12,009 21,528 0 105,138
Michae Peninger ADC Plan 0 0 (3) 0 0 0
AIP 0 (4) 0 (4) 83,714 1,035,288 0
Executive 401(k) 0 (4) 85,050 1,908 0 480,010
---------------- --- ---------------- ------------- ------------- -------------
TOTAL 0 85,050 85,622 1,035,288 480,010
Sylvia Wagner ADC Plan 0 0 (3) 0 0 0
AIP 0 (4) 0 (4) 97,134 (5) 0 554,712
Executive 401(k) 0 (4) 20,080 30,794 0 162,737
TOTAL 0 20,080 127,928 0 717,449
J. Marc ADC Plan 0 (3) 0 0 0
Warrington
AIP 0 (4) 0 (4) 0 0 0
Executive 401(k) 0 (4) 15,558 26,825 0 113,673
---------------- --- ---------------- ------------- ------------- -------------
TOTAL 0 15,558 26,825 0 113,673
---------------- ---------------- ------------- ------------- -------------
</Table>
(1) The amounts in column (c) were reported as compensation in the last
completed fiscal year in the "All Other Compensation" column of the
Summary Compensation Table as follows: for Mr. Roberts, $60,566 of Company
contributions to the Executive 401(k) Plan; for Mr. Yakre, $12,009 of
Company contributions to the Executive 401(k) Plan; for Mr. Peninger,
$85,050 of Company contributions to the Executive 401(k) Plan; for Ms.
Wagner, $20,080 of Company contributions to the Executive 401(k) Plan; and
for Mr. Warrington, $15,558 of Company contributions to the Executive
401(k) Plan.
The NEOs' Aggregate Earnings in the last fiscal year reported in column
(d) with respect to the ADC Plan, and AIP, as applicable, represent the
capital gains or losses on investments in publicly available mutual funds,
interest and dividends held in the plans during 2009. The Parent does not
provide any preferential or above market earnings or contributions. These
earnings are not reported in any column of the Summary Compensation Table.
With respect to the Executive 401(k) Plan, the aggregate earnings
represent capital gains or losses, interest and dividends on the aggregate
balance during 2009. Similarly, the Parent does not provide any above
market or preferential earnings and these earnings are not reported in the
Summary Compensation Table.
For the AIP, no contributions could have been made during the fiscal year
2009 since it has been frozen since December 2004.
(2) The Executive 401(k) Plan amounts reported in this column reflect the
Parent contribution to the Executive 401(k) Plan (7% of eligible
compensation in excess of the limit under IRC Section 401(a)(17)) that was
made in February 2010.
(3) The Parent does not currently make any contributions to the ADC Plan.
(4) Since the AIP has been frozen since December 2004, no contributions could
have been made during fiscal year 2009. The Executive 401(k) Plan does not
provide for participant contributions.
(5) The earnings in the ADC Plan and AIP are based on a comparison of balances
from March 31, 2009 through December 31, 2009 due to unavailability of
data as of December 31, 2009.
NARRATIVE TO THE NONQUALIFIED DEFINED CONTRIBUTION AND OTHER NONQUALIFIED
DEFERRED COMPENSATION PLANS TABLE
The following is a description of the plans and information reported in the
Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation
Plans Table.
THE ADC PLAN
Participation in the ADC Plan is restricted to a select group of management or
highly compensated employees of Assurant. Under the terms of the ADC Plan,
deferral elections can be made once a year with respect to base salary,
incentive payments or (with respect to the Board of Directors) director fees to
be earned in the following year. Benefits under the ADC Plan are notionally
invested in accordance with participant elections among various publicly
available mutual funds and deferred amounts and any notional earning or losses
are notionally credited to a deemed investment account. Currently, Assurant does
not provide any above market earnings or preferential earnings to the
participants. Each deferral must remain in the plan for at least one full
calendar year, until July 1 of the following year or until the earlier of
termination, disability or death. Deferrals cannot be changed or revoked during
the plan year, except as permitted by applicable law. Upon voluntary or
involuntary termination (including retirement) or disability, participants can
withdraw their account balances from the ADC Plan in a lump sum or in annual
installments over five, ten or fifteen years or other agreed upon installment
schedule between the participant and the administrator As a result of IRC
Section 409A, certain key employees (including the NEOs) are subject to a
six-month waiting period for distributions following termination.
<Page>
UNION SECURITY INSURANCE COMPANY 115
-------------------------------------------------------------------------------
THE AIP
Prior to the establishment of the ADC Plan in 2005, eligible employees were able
to participate in the AIP. The AIP provided key employees the ability to
exchange a portion of their compensation for options to purchase certain
publicly available mutual funds. Assurant did not provide any above market
earnings or preferential earnings to the participants. The AIP was frozen in
December 2004. Since then, participants have been able to withdraw from the AIP
and have the ability to change their investment elections but any new deferrals
of compensation have been made through the ADC Plan.
THE EXECUTIVE 401(K) PLAN
Eligible employees may generally participate in this plan after completing one
year of service with the Company and when their eligible compensation exceeds
the compensation limit under the IRC. The Parent makes an annual contribution
for each participant in this plan equal to 7% of eligible compensation in excess
of the IRC limit (which was $245,000 for 2009). The participant must be employed
on the last regularly scheduled work day of the year in order to receive the
contribution unless the participant retires, becomes totally disabled, dies or
his or her employment is terminated in the fourth quarter of the year as a
result of a reduction in work force. The participants select among various
publicly available mutual funds in which the contributions are deemed to be
invested on a tax deferred basis. These notional contributions are credited with
notional earnings and losses based on the performance of the mutual funds.
Currently, Assurant does not provide any above market earnings or preferential
earnings to the participants. For the NEOs, eligibility for retirement under the
Executive 401(k) Plan is based upon reaching age 55 and completing ten years of
service. Please see footnote 4 to the Summary Compensation Table above, for
quantification of Company contributions to the Executive 401(k) Plan in 2009.
The benefits under the Executive 401(k) Plan are payable only in a lump sum
following termination of employment. Payments made following termination of
employment are subject to the restrictions of IRC Section 409A. A participant
becomes vested in the benefits under the Executive 401(k) Plan after three years
of service. Participants are currently 100% vested in their Executive 401(k)
Plan benefit.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
The following section sets forth for each NEO, an estimate of potential payments
the NEO would have received at, following, or in connection with termination of
employment under the circumstances enumerated below on December 31, 2009.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL TABLE
<Table>
<Caption>
PAYOUT IF PAYOUT IF
TERMINATES TERMINATES PAYOUT IF
VOLUNTARILY VOLUNTARILY TERMINATED
12/31/09 12/31/09 INVOLUNTARILY
NAME (NOT RETIREMENT) (1)(A) (RETIREMENT) (1)(B) 12/31/09 (2)(C)
---------------------------------------------------------------------------------------------------------------
JOHN S. ROBERTS
Base Salary -- -- --
STIP Award -- -- --
Long-Term Equity Awards (4) -- -- $303,113
Executive Pension Plan (5) $15,284 -- $15,284
SERP (6) -- -- --
Executive 401(k) Plan (8) $179,510 -- $179,510
Welfare Benefit Lump Sum (9) -- -- --
Severance (12) -- -- $0
Outplacement -- -- --
Gross Up on Excise Tax -- -- --
------------------ --------------- -----------
TOTAL $194,794 -- $497,907
------------------ --------------- -----------
MILES B. YAKRE
Base Salary -- -- --
STIP Award -- -- --
Long-Term Equity Awards (4) -- -- $58,488
Executive Pension Plan (5) $133,068 -- $133,068
SERP -- -- --
Executive 401(k) Plan (8) $105,138 -- $105,138
Welfare Benefit Lump Sum (9) -- -- --
Severance (12) -- -- --
Outplacement -- -- --
Gross Up on Excise Tax -- -- --
------------------ --------------- -----------
TOTAL $238,206 -- $296,694
------------------ --------------- -----------
MICHAEL J. PENINGER
Base Salary -- -- --
STIP Award -- -- --
Long-Term Equity Awards (4) -- -- $303,113
Executive Pension Plan (5) $320,563 -- $320,563
SERP (6) $3,436,900 -- $3,436,900
Executive 401(k) Plan (8) $480,010 -- $480,010
Welfare Benefit Lump Sum (9) -- -- --
Severance (12) -- -- $0
Outplacement -- -- --
Gross Up on Excise Tax -- -- --
TOTAL $4,237,473 -- $4,540,586
------------------ --------------- -----------
<Caption>
PAYOUT IF
TERMINATED PAYOUT IF PAYOUT IF
UPON CHANGE OF TERMINATED TERMINATED
CONTROL UPON DEATH UPON DISABILITY
NAME 12/31/09 (3)(D) 12/31/09(E) 12/31/09(F)
----------------------------- -----------------------------------------------------------------------
JOHN S. ROBERTS
Base Salary -- -- --
STIP Award $200,000 $0 $0
Long-Term Equity Awards (4) $303,113 $346,950 $346,950
Executive Pension Plan (5) $15,284 $15,284 $15,284
SERP (6) $982,417 (7) $269,664 $269,664
Executive 401(k) Plan (8) $179,510 $179,510 $179,510
Welfare Benefit Lump Sum (9) $15,377 -- --
Severance (12) $2,700,000 -- --
Outplacement $30,000 (10) -- --
Gross Up on Excise Tax $1,895,146 (11) -- --
------------- ----- ----------- -----------
TOTAL $6,320,847 $811,408 $811,408
------------- ----------- -----------
MILES B. YAKRE
Base Salary -- --
STIP Award $65,138 $0 $0
Long-Term Equity Awards (4) $58,488 $89,914 $89,914
Executive Pension Plan (5) $133,068 $133,068 $133,068
SERP -- -- --
Executive 401(k) Plan (8) $105,138 $105,138 $105,138
Welfare Benefit Lump Sum (9) $20,391 -- --
Severance (12) $839,550 -- --
Outplacement $13,500 (10) -- --
Gross Up on Excise Tax -- -- --
------------- ----------- -----------
TOTAL $1,235,273 $328,120 $328,120
------------- ----------- -----------
MICHAEL J. PENINGER
Base Salary -- -- --
STIP Award -- -- --
Long-Term Equity Awards (4) -- $359,862 $359,862
Executive Pension Plan (5) -- $296,200 $320,563
SERP (6) -- $3,675,831 $3,436,900
Executive 401(k) Plan (8) -- $480,010 $480,010
Welfare Benefit Lump Sum (9) -- -- --
Severance (12) -- -- --
Outplacement -- -- --
Gross Up on Excise Tax -- -- --
TOTAL -- $4,811,903 $4,597,335
------------- ----------- -----------
</Table>
<Page>
116 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
<Table>
<Caption>
PAYOUT IF PAYOUT IF
TERMINATES TERMINATES PAYOUT IF
VOLUNTARILY VOLUNTARILY TERMINATED
12/31/09 12/31/09 INVOLUNTARILY
NAME (NOT RETIREMENT) (1)(A) (RETIREMENT) (1)(B) 12/31/09 (2)(C)
---------------------------------------------------------------------------------------------------------------
SYLVIA R. WAGNER
Base Salary -- -- --
STIP Award -- -- --
Long-Term Equity Awards (4) -- -- $317,824
Executive Pension Plan (5) -- $631,367 $631,367
SERP -- -- --
Executive 401(k) Plan (8) -- $162,737 $162,737
Welfare Benefit Lump Sum -- -- --
Severance (12) -- -- $0
Outplacement -- -- --
Gross Up on Excise Tax -- -- --
------------------ --------------- -----------
TOTAL -- $794,104 $1,111,928
------------------ --------------- -----------
J. MARC WARRINGTON
Base Salary -- -- --
STIP Award -- -- --
Long-Term Equity Awards (4) -- -- --
Executive Pension Plan (5) -- -- $50,470
SERP $89,721 -- $89,721
Executive 401(k) Plan (8) -- -- --
Welfare Benefit Lump Sum (9) $113,673 -- $113,673
Severance (12) -- -- --
Outplacement -- -- --
Gross Up on Excise Tax -- -- --
-- -- --
------------------ --------------- -----------
TOTAL $203,394 -- $253,864
------------------ --------------- -----------
<Caption>
PAYOUT IF
TERMINATED PAYOUT IF PAYOUT IF
UPON CHANGE OF TERMINATED TERMINATED
CONTROL UPON DEATH UPON DISABILITY
NAME 12/31/09 (3)(D) 12/31/09(E) 12/31/09(F)
----------------------------- -----------------------------------------------------------------------
SYLVIA R. WAGNER
Base Salary -- -- --
STIP Award -- -- --
Long-Term Equity Awards (4) -- $325,990 $325,990
Executive Pension Plan (5) -- $586,414 $631,367
SERP -- -- --
Executive 401(k) Plan (8) -- $162,737 $162,737
Welfare Benefit Lump Sum -- -- --
Severance (12) -- -- --
Outplacement -- -- --
Gross Up on Excise Tax -- -- --
------------- ----------- -----------
TOTAL -- $1,075,141 $1,120,094
------------- ----------- -----------
J. MARC WARRINGTON
Base Salary -- -- --
STIP Award -- -- --
Long-Term Equity Awards (4) $70,200 -- --
Executive Pension Plan (5) $50,470 $58,931 $58,931
SERP $89,721 $89,721 $89,721
Executive 401(k) Plan (8) -- -- --
Welfare Benefit Lump Sum (9) $113,673 $113,673 $113,673
Severance (12) $23,924 -- --
Outplacement $904,800 -- --
Gross Up on Excise Tax $13,500 (10) -- --
-- -- --
------------- ----------- -----------
TOTAL $1,266,288 $262,325 $262,325
------------- ----------- -----------
</Table>
(1) As of December 31, 2009, Ms. Wagner met the requirements to be considered
"retired" by the Company (age 55 with 10 years of service). Therefore, if
Ms. Wagner were to terminate voluntarily, it would be considered a
retirement and column (a) "Payout if Terminated Voluntarily (Not
Retirement)" is not applicable to Ms. Wagner. Since none of the other NEOs
qualify for retirement, the column entitled "Payout if Terminated
Voluntarily (Retirement)" is not applicable to them.
(2) The values in this column reflect involuntary termination not for cause. In
the event of involuntary termination for cause, the same amounts would be
payable except (1) the NEOs would not receive a SERP payment and (2) the
NEOs would not receive a pro-rata vesting from the ALTEIP grants.
(3) A sale of USIC would only trigger payments for Messrs. Roberts, Yakre and
Warrington under the definition of change of control under their respective
Change of Control Employment Agreements.
(4) These amounts assume accelerated vesting and/or exercise of all or a
portion of unvested equity awards on December 31, 2009 based on the closing
stock price of $29.48. These amounts also reflect pro-rata vesting in the
event of death or disability. Pro-rata vesting in the event of retirement
only applies to awards granted prior to 2007. In the event of change of
control of USIC, awards under the ALTEIP would be prorated based on
treatment as an involuntary termination.
(5) Executive Pension Plan benefits are payable only as a lump sum payment and
as soon as administratively feasible following termination (in compliance
with IRC Section 409A).
(6) SERP payments are all shown as the present value of the retirement benefit.
(7) Upon a change of control (under the Assurant SERP), participants are
granted 3 additional years of benefit service (capped at 20 years) and are
considered 3 years older. The amounts in this column represent the present
value of the Assurant SERP benefit under these conditions.
(8) This amount includes the Parent contribution to the Executive 401(k) Plan
which was made in February 2010 since that amount would have been payable
to an NEO if he or she terminated on December 31, 2009.
(9) This represents a one-time lump sum payment by the Parent that equals the
value of Parent paid premiums for the medical, dental, life insurance and
disability plans as of December 31, 2009 for 18 months based on the
individual's benefit election (in accordance with IRC Section 409A).
(10) This represents the Parent's best estimate of the costs of outplacement
services for an NEO.
(11) The gross-up on excise tax has been eliminated as of February 1, 2010 for
Messrs. Roberts and Peninger and Ms. Wagner.
(12) Although no agreements exist with respect to the exact severance amounts an
NEO would receive upon voluntary termination (retirement) or involuntary
termination, the Parent may consider paying discretionary severance amounts
(including a welfare benefit lump sum and costs of outplacement services)
depending on the facts and circumstances of the NEO's termination.
Additionally, under an annual incentive program policy, in the event of
involuntary termination not for cause or due to death during the fourth
quarter, a participant in the annual incentive program will receive an
annual incentive payment based on the full-year results of the year in
which the termination takes place.
NARRATIVE TO THE POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL TABLE
The following is a description of the information reported in the Potential
Payments Upon Termination or Change of Control Table, including the material
terms of the Change of Control Agreements and the methodology and material
assumptions made in calculating the Executive Pension Plan and SERP benefits
payable in the event of disability or death. The material terms of the Executive
Pension Plan and the SERP are described in the section entitled "NARRATIVE TO
THE PENSION BENEFITS TABLE" above. The material terms of the ADC Plan and the
Executive 401(k) Plan are described in the section entitled "NARRATIVE TO THE
NONQUALIFIED DEFINED CONTRIBUTION AND OTHER NONQUALIFIED DEFERRED COMPENSATION
PLANS TABLE" above. Additional information on the ALTEIP is described in the
CD&A and the section entitled "NARRATIVE TO THE SUMMARY COMPENSATION TABLE AND
GRANTS OF PLAN-BASED AWARDS TABLE" above.
Ms. Almquist (who is not listed in the table) would have only received payments
in the event of involuntary termination not for cause or due to death or
disability on December 31, 2009. In the case of involuntary termination not for
cause, Ms. Almquist would have received $16,450, and in the case termination due
to death or disability, Ms. Almquist would have received $17,511. Additionally,
under an annual incentive program policy, participants in the short term
incentive program
<Page>
UNION SECURITY INSURANCE COMPANY 117
-------------------------------------------------------------------------------
would have also received an annual short term incentive award on March 15, 2010
based on full-year 2009 results in the case of involuntarily termination not for
cause or due to death. For more information on Ms. Almquist's annual incentive
award, including the amount, please see the CD&A.
TREATMENT OF ANNUAL INCENTIVE AWARDS
Under the ESTIP (which applied to Messrs. Peninger and Roberts), if a
participant's employment is terminated during a performance period due to
disability or death, the Committee may grant the participant an award in any
amount the Committee deems appropriate. If a participant's employment is
terminated during a performance period due to retirement, any award for that
participant will be subject to the maximum limits under the ESTIP (participant's
allocated portion of 5% of the Parent Company's net income as defined under the
ESTIP), based on the amount of the Parent Company's net income for the full
performance period. If a participant's employment terminates for any other
reason, any award paid to that participant will be subject to the maximum limits
described above, pro-rated to reflect the number of days in the performance
period that the participant was employed. Upon a change of control of the Parent
Company, each participant will be paid an amount based on the level of
achievement of the performance goals as determined by the Committee no later
than the date of the change of control.
ACCELERATED AND PRO-RATED VESTING OF EQUITY AWARDS
Upon a termination due to death or disability, SARs, restricted stock, RSUs and
PSUs vest on a pro-rata basis (subject, in the case of PSUs, to the level of
performance achieved). Pro-rata vesting upon retirement is discretionary for
restricted stock and SAR awards. RSUs and PSUs vest in full upon retirement
(subject, in the case of PSUs, to the level of performance achieved), except for
grants made in the year of retirement, which are forfeited. RSUs and PSUs vest
on a pro-rata basis upon an involuntary termination without cause (subject, in
the case of PSUs, to the level of performance achieved), and are forfeited upon
a voluntary termination. Unvested SARs and restricted stock are forfeited in the
event of a voluntary or involuntary termination. In the event of a change of
control of the Company, awards under the ALTEIP would be prorated based on
treatment as an involuntary termination.
THE SERP
Mr. Peninger is 100% vested in his SERP benefit and Mr. Roberts is 0% vested in
SERP benefit. Mr. Peninger has 20 years of credited service and therefore will
only continue to accrue benefits under the SERP due to increases in eligible
compensation (as defined in the SERP). Neither Mr. Roberts nor Mr. Peninger had
attained normal retirement age under the SERP as of December 31, 2009;
therefore, if they terminated employment, their SERP benefit would have been
actuarially reduced to their respective ages.
If there is a change of control with respect to the Parent or applicable
operating segment, and within two years after the change of control a
participant's employment is terminated without cause or the participant
terminates employment for good reason (as defined in the SERP), then (1) the
participant will become 100% vested in his or her SERP benefit; (2) the
participant will be credited with 36 additional months of service for purposes
of computing his or her target benefit; (3) the actuarial reduction for
commencement of the SERP benefit prior to normal retirement age will be
calculated as though the participant was 36 months older than his or her actual
age; and (4) the participant may receive his or her SERP benefit following a
change of control at a time and in an optional form that is different than the
time and optional form that he or she would receive under circumstances not
related to a change of control. This election may not be changed within one year
prior to the participant's termination date. In the event of a termination of
employment other than described above, the following applies: (i) a participant
will automatically become 100% vested in his or her SERP benefit in the event of
death or disability, (ii) a participant will forfeit any remaining benefit in
the event he or she is terminated for cause or commits a material breach of
certain covenants regarding non-competition, confidentiality, non-solicitation
of employees or non-solicitation of customers.
As of December 31, 2009, for grandfathered benefits (the benefit portion of the
SERP that was earned and vested as of December 31, 2004), in the event of
termination, Mr. Peninger had elected to take his SERP benefit in the form of a
100% joint and survivor annuity as soon as practicable following termination and
in accordance with IRC Section 409A. In the event of death, Mr. Peninger has
elected single lump sum payments. Mr. Roberts does not have a grandfathered
benefit earned and vested as of December 31, 2004. For Messrs. Peninger and
Roberts, as of January 1, 2008, for benefits earned and vested after December
31, 2004, the only form of payment available under the SERP is a single lump
payment that is the actuarial equivalent of the SERP benefit payable as a life
annuity.
<Page>
118 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
THE EXECUTIVE 401(K) PLAN
The benefits under the Executive 401(k) Plan are payable only in a lump sum
following termination of employment. Payments made following termination of
employment are subject to the restrictions of IRC Section 409A.
CHANGE OF CONTROL AGREEMENTS
Assurant, Inc. is a party to a COC Agreement with Messrs. Peninger, Roberts,
Warrington and Yakre and Ms. Wagner. The COC Agreements generally provide that
if, during the two-year period following a change of control (as defined in the
COC Agreements), the executive's employment is terminated by the Company other
than for cause (as defined in the COC Agreements) or disability (as defined in
the COC Agreements), or by the executive for good reason (as defined in the COC
Agreements), the executive would be entitled to receive, subject to the
executive's execution of a release of claims, within 60 days of the termination
(or such later date that may be required by tax laws governing deferred
compensation), a payment equal to 0.5 times the target annual ESTIP or short
term incentive program ("STIP") award for the year in which the date of
termination occurs, an amount of cash severance equal to two (in the case of
Messrs. Warrington and Yakre) or three (in the case of Messrs. Peninger and
Roberts and Ms. Wagner) times the sum of the executive's annual base salary plus
target short term incentive program or ESTIP award, continued welfare benefits
for the 18-month period following the date of termination, and outplacement
benefits.
The following provision was effective in 2009, but was eliminated for Messrs.
Peninger and Roberts and Ms. Wagner, who served as members of the Management
Committee in February 2010, as described above in the section entitled "CD&A --
BENEFITS AND PERQUISITES". In the event that an executive were subject to an
excise tax under IRC Section 4999, the executive would have been entitled to
receive an additional payment such that the executive is placed in the same
after-tax position as if no excise tax had been imposed. However, if the
executive's change of control payments exceeded the maximum amount that the
executive could have received without being subject to the tax by five percent
or less, then the executive would not have received the gross-up payment and
instead the executive's change of control payments would have been reduced to
the maximum amount that the executive could have received without being subject
to the tax.
TERMINATION IN ANTICIPATION OF A CHANGE OF CONTROL. If an executive's employment
is terminated by Assurant without cause or by the executive for good reason
prior to the date on which a change of control occurs, and if it is reasonably
demonstrated by the executive that such termination of employment (i) was at the
request of a third party that has taken steps reasonably calculated to effect a
change of control or (ii) otherwise arose in connection with or anticipation of
a change of control, then the executive will be entitled to the severance and
other benefits described above.
FUNDING OF SEVERANCE PAYMENT OBLIGATIONS. Within five business days of the
executive's date of termination after a change of control, Assurant must
establish and fund a trust in an amount of cash equal to the amount of the
severance payments to which the executive is entitled.
DEFINITION OF "CHANGE OF CONTROL". For purposes of the agreements, change of
control is defined to mean:
- a change in a majority of the Assurant's Board of Directors (the "Incumbent
Board") excluding any persons approved by a vote of at least a majority of
the Incumbent Board other than in connection with an actual or threatened
proxy contest;
- an acquisition by an individual, entity or a group of 30% or more of the
Assurant's Common Stock or voting securities (excluding an acquisition
directly from Assurant, by Assurant, by an employee benefit plan of Assurant
or pursuant to a transaction described immediately below);
- consummation of a merger, consolidation or similar transaction, or sale of
all or substantially all of Assurant's assets other than a business
combination in which all or substantially all of the stockholders of
Assurant receive 60% or more of the stock of the company resulting from the
business combination, at least a majority of the board of directors of the
resulting corporation were members of the Incumbent Board, and after which
no person owns 30% or more of the stock of the resulting corporation, who
did not own such stock immediately before the business combination;
- stockholder approval of a complete liquidation or dissolution of Assurant;
or
- for the NEOs who are officers of an operating division of Assurant only
(Messrs. Roberts, Warrington and Yakre), the sale or other disposition of
the companies, assets or businesses comprising the division having (A) book
value equal to at least 70% of the book value of the aggregate consolidated
assets of the division immediately prior to such sale or disposition; or (B)
market value equal to at least 70% of the market value of the aggregate
consolidated assets of the division immediately prior to such sale or
disposition; provided, that neither an initial public offering of some or
all of the division nor a spin-off to Assurant's stockholders of some or all
of the companies or business divisions comprising the division (or a
transaction having a similar effect) shall constitute a change of control.
A sale or other disposition of the Company (followed by termination of
employment within two years) would trigger the COC agreements of Messrs.
Roberts, Warrington and Yakre.
NON-COMPETITION AND NON-SOLICITATION. Under the COC Agreements, executives may
not engage in activity competitive with Assurant (including as an employee or
officer of a competitor) or solicit customers of Assurant during the period
beginning
<Page>
UNION SECURITY INSURANCE COMPANY 119
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on January 1, 2009 and expiring on the date of a change of control. If the
executive's employment is terminated before a change of control occurs, the
length of the applicable non-competition period varies based on the type of
termination. Specifically, if the executive's employment is terminated by
Assurant for cause or by the executive without good reason, the non-competition
period will expire six months after the date of termination. If the executive's
employment is terminated by Assurant without cause or by the executive for good
reason, the non-competition period will expire on the date of termination.
Executives also may not employ or offer to employ officers or employees of
Assurant or any of its subsidiaries during the period beginning on January 1,
2009 and ending one year after the date of termination of the executive's
employment.
AMOUNTS PREVIOUSLY EARNED AND PAYABLE REGARDLESS OF TERMINATION OR CHANGE OF
CONTROL
The amounts reflected in the Potential Payments Upon Termination or Change of
Control Table show payments that the NEOs could only receive in the event of
termination or change of control. The amounts reflected below were earned in
previous years and were already available to the NEOs through withdrawal or
exercise regardless of termination or change of control. These amounts include
vested and unexercised SARs and deferred compensation balances held in the AIP
and/or ADC Plan. The vested and unexercised SARs amounts below assume a vesting
date of December 31, 2009, an exercise date of December 31, 2009 and a base
price of $29.48.
The following amounts would have been available on December 31, 2009 for
withdrawal or exercise by the NEOs regardless of termination or change of
control: for Mr. Peninger, $632,646 in vested and unexercised SARs and for Ms.
Wagner $554,712 from the AIP and $148,906 in vested and unexercised SARs.
COMPENSATION OF DIRECTORS
The directors of the Company are identified above. Each director of the Company
is an employee and received no additional compensation for service as a director
during 2009.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a standing compensation committee of its Board, or any
committee that performs similar functions. Compensation decisions regarding the
executive officers of the Company are made either by the Assurant Compensation
Committee of the Assurant, Inc. Board of Directors, by the Chief Financial
Officer of the Parent or by senior management at the Company, as applicable.
No member of the Assurant Compensation Committee is now, or was during 2009 or
any time prior thereto, an officer or employee of Assurant, Inc. or any of its
subsidiaries.
No executive officer of the Company served as a member of the compensation
committee (or other board committee performing similar functions) of another
entity, one of whose executive officers served as a director of the Company. No
executive officer of the Company served as a director of another entity, one of
whose executive officers served as a director of the Company.
No director of the Company had any relationship pursuant to which disclosure
would be required under applicable rules of the SEC pertaining to the disclosure
of transactions with related persons.
(M) SECURITY OWNERSHIP OF BENEFICIAL HOLDERS
Union Security Insurance Company is a wholly-owned subsidiary of Assurant, Inc.
and does not have any other voting securities held by any entity or individual
other than Assurant, Inc.
SECURITY OWNERSHIP OF MANAGEMENT
The following table provides information concerning the beneficial ownership of
Common Stock of Assurant, Inc. as of December 31, 2009 by Union Security
Insurance Company's Chief Executive Officer, Chief Financial Officer and three
most highly compensated executive officers, each director, and all executive
officers and directors as a group. As of December 31, 2009, Assurant, Inc. had
116,797,887 outstanding shares of Common Stock. Except as otherwise indicated,
all persons listed below have sole voting power and dispositive power with
respect to their shares, except to the extent that authority is shared by their
spouses, and have record and beneficial ownership of their shares.
<Page>
120 UNION SECURITY INSURANCE COMPANY
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<Table>
<Caption>
SHARES OF COMMON
STOCK OWNED PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIALLY (1) OF CLASS
--------------------------------------------------------------------------------
John S. Roberts 15,982 *
Michael J. Peninger 64,459 *
Stacia N. Almquist 255 *
Sylvia R. Wagner 12,924 *
J. Marc Warrington 2,073 *
Miles B. Yakre 4,455 *
Christopher J. Pagano 17,262 *
S. Craig Lemasters 33,503 *
All directors and executive 185,995 *
officers as a group (18 persons)
</Table>
* Less than one percent of class.
(1) (a) Includes: for Mr. Pagano, 1,736 and for all directors and executive
officers as a group, 1,985 shares of Common Stock held through the Assurant
401(k) Plan, as of December 31, 2009.
(b) Includes: for Mr. Roberts, 9,806 shares of restricted stock; for Mr.
Peninger, 10,220 shares of restricted stock; for Ms. Almquist, 87 shares of
restricted stock; for Ms. Wagner, 490 shares of restricted stock; for Mr.
Warrington, 509 shares of restricted stock; for Mr. Yakre, 1,988 shares of
restricted stock; for Mr. Pagano, 1,490 shares of restricted stock; for Mr.
Lemasters, 2,461 shares of restricted stock; and for all executive officers
and directors as a group, 30,315 shares of restricted stock awarded under
the Assurant, Inc. 2004 Long-Term Incentive Plan.
(c) Includes vested and unexercised stock appreciation rights ("SARs") that
could have been exercised on or within 60 days of December 31, 2009 in
exchange for the following gross amounts of Common Stock as of December 31,
2009: for Mr. Peninger, 21,463 shares; for Ms. Wagner, 5,054 shares; and
for Mr. Lemasters, 14,581 shares. Vested and unexercised SARs that could
have been exercised on or within 60 days of December 31, 2009 in exchange
for gross amounts of Common Stock, for all directors and executive officers
as a group, totaled 43,267shares.
(N) TRANSACTIONS WITH RELATED PERSONS
The Company is an indirect wholly-owned subsidiary of the Parent and therefore
receives various ordinary course services from the Parent and its affiliates.
These services include assistance in benefit plan administration, corporate
insurance, accounting, tax, auditing, investment, information technology and
other administrative functions. The fees paid by the Company to the Parent for
these services during 2009 were $33,398,000. Net expenses paid to affiliates
were $12,986,000. Information technology expenses were $20,309,000.
Administrative expenses allocated for the Company may be greater or less than
the expenses that would be incurred if the Company were operating on its own.
The Company assumes group disability business from its affiliate, Union Security
Life Insurance Company of New York ("USLICONY") which is a wholly-owned
subsidiary of the Parent. The Company assumed $4,777,000 of premiums and
$30,149,000 of reserves from USLICONY during 2009. This relationship between the
Company and its affiliate USICONY was discontinued effective January 1, 2010,
for new incurrals.
REVIEW, APPROVAL OR RATIFICATION OF TRANSACTIONS WITH RELATED PERSONS
The Parent has adopted the Assurant, Inc. Related Person Transaction Policy in
order to provide written guidelines on the review, approval and monitoring of
transactions involving related persons (directors and executive officers or
their immediate family members, or stockholders owning five percent or greater
of the Company's outstanding Common Stock). The policy covers any related person
transaction that meets the minimum threshold for disclosure under the relevant
SEC rules (generally, transactions involving amounts exceeding $120,000 in which
a related person has a direct or indirect material interest).
POLICY:
- Related person transactions must be approved by the Nominating and Corporate
Governance Committee of the Parent's Board of Directors (the "Nominating
Committee"), which will approve the transaction only if it determines that
the transaction is in, or is not inconsistent with, the best interests of
the Company and its stockholders. In determining whether to approve or
ratify a transaction, the Nominating Committee will take into account, among
other factors it deems appropriate: (1) the benefits to the Company; (2) the
extent of the related person's interest in the transaction, including the
related person's position(s) or relationship(s) with, or ownership in, the
entity that is a party to, or has an interest in, the transaction; (3) the
impact on a director's independence if the related person is a director, an
immediate family member of a director or an entity in which the director is
a partner, stockholder or executive officer; and (4) whether the transaction
is on terms no less favorable than terms generally available to an unrelated
third-party under similar circumstances.
<Page>
UNION SECURITY INSURANCE COMPANY 121
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- If a related person transaction will be ongoing, the Nominating Committee
may establish guidelines for management to follow in its ongoing dealings
with the related person. Thereafter, the Nominating Committee, on at least
an annual basis, will review and assess the ongoing relationship with the
related person to see that it remains appropriate.
PROCEDURES:
- Prior to entering into a transaction, related persons must notify the
Parent's law department of any potential related person transaction, as
required by the Parent's Code of Ethics, and must provide all relevant facts
and circumstances of the proposed transaction. In addition, the law
department will periodically obtain information on proposed related person
transactions through various sources.
- If the law department determines that the proposed transaction involves a
related person and an amount in excess of $120,000, the proposed transaction
will be submitted to the Nominating Committee for consideration at its next
meeting. In those instances where the law department determines that it is
not practicable or desirable to wait until the next Nominating Committee
meeting, the Nominating Committee will call a special meeting to consider
proposed transaction.
- The Nominating Committee will review the facts of all related person
transactions that require approval and either approve or disapprove the
entry into the transaction. If advance approval is not feasible, then the
transaction will be considered and, if the Nominating Committee determines
it to be appropriate, ratified at its next meeting.
- No director will participate in any discussion or approval of a transaction
in which he or she is a related person.
DIRECTOR INDEPENDENCE
We are not a listed issuer and therefore are not subject to the listing
requirements of any national securities exchange or inter-dealer quotation
system. As a result, currently, we are not required to have a board of directors
comprised of a majority of "independent directors." The Company is an insurance
company domiciled in Kansas and the Kansas insurance regulations do not require
any independent directors to serve on the Board. We currently do not have any
independent directors serving on our Board.
<Page>
122 UNION SECURITY INSURANCE COMPANY
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UNION SECURITY INSURANCE COMPANY
AT DECEMBER 31, 2009
SCHEDULE I -- SUMMARY OF INVESTMENTS
OTHER-THAN-INVESTMENTS IN RELATED PARTIES
<Table>
<Caption>
COST OR AMOUNT AT
AMORTIZED FAIR WHICH SHOWN IN
COST VALUE BALANCE SHEET
(IN THOUSANDS)
---------------------------------------------------------------------------------------------------------------------------------
FIXED MATURITY SECURITIES:
United States Government and government agencies and
authorities $2,888 $3,012 $3,012
States, municipalities and political subdivisions 58,962 58,394 58,394
Foreign governments 34,969 35,128 35,128
Asset-backed 3,782 3,780 3,780
Commercial mortgage-backed 20,369 20,322 20,322
Residential mortgage-backed 122,036 127,529 127,529
Corporate 2,250,259 2,307,698 2,307,698
------------- ------------- -------------
TOTAL FIXED MATURITY SECURITIES 2,493,265 2,555,863 2,555,863
------------- ------------- -------------
EQUITY SECURITIES:
Non-redeemable preferred stocks 160,510 157,993 157,993
Commercial mortgage loans on real estate, at amortized cost 772,912 782,922 772,912
Policy loans 13,981 13,981 13,981
Short-term investments 70,367 70,367 70,367
Collateral held under securities lending 108,186 106,896 106,896
Other investments 88,736 88,736 88,736
------------- ------------- -------------
TOTAL INVESTMENTS $3,707,957 $3,776,758 $3,766,748
------------- ------------- -------------
</Table>
<Page>
UNION SECURITY INSURANCE COMPANY 123
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UNION SECURITY INSURANCE COMPANY
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 & 2007
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
<Table>
<Caption>
FUTURE
DEFERRED POLICY CLAIMS AND
ACQUISITION BENEFITS AND UNEARNED BENEFITS PREMIUM
COSTS EXPENSES PREMIUMS PAYABLE REVENUES
-----------------------------------------------------------------------------------------------------
2009 $37,908 $2,675,069 $37,692 $1,751,501 $1,092,512
------- --------- ------- --------- ---------
2008 $43,020 $2,687,488 $35,962 $1,778,563 $1,173,790
------- --------- ------- --------- ---------
2007 $50,575 $2,675,363 $40,147 $1,840,353 $1,259,930
------- --------- ------- --------- ---------
<Caption>
BENEFITS AMORTIZATION
CLAIMS, LOSSES OF DEFERRED
NET AND POLICY OTHER*
INVESTMENT SETTLEMENT ACQUISITION OPERATING
INCOME EXPENSES COSTS EXPENSES
---------- -----------------------------------------------------------------------------
2009 $216,725 $849,531 $43,720 $418,264
-------- -------- ------- --------
2008 $238,451 $889,498 $43,235 $357,217
-------- -------- ------- --------
2007 $286,235 $934,609 $39,724 $386,957
-------- -------- ------- --------
</Table>
* Includes goodwill impairment and other expenses
<Page>
124 UNION SECURITY INSURANCE COMPANY
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UNION SECURITY INSURANCE COMPANY
FOR THE YEARS ENDED DECEMBER 31, 2009
SCHEDULE IV -- REINSURANCE
<Table>
<Caption>
CEDED TO ASSUMED FROM
DIRECT OTHER OTHER
AMOUNT COMPANIES COMPANIES
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------------------
LIFE INSURANCE IN FORCE $74,478,037 $14,220,902 $8,661,374
------------- ------------- ------------
PREMIUMS:
Life insurance 314,216 112,043 11,258
Accident and health insurance 843,340 89,845 125,586
------------- ------------- ------------
TOTAL EARNED PREMIUMS $1,157,556 $201,888 $136,844
------------- ------------- ------------
BENEFITS:
Life insurance $457,403 $290,203 $31,302
Accident and health insurance 678,945 139,858 111,942
------------- ------------- ------------
TOTAL POLICYHOLDER BENEFITS $1,136,348 $430,061 $143,244
------------- ------------- ------------
<Caption>
PERCENTAGE OF
NET AMOUNT
AMOUNT ASSUMED TO NET
(IN THOUSANDS)
-------------------------------------- --------------------------------------------
LIFE INSURANCE IN FORCE 68,918,509 12.6%
-------------
PREMIUMS:
Life insurance 213,431 5.3%
Accident and health insurance 879,081 14.3%
-------------
TOTAL EARNED PREMIUMS $1,092,512 12.5%
-------------
BENEFITS:
Life insurance $198,502 15.8%
Accident and health insurance 651,029 17.2%
-------------
TOTAL POLICYHOLDER BENEFITS $849,531 16.9%
-------------
</Table>
<Page>
UNION SECURITY INSURANCE COMPANY 125
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UNION SECURITY INSURANCE COMPANY
FOR THE YEARS ENDED DECEMBER 31, 2008
SCHEDULE IV -- REINSURANCE
<Table>
<Caption>
CEDED TO ASSUMED FROM
DIRECT OTHER OTHER
AMOUNT COMPANIES COMPANIES
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------------------
LIFE INSURANCE IN FORCE $80,291,791 $14,159,840 $1,734,842
------------- ------------- ------------
PREMIUMS:
Life insurance 350,710 127,910 9,861
Accident and health insurance 901,072 87,337 127,394
------------- ------------- ------------
TOTAL EARNED PREMIUMS $1,251,782 $215,247 $137,255
------------- ------------- ------------
BENEFITS:
Life insurance $606,408 $439,880 $34,399
Accident and health insurance 666,924 95,127 116,774
------------- ------------- ------------
TOTAL POLICYHOLDER BENEFITS $1,273,332 $535,007 $151,173
------------- ------------- ------------
<Caption>
PERCENTAGE OF
NET AMOUNT
AMOUNT ASSUMED TO NET
(IN THOUSANDS)
-------------------------------------- --------------------------------------------
LIFE INSURANCE IN FORCE $67,866,793 2.6%
-------------
PREMIUMS:
Life insurance 232,661 4.2%
Accident and health insurance 941,129 13.5%
-------------
TOTAL EARNED PREMIUMS $1,173,790 11.7%
-------------
BENEFITS:
Life insurance $200,927 17.1%
Accident and health insurance 688,571 17.0%
-------------
TOTAL POLICYHOLDER BENEFITS $889,498 17.0%
-------------
</Table>
<Page>
126 UNION SECURITY INSURANCE COMPANY
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UNION SECURITY INSURANCE COMPANY
FOR THE YEARS ENDED DECEMBER 31, 2007
SCHEDULE IV -- REINSURANCE
<Table>
<Caption>
CEDED TO ASSUMED FROM
DIRECT OTHER OTHER
AMOUNT COMPANIES COMPANIES
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------------------
LIFE INSURANCE IN FORCE $84,912,189 $15,365,458 $1,641,309
------------- ------------- ------------
PREMIUMS:
Life insurance 380,188 142,295 11,322
Accident and health insurance 917,129 84,219 177,805
------------- ------------- ------------
TOTAL EARNED PREMIUMS $1,297,317 $226,514 $189,127
------------- ------------- ------------
BENEFITS:
Life insurance $777,527 $592,582 $32,556
Accident and health insurance 622,418 81,665 176,355
------------- ------------- ------------
TOTAL POLICYHOLDER BENEFITS $1,399,945 $674,247 $208,911
------------- ------------- ------------
<Caption>
PERCENTAGE OF
NET AMOUNT
AMOUNT ASSUMED TO NET
(IN THOUSANDS)
-------------------------------------- -----------------------------------------------
LIFE INSURANCE IN FORCE $71,188,040 2.3%
-------------
PREMIUMS:
Life insurance 249,215 4.5%
Accident and health insurance 1,010,715 17.6%
-------------
TOTAL EARNED PREMIUMS $1,259,930 15.0%
-------------
BENEFITS:
Life insurance $217,501 15.0%
Accident and health insurance 717,108 24.6%
-------------
TOTAL POLICYHOLDER BENEFITS $934,609 22.4%
-------------
</Table>
<Page>
UNION SECURITY INSURANCE COMPANY 127
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UNION SECURITY INSURANCE COMPANY
AS OF DECEMBER 31, 2009, 2008 AND 2007
SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO CHARGED TO
YEAR COSTS AND OTHER
EXPENSES ACCOUNTS
(IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------
2009:
Valuation allowance for deferred tax
assets $7,195 $(390) $3,610
Valuation allowance for mortgage
loans on real estate 3,252 5,300 --
Valuation allowance for uncollectible
agents balances 4,840 (21) --
--------- -------- --------
TOTAL $15,287 $4,889 $3,610
--------- -------- --------
2008:
Valuation allowance for deferred tax
assets $ -- $7,195 $ --
Valuation allowance for mortgage
loans on real estate 3,018 234 --
Valuation allowance for uncollectible
agents balances 5,622 (424) --
--------- -------- --------
TOTAL $8,640 $7,005 $ --
--------- -------- --------
2007:
Valuation allowance for mortgage
loans on real estate $2,706 $319 $ --
Valuation allowance for uncollectible
agents balances 6,613 (953) --
--------- -------- --------
TOTAL $9,319 $(634) $ --
--------- -------- --------
<Caption>
BALANCE AT
END OF
DEDUCTIONS YEAR
(IN THOUSANDS)
-------------------------------------- -----------------------------------------------
2009:
Valuation allowance for deferred tax
assets $ -- $10,415
Valuation allowance for mortgage
loans on real estate -- $8,552
Valuation allowance for uncollectible
agents balances 8 $4,811
------ ---------
TOTAL $8 $23,778
------ ---------
2008:
Valuation allowance for deferred tax
assets $ -- $7,195
Valuation allowance for mortgage
loans on real estate -- 3,252
Valuation allowance for uncollectible
agents balances 358 4,840
------ ---------
TOTAL $358 $15,287
------ ---------
2007:
Valuation allowance for mortgage
loans on real estate $7 $3,018
Valuation allowance for uncollectible
agents balances 38 5,622
------ ---------
TOTAL $45 $8,640
------ ---------
</Table>
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128 UNION SECURITY INSURANCE COMPANY
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TABLE OF CONTENTS TO STATEMENT OF ADDITIONAL INFORMATION
<Table>
GENERAL INFORMATION
Safekeeping of Assets
Experts
Independent Registered Public Accounting Firm
Non-Participating
Misstatement of Age or Sex
Principal Underwriter
PERFORMANCE RELATED INFORMATION
Total Return for all Sub-Accounts
Yield for Sub-Accounts
Money Market Sub-Accounts
Additional Materials
Performance Comparisons
FINANCIAL STATEMENTS
</Table>
<Page>
UNION SECURITY INSURANCE COMPANY 129
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APPENDIX I -- SAMPLE MARKET VALUE ADJUSTMENT CALCULATIONS
We will determine the Market Value Adjustment by multiplying the general account
value that is withdrawn or transferred from the existing Guarantee Period (after
deduction of any applicable surrender charge) by the following factor:
[(1 + I)/(1 + J + .005)] TO THE POWER OF N/12 - 1
where,
- I is the guaranteed interest rate we credit to the general account value
that is withdrawn or transferred from the existing Guarantee Period.
- J is the guaranteed interest rate we are then offering for new Guarantee
Periods with durations equal to the number of years remaining in the
existing Guarantee Period (rounded up to the next higher number of years).
- N is the number of months remaining in the existing Guarantee Period
(rounded up to the next higher number of months).
SAMPLE CALCULATION 1: POSITIVE ADJUSTMENT
<Table>
Amount withdrawn or transferred $10,000
Existing Guarantee Period 7 years
Time of withdrawal or transfer Beginning of 3rd year of Existing Guarantee Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for new 5-year guarantee (J) 7%*
Remaining Guarantee Period (N) 60 months
Market Value Adjustment: = $10,000 x [[(1 + .08)/(1 + .07 + .005)]TO THE POWER OF 60/12-1]
= $234.73
</Table>
Amount transferred or withdrawn (adjusted for Market Value Adjustment):
$10,234.73
SAMPLE CALCULATION 2: NEGATIVE ADJUSTMENT
<Table>
Amount withdrawn or transferred $10,000
Existing Guarantee Period 7 years
Time of withdrawal or transfer Beginning of 3rd year of Existing Guarantee Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for new 5-year guarantee (J) 9%*
Remaining Guarantee Period (N) 60 months
Market Value Adjustment: = $10,000 x [[(1 + .08)/(1 + .09 + .005)]TO THE POWER OF 60/12-1]
= -$666.42
</Table>
Amount transferred or withdrawn (adjusted for Market Value Adjustment):
$9,333.58
SAMPLE CALCULATION 3: NEGATIVE ADJUSTMENT
<Table>
Amount withdrawn or transferred $10,000
Guarantee Period 7 years
Time of withdrawal or transfer Beginning of 3rd year of Existing Guarantee Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for new 5-year guarantee (J) 7.75%*
Remaining Guarantee Period (N) 60 months
Market Value Adjustment: = $10,000 x [[(1 + .08)/(1 + .0775 + .005)]TO THE POWER OF
60/12-1]
= -$114.94
</Table>
Amount transferred or withdrawn (adjusted for Market Value Adjustment):
$9,885.06
<Page>
130 UNION SECURITY INSURANCE COMPANY
-------------------------------------------------------------------------------
SAMPLE CALCULATION 4: NEUTRAL ADJUSTMENT
<Table>
Amount withdrawn or transferred: $10,000
Existing Guarantee Period: 7 years
Time of withdrawal or transfer Beginning of 3rd year of Existing Guarantee Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for new 5 year guarantee (J) 8%*
Remaining Guarantee Period (N) 60 months
Market Value Adjustment = $10,000 x [[(1 + .08)/(1 + .08 + .005)]TO THE POWER OF 60/12-1]
= -$228.30
</Table>
Amount transferred or withdrawn (adjusted for Market Value Adjustment):
$9,771.70
* Assumed for illustrative purposes only.
<Page>
UNION SECURITY INSURANCE COMPANY 131
-------------------------------------------------------------------------------
APPENDIX II -- INVESTMENTS BY UNION SECURITY
Union Security's legal obligations with respect to the Guarantee Periods are
supported by our General Account assets. These General Account assets also
support our obligations under other insurance and annuity contracts. Investments
purchased with amounts allocated to the Guarantee Periods are the property of
Union Security, and you have no legal rights in such investments. Subject to
applicable law, we have sole discretion over the investment of assets in our
General Account. Neither our General Account nor the Guarantee Periods are
subject to registration under the Investment Company Act of 1940.
We will invest amounts in our General Account in compliance with applicable
state insurance laws and regulations concerning the nature and quality of
investments for the General Account. Within specified limits and subject to
certain standards and limitations, these laws generally permit investment in:
- federal, state and municipal obligations,
- preferred and common stocks,
- corporate bonds,
- real estate mortgages and mortgage backed securities,
- real estate, and
- certain other investments, including various derivative investments.
See the Financial Statements for information on our investments.
When we establish guaranteed interest rates, we will consider the available
return on the instruments in which we invest amounts allocated to the General
Account. However, this return is only one of many factors we consider when we
establish the guaranteed interest rates. See "Guarantee Periods".
Generally, we expect to invest amounts allocated to the Guarantee Periods in
debt instruments. We expect that these debt instruments will approximately match
our liabilities with regard to the Guarantee Periods. We also expect that these
debt instruments will primarily include:
(1) securities issued by the United States Government or its agencies or
instrumentalities. These securities may or may not be guaranteed by the
United States Government;
(2) debt securities that, at the time of purchase, have an investment grade
within the four highest grades assigned by Moody's Investors Services, Inc.
("Moody's"), Standard & Poor's Corporation ("Standard & Poor's"), or any
other nationally recognized rating service. Moody's four highest grades
are: Aaa, Aa, A, and Baa. Standard & Poor's four highest grades are: AAA,
AA, A, and BBB;
(3) other debt instruments including, but not limited to, issues of, or
guaranteed by, banks or bank holding companies and corporations. Although
not rated by Moody's or Standard & Poor's, we deem these obligations to
have an investment quality comparable to securities that may be purchased
as stated above;
(4) other evidences of indebtedness secured by mortgages or deeds of trust
representing liens upon real estate.
Except as required by applicable state insurance laws and regulations, we are
not obligated to invest amounts allocated to the General Account according to
any particular strategy.
The Contracts are reinsured by Hartford Life and Annuity Insurance Company. As
part of this reinsurance arrangement, the assets supporting the General Account
under the Contracts are held by Union Security; however, these assets are
managed by Hartford Investment Management Company ("HIMCO"), an affiliate of
Hartford Life and Annuity Insurance Company. HIMCO generally invests those
assets as described above for the Contract General Account related investments
of Union Security.
<Page>
To obtain a Statement of Additional Information, please complete the form below
and mail to:
Union Security Insurance Company
c/o Hartford Life and Annuity Insurance Company
P.O. Box 5085
Hartford, CT 06102-5085
Please send a Statement of Additional Information for Triple Crown Variable
Annuity to me at the following address:
----------------------------------------------------------------
Name
----------------------------------------------------------------
Address
----------------------------------------------------------------
City/State Zip Code
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Union Security Insurance Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholder's equity and cash
flows present fairly, in all material respects, the financial position of Union
Security Insurance Company and its subsidiaries (the "Company"), an indirect
wholly-owned subsidiary of Assurant, Inc. at December 31, 2009 and 2008, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the accompanying financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These consolidated financial
statements and financial statement schedules are the responsibility of the
Company's management; our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits. We conducted our audits of these statements in accordance with standards
of the Public Company Accounting Oversight Board (United States), which require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the Company
changed the manner in which it accounts for other-than-temporary impairment of
debt securities on April 1, 2009.
/s/ PricewaterhouseCoopers LLP
April 23, 2010
New York, New York
F-1
<Page>
UNION SECURITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2009 AND 2008
<Table>
<Caption>
DECEMBER 31, DECEMBER 31,
2009 2008
(IN THOUSANDS EXCEPT PER
SHARE AND SHARE AMOUNTS)
-----------------------------------------------------------------------------------------------
ASSETS
Investments:
Fixed maturity securities available for
sale, at fair value (amortized cost --
$2,493,265 in 2009 and $2,399,676 in
2008) $2,555,863 $2,199,547
Equity securities available for sale,
at fair value (cost -- $160,510 in
2009 and $189,973 in 2008) 157,993 144,770
Commercial mortgage loans on real
estate, at amortized cost 772,912 838,254
Policy loans 13,981 14,422
Short-term investments 70,367 159,847
Collateral held under securities
lending 106,896 113,191
Other investments 88,736 82,628
------------ ------------
TOTAL INVESTMENTS 3,766,748 3,552,659
------------ ------------
Cash and cash equivalents 43,819 17,171
Premiums and accounts receivable, net 79,516 71,850
Reinsurance recoverables 1,434,405 1,359,251
Accrued investment income 41,476 40,610
Deferred acquisition costs 37,908 43,020
Deferred income taxes, net 56,569 179,413
Goodwill 81,573 156,817
Value of business acquired 18,783 21,461
Other assets 39,732 32,893
Assets held in separate accounts 1,740,344 1,557,313
------------ ------------
TOTAL ASSETS $7,340,873 $7,032,458
------------ ------------
LIABILITIES
Future policy benefits and expenses $2,675,069 $2,687,488
Unearned premiums 37,692 35,962
Claims and benefits payable 1,751,501 1,778,563
Commissions payable 13,242 14,998
Deferred gain on disposal of businesses 97,021 113,927
Obligations under securities lending 108,186 124,063
Accounts payable and other liabilities 188,958 188,053
Taxes payable 10,523 2,331
Liabilities related to separate
accounts 1,740,344 1,557,313
------------ ------------
TOTAL LIABILITIES 6,622,536 6,502,698
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 16)
STOCKHOLDER'S EQUITY
Common stock, par value $5 per share,
1,000,000 shares authorized, issued,
and outstanding 5,000 5,000
Additional paid-in capital 475,635 460,635
Retained earnings 203,109 229,837
Accumulated other comprehensive income
(loss) 34,593 (165,712)
------------ ------------
TOTAL STOCKHOLDER'S EQUITY 718,337 529,760
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY $7,340,873 $7,032,458
------------ ------------
</Table>
SEE THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-2
<Page>
UNION SECURITY INSURANCE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2009 2008 2007
(IN THOUSANDS)
---------------------------------------------------------------------------------------------------------------------------------
REVENUES
Net earned premiums and other considerations $1,092,512 $1,173,790 $1,259,930
Net investment income 216,725 238,451 286,235
Net realized losses on investments, excluding
other-than-temporary investment losses (13,925) (26,621) (7,093)
Total other-than-temporary investment losses (11,330) (109,075) (21,126)
Portion of gain recognized in other comprehensive income,
before taxes (257) -- --
------------- ------------- -------------
Net other-than-temporary investment losses recognized in
earnings (11,587) (109,075) (21,126)
Amortization of deferred gains on disposal of businesses 16,906 20,680 23,548
Fees and other income 14,859 11,449 16,395
------------- ------------- -------------
TOTAL REVENUES 1,315,490 1,308,674 1,557,889
------------- ------------- -------------
BENEFITS, LOSSES AND EXPENSES
Policyholder benefits 849,531 889,498 934,609
Amortization of deferred acquisition costs and value of
business acquired 46,398 46,678 43,575
Underwriting, general and administrative expenses 340,342 353,774 383,106
Goodwill impairment 75,244 -- --
------------- ------------- -------------
TOTAL BENEFITS, LOSSES AND EXPENSES 1,311,515 1,289,950 1,361,290
------------- ------------- -------------
Income before provision for income taxes 3,975 18,724 196,599
Provision for income taxes 27,127 10,867 57,121
------------- ------------- -------------
NET (LOSS) INCOME $(23,152) $7,857 $139,478
------------- ------------- -------------
</Table>
SEE THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-3
<Page>
UNION SECURITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
<Table>
<Caption>
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON ADDITIONAL INCOME (LOSS)
STOCK PAID-IN RETAINED
CAPITAL EARNINGS TOTAL
(IN THOUSANDS)
---------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2007 $5,000 $545,635 $286,350 $62,279 $899,264
Dividends -- -- (197,000) -- (197,000)
Cumulative effect of change
in accounting principles -- -- (4,118) -- (4,118)
Comprehensive income:
Net income -- -- 139,478 -- 139,478
Other comprehensive loss:
Net change in unrealized
gains on securities, net
of taxes -- -- -- (56,642) (56,642)
Net change in foreign
currency translation, net
of taxes -- -- -- 59 59
----------
Total other comprehensive
loss (56,583)
----------
Total comprehensive income 82,895
------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2007 5,000 545,635 224,710 5,696 781,041
------- ---------- ---------- ---------- ----------
Return of capital (Note 7) -- (100,000) -- -- (100,000)
Capital contribution (Note
7) -- 15,000 -- -- 15,000
Cumulative effect of change
in accounting principles
(Note 2) -- -- (2,730) -- (2,730)
Comprehensive loss:
Net income -- -- 7,857 -- 7,857
Other comprehensive loss:
Net change in unrealized
gains on securities, net
of taxes -- -- -- (171,408) (171,408)
----------
Total other comprehensive
loss (171,408)
----------
Total comprehensive income (163,551)
------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2008 5,000 460,635 229,837 (165,712) 529,760
------- ---------- ---------- ---------- ----------
Dividends -- -- (20,000) -- (20,000)
Capital contribution (Note
7) -- 15,000 -- -- 15,000
Cumulative effect of change
in accounting principles
(Note 2) -- -- 16,424 (16,424) --
Comprehensive Income:
Net loss -- -- (23,152) -- (23,152)
Other comprehensive income:
Net change in unrealized
losses on securities, net
of taxes -- -- -- 210,552 210,552
Net change in
other-than-temporary
impairment gains,
recognized in other
comprehensive income, net
of taxes -- -- -- 6,177 6,177
----------
Total other comprehensive
income 216,729
----------
Total comprehensive income 193,577
------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2009 $5,000 $475,635 $203,109 $34,593 $718,337
------- ---------- ---------- ---------- ----------
</Table>
SEE THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-4
<Page>
UNION SECURITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2009 2008 2007
(IN THOUSANDS)
--------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net (loss) income $(23,152) $7,857 $139,478
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in reinsurance recoverable (75,154) (51,605) (8,648)
Change in premiums and accounts receivable (5,590) 40,739 (2,976)
Depreciation and amortization 3,418 1,173 2,124
Change in deferred acquisition costs and value of
business acquired 7,790 8,910 10,512
Change in accrued investment income (866) 1,742 3,980
Change in insurance policy reserves and expenses (45,507) (53,850) (73,896)
Change in accounts payable and other liabilities (3,222) (20,638) (13,212)
Change in commissions payable (1,756) (509) (681)
Change in reinsurance balances payable -- (2,706) (437)
Change in funds held under reinsurance -- (118) 11
Amortization of deferred gain on disposal of
businesses (16,906) (20,680) (23,548)
Change in income taxes 7,501 (22,869) (47,888)
Net realized losses on investments 25,512 135,696 28,219
Goodwill impairment 75,244 -- --
Other (5,251) (84) 302
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES (57,939) 23,058 13,340
----------- ----------- -----------
INVESTING ACTIVITIES
Sales of:
Fixed maturity securities available for sale 244,094 451,988 382,557
Equity securities available for sale 27,345 96,375 116,117
Property and equipment (105) 25 --
Maturities, prepayments, and scheduled redemption
of:
Fixed maturity securities available for sale 129,687 76,593 208,303
Purchase of:
Fixed maturity securities available for sale (449,662) (357,887) (394,138)
Equity securities available for sale (11,750) (74,181) (116,049)
Property and equipment -- -- (25)
Subsidiary, net of cash transferred (1) 4,923 -- --
Change in other invested assets (6,108) (7,847) 12,542
Change in commercial mortgage loans on real
estate 61,242 (16,070) (72,213)
Change in short-term investments 89,480 (115,755) 4,049
Change in collateral held under securities
lending 15,877 111,102 (63,112)
Change in policy loans 441 (2,076) 116
----------- ----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 105,464 162,267 78,147
----------- ----------- -----------
FINANCING ACTIVITIES
Dividends paid (20,000) -- (197,000)
Change in obligation under securities lending (15,877) (115,986) 63,112
Return of capital -- (100,000) --
Contributed capital 15,000 15,000 --
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (20,877) (200,986) (133,888)
----------- ----------- -----------
Change in cash and cash equivalents 26,648 (15,661) (42,401)
Cash and cash equivalents at beginning of period 17,171 32,832 75,233
----------- ----------- -----------
Cash and cash equivalents at end of period $43,819 $17,171 $32,832
----------- ----------- -----------
Supplemental information:
Income taxes paid, net of refunds $19,597 $33,270 $104,754
</Table>
(1) This relates to Shenandoah Life Insurance Company ("Shenandoah"), acquired
through reinsurance agreement on October 1, 2009.
SEE THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-5
<Page>
UNION SECURITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007
(IN THOUSANDS EXCEPT SHARE DATA)
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Union Security Insurance Company (the "Company") is a provider of life and
health insurance products, including group disability insurance, group dental
insurance, group life insurance, small employer group health insurance and
preneed. The Company is an indirect wholly-owned subsidiary of Assurant, Inc.
(the "Parent"). The Parent's common stock is traded on the New York Stock
Exchange under the symbol AIZ. The Company distributes its products in the
District of Columbia and in all states except New York.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). Amounts are presented in United States of America ("U.S.") dollars and
all amounts are in thousands, except for number of shares.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all of its wholly owned subsidiaries. All significant inter-company transactions
and balances are eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities. The items on the Company's balance sheet affected by the
use of estimates include but are not limited to, investments, premiums and
accounts receivable, reinsurance recoverables, deferred acquisition costs
("DAC"), deferred income taxes and associated valuation allowances, goodwill,
valuation of business acquired ("VOBA"), future policy benefits and expenses,
unearned premiums, claims and benefits payable, deferred gain on disposal of
businesses, and commitments and contingencies. The estimates are sensitive to
market conditions, investment yields, mortality, morbidity, commissions and
other acquisition expenses, policyholder behavior and other factors. Actual
results may differ from the estimates reported. The Company believes the amounts
reported are reasonable and adequate.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income, net unrealized gains and
losses on foreign currency translation, net unrealized gains and losses on
securities classified as available-for-sale and net unrealized gains and losses
on other-than-temporarily impaired securities, less deferred income taxes.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the 2009
presentation.
REVENUE RECOGNITION
The Company recognizes revenue when realized or realizable and earned. Revenue
generally is realized or realizable and earned when persuasive evidence of an
arrangement exists, services have been rendered, the price is fixed or
determinable, and collectability is reasonably assured.
FOREIGN CURRENCY TRANSLATION
For those foreign affiliates where the local currency is the functional
currency, unrealized foreign currency translation gains and losses net of
deferred income taxes have been reflected in accumulated other comprehensive
income (loss) ("AOCI").
FAIR VALUE
The Company uses an exit price for its fair value measurements. An exit price is
defined as the amount received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
In measuring fair value, the Company gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs. Please see Note 4 for more information
on the Company's fair value policies.
INVESTMENTS
Fixed maturity and equity securities are classified as available-for-sale, as
defined in the investments guidance, which is included within the Financial
Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC")
Topic 320, INVESTMENTS-DEBT AND EQUITY SECURITIES and reported at fair value. If
the fair value is higher than the amortized cost for fixed
F-6
<Page>
maturity securities or the purchase cost for equity securities, the excess is an
unrealized gain; and, if lower than cost, the difference is an unrealized loss.
The net unrealized gains and losses, less deferred income taxes, are included in
AOCI.
Commercial mortgage loans on real estate are reported at unpaid balances,
adjusted for amortization of premium or discount, less allowance for losses. The
allowance is based on management's analysis of factors including actual loan
loss experience, specific events based on geographical, political or economic
conditions, industry experience, loan groupings that have probable and estimable
losses and individually impaired loan loss analysis. A loan is considered
individually impaired when it becomes probable the Company will be unable to
collect all amounts due, including principal and interest, according to the
contractual terms of the loan agreement. Indicative factors of impairment
include, but are not limited to, whether the loan is current, the value of the
collateral and the financial position of the borrower. If a loan is individually
impaired, the Company uses one of the following valuation methods based on the
individual loans facts and circumstances to measure the impairment amount: (1)
the present value of expected future cash flows, (2) the loan's observable
market price, or (3) the fair value of collateral. Changes in the allowance for
loan losses are recorded in net realized losses on investments, excluding
other-than-temporary impairment ("OTTI") losses.
The Company has determined that a loan be placed on non-accrual status after 90
days of delinquent payments (unless the loan is both well secured and in the
process of collection). A loan may be placed on non-accrual status before this
time if information is available that suggests it is probable a loan may be
impaired.
Policy loans are reported at unpaid principal balances, which do not exceed the
cash surrender value of the underlying policies.
Short-term investments include money market funds and short maturity
investments. These amounts are reported at cost, which approximates fair value.
The collateral held under securities lending is reported at fair value. The
obligation under securities lending is reported at the amount of the collateral
received.
Other investments consist primarily of investments in joint ventures and
partnerships. The joint ventures and partnerships are valued according to the
equity method of accounting.
The Company monitors its investment portfolio to identify investments that may
be other-than-temporarily impaired. In addition, securities, aggregated by
issuer, whose market price is equal to 80% or less of their original purchase
price or which had a discrete credit event resulting in the debtor defaulting or
seeking bankruptcy protection are added to a potential write-down list, which is
discussed at quarterly meetings attended by members of the Company's investment,
accounting and finance departments. Please see Note 3 for more information.
Realized gains and losses on sales of investments are recognized on the specific
identification basis.
Investment income is recorded as earned net of investment expenses. The Company
uses the interest method to recognize interest income on its commercial mortgage
loans.
The Company anticipates prepayments of principal in the calculation of the
effective yield for mortgage-backed securities and structured securities. The
retrospective method is used to adjust the effective yield.
CASH AND CASH EQUIVALENTS
The Company considers cash on hand, all operating cash and working capital cash
to be cash equivalents. These amounts are carried at cost, which approximates
fair value. Cash balances are reviewed at the end of each reporting period to
determine if negative cash balances exist. If negative cash balances do exist,
the cash accounts are netted with other positive cash accounts of the same bank
provided the right of offset exists between the accounts. If the right of offset
does not exist, the negative cash balances are reclassified to accounts payable.
RECEIVABLES
The Company records a receivable when revenue has been earned but the cash has
not been collected. The Company maintains allowances for doubtful accounts for
probable losses resulting from the inability to collect payments.
REINSURANCE
Reinsurance recoverables include amounts related to paid benefits and estimated
amounts related to unpaid policy and contract claims, future policyholder
benefits and policyholder contract deposits. The cost of reinsurance is
recognized over the terms of the underlying reinsured policies using assumptions
consistent with those used to account for the policies. Amounts recoverable from
reinsurers are estimated in a manner consistent with claim and claim adjustment
expense reserves or future policy benefits reserves and are reported in the
consolidated balance sheets. The cost of reinsurance related to long-duration
contracts is recognized over the life of the underlying reinsured policies. The
ceding of insurance does not discharge the Company's primary liability to
insureds. An allowance for doubtful accounts is recorded on the basis of
periodic evaluations of balances due from reinsurers, reinsurer solvency,
management's experience and current economic conditions.
F-7
<Page>
Reinsurance balances payable include amounts related to ceded premiums and
estimated amounts related to assumed paid or incurred losses, which are reported
based upon ceding entities' estimations.
Funds held under reinsurance represent amounts contractually held from assuming
companies in accordance with reinsurance agreements.
Reinsurance premiums assumed are calculated based upon payments received from
ceding companies together with accrual estimates, which are based on both
payments received and in-force policy information received from ceding
companies. Any subsequent differences arising on such estimates are recorded in
the period in which they are determined.
INCOME TAXES
The Company reports its taxable income in a consolidated federal income tax
return along with other affiliated subsidiaries of the Parent. Income tax
expense or benefit is allocated among the affiliated subsidiaries by applying
corporate income tax rates to taxable income or loss determined on a separate
return basis according to a tax allocation agreement.
Current federal income taxes are recognized based upon amounts estimated to be
payable or recoverable as a result of taxable operations for the current year.
Deferred income taxes are recorded for temporary differences between the
financial reporting basis and income tax basis of assets and liabilities, based
on enacted tax laws and statutory tax rates applicable to the periods in which
the Company expects the temporary differences to reverse. A valuation allowance
is established for deferred tax assets when it is more likely than not that an
amount will not be realized.
The Company classifies net interest expense related to tax matters and any
applicable penalties as a component of income tax expense.
DEFERRED ACQUISITION COSTS
The costs of acquiring new business that vary with and are primarily related to
the production of new business are deferred to the extent that such costs are
deemed recoverable from future premiums or gross profits. Acquisition costs
primarily consist of commissions, policy issuance expenses, premium taxes and
certain direct marketing expenses.
Premium deficiency testing is performed annually and generally reviewed
quarterly. Such testing involves the use of best estimate assumptions including
the anticipation of interest income to determine if anticipated future policy
premiums are adequate to recover all DAC and related claims, benefits and
expenses. To the extent a premium deficiency exists, it is recognized
immediately by a charge to the consolidated statement of operations and a
corresponding reduction in DAC. If the premium deficiency is greater than
unamortized DAC, a liability will be accrued for the excess deficiency.
Long Duration Contracts
Acquisition costs for preneed life insurance policies and life insurance
policies (no longer offered) are deferred and amortized in proportion to
anticipated premiums over the premium-paying period. These acquisition costs
consist primarily of first year commissions paid to agents and sales and policy
issue costs.
Acquisition costs relating to group worksite insurance products consist
primarily of first year commissions to brokers and one time policy transfer fees
and costs of issuing new certificates. These acquisition costs are front-end
loaded, thus they are deferred and amortized over the estimated terms of the
underlying contracts.
For preneed investment-type annuities, DAC is amortized in proportion to the
present value of estimated gross profits from investment, mortality, expense
margins and surrender charges over the estimated life of the policy or contract.
The assumptions used for the estimates are consistent with those used in
computing the policy or contract liabilities.
Acquisition costs on Fortis Financial Group ("FFG") and Long-Term Care ("LTC")
disposed businesses were written off when the businesses were sold.
Short Duration Contracts
Acquisition costs relating to monthly pay credit insurance business consist
mainly of direct marketing costs and are deferred and amortized over the
estimated average terms and balances of the underlying contracts.
Acquisition costs relating to group term life, group disability and group dental
consist primarily of compensation to sales representatives. These acquisition
costs are front-end loaded; thus, they are deferred and amortized over the
estimated terms of the underlying contracts.
Acquisition costs on small group medical contracts consist primarily of
commissions to agents and brokers and compensation to representatives. These
contracts are considered short duration because the terms of the contracts are
not fixed at issue and they are not guaranteed renewable. As a result, these
costs are not deferred, but rather they are recorded in the consolidated
statement of operations in the period in which they are incurred.
F-8
<Page>
PROPERTY AND EQUIPMENT
Property and equipment are reported at cost less accumulated depreciation.
Depreciation is calculated on a straight-line basis over estimated useful lives
with a maximum of 39.5 years for buildings, a maximum of 7 years for furniture
and a maximum of 5 years for equipment. Expenditures for maintenance and repairs
are charged to income as incurred. Expenditures for improvements are capitalized
and depreciated over the remaining useful life of the asset.
Property and equipment also includes capitalized software costs, which represent
costs directly related to obtaining, developing or upgrading internal use
software. Such costs are capitalized and amortized using the straight-line
method over their estimated useful lives.
GOODWILL
Goodwill represents the excess of acquisition costs over the net fair value of
identifiable assets acquired and liabilities assumed in a business combination.
Goodwill is deemed to have an indefinite life and is not amortized, but rather
is tested at least annually for impairment. The Company reviews goodwill
annually in the fourth quarter for impairment, or more frequently if indicators
of impairment exist. The Company regularly assesses whether any indicators of
impairment exist. Such indicators include, but are not limited to: a significant
decline in expected future cash flows due to changes in company-specific factors
or the broader business climate. The evaluation of such factors requires
considerable management judgment.
The goodwill impairment test has two steps. The Company first compares its
estimated fair value with its net book value. If the estimated fair value
exceeds its net book value, goodwill is deemed not to be impaired, and no
further testing is necessary. If the net book value exceeds its estimated fair
value, the Company would perform a second test to measure the amount of
impairment if any. To determine the amount of any impairment, the Company would
determine the implied fair value of goodwill in the same manner as if the
Company were being acquired in a business combination. Specifically, the Company
would determine the fair value of all of the assets and liabilities, including
any unrecognized intangible assets, in a hypothetical calculation that would
yield the implied fair value of goodwill. If the implied fair value of goodwill
were less than the recorded goodwill, the Company would record an impairment
charge for the difference.
In the fourth quarters of 2009 and 2008, the Company conducted annual
assessments of goodwill. Based on the results of the 2009 assessment, the
Company concluded that the net book value of its goodwill exceeded the estimated
fair value and therefore performed a Step 2 test. Based on the results of the
Step 2 test, the Company recorded a $75,244 impairment charge. Based on the
results of the 2008 assessment, the Company concluded that its estimated fair
value exceeded its net book value and therefore goodwill was not impaired. See
Note 4 and 13 for further information.
VALUE OF BUSINESSES ACQUIRED
VOBA is the identifiable intangible asset representing the value of the
insurance businesses acquired. The amount is determined using best estimates for
mortality, lapse, maintenance expenses and investment returns at date of
purchase. The amount determined represents the purchase price paid to the seller
for producing the business. Similar to the amortization of DAC, the amortization
of VOBA is over the premium payment period for traditional life insurance
policies and preneed limited payment policies. For preneed annuities, the
amortization of VOBA is over the expected lifetime of the policies.
VOBA is tested for recoverability annually. If it is determined that future
policy premiums and investment income or gross profits are not adequate to cover
related losses or loss expenses, then an expense is reported in current
earnings. Based on 2009 and 2008 testing, future policy premiums and investment
income or gross profits were deemed adequate to cover related losses or loss
expenses.
OTHER ASSETS
Other assets primarily include prepaid items and intangible assets. Intangible
assets that have finite lives, including but not limited to, customer
relationships, customer contracts and other intangible assets, are amortized
over their estimated useful lives. Intangible assets deemed to have indefinite
useful lives, primarily certain state licenses, are not amortized and are
subject to at least annual impairment tests. Impairment exists if the carrying
amount of the indefinite-lived intangible asset exceeds its fair value. For
other intangible assets subject to amortization, impairment is recognized if the
carrying amount is not recoverable and exceeds the fair value of the intangible
asset. There were no impairments of finite-lived or indefinite-lived intangible
assets in either 2009 or 2008.
SEPARATE ACCOUNTS
Assets and liabilities associated with separate accounts relate to premium and
annuity considerations for variable life and annuity products for which the
contract-holder, rather than the Company, bears the investment risk. Separate
account assets (with matching liabilities) are reported at fair value. Revenues
and expenses related to the separate account assets and liabilities, to the
extent of benefits paid or provided to the separate account policyholders, are
excluded from the amounts reported in the accompanying consolidated statements
of operations because the accounts are administered by reinsurers.
Prior to April 2, 2001, FFG had issued variable insurance products registered as
securities under the Securities Act of 1933, as amended. These products featured
fixed premiums, a minimum death benefit, and policyholder returns linked to an
F-9
<Page>
underlying portfolio of securities. The variable insurance products issued by
FFG have been 100% reinsured with The Hartford Financial Services Group, Inc.
and certain of its subsidiaries ("The Hartford").
RESERVES
Reserves are established in accordance with GAAP, using generally accepted
actuarial methods and are based on a number of factors. These factors include
experience derived from historical claim payments and actuarial assumptions.
Such assumptions and other factors include trends, the incidence of incurred
claims, the extent to which all claims have been reported, and internal claims
processing charges. The process used in computing reserves cannot be exact,
since actual claim costs are dependent upon such complex factors as inflation,
changes in doctrines of legal liabilities and damage awards. The methods of
making such estimates and establishing the related liabilities are periodically
reviewed and updated.
Reserves do not represent an exact calculation of exposure, but instead
represent our best estimates, generally involving actuarial projections at a
given time, of what we expect the ultimate settlement and administration of a
claim or group of claims will cost based on our assessment of facts and
circumstances then known. The adequacy of reserves will be impacted by future
trends in claims severity, frequency, judicial theories of liability and other
factors. These variables are affected by both external and internal events,
including but not limited to: changes in the economic cycle, changes in the
social perception of the value of work, emerging medical perceptions regarding
physiological or psychological causes of disability, emerging health issues and
new methods of treatment or accommodation, inflation, judicial trends,
legislative changes and claims handling procedures.
Many of these items are not directly quantifiable, particularly on a prospective
basis. Reserve estimates are refined as experience develops. Adjustments to
reserves, both positive and negative, are reflected in the consolidated
statement of operations in the period in which such estimates are updated.
Because establishment of reserves is an inherently uncertain process involving
estimates of future losses, there can be no certainty that ultimate losses will
not exceed existing claims reserves. Future loss development could require
reserves to be increased, which could have a material adverse effect on our
earnings in the periods in which such increases are made. However, based on
information currently available, we believe our reserve estimates are adequate.
Long Duration Contracts
The Company's long duration contracts include Canadian pre-funded funeral
("preneed") life insurance policies and annuity contracts, traditional life
insurance policies (no longer offered), FFG and LTC contracts disposed. Future
policy benefits and expense reserves on preneed life insurance and, life
insurance policies (no longer offered) are reported at the present value of
future benefits to be paid to policyholders and related expenses less the
present value of the future net premiums. These amounts are estimated and
include assumptions as to the expected investment yield, inflation, mortality,
morbidity, expenses, and withdrawal rates as well as other assumptions that are
based on the Company's experience. These assumptions reflect anticipated trends
and include provisions for possible adverse deviations. An unearned revenue
reserve is also recorded for these contracts which represents the balance of the
excess of gross premiums over net premiums that is still to be recognized in
future years' income in a constant relationship to insurance in force.
Future policy benefits and expense reserves for preneed investment-type
annuities consist of policy account balances before applicable surrender charges
and certain deferred policy initiation fees that are being recognized in income
over the terms of the policies. Policy benefits charged to expense during the
period include amounts paid in excess of policy account balances and interest
credited to policy account balances.
For worksite group disability, which typically has high front-end costs and are
expected to remain in-force for an extended period of time, the case reserves
and incurred but not reported ("IBNR") reserves are recorded at an amount equal
to the net present value of the expected future claims payments. Worksite group
long term disability reserves are discounted to the valuation date at the
valuation interest rate. The valuation interest rate is reviewed quarterly by
taking into consideration actual and expected earned rates on our asset
portfolio.
Changes in the estimated liabilities are reported as a charge or credit to
policyholder benefits as the estimates are revised.
Short Duration Contracts
The Company's short duration contracts include group term life contracts, group
disability contracts, medical contracts, dental contracts, credit life and
disability contracts. For short duration contracts, claims and benefits payable
reserves are recorded when insured events occur. The liability is based on the
expected ultimate cost of settling the claims. The claims and benefits payable
reserves include (1) case reserves for known but unpaid claims as of the balance
sheet date; (2) IBNR reserves for claims where the insured event has occurred
but has not been reported to the Company as of the balance sheet date; and (3)
loss adjustment expense reserves for the expected handling costs of settling the
claims.
For group disability, the case reserves and IBNR reserves are recorded at an
amount equal to the net present value of the expected future claims payments.
Group long-term disability and group term life waiver of premiums reserves are
discounted to the valuation date at the valuation interest rate. The valuation
interest rate is reviewed quarterly by taking into consideration actual and
expected earned rates on our asset portfolio. Group long term disability and
group term life reserve adequacy studies are performed annually, and morbidity
and mortality assumptions are adjusted where appropriate.
F-10
<Page>
Changes in the estimated liabilities are recorded as a charge or credit to
policyholder benefits as estimates are revised.
DEFERRED GAIN ON DISPOSAL OF BUSINESSES
The Company recorded a deferred gain on disposal of businesses utilizing
reinsurance. On March 1, 2000, the Company sold its LTC business using a
coinsurance contract. On April 2, 2001, the Company sold its FFG business using
coinsurance and a modified coinsurance contract. Since the form of sale did not
discharge the Company's primary liability to the insureds, the gain on these
disposals was deferred and reported as a liability. The liability is decreased
and recognized as revenue over the estimated life of the contracts' terms. The
Company reviews and evaluates the estimates affecting the deferred gain on
disposal of businesses annually or when significant information affecting the
estimates becomes known to the Company.
PREMIUMS
Long Duration Contracts
Currently, the Company's long duration contracts being sold are group worksite
disability and life insurance. Revenues are recognized when earned on group
worksite insurance products.
For life insurance policies previously sold by the preneed business (no longer
offered), revenue is recognized when due from policyholders.
For investment-type annuity contracts previously sold by the preneed business
(no longer offered), revenues consist of charges assessed against policy
balances.
Premiums for LTC insurance and traditional life insurance contracts within FFG
are recognized as revenue when due from the policyholder. For universal life
insurance and investment-type annuity contracts within FFG, revenues consist of
charges assessed against policy balances. For the FFG and LTC businesses
previously sold, all revenue is ceded.
Short Duration Contracts
The Company's short duration contracts are those on which the Company recognizes
revenue on a pro-rata basis over the contract term. The Company's short duration
contracts primarily include group term life, group disability, medical, dental,
and credit life and disability.
TOTAL OTHER-THAN-TEMPORARY IMPAIRMENT LOSSES
For debt securities with credit losses and non-credit losses or gains, total
other-than-temporary impairment losses is the total of the decline in fair value
from either the most recent OTTI determination or a prior period end in which
the fair value declined until the current period end valuation date. This amount
does not include any securities that had fair value increases. For equity
securities and debt securities that the Company has the intent to sell or if it
is more likely than not that it will be required to sell, for equity securities
that have an OTTI or for debt securities if there are only credit losses, total
other-than-temporary impairment losses is the total amount by which the fair
value of the security is less than its amortized cost basis at the period end
valuation date and the decline in fair value is deemed to be other-
than-temporary.
FEE AND OTHER INCOME
The Company derives fee and other income primarily from providing administrative
services. Fee income is recognized when services are performed.
UNDERWRITING, GENERAL AND ADMINISTRATIVE EXPENSES
Underwriting, general and administrative expenses consist primarily of
commissions, premium taxes, licenses, fees, salaries and personnel benefits and
other general operating expenses.
LEASES
The Company records expenses for operating leases on a straight-line basis over
the lease term.
CONTINGENCIES
The Company follows the guidance on contingencies, which is included within ASC
Topic 450, CONTINGENCIES, which requires the Company to evaluate each contingent
matter separately. A loss contingency is recorded if reasonably estimable and
probable. The Company establishes reserves for these contingencies at the best
estimate, or if no one estimated number within the range of possible losses is
more probable than any other, the Company records an estimated reserve at the
low end of the estimated range. Contingencies affecting the Company primarily
relate to litigation matters which are inherently difficult to evaluate and are
subject to significant changes. The Company believes the contingent amounts
recorded are adequate and reasonable.
RECENT ACCOUNTING PRONOUNCEMENTS -- ADOPTED
On July 1, 2009, the Company adopted the new guidance on GAAP, which is within
ASC Topic 105, GAAP. The new guidance establishes a single source of
authoritative accounting and reporting guidance recognized by the FASB for
nongovernmental entities (the "Codification"). The Codification does not change
current GAAP, but is intended to simplify user access to all authoritative GAAP
by providing all the authoritative literature related to a particular topic in
one place. All existing accounting standard documents will be superseded and all
other accounting literature not included in the Codification will be considered
non-authoritative. The adoption of the new guidance did not have an impact on
the
F-11
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Company's financial position or results of operations. References to accounting
guidance contained in the Company's consolidated financial statements and
disclosures have been updated to reflect terminology consistent with the
Codification. Plain English references to the accounting guidance have been made
along with references to the ASC topic number and name.
On October 1, 2009, the Company adopted the new guidance on measuring the fair
value of liabilities, which is within ASC Topic 820, FAIR VALUE MEASUREMENTS AND
DISCLOSURES. When the quoted price in an active market for an identical
liability is not available, this new guidance requires that either the quoted
price of the identical or similar liability when traded as an asset or another
valuation technique that is consistent with the fair value measurements and
disclosures guidance be used to fair value the liability. The adoption of this
new guidance did not have an impact on the Company's financial position or
results of operations.
On June 30, 2009, the Company adopted the new subsequent events guidance, which
is within ASC Topic 855, SUBSEQUENT EVENTS. This new guidance establishes
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The adoption of the new guidance did not have an impact
on the Company's financial position or results of operations. See Note 18.
On April 1, 2009, the Company adopted the new OTTI guidance, which is within ASC
Topic 320. This new guidance amends the previous guidance for debt securities
and modifies the presentation and disclosure requirements for debt and equity
securities. In addition, it amends the requirement for an entity to positively
assert the intent and ability to hold a debt security to recovery to determine
whether an OTTI exists and replaces this provision with the assertion that an
entity does not intend to sell or it is not more likely than not that the entity
will be required to sell a security prior to recovery of its amortized cost
basis. Additionally, this new guidance modifies the presentation of certain OTTI
debt securities to only present the impairment loss within the results of
operations that represents the credit loss associated with the OTTI with the
remaining impairment loss being presented within other comprehensive income
(loss) ("OCI"). At adoption, the Company recorded a cumulative effect adjustment
to reclassify the non-credit component of previously recognized OTTI securities
which resulted in an increase of $16,424 (after-tax) in retained earnings and a
decrease of $16,424 (after-tax) in AOCI. See Note 3 for further information.
On April 1, 2009, the Company adopted the new guidance on determining fair value
in illiquid markets, which is within ASC Topic 820. This new guidance clarifies
how to estimate fair value when the volume and level of activity for an asset or
liability have significantly decreased. This new guidance also clarifies how to
identify circumstances indicating that a transaction is not orderly. Under this
new guidance, significant decreases in the volume and level of activity of an
asset or liability, in relation to normal market activity, requires further
evaluation of transactions or quoted prices and exercise of significant judgment
in arriving at fair values. This new guidance also requires additional interim
and annual disclosures. The adoption of this new guidance did not have an impact
on the Company's financial position or results of operations.
On January 1, 2009, the Company adopted the revised business combinations
guidance, which is within ASC Topic 805, BUSINESS COMBINATIONS. The revised
guidance retains the fundamental requirements of the previous guidance in that
the acquisition method of accounting be used for all business combinations, that
an acquirer be identified for each business combination and for goodwill to be
recognized and measured as a residual. The revised guidance expands the
definition of transactions and events that qualify as business combinations to
all transactions and other events in which one entity obtains control over one
or more other businesses. The revised guidance broadens the fair value
measurement and recognition of assets acquired, liabilities assumed and
interests transferred as a result of business combinations. It also increases
the disclosure requirements for business combinations in the consolidated
financial statements. The adoption of the revised guidance did not have an
impact on the Company's financial position or results of operations. However,
should the Company enter into any business combination in 2010 or beyond, our
financial position or results of operations could incur a significantly
different impact than had it recorded the acquisition under the previous
business combinations guidance. Earnings volatility could result, depending on
the terms of the acquisition.
On January 1, 2009, the Company adopted the new consolidations guidance, which
is within ASC Topic 810, CONSOLIDATION. The new guidance requires that a
noncontrolling interest in a subsidiary be separately reported within equity and
the amount of consolidated net income attributable to the noncontrolling
interest be presented in the statement of operations. The new guidance also
calls for consistency in reporting changes in the parent's ownership interest in
a subsidiary and necessitates fair value measurement of any noncontrolling
equity investment retained in a deconsolidation. The adoption of the new
guidance did not have an impact on the Company's financial position or results
of operations.
On January 1, 2009, the Company applied the fair value measurements and
disclosures guidance, which is within ASC Topic 820, FAIR VALUE MEASUREMENTS AND
DISCLOSURES, for all non-financial assets and liabilities measured at fair value
on a non-recurring basis. The application of this guidance for those assets and
liabilities did not have an impact on the Company's financial position or
results of operations. The Company's non-financial assets measured at fair value
on a non-recurring basis include goodwill and intangible assets. In a business
combination, the non-financial assets and liabilities of the acquired company
would be measured at fair value in accordance with the fair value measurements
and disclosures guidance. The requirements of this guidance include using an
exit price based on an orderly transaction between market participants at the
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measurement date assuming the highest and best use of the asset by market
participants. To perform a market valuation, the Company is required to use a
market, income or cost approach valuation technique(s). The Company performed
its annual impairment analyses of goodwill and indefinite-lived intangible
assets in the fourth quarter of 2009. Step 1 of the impairment test indicated
that the net book value of the Company's goodwill was greater than its estimated
fair value. Based on the results of the Step 1 test, the Company was required to
measure the fair value of its goodwill in Step 2 of the impairment test. As
mentioned above, the application of this guidance which was used to measure the
fair value of goodwill in Step 2 of the impairment test did not have an impact
on the Company's financial position or results of operations during 2009.
On January 1, 2008, the Company adopted the fair value measurements and
disclosures guidance, which is within ASC Topic 820. This guidance defined fair
value, addressed how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure purposes under GAAP
and expanded disclosures about fair value measurements. This guidance was
applied prospectively for financial assets and liabilities measured on a
recurring basis as of January 1, 2008 except for certain financial assets that
were measured at fair value using a transaction price. For these financial
instruments, which the Company has, this guidance required limited retrospective
adoption and thus the difference between the fair values using a transaction
price and the fair values using an exit price of the relevant financial
instruments was shown as a cumulative-effect adjustment to the January 1, 2008
retained earnings balance. At adoption, the Company recognized a $4,200 decrease
to other assets, and a corresponding decrease of $2,730 (after-tax) to retained
earnings. See Notes 3 and 4 for further information regarding these financial
instruments and the fair value disclosures, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS -- NOT YET ADOPTED
In June 2009, the FASB issued new guidance on transfers of financial assets,
which is within ASC Topic 860, TRANSFERS AND SERVICING. This new guidance amends
the derecognition guidance in the Codification and eliminates the exemption from
consolidation for qualifying special-purpose entities. This new guidance is
effective for transfers of financial assets occurring in fiscal years beginning
after November 15, 2009 and in interim periods within those fiscal years.
Therefore, the Company is required to adopt this guidance on January 1, 2010.
The adoption of this new guidance will not have an impact on the Company's
financial position or results of operations.
In June 2009, the FASB issued new guidance on the accounting for a variable
interest entity ("VIE"), which is within ASC Topic 810, CONSOLIDATION. This new
guidance amends the consolidation guidance applicable to VIEs to require a
qualitative assessment in the determination of the primary beneficiary of the
VIE, to require an ongoing reconsideration of the primary beneficiary, to amend
the events that trigger a reassessment of whether an entity is a VIE and to
change the consideration of kick-out rights in determining if an entity is a
VIE. This new guidance provides two transition alternatives: (i) retrospective
application with a cumulative-effect adjustment to retained earnings as of the
beginning of the first year adjusted; or (ii) application as of the date of
adoption with a cumulative-effect adjustment to retained earnings recognized on
that date. This new guidance is effective as of the beginning of the Company's
first fiscal year beginning after November 15, 2009, and for interim periods
within those fiscal years. Therefore, the Company is required to adopt this
guidance on January 1, 2010. The adoption of this new guidance will not have a
material impact on the Company's financial position and results of operations.
3. INVESTMENTS
The following table shows the amortized cost, gross unrealized gains and losses,
fair value and OTTI of our fixed maturity and equity securities as of the dates
indicated.
<Table>
<Caption>
DECEMBER 31, 2009
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED OTTI IN
COST GAINS LOSSES FAIR VALUE AOCI (1)
--------------------------------------------------------------------------------------------------------------------------
FIXED MATURITY SECURITIES:
United States Government and
government agencies and
authorities $2,888 $124 $ -- $3,012 $ --
States, municipalities and
political subdivisions 58,962 1,194 (1,762) 58,394 --
Foreign governments 34,969 1,984 (1,825) 35,128 --
Asset-backed 3,782 56 (58) 3,780 --
Commercial mortgage-backed 20,369 121 (168) 20,322 --
Residential mortgage-backed 122,036 5,947 (454) 127,529 (132)
Corporate 2,250,259 107,017 (49,578) 2,307,698 6,218
---------- -------- -------- ---------- ------
TOTAL FIXED MATURITY
SECURITIES $2,493,265 $116,443 $(53,845) $2,555,863 $6,086
---------- -------- -------- ---------- ------
EQUITY SECURITIES:
Non-redeemable preferred
stocks $160,510 $9,699 $(12,216) $157,993 $ --
---------- -------- -------- ---------- ------
</Table>
(1) Represents the amount of other-than-temporary impairment (losses) gains in
AOCI, which, from April 1, 2009, were not included in earnings under the
new OTTI guidance for debt securities.
F-13
<Page>
<Table>
<Caption>
DECEMBER 31, 2008
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------------------------------------------------------------------------------------------------------------------------------
FIXED MATURITY SECURITIES:
United States Government and government agencies
and authorities $3,276 $386 $ -- $3,662
States, municipalities and political
subdivisions 53,580 568 (2,671) 51,477
Foreign governments 40,202 2,019 (1,941) 40,280
Asset-backed 7,036 33 (397) 6,672
Commercial mortgage-backed 19,409 19 (3,348) 16,080
Residential mortgage-backed 148,097 5,460 (354) 153,203
Corporate 2,128,076 42,478 (242,381) 1,928,173
------------- --------- ------------ -------------
TOTAL FIXED MATURITY SECURITIES $2,399,676 $50,963 $(251,092) $2,199,547
------------- --------- ------------ -------------
EQUITY SECURITIES:
Non-redeemable preferred stocks $189,973 $3,938 $(49,141) $144,770
------------- --------- ------------ -------------
</Table>
The cost or amortized cost and fair value of fixed maturity securities at
December 31, 2009 by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because issuers of the securities may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<Table>
<Caption>
COST OR
AMORTIZED
COST FAIR VALUE
--------------------------------------------------------------------------------
Due in one year or less $26,443 $27,130
Due after one year through five years 409,189 424,109
Due after five years through ten years 433,202 448,572
Due after ten years 1,478,244 1,504,421
------------ ------------
TOTAL 2,347,078 2,404,232
Asset-backed 3,782 3,780
Commercial mortgage-backed 20,369 20,322
Residential mortgage-backed 122,036 127,529
------------ ------------
TOTAL $2,493,265 $2,555,863
------------ ------------
</Table>
Major categories of net investment income were as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2009 2008 2007
--------------------------------------------------------------------------------
Fixed maturity securities $158,678 $165,334 $177,108
Equity securities 12,522 15,860 20,997
Commercial mortgage loans on
real estate 51,287 54,535 52,990
Policy loans 830 806 459
Short-term investments 1,207 2,888 4,060
Other investments 603 6,351 38,140
Cash and cash equivalents 95 1,208 1,928
---------- ---------- ----------
INVESTMENT INCOME 225,222 246,982 295,682
Investment expenses (8,497) (8,531) (9,447)
---------- ---------- ----------
NET INVESTMENT INCOME $216,725 $238,451 $286,235
---------- ---------- ----------
</Table>
No material investments of the Company were non-income producing for the years
ended December 31, 2009, 2008, and 2007.
The following table summarizes the proceeds from sales of available-for-sale
securities and the gross realized gains and gross realized losses that have been
included in earnings as a result of those sales.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2009 2008 2007
--------------------------------------------------------------------------------
Proceeds from sales $271,086 $548,341 $490,403
Gross realized gains 10,045 20,231 11,155
Gross realized losses 20,503 44,001 18,121
</Table>
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<Page>
For securities sold at a loss during 2009, the average period of time these
securities were trading continuously at a price below book value was
approximately 13 months.
After a period of declining market values in the fixed maturity and equity
security markets, the credit markets have shown continued improvement throughout
2009. This is primarily due to specific U.S. government intervention which
resulted in a lower threat of systemic collapse, enhanced liquidity in the
market, and improved economic prospects. As a result, many securities in the
portfolio have shown improved market values throughout the year.
We recorded net realized (losses) gains, including other-than-temporary
impairments, in the statement of operations as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2009 2008 2007
------------------------------------------------------------------------------------------
Net realized (losses) gains related to
sales:
Fixed maturity securities $(198) $(5,350) $(2,495)
Equity securities (9,647) (16,153) (4,471)
Commercial mortgage loans on real
estate (4,100) (234) (312)
Other investments 20 -- 185
Collateral held under securities
lending -- (4,884) --
--------- ----------- ---------
TOTAL NET REALIZED LOSSES RELATED TO
SALES (13,925) (26,621) (7,093)
--------- ----------- ---------
Net realized losses related to
other-than-temporary impairments:
Fixed maturity securities (6,990) (57,271) (13,757)
Equity securities (4,597) (51,804) (7,369)
--------- ----------- ---------
TOTAL NET REALIZED LOSSES RELATED TO
OTHER-THAN-TEMPORARY IMPAIRMENTS (11,587) (109,075) (21,126)
--------- ----------- ---------
TOTAL NET REALIZED LOSSES $(25,512) $(135,696) $(28,219)
--------- ----------- ---------
</Table>
OTHER-THAN-TEMPORARY IMPAIRMENTS
Adoption of the New OTTI Guidance
On April 1, 2009, the Company adopted the new OTTI guidance, which is within ASC
Topic 320. See Note 2 for further information. The new OTTI guidance requires
entities to separate an OTTI of a debt security into two components when there
are credit related losses associated with the impaired debt security for which
the Company asserts that it does not have the intent to sell, and it is more
likely than not that it will not be required to sell before recovery of its cost
basis. Prior to April 1, 2009, the Company had to determine whether it had the
intent and ability to hold the investment for a sufficient period of time for
the value to recover. When the analysis of the above factors resulted in the
Company's conclusion that declines in market values were other-than-temporary,
the cost of the securities was written down to market value and the reduction in
value was reflected as a realized loss in the statement of operations. Under the
new OTTI guidance, the amount of the OTTI related to a credit loss is recognized
in earnings, and the amount of the OTTI related to other, non-credit, factors
(E.G., interest rates, market conditions, etc.) is recorded as a component of
other comprehensive income. In instances where no credit loss exists but it is
more likely than not that the Company will have to sell the debt security prior
to the anticipated recovery, the decline in market value below amortized cost is
recognized as an OTTI in earnings. In periods after the recognition of an OTTI
on debt securities, the Company accounts for such securities as if they had been
purchased on the measurement date of the OTTI at an amortized cost basis equal
to the previous amortized cost basis less the OTTI recognized in earnings. For
debt securities for which OTTI were recognized in earnings, the difference
between the new amortized cost basis and the cash flows expected to be collected
will be accreted or amortized into net investment income.
The new OTTI guidance required that the Company record, as of April 1, 2009, the
date of adoption, a cumulative effect adjustment to reclassify the noncredit
component of a previously recognized OTTI from retained earnings to other
comprehensive income. For purposes of calculating the cumulative effect
adjustment, the Company reviewed OTTI it had recorded through realized losses on
securities held at March 31, 2009, which were $64,705, and estimated the portion
related to credit losses (I.E., where the present value of cash flows expected
to be collected are lower than the amortized cost basis of the security) and the
portion related to all other factors. The Company determined that $36,462 of the
OTTI previously recorded related to specific credit losses and $28,243 related
to all other factors. Under the new OTTI guidance, the Company increased the
amortized cost basis of these debt securities by $25,268 and recorded a
cumulative effect adjustment, net of tax, in its shareholder's equity section.
The cumulative effect adjustment had no effect on total shareholder's equity as
it increased retained earnings and reduced accumulated other comprehensive
income.
For the twelve months ended December 31, 2009, the Company recorded $11,330 of
OTTI of which $11,587 was related to credit losses and recorded as net OTTI
losses recognized in earnings, while the remaining $(257) related to all other
factors was recorded as an unrealized gain component of AOCI.
F-15
<Page>
The following table sets forth the amount of credit loss impairments recognized
within the results of operations on fixed maturity securities held by the
Company as of the dates indicated, for which a portion of the OTTI loss was
recognized in AOCI, and the corresponding changes in such amounts.
<Table>
BALANCE, APRIL 1, 2009 $ 36,462
Additions for credit loss impairments recognized in the current
period on securities not previously impaired 681
Additions for credit loss impairments recognized in the current
period on securities previously impaired 680
Reductions for increases in cash flows expected to be collected
that are recognized over the remaining life of the security (275)
Reductions for credit loss impairments previously recognized on
securities which matured, paid down, prepaid, or were sold
during the period (8,301)
---------
BALANCE, DECEMBER 31, 2009 $29,247
---------
</Table>
We regularly monitor our investment portfolio to ensure investments that may be
other-than-temporarily impaired are identified in a timely fashion, properly
valued, and charged against earnings in the proper period. The determination
that a security has incurred an other-than-temporary decline in value requires
the judgment of management. Assessment factors include, but are not limited to,
the length of time and the extent to which the market value has been less than
cost, the financial condition and rating of the issuer, whether any collateral
is held, the intent and ability of the Company to retain the investment for a
period of time sufficient to allow for recovery for equity securities and the
intent to sell or whether it is more likely than not that the Company will be
required to sell for fixed maturity securities. Inherently, there are risks and
uncertainties involved in making these judgments. Changes in circumstances and
critical assumptions such as a continued weak economy, a more pronounced
economic downturn or unforeseen events which affect one or more companies,
industry sectors, or countries could result in additional impairments in future
periods for other-than-temporary declines in value. Any equity security whose
price decline is deemed other-than-temporary is written down to its then current
market value with the amount of the impairment reported as a realized loss in
that period. The impairment of a fixed maturity security that the Company has
the intent to sell or that it is more likely than not that the Company will be
required to sell is deemed other-than-temporary and is written down to its
market value at the balance sheet date with the amount of the impairment
reported as a realized loss in that period. For all other-than-temporarily
impaired fixed maturity securities that do not meet either of these two
criteria, the Company is required to analyze its ability to recover the
amortized cost of the security by calculating the net present value of projected
future cash flows. For these other-than-temporarily impaired fixed maturity
securities, the net amount recognized in earnings is equal to the difference
between the amortized cost of the fixed maturity security and its net present
value.
The Company considers different factors to determine the amount of projected
future cash flows and discounting methods for corporate debt and residential and
commercial mortgage-backed or asset-backed securities. For corporate debt
securities, the split between the credit and non-credit losses is driven
principally by assumptions regarding the amount and timing of projected future
cash flows. The net present value is calculated by discounting the Company's
best estimate of projected future cash flows at the effective interest rate
implicit in the security at the date of acquisition. For residential and
commercial mortgage-backed and asset-backed securities, cash flow estimates,
including prepayment assumptions, are based on data from widely accepted
third-party data sources or internal estimates. In addition to prepayment
assumptions, cash flow estimates vary based on assumptions regarding the
underlying collateral including default rates, recoveries and changes in value.
The net present value is calculated by discounting the Company's best estimate
of projected future cash flows at the effective interest rate implicit in the
fixed maturity security prior to impairment at the balance sheet date. The
discounted cash flows become the new amortized cost basis of the fixed maturity
security.
In periods subsequent to the recognition of an other-than-temporary impairment,
the Company generally accretes the discount (or amortize the reduced premium)
into net investment income, up to the non-discounted amount of projected future
cash flows, resulting from the reduction in cost basis, based upon the amount
and timing of the expected future cash flows over the estimated period of cash
flows.
Realized gains and losses on sales of investments are recognized on the specific
identification basis.
F-16
<Page>
The investment category and duration of the Company's gross unrealized losses on
fixed maturity securities and equity securities at December 31, 2009 and 2008
were as follows:
<Table>
<Caption>
DECEMBER 31, 2009
LESS THAN 12 MONTHS 12 MONTHS OR MORE
FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES
-------------------------------------------------------------------------------------------------------------
FIXED MATURITY SECURITIES:
States, municipalities and
political subdivisions $8,053 $(347) $13,143 $(1,415)
Foreign governments 653 (28) 12,874 (1,797)
Asset-backed 1,499 (21) 1,005 (37)
Commercial mortgage-backed 10,342 (64) 1,070 (104)
Residential mortgage-backed 2,284 (289) 1,184 (165)
Corporate 249,368 (8,761) 389,551 (40,817)
---------- -------- ---------- ---------
TOTAL FIXED MATURITY
SECURITIES $272,199 $(9,510) $418,827 $(44,335)
---------- -------- ---------- ---------
EQUITY SECURITIES:
Non-redeemable preferred
stocks $505 $(39) $83,260 $(12,177)
---------- -------- ---------- ---------
<Caption>
DECEMBER 31, 2009
TOTAL
FAIR UNREALIZED
VALUE LOSSES
----------------------------- -----------------------------------------
FIXED MATURITY SECURITIES:
States, municipalities and
political subdivisions $21,196 $(1,762)
Foreign governments 13,527 (1,825)
Asset-backed 2,504 (58)
Commercial mortgage-backed 11,412 (168)
Residential mortgage-backed 3,468 (454)
Corporate 638,919 (49,578)
---------- ---------
TOTAL FIXED MATURITY
SECURITIES $691,026 $(53,845)
---------- ---------
EQUITY SECURITIES:
Non-redeemable preferred
stocks $83,765 $(12,216)
---------- ---------
</Table>
<Table>
<Caption>
DECEMBER 31, 2008
LESS THAN 12 MONTHS 12 MONTHS OR MORE
FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES
----------------------------------------------------------------------------------------------
FIXED MATURITY SECURITIES:
States, municipalities
and political
subdivisions $19,525 $(1,534) $11,085 $(1,137)
Foreign governments 15,043 (1,446) 7,443 (495)
Asset-backed 2,156 (98) 2,387 (299)
Commercial
mortgage-backed 8,780 (2,042) 6,631 (1,306)
Residential
mortgage-backed 1,210 (93) 1,067 (261)
Corporate 783,894 (111,976) 498,897 (130,405)
---------- ---------- ---------- ----------
TOTAL FIXED MATURITY
SECURITIES $830,608 $(117,189) $527,510 $(133,903)
---------- ---------- ---------- ----------
EQUITY SECURITIES:
Non-redeemable preferred
stocks $54,750 $(21,217) $65,285 $(27,924)
---------- ---------- ---------- ----------
<Caption>
DECEMBER 31, 2008
TOTAL
FAIR UNREALIZED
VALUE LOSSES
-------------------------- ---------------------------------
FIXED MATURITY SECURITIES:
States, municipalities
and political
subdivisions $30,610 $(2,671)
Foreign governments 22,486 (1,941)
Asset-backed 4,543 (397)
Commercial
mortgage-backed 15,411 (3,348)
Residential
mortgage-backed 2,277 (354)
Corporate 1,282,791 (242,381)
----------- ----------
TOTAL FIXED MATURITY
SECURITIES $1,358,118 $(251,092)
----------- ----------
EQUITY SECURITIES:
Non-redeemable preferred
stocks $120,035 $(49,141)
----------- ----------
</Table>
Total gross unrealized losses represent less than 9% and 21% of the aggregate
fair value of the related securities at December 31, 2009 and 2008,
respectively. Approximately 14% and 46% of these gross unrealized losses have
been in a continuous loss position for less than twelve months at December 31,
2009 and 2008, respectively. The total gross unrealized losses are comprised of
328 and 677 individual securities at December 31, 2009 and 2008, respectively.
In accordance with its policy described above, the Company concluded that for
these securities an adjustment to its results of operations for
other-than-temporary impairments of the gross unrealized losses was not
warranted at December 31, 2009 and 2008. These conclusions are based on a
detailed analysis of the underlying credit and expected cash flows of each
security. As of December 31, 2009, the gross unrealized losses that have been in
a continuous loss position for twelve months or more were concentrated in non-
redeemable preferred stocks and in the financial, energy and industrial
industries of the Company's corporate fixed maturity securities. For these
concentrations, gross unrealized losses of twelve months or more were $43,794,
or 77%, of the total. The gross unrealized losses are primarily attributable to
widening credit spreads associated with an underlying shift in overall credit
risk premium. As of December 31, 2009, the Company did not intend to sell the
securities and it was not more likely than not that the Company would be
required to sell the securities before the anticipated recovery of their
amortized cost basis.
The cost or amortized cost and fair value of available for sale fixed maturity
securities in an unrealized loss position at December 31, 2009, by contractual
maturity, is shown below:
<Table>
<Caption>
COST OR
AMORTIZED COST FAIR VALUE
--------------------------------------------------------------------------------
Due in one year or less $563 $549
Due after one year through five years 52,031 49,938
Due after five years through ten years 116,070 110,073
Due after ten years 558,145 513,082
----------- -----------
TOTAL 726,809 673,642
Asset-backed 2,561 2,504
Commercial mortgage-backed 11,579 11,412
Residential mortgage-backed 3,922 3,468
----------- -----------
TOTAL $744,871 $691,026
----------- -----------
</Table>
F-17
<Page>
The Company has exposure to sub-prime and related mortgages within our fixed
maturity security portfolio. At December 31, 2009, approximately 3.1% of the
residential mortgage-backed holdings had exposure to sub-prime mortgage
collateral. This represented approximately 1.5% of the total fixed income
portfolio and 0.6% of the total unrealized loss position. Of the securities with
sub-prime exposure, approximately 51% are rated as investment grade. All
residential mortgage-backed securities, including those with sub-prime exposure,
are reviewed as part of the ongoing other-than-temporary impairment monitoring
process.
The Company has made commercial mortgage loans, collateralized by the underlying
real estate, on properties located throughout the U.S. and Canada. At December
31, 2009, approximately 39% of the outstanding principal balance of commercial
mortgage loans was concentrated in the states of California, New York and Utah.
Although the Company has a diversified loan portfolio, an economic downturn
could have an adverse impact on the ability of its debtors to repay their loans.
The outstanding balance of commercial mortgage loans range in size from $54 to
$13,926 at December 31, 2009 and from $7 to $14,345 at December 31, 2008. The
mortgage loan valuation allowance for losses was $8,552 and $3,252 at December
31, 2009 and 2008, respectively.
At December 31, 2009, there are no outstanding mortgage loan commitments. At
December 31, 2009, the Company is committed to fund additional capital
contributions of $3,500 to joint ventures and to certain investments in limited
partnerships.
The Company has short term investments and fixed maturities of $7,378 and $4,937
at December 31, 2009 and 2008, respectively, on deposit with various
governmental authorities as required by law.
Securities Lending
The Company engages in transactions in which fixed maturity securities,
especially bonds issued by the U.S. government, government agencies and
authorities, and U.S. corporations, are loaned to selected broker/dealers.
Collateral, greater than or equal to 102% of the fair value of the securities
lent, plus accrued interest, is received in the form of cash and cash
equivalents held by a custodian bank for the benefit of the Company. The use of
cash collateral received is unrestricted. The Company reinvests the cash
collateral received, generally in investments of high credit quality that are
designated as available-for-sale under the debt and equity securities guidance,
which is within ASC Topic 320. The Company monitors the fair value of securities
loaned and the collateral received, with additional collateral obtained, as
necessary. The Company is subject to the risk of loss to the extent there is a
loss on the re-investment of cash collateral.
As of December 31, 2009 and 2008, our collateral held under securities lending,
of which its use is unrestricted, was $106,896 and $113,191, respectively, while
our liability to the borrower for collateral received was $108,186 and $124,063,
respectively. The difference between the collateral held and obligations under
securities lending is recorded as an unrealized loss and is included as part of
AOCI. All securities with unrealized losses have been in a continuous loss
position for twelve months or longer as of December 31, 2009 and December 31,
2008. The Company has actively reduced the size of the securities lending to
mitigate counter-party exposure. The Company includes the available-for-sale
investments purchased with the cash collateral in its evaluation of
other-than-temporary impairments.
Cash proceeds that the Company receives as collateral for the securities it
lends and subsequent repayment of the cash are regarded by the Company as cash
flows from financing activities, since the cash received is considered a
borrowing. Since the Company reinvests the cash collateral generally in
investments that are designated as available-for-sale, the reinvestment is
presented as cash flows from investing activities.
4. FAIR VALUE DISCLOSURES
Inputs and Valuation Techniques for Financial Assets and Liabilities Disclosures
The fair value measurements and disclosures guidance, which is within ASC Topic
820, defines fair value, establishes a framework for measuring fair value,
creates a fair value hierarchy based on the quality of inputs used to measure
fair value and enhances disclosure requirements for fair value measurements.
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. In accordance with this guidance, the
Company has categorized its recurring basis financial assets and liabilities
into a three-level fair value hierarchy based on the priority of the inputs to
the valuation technique.
The fair value hierarchy gives the highest priority to quoted prices in active
markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). The inputs used to measure fair value may fall
into different levels of the fair value hierarchy. In such cases, the level in
the fair value hierarchy within which the fair value measurement in its entirety
falls has been determined based on the lowest level input that is significant to
the fair value measurement in its entirety. The Company's assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset or liability.
F-18
<Page>
The levels of the fair value hierarchy and its application to the Company's
financial assets and liabilities are described below:
- Level 1 inputs utilize quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Company has the ability to access.
Financial assets and liabilities utilizing Level 1 inputs include certain
U.S. mutual funds, money market funds and certain foreign securities.
- Level 2 inputs utilize other than quoted prices included in Level 1 that are
observable for the asset, either directly or indirectly, for substantially
the full term of the asset. Level 2 inputs include quoted prices for similar
assets in active markets, quoted prices for identical or similar assets in
markets that are not active and inputs other than quoted prices that are
observable in the marketplace for the asset. The observable inputs are used
in valuation models to calculate the fair value for the asset. Financial
assets utilizing Level 2 inputs include corporate, municipal, foreign
government and private placement bonds, U.S. Government and agency
securities, residential and commercial mortgage-backed securities,
asset-backed securities, non-redeemable preferred stocks and certain U.S.
and foreign mutual funds.
- Level 3 inputs are unobservable but are significant to the fair value
measurement for the asset, and include situations where there is little, if
any, market activity for the asset. These inputs reflect management's own
assumptions about the assumptions a market participant would use in pricing
the asset. Financial assets utilizing Level 3 inputs include certain
non-redeemable preferred stocks, foreign government and corporate bonds, and
commercial mortgage-backed securities that were quoted by brokers and could
not be corroborated by Level 2 inputs and derivatives.
A review of fair value hierarchy classifications is conducted on a quarterly
basis. Changes in the observability of valuation inputs may result in a
reclassification of levels for certain securities within the fair value
hierarchy.
The following tables present the Company's fair value hierarchy for those
recurring basis assets and liabilities as of December 31, 2009 and 2008.
<Table>
<Caption>
DECEMBER 31, 2009
TOTAL LEVEL 1 LEVEL 2 LEVEL 3
---------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Fixed maturity securities:
United States government and government
agencies and authorities $3,012 $ -- $3,012 $ --
States, municipalities and political
subdivisions 58,394 -- 58,394 --
Foreign governments 35,128 -- 34,613 515
Asset-backed 3,780 -- 3,780 --
Commercial mortgage-backed 20,322 -- 18,130 2,192
Residential mortgage-backed 127,529 -- 127,529 --
Corporate 2,307,698 -- 2,275,987 31,711
Non-redeemable preferred stocks 157,993 -- 154,774 3,219
Short-term investments 70,367 65,875 4,492 --
Collateral held under securities
lending 66,896(b) 27,833 39,063 --
Cash equivalents 32,491(b) 32,491 -- --
Other assets 10,406(c) -- -- 10,406
Assets held in separate accounts 1,738,969(b) 1,653,588(a) 85,381 --
------------- ------------- ------------- ---------
TOTAL FINANCIAL ASSETS $4,632,985 $1,779,787 $2,805,155 $48,043
------------- ------------- ------------- ---------
</Table>
F-19
<Page>
<Table>
<Caption>
DECEMBER 31,2008
TOTAL LEVEL 1 LEVEL 2 LEVEL 3
---------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Fixed maturity securities:
United States government and government
agencies and authorities $3,662 $ -- $3,662 $ --
States, municipalities and political
subdivisions 51,477 -- 51,477 --
Foreign governments 40,280 -- 33,952 6,328
Asset-backed 6,672 -- 6,672 -
Commercial mortgage-backed 16,080 -- 14,156 1,924
Residential mortgage backed securities 153,203 -- 153,203 -
Corporate 1,928,173 -- 1,902,538 25,635
Non-redeemable preferred stocks 144,770 -- 140,126 4,644
Short-term investments 159,847 159,398 449 --
Collateral held under securities
lending 76,916(b) 26,211 50,705 --
Cash equivalents 11,724(b) 11,724 -- --
Other assets 4,821(c) -- -- 4,821
Assets held in separate accounts 1,556,089(b) 1,490,877(a) 65,212 --
------------- ------------- ------------- ---------
TOTAL FINANCIAL ASSETS $4,153,714 $1,688,210 $2,422,152 $43,352
------------- ------------- ------------- ---------
</Table>
(a) Mainly includes mutual fund investments
(b) The amounts presented differ from the amounts presented in the consolidated
balance sheets because certain cash equivalent investments are not measured
at estimated fair value (e.g., certificates of deposit, etc.).
(c) The amounts presented differ from the amounts presented in the consolidated
balance sheets because only certain assets or liabilities within these line
items are measured at estimated fair value (e.g., debt and equity
securities and derivatives, etc.).
The following table summarizes the change in balance sheet carrying value
associated with Level 3 financial assets carried at fair value during the years
ended December 31, 2009 and 2008:
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2009
TOTAL
LEVEL 3
ASSETS
--------------------------------------------
Balance, beginning of period $43,352
Total gains (losses)
(realized/ unrealized)
included in earnings 5,039
Net unrealized gains
(losses) included in
stockholder's equity 4,079
Purchases, issuances,
(sales) and (settlements) 10,816
Net transfers out (15,243)
---------
BALANCE, END OF PERIOD $48,043
---------
<Caption>
YEAR ENDED DECEMBER 31, 2009
FIXED MATURITY SECURITIES EQUITY SECURITIES
FOREIGN COMMERCIAL NON-REDEEMABLE
GOVERNMENT MORTGAGE-BACKED CORPORATE PREFERRED
----------------------------- ---------------------------------------------------------------------------------------------------
Balance, beginning of period $6,328 $1,924 $25,635 $4,644
Total gains (losses)
(realized/ unrealized)
included in earnings 147 24 (717) --
Net unrealized gains
(losses) included in
stockholder's equity (1,335) 308 4,748 358
Purchases, issuances,
(sales) and (settlements) -- (64) 10,880 --
Net transfers out (4,625) -- (8,835) (1,783)
-------- -------- --------- --------
BALANCE, END OF PERIOD $515 $2,192 $31,711 $3,219
-------- -------- --------- --------
<Caption>
YEAR ENDED DECEMBER 31, 2009
OTHER
ASSETS
----------------------------- ---------
Balance, beginning of period $4,821
Total gains (losses)
(realized/ unrealized)
included in earnings 5,585
Net unrealized gains
(losses) included in
stockholder's equity --
Purchases, issuances,
(sales) and (settlements) --
Net transfers out --
---------
BALANCE, END OF PERIOD $10,406
---------
</Table>
F-20
<Page>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2008
TOTAL
LEVEL 3
ASSETS
--------------------------------------------
Balance, beginning of period $67,436
Total (losses) gains
(realized/ unrealized)
included in earnings (1,324)
Net unrealized (losses)
gains included in
stockholder's equity (7,919)
Purchases, issuances,
(sales) and (settlements) 1,652
Net transfers (out) in (16,493)
---------
BALANCE, END OF PERIOD $43,352
---------
<Caption>
YEAR ENDED DECEMBER 31, 2008
FIXED MATURITY SECURITIES EQUITY SECURITIES
FOREIGN COMMERCIAL NON-REDEEMABLE
GOVERNMENT MORTGAGE-BACKED CORPORATE PREFERRED
----------------------------- ----------------------------------------------------------------------------------------------------
Balance, beginning of period $499 $1,247 $58,429 $4,826
Total (losses) gains
(realized/ unrealized)
included in earnings 196 22 (3,928) --
Net unrealized (losses)
gains included in
stockholder's equity 536 (411) (6,939) (1,105)
Purchases, issuances,
(sales) and (settlements) 2,898 1,066 (2,797) 485
Net transfers (out) in 2,199 -- (19,130) 438
-------- -------- --------- --------
BALANCE, END OF PERIOD $6,328 $1,924 $25,635 $4,644
-------- -------- --------- --------
<Caption>
YEAR ENDED DECEMBER 31, 2008
OTHER
ASSETS
----------------------------- --------
Balance, beginning of period $2,435
Total (losses) gains
(realized/ unrealized)
included in earnings 2,386
Net unrealized (losses)
gains included in
stockholder's equity --
Purchases, issuances,
(sales) and (settlements) --
Net transfers (out) in --
--------
BALANCE, END OF PERIOD $4,821
--------
</Table>
Three different valuation techniques can be used in determining fair value for
financial assets and liabilities: the market, income or cost approaches. The
three valuation techniques described in the fair value measurements and
disclosures guidance, which is within ASC Topic 820, are consistent with
generally accepted valuation methodologies. The market approach valuation
techniques use prices and other relevant information from market transactions
involving identical or comparable assets or liabilities. When possible, quoted
prices (unadjusted) in active markets are used as of the period-end date.
Otherwise, valuation techniques consistent with the market approach including
matrix pricing and comparables are used. Matrix pricing is a mathematical
technique employed principally to value debt securities without relying
exclusively on quoted prices for those securities but rather by relying on the
securities' relationship to other benchmark quoted securities. Market approach
valuation techniques often use market multiples derived from a set of
comparables. Multiples might lie in ranges with a different multiple for each
comparable. The selection of where within the range the appropriate multiple
falls requires judgment, considering both qualitative and quantitative factors
specific to the measurement.
Income approach valuation techniques convert future amounts, such as cash flows
or earnings, to a single present amount, or a discounted amount. These
techniques rely on current market expectations of future amounts as of the
period-end date. Examples of income approach valuation techniques include
present value techniques, option-pricing models, binomial or lattice models that
incorporate present value techniques, and the multi-period excess earnings
method.
Cost approach valuation techniques are based upon the amount that would be
required to replace the service capacity of an asset at the period-end date, or
the current replacement cost. That is, from the perspective of a market
participant (seller), the price that would be received for the asset is
determined based on the cost to a market participant (buyer) to acquire or
construct a substitute asset of comparable utility, adjusted for obsolescence.
While not all three approaches are applicable to all financial assets or
liabilities, where appropriate, one or more valuation techniques may be used.
For all the financial assets and liabilities included in the above hierarchy,
excluding derivatives and private placement bonds, the market valuation
technique is generally used. For private placement bonds and derivatives, the
income valuation technique is generally used. For the years ended December 31,
2009 and 2008, the application of the valuation technique applied to similar
assets and liabilities has been consistent.
Level 1 and Level 2 securities are valued using various observable market inputs
obtained from a pricing service. The pricing service prepares estimates of fair
value measurements for our Level 2 securities using proprietary valuation models
based on techniques such as matrix pricing which include observable market
inputs. The fair value measurements and disclosures guidance, defines observable
market inputs as the assumptions market participants would use in pricing the
asset or liability developed on market data obtained from sources independent of
the Company. The extent of the use of each observable market input for a
security depends on the type of security and the market conditions at the
balance sheet date. Depending on the security, the priority of the use of
observable market inputs may change as some observable market inputs may not be
relevant or additional inputs may be necessary. The following observable market
inputs, listed in the approximate order of priority, are utilized in the pricing
evaluation of Level 2 securities: benchmark yields, reported trades,
broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities,
bids, offers and reference data. The pricing service also evaluates each
security based on relevant market information including: relevant credit
information, perceived market movements and sector news. Valuation models can
change period to period, depending on the appropriate observable inputs that are
available at the balance sheet date to price a security. When market observable
inputs are unavailable, the remaining unpriced securities are submitted to
independent brokers who provide non-binding broker quotes or are priced by other
qualified sources and are categorized as Level 3 securities.
F-21
<Page>
Management evaluates the following factors in order to determine whether the
market for a financial asset is inactive. The factors include, but are not
limited to:
- There are few recent transactions,
- Little information is released publicly,
- The available prices vary significantly over time or among market
participants,
- The prices are stale (i.e., not current), and
- The magnitude of the bid-ask spread.
Illiquidity did not have a material impact in the fair value determination of
the Company's financial assets.
The Company generally obtains one price for each financial asset. The Company
performs a monthly analysis to assess if the evaluated prices represent a
reasonable estimate of their fair value. This process involves quantitative and
qualitative analysis and is overseen by investment and accounting professionals.
Examples of procedures performed include, but are not limited to, initial and
on-going review of pricing service methodologies, review of the prices received
from the pricing service, review of pricing statistics and trends, and
comparison of prices for certain securities with two different appropriate price
sources for reasonableness. Following this analysis, the Company generally uses
the best estimate of fair value based upon all available inputs. On infrequent
occasions, a non-pricing service source may be more familiar with the market
activity for a particular security than the pricing service. In these cases the
price used is taken from the non-pricing service source. The pricing service
provides information to indicate which securities were priced using market
observable inputs so that the Company can properly categorize our financial
assets in the fair value hierarchy.
Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring
Basis
The Company also measures the fair value of certain assets on a non-recurring
basis, generally on an annual basis, or when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. These
assets include goodwill and finite-lived intangible assets. In accordance with
the provisions of ASC Topic 350, INTANGIBLES-- GOODWILL AND OTHER, since the
carrying amount of the Company was greater than its fair value as determined in
Step 1 of the impairment test, the Company was required to measure the estimated
fair value of goodwill in Step 2 of the impairment test. Goodwill of the Company
with a carrying amount of $156,817 was written down to its implied fair value of
$81,573, resulting in an impairment charge of $75,244, which was included in
earnings for the period. See Note 13 for further information.
To estimate the fair value, the Company utilized both the income and market
valuation approaches. Under the income approach, the Company determined the fair
value considering distributable earnings which were estimated from operating
plans. The resulting cash flows were then discounted using a market participant
weighted average cost of capital estimated for the Company. After discounting
the future discrete earnings to their present value, the Company estimated the
terminal value attributable to the years beyond the discrete operating plan
period. The discounted terminal value was then added to the aggregate discounted
distributable earnings from the discrete operating plan period to estimate the
fair value of Company. Under the market approach, the Company derived the fair
value based on various financial multiples, including but not limited to: price
to tangible book value of equity, price to estimated 2009 earnings and price to
estimated 2010 earnings which were estimated based on publicly available data
related to comparable guideline companies. In addition, financial multiples were
also estimated from publicly available purchase price data for acquisitions of
companies operating in the insurance industry. The estimated fair value of the
Company was more heavily weighted towards the income approach because the
earnings capacity of a business is generally considered the most important
factor in the valuation of a business enterprise. This fair value determination
was categorized as Level 3 (unobservable) in the fair value hierarchy.
The following tables present the Company's fair value hierarchy for goodwill
measured at fair value on a non-recurring basis on which an impairment charge
was recorded, and the related impairment charge as of December 31, 2009:
<Table>
<Caption>
ASSETS AT FAIR VALUE
NON-RECURRING BASIS
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
---------------------------------------------------------------------------------------------------------------------------------
At December 31, 2009
Goodwill- $ -- $ -- $81,573 $81,573
----- ----- --------- ---------
</Table>
<Table>
<Caption>
IMPAIRMENT CHARGES
TWELVE MONTHS ENDED DECEMBER 31,
2009 2008
-------------------------------------------------------------------------------------
Goodwill- $75,244 $ --
--------- -----
</Table>
F-22
<Page>
Fair Value of Financial Instruments Disclosures
The financial instruments guidance, which is within ASC Topic 825, requires
disclosure of fair value information about financial instruments, as defined
therein, for which it is practicable to estimate such fair value. Therefore, it
requires fair value disclosure for financial instruments that are not recognized
in the consolidated balance sheets. However, this guidance excludes certain
financial instruments, including those related to insurance contracts and those
accounted for under the equity method and joint ventures guidance, which is
within ASC Topic 323, INVESTMENTS -- EQUITY METHOD AND JOINT VENTURES (such as
real estate joint ventures).
Please refer to the INPUTS AND VALUATION TECHNIQUES FOR FINANCIAL AND
LIABILITIES DISCLOSURE section above for the methods and assumptions used to
estimate fair value for the following assets and liabilities:
- Fixed maturity securities
- Equity securities
- Short-term investments
- Other assets
Fair values for collateral held and obligations under securities lending and for
separate account assets (with matching liabilities) are obtained from an
independent pricing service which uses observable market information.
In estimating the fair value of the financial instruments presented, the Company
used the following methods and assumptions:
CASH AND CASH EQUIVALENTS: the carrying value reported approximates fair value
because of the short maturity of the instruments.
COMMERCIAL MORTGAGE LOANS AND POLICY LOANS: the fair values of mortgage loans
are estimated using discounted cash flow analyses, based on interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. Mortgage loans with similar characteristics are aggregated for purposes
of the calculations. The carrying value of policy loans reported in the balance
sheets approximates fair value.
OTHER INVESTMENTS: the carrying value of the other investments approximates fair
value.
COLLATERAL AND OBLIGATIONS UNDER SECURITIES LENDING: the invested assets of the
collateral held under securities lending are reported at their estimated fair
values, which are primarily based on matrix pricing models and quoted market
prices. The obligations under securities lending are reported at the amount
received from the selected broker/dealers.
POLICY RESERVES UNDER INVESTMENT PRODUCTS: the fair values for the Company's
policy reserves under the investment products are determined using discounted
cash flow analysis.
SEPARATE ACCOUNT ASSETS AND LIABILITIES: separate account assets and liabilities
are reported at their estimated fair values, which are primarily based on quoted
market prices.
The following table demonstrates the carrying value and fair value of our
financial assets and liabilities as of December 31, 2009 and December 31, 2008.
<Table>
<Caption>
DECEMBER 31, 2009 DECEMBER 31, 2008
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and cash equivalents $43,819 $43,819 $17,171 $17,171
Fixed maturities securities 2,555,863 2,555,863 2,199,547 2,199,547
Equity securities 157,993 157,993 144,770 144,770
Commercial mortgage loans on real estate 772,912 782,922 838,254 843,128
Policy loans 13,981 13,981 14,422 14,422
Short-term investments 70,367 70,367 159,847 159,847
Other investments 3,123 3,123 3,938 3,938
Other assets 10,406 10,406 4,821 4,821
Assets held in separate accounts 1,740,344 1,740,344 1,557,313 1,557,313
Collateral held under securities lending 106,896 106,896 113,191 113,191
FINANCIAL LIABILITIES
Policy reserves under investment
products (Individual and group
annuities, subject to discretionary
withdrawal) $262,990 $245,356 $282,175 $261,661
Liabilities related to separate accounts 1,740,344 1,740,344 1,557,313 1,557,313
Obligations under securities lending 108,186 108,186 124,063 124,063
------------ ------------ ------------ ------------
</Table>
F-23
<Page>
The fair value of the Company's liabilities for insurance contracts other than
investment-type contracts are not required to be disclosed. However, the fair
values of liabilities under all insurance contracts are taken into consideration
in the Company's overall management of interest rate risk, such that the
Company's exposure to changing interest rates is minimized through the matching
of investment maturities with amounts due under insurance contracts.
5. INCOME TAXES
The Company is subject to U.S. tax and files a U.S. consolidated federal income
tax return with its parent, Assurant Inc. Information about the Company's
current and deferred tax expense follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2009 2008 2007
--------------------------------------------------------------------------------
Current expense:
Federal and state $28,000 $37,814 $39,405
Deferred (benefit) expense:
Federal and state (873) (26,947) 17,716
--------- --------- ---------
TOTAL INCOME TAX EXPENSE $27,127 $10,867 $57,121
--------- --------- ---------
</Table>
A reconciliation of the federal income tax rate to the Company's effective
income tax rate follows:
<Table>
<Caption>
DECEMBER 31,
2009 2008 2007
--------------------------------------------------------------------------------
FEDERAL INCOME TAX RATE: 35.0% 35.0% 35.0%
RECONCILING ITEMS:
Goodwill impairment* 662.5 -- --
Change in liability for prior years'
taxes 46.0 6.0 (5.0)
Permanent nondeductible expenses 10.9 2.2 0.2
Dividends-received deduction (57.1) (21.4) (1.7)
Tax-exempt interest (4.3) (0.9) (0.1)
Change in valuation allowance -- 36.3 --
Other (10.6) 0.8 0.7
------ ------ -----
EFFECTIVE INCOME TAX RATE 682.4% 58.0% 29.1%
------ ------ -----
</Table>
* See note 13 for more information on Goodwill impairment.
The increase in the deduction for dividends received is due mainly to the
decrease in pre-tax income, partially offset by a decrease in the Company's
eligible dividends.
A reconciliation of the beginning and ending amounts of unrecognized tax
benefits for the years ended December 31, 2009 and 2008 is as follows:
<Table>
<Caption>
2009 2008
--------------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $ (4,723) $ (7,271)
Additions for tax positions related to the current
year (536) (733)
Reductions for tax positions related to the
current year 7,838 3,717
Additions for tax positions related to prior years (8,039) (467)
Reductions for tax positions related to prior
years 416 31
-------- --------
BALANCE AT END OF YEAR $(5,044) $(4,723)
-------- --------
</Table>
Of the total unrecognized tax benefit, $6,064, $5,260 and $8,249, for 2009, 2008
and 2007, respectively, which includes interest, if recognized, would impact the
Company's consolidated effective tax rate. The liability for unrecognized tax
benefits is included in the Company's tax payable on its balance sheet.
The Company's continuing practice is to recognize interest related to income tax
matters in income tax expense. During the years ended December 31, 2009, 2008
and 2007, the Company recognized $464 and $372 of interest expense, and $4,880
of interest income, respectively, related to income tax matters. The Company had
$2,099 and $1,635 of interest accrued at December 31, 2009 and 2008,
respectively.
The Company files income tax returns in the U.S. and various state
jurisdictions. The Company has substantially concluded all U.S. federal income
tax matters for years through 2004. Substantially all state and non-U.S. income
tax matters have been concluded for the years through 2002.
F-24
<Page>
The tax effects of temporary differences that result in significant deferred tax
assets and deferred tax liabilities are as follows:
<Table>
<Caption>
DECEMBER 31,
2009 2008 (1)
--------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Deferred gains on reinsurance $33,957 $39,875
Investments 25,535 40,229
Capital loss carryforwards 24,034 14,446
Deferred acquisition costs 19,293 22,350
Compensation related 1,182 970
Accrued liabilities 1,735 1,863
Net unrealized depreciation on securities -- 90,493
Employee and post-retirement benefits -- 1,417
---------- ----------
TOTAL DEFERRED TAX ASSET 105,736 211,643
Less: valuation allowance (10,415) (7,195)
---------- ----------
Deferred tax assets net of valuation
allowance $95,321 $204,448
---------- ----------
DEFERRED TAX LIABILITIES:
Net unrealized appreciation on securities $20,588 $ --
Policyholder and separate account reserves 5,238 11,110
Employee and post-retirement benefits 361 --
Other 12,565 13,925
---------- ----------
TOTAL DEFERRED TAX LIABILITY 38,752 25,035
---------- ----------
NET DEFERRED INCOME TAX ASSET $56,569 $179,413
---------- ----------
</Table>
(1) Components of the 2008 net deferred income tax asset have been reclassified
to conform to the 2009 presentation. These reclassifications had no effect
on the overall net deferred income tax asset.
The Company's total valuation allowance against deferred tax assets increased
$3,220, from $7,195 at December 31, 2008 to $10,415 at December 31, 2009,
respectively, through other comprehensive income and retained earnings. The
calculation of the valuation allowance is made at the consolidated return group
level. A portion of the valuation allowance has been assigned to the Company
based on the provisions of the tax sharing agreement. A cumulative valuation
allowance of $10,415 has been recorded because it is management's assessment
that it is more likely than not that deferred tax assets of $10,415 will not be
realized.
The Company's ability to realize deferred tax assets depends on its ability to
generate sufficient taxable income of the same character within the carryback or
carryforward periods. In assessing future GAAP taxable income, the Company has
considered all sources of taxable income available to realize the deferred tax
asset, including the future reversal of existing temporary differences, future
taxable income exclusive of reversing temporary differences and carry forwards,
taxable income in carryback years and tax-planning strategies. If changes occur
in the assumptions underlying the Company's tax planning strategies or in the
scheduling of the reversal of the Company's deferred tax liabilities, the
valuation allowance may need to be adjusted in the future.
At December 31, 2009, the Company had no net operating loss carryforwards for
U.S. federal income tax purposes. At December 31, 2009, the Company had a
capital loss carryover for U.S. federal income tax purposes in the amount of
$68,670. The 2008 capital loss carryovers which represent $39,439 will expire if
not utilized in 2013, while the 2009 capital loss carryovers of $29,231 will
expire if not utilized in 2014.
6. PREMIUMS AND ACCOUNTS RECEIVABLE
Receivables are reported net of an allowance for uncollectible items. A summary
of such receivables is as follows:
<Table>
<Caption>
DECEMBER 31,
2009 2008
--------------------------------------------------------------------------------
Insurance premiums receivable $64,906 $60,991
Other receivables 19,421 15,699
Allowance for uncollectible items (4,811) (4,840)
--------- ---------
TOTAL $79,516 $71,850
--------- ---------
</Table>
F-25
<Page>
7. STOCKHOLDER'S EQUITY
The Board of Directors of the Company has authorized 1,000,000 shares of common
stock with a par value of $5.00 per share. All the shares are issued and
outstanding as of December 31, 2009 and 2008. All the outstanding shares at
December 31, 2009 are owned by the Parent (see Note 1). The Company paid
dividends of $20,000 and $197,000 at December 31, 2009 and 2007, respectively.
No dividends were paid during 2008.
The maximum amount of dividends which can be paid by the Company to its
shareholder without prior approval of the Insurance Commissioner is subject to
restrictions relating to statutory surplus (see Note 8).
The Company received contributed capital of $15,000 at December 31, 2009 and
2008. No contributed capital was received during 2007.
In 2008, based on operating lines of business, management determined that the
Company was over capitalized. As a result, with the approval of the Iowa
Insurance Division, on June 27, 2008, the Company returned $100,000 of
contributed capital to its parent company, Interfinancial Inc.
8. STATUTORY INFORMATION
The Company prepares consolidated financial statements on the basis of statutory
accounting principles ("SAP") prescribed or permitted by the Kansas Department
of Commerce. Prescribed SAP includes the Accounting Practices and Procedures
Manual of the National Association of Insurance Commissioners ("NAIC") as well
as state laws, regulations and administrative rules.
The principal differences between SAP and GAAP are: 1) policy acquisition costs
are expensed as incurred under SAP, but are deferred and amortized under GAAP;
2) the value of business acquired is not capitalized under SAP but is under
GAAP; 3) amounts collected from holders of universal life-type and annuity
products are recognized as premiums when collected under SAP, but are initially
recorded as contract deposits under GAAP, with cost of insurance recognized as
revenue when assessed and other contract charges recognized over the periods for
which services are provided; 4) the classification and carrying amounts of
investments in certain securities are different under SAP than under GAAP; 5)
the criteria for providing asset valuation allowances, and the methodologies
used to determine the amounts thereof, are different under SAP than under GAAP;
6) the timing of establishing certain reserves, and the methodologies used to
determine the amounts thereof, are different under SAP than under GAAP; 7)
certain assets are not admitted for purposes of determining surplus under SAP;
8) methodologies used to determine the amounts of deferred taxes and goodwill
are different under SAP than under GAAP; and 9) the criteria for obtaining
reinsurance accounting treatment is different under SAP than under GAAP.
The Company's statutory net income and capital and surplus are as follows:
<Table>
<Caption>
YEARS ENDED AND AT
DECEMBER 31,
2009 2008 2007
--------------------------------------------------------------------------------
Statutory net income $59,863 $1,754 (1) $138,496
---------- ---------- --- ----------
Statutory capital and surplus $418,397 $350,383 $438,924
---------- ---------- ----------
</Table>
(1) The $1,754 net income in 2008 includes realized capital losses on
investments of $135,094 due to other-than-temporary impairments in our
investment portfolio of $108,913 in 2008 compared to $21,291 in 2007.
Insurance enterprises are required by state insurance departments to adhere to
minimum risk-based capital ("RBC") requirements developed by the NAIC. The
Company exceeds the minimum RBC requirements.
Dividend distributions to the Parent are restricted as to the amount by state
regulatory requirements. A dividend is extraordinary when combined with all
other dividends and distributions made within the preceding 12 months exceeds
the greater of 10% of the insurers surplus as regards to policyholders on
December 31 of the next preceding year, or the net gain from operations. In
2009, the Company declared and paid dividends of $20,000, all of which were
ordinary. There were no dividends declared and paid during 2008. Dividends may
only be paid out of earned surplus. In 2007, the Company declared and paid
dividends of $197,000, of which $30,442 was ordinary and $166,558 was
extraordinary. The Company has the ability, under state regulatory requirements,
to dividend up to $50,830 to its parent in 2010 without permission from Kansas
regulators.
F-26
<Page>
9. REINSURANCE
In the ordinary course of business, the Company is involved in both the
assumption and cession of reinsurance with non-affiliated companies. The
following table provides details of the reinsurance recoverables balance for the
years ended December 31:
<Table>
<Caption>
DECEMBER 31,
2009 2008
--------------------------------------------------------------------------------
Ceded future policyholder benefits and expenses $1,300,352 $1,248,756
Ceded unearned premium 18,942 18,502
Ceded claims and benefits payable 105,900 80,414
Ceded paid losses 9,211 11,579
------------ ------------
TOTAL $1,434,405 $1,359,251
------------ ------------
</Table>
The effect of reinsurance on premiums earned and benefits incurred was as
follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2009 2008
LONG SHORT LONG SHORT
DURATION DURATION TOTAL DURATION DURATION TOTAL
---------------------------------------------------------------------------------------------------------------------------
Direct earned
Premiums and other considerations $248,457 $909,099 $1,157,556 $270,883 $980,899 $1,251,782
Premiums assumed 8,419 128,425 136,844 9,599 127,656 137,255
Premiums ceded (190,555) (11,333) (201,888) (204,503) (10,744) (215,247)
-------- --------- ---------- -------- ---------- ----------
NET EARNED PREMIUMS AND OTHER
CONSIDERATIONS $66,321 $1,026,191 $1,092,512 $75,979 $1,097,811 $1,173,790
-------- --------- ---------- -------- ---------- ----------
Direct policyholder Benefits $492,058 $644,290 $1,136,348 $614,911 $658,421 $1,273,332
Benefits assumed 28,667 114,577 143,244 33,913 117,260 151,173
Benefits ceded (424,066) (5,995) (430,061) (531,732) (3,275) (535,007)
-------- --------- ---------- -------- ---------- ----------
NET POLICYHOLDER BENEFITS $96,659 $752,872 $849,531 $117,092 $772,406 $889,498
-------- --------- ---------- -------- ---------- ----------
<Caption>
YEARS ENDED DECEMBER 31,
2007
LONG SHORT
DURATION DURATION TOTAL
---------------------------------- ------------------------------------------------
Direct earned
Premiums and other considerations $293,346 $1,003,971 $1,297,317
Premiums assumed 9,732 179,395 189,127
Premiums ceded (219,490) (7,024) (226,514)
-------- ---------- ----------
NET EARNED PREMIUMS AND OTHER
CONSIDERATIONS $83,588 $1,176,342 $1,259,930
-------- ---------- ----------
Direct policyholder Benefits $756,784 $643,161 $1,399,945
Benefits assumed 31,002 177,909 208,911
Benefits ceded (671,497) (2,750) (674,247)
-------- ---------- ----------
NET POLICYHOLDER BENEFITS $116,289 $818,320 $934,609
-------- ---------- ----------
</Table>
The Company had $843,194 and $714,556 of assets held in trusts as of December
31, 2009 and 2008, respectively, for the benefit of others related to certain
reinsurance arrangements.
The Company utilizes ceded reinsurance for loss protection and capital
management, business divestitures, client risk and profit sharing.
LOSS PROTECTION AND CAPITAL MANAGEMENT
As part of the Company's overall risk and capacity management strategy, the
Company purchases reinsurance for certain risks underwritten by the Company,
including significant individual or catastrophic claims, which enables the
Company to free up capital to write additional business.
Under indemnity reinsurance transactions in which the Company is the ceding
insurer, the Company remains liable for policy claims if the assuming company
fails to meet its obligations. To mitigate this risk, the Company has control
procedures to evaluate the financial condition of reinsurers and to monitor the
concentration of credit risk. The selection of reinsurance companies is based on
criteria related to solvency and reliability and, to a lesser degree,
diversification as well as developing strong relationships with the Company's
reinsurers for the sharing of risks. A.M. Best ratings for The Hartford and John
Hancock Life Insurance Company ("John Hancock"), the reinsurers we have the most
exposure to, are A and A+, respectively, although A.M. Best recently placed a
negative outlook on the issuer credit and financial strength ratings of The
Hartford and a stable outlook for John Hancock.
BUSINESS DIVESTITURES
The Company has used reinsurance to exit certain businesses.
In 2005, the Parent signed an agreement with Forethought whereby the Company
agreed to discontinue writing new preneed insurance policies in the United
States via independent funeral homes and funeral homes other than those owned
and operated by SCI for a period of ten years.
In 2001, the Parent entered into a reinsurance agreement with The Hartford for
the sale of the FFG division. In 2000, the Company divested its LTC operations
to John Hancock. Assets supporting liabilities ceded relating to these
businesses are held in trusts and the separate accounts relating to FFG are
still reflected in the Company's balance sheet. If the reinsurers became
insolvent, we would be exposed to the risk that the assets in the trusts and/or
the separate accounts would be insufficient to support the liabilities that
would revert back to us. The reinsurance recoverable from The Hartford was
$648,919 and $677,836 as of December 31, 2009 and 2008, respectively. The
reinsurance recoverable from John Hancock was $669,407 and $561,342 as of
December 31, 2009 and 2008, respectively.
F-27
<Page>
The reinsurance agreement associated with the FFG sale also stipulates that The
Hartford contribute funds to increase the value of the separate account assets
relating to Modified Guaranteed Annuity business sold if such value declines
below the value of the associated liabilities. If The Hartford fails to fulfill
these obligations, the Company will be obligated to make these payments.
In addition, the Company would be responsible for administering this business in
the event of reinsurer insolvency. We do not currently have the administrative
systems and capabilities to process this business. Accordingly, we would need to
obtain those capabilities in the event of an insolvency of one or more of the
reinsurers of these businesses. We might be forced to obtain such capabilities
on unfavorable terms with a resulting material adverse effect on our results of
operations and financial condition.
As of December 31, 2009, we were not aware of any regulatory actions taken with
respect to the solvency of the insurance subsidiaries of The Hartford or John
Hancock that reinsure the FFG and LTC businesses, and the Company has not been
obligated to fulfill any such reinsurers' obligations.
On April 1, 2008, the Company and United Family Life Insurance Company ("UFLIC")
amended an existing Agreement of Reinsurance (the"Agreement") between the two
companies. Under the terms of the amendment, UFLIC will cede to the Company 100%
of its remaining reinsured liabilities, as defined in the Agreement, on a
coinsurance basis. No gain or loss was recognized as a result of this amendment
to the Agreement, and the Company paid a ceding fee of $8,159 to UFLIC.
10. RESERVES
The following table provides reserve information of our major product lines at
the dates shown:
<Table>
<Caption>
CLAIMS AND BENEFITS
DECEMBER 31, 2009 PAYABLE
FUTURE INCURRED
POLICY BUT NOT
BENEFITS AND UNEARNED CASE REPORTED
EXPENSES PREMIUMS RESERVES RESERVES
------------------------------------------------------------------------------------------------------
LONG DURATION CONTRACTS:
Pre-funded funeral life $1,185,901 $1,105 $3,737 $1,192
insurance policies and
investment-type annuity
contracts
Life insurance no longer 287,590 627 1,036 33
offered
FFG and LTC disposed 1,196,373 19,056 6,851 89,323
businesses
All other 5,205 335 8,084 18,792
SHORT DURATION CONTRACTS:
Group term life -- 3,501 36,977 202,823
Group disability -- 6,716 137,402 1,209,968
Medical -- 2,582 3,245 7,603
Dental -- 3,769 18,297 4,722
Credit life and disability -- 1 -- 1,416
---------- ------- -------- ----------
TOTAL $2,675,069 $37,692 $215,629 $1,535,872
---------- ------- -------- ----------
<Caption>
CLAIMS AND BENEFITS
DECEMBER 31, 2008 PAYABLE
FUTURE INCURRED
POLICY BUT NOT
BENEFITS AND UNEARNED CASE REPORTED
EXPENSES PREMIUMS RESERVES RESERVES
------------------------------- -----------------------------------------------------------------------------
LONG DURATION CONTRACTS:
Pre-funded funeral life $1,237,749 $1,316 $4,076 $1,168
insurance policies and
investment-type annuity
contracts
Life insurance no longer 303,660 673 932 31
offered
FFG and LTC disposed 1,141,011 18,277 8,451 62,945
businesses
All other 5,068 290 20,499 7,767
SHORT DURATION CONTRACTS:
Group term life -- 5,988 196,875 41,470
Group disability -- 2,104 1,256,171 138,956
Medical -- 3,315 5,537 9,494
Dental -- 3,995 2,600 20,207
Credit life and disability -- 4 -- 1,384
---------- ------- ---------- --------
TOTAL $2,687,488 $35,962 $1,495,141 $283,422
---------- ------- ---------- --------
</Table>
F-28
<Page>
The following table provides a roll forward of the Company's product lines with
the most significant short duration claims and benefits payable balances: group
term life and group disability lines of business. Claims and benefits payable is
comprised of case and IBNR reserves.
<Table>
<Caption>
GROUP GROUP
TERM LIFE DISABILITY
--------------------------------------------------------------------------------
BALANCE AS OF JANUARY 1, 2007, GROSS OF
REINSURANCE $276,995 $1,448,571
Less: Reinsurance ceded and other (1) (412) (10,054)
----------- -------------
Balance as of January 1, 2007, net of
reinsurance 276,583 1,438,517
Incurred losses related to:
Current year 168,613 367,871
Prior year's interest 9,150 62,073
Prior year(s) (51,190) (93,096)
----------- -------------
TOTAL INCURRED LOSSES 126,573 336,848
Paid losses related to:
Current year 107,361 71,413
Prior year(s) 34,609 289,046
----------- -------------
TOTAL PAID LOSSES 141,970 360,459
Balance as of December 31, 2007, net of
reinsurance 261,186 1,414,906
Plus: Reinsurance ceded and other (1) 955 34,237
----------- -------------
BALANCE AS OF DECEMBER 31, 2007, GROSS OF
REINSURANCE $ 262,141 $ 1,449,143
Less: Reinsurance ceded and other (1) (955) (34,237)
----------- -------------
Balance as of January 1, 2008, net of
reinsurance 261,186 1,414,906
Incurred losses related to:
Current year 158,899 317,328
Prior year's interest 8,358 62,678
Prior year(s) (54,593) (85,403)
----------- -------------
TOTAL INCURRED LOSSES 112,664 294,603
Paid losses related to:
Current year 104,535 77,684
Prior year(s) 32,204 268,345
----------- -------------
TOTAL PAID LOSSES 136,739 346,029
Balance as of December 31, 2008, net of
reinsurance 237,111 1,363,480
Plus: Reinsurance ceded and other (1) 1,234 31,647
----------- -------------
BALANCE AS OF DECEMBER 31, 2008, GROSS OF
REINSURANCE $ 238,345 $ 1,395,127
Less: Reinsurance ceded and other (1) (1,234) (31,647)
----------- -------------
Balance as of January 1, 2009, net of
reinsurance 237,111 1,363,480
Incurred losses related to:
Current year 138,168 300,046
Prior year's interest 8,299 60,625
Prior year(s) (22,243) (75,016)
----------- -------------
TOTAL INCURRED LOSSES 124,224 285,655
Paid losses related to:
Current year 83,520 69,424
Prior year(s) 39,399 264,809
----------- -------------
TOTAL PAID LOSSES 122,919 334,233
Balance as of December 31, 2009, net of
reinsurance 238,416 1,314,902
Plus: Reinsurance ceded and other (1) 1,384 32,468
----------- -------------
BALANCE AS OF DECEMBER 31, 2009, GROSS OF
REINSURANCE $239,800 $1,347,370
----------- -------------
</Table>
(1) Reinsurance ceded and other includes claims and benefits payable balances
that have either been (a) reinsured to third parties, (b) established for
claims related expenses whose subsequent payment is not recorded as a paid
claim, or (c) reserves established for obligations that would persist even
if contracts were cancelled (such as extension of benefits), which cannot
be analyzed appropriately under a roll-forward approach.
SHORT DURATION CONTRACTS
The Company's short duration contracts are comprised of group term life, group
disability, medical, dental, and credit life and disability. The principal
products and services included in these categories are described in the summary
of significant accounting polices. See note 2 for further information.
Case and IBNR reserves are developed using actuarial principles and assumptions
that consider, among other things, contractual requirements, historical
utilization trends and patterns, benefits changes, medical inflation,
seasonality, membership, product mix, legislative and regulatory environment,
economic factors, disabled life mortality and claim termination rates and other
relevant factors. The Company consistently applies the principles and
assumptions listed above from year to year, while also giving due consideration
to the potential variability of these factors.
F-29
<Page>
Since case and IBNR reserves include estimates developed from various actuarial
methods, the Company's actual losses incurred may be more or less than the
Company's previously developed estimates. As shown in the table above, if the
amounts listed on the line labeled "Incurred losses related to: Prior year" are
negative (redundant) this means that the Company's actual losses incurred
related to prior years for these lines were less than the estimates previously
made by the Company. If the line labeled "Incurred losses related to: Prior
year" are positive (deficient) this means that the Company's actual losses
incurred related to prior years for these lines were greater than the estimates
previously made by the Company.
The Group Term Life case and IBNR reserves redundancies in all years are due to
actual mortality rates running below those assumed in prior year reserves, and
actual recovery rates running higher than those assumed in prior year reserves.
Group Disability case and IBNR reserves show redundancies in all years due to
actual claim recovery rates exceeding those assumed in prior year reserves.
The Company's short duration group disability category includes short and long
term disability products. Case and IBNR reserves for long-term disability have
been discounted at 5.25%. The December 31, 2009 and 2008 liabilities net of
reinsurance include $1,288,589 and $1,334,794, respectively, of such reserves.
The amount of discounts deducted from outstanding reserves as of December 31,
2009 and 2008 are $451,267 and $465,786, respectively
LONG DURATION CONTRACTS
The Company's long duration contracts are comprised of preneed funeral life
insurance policies and annuity contracts, life insurance policies (no longer
offered), and FFG and LTC disposed businesses. The principal products and
services included in these categories are described in the summary of
significant accounting polices. See note 2 for further information.
PRENEED BUSINESS
Interest and discount rates for preneed life insurance vary by year of issuance
and product, are based on pricing assumptions and modified to allow for
provisions for adverse deviation. During 2009 and 2008, interest and discount
rates ranged between 4.7% and 7.3%.
Interest and discount rates for traditional life insurance (no longer offered)
vary by year of issuance and products and were 7.5% grading to 5.3% over 20
years in 2009 and 2008 with the exception of a block of pre-1980 business which
had a level 8.8% discount rate in both 2009 and 2008.
Mortality assumptions are based upon pricing assumptions and modified to allow
provisions for adverse deviation. Surrender rates vary by product and are based
upon pricing assumptions.
Future policy benefit increases on preneed life insurance policies ranged from
1.0% to 7.0% in 2009 and 2008. Some policies have future policy benefit
increases that are guaranteed or tied to equal some measure of inflation. The
inflation assumption for most of these inflation-linked benefits was 3.0% in
both 2009 and 2008 with the exception of most policies issued in 2005 and later
where the assumption was 2.3%.
The reserves for annuities are based on credited interest rates, which vary by
year of issue, and ranged from 1.5% to 5.5% in 2009 and 2008. Withdrawal
charges, if any, generally range from 7.0% to 0.0% and grade to zero over a
period of seven years.
FFG AND LTC
The reserves for FFG and LTC are included in the Company's reserves in
accordance with the insurance guidance, which is within ASC Topic 944. The
Company maintains an offsetting reinsurance recoverable related to these
reserves. See note 9 for further information.
11. RETIREMENT AND OTHER EMPLOYEE BENEFITS
The Parent sponsors a defined benefit pension plan and certain other post
retirement benefits covering employees who meet eligibility requirements as to
age and length of service. Plan assets of the defined benefit plans are not
specifically identified by each participating subsidiary. Therefore, a breakdown
of plan assets is not reflected in these consolidated financial statements. The
Company has no legal obligation for benefits under these plans. The benefits are
based on years of service and career compensation. The Parent's pension plan
funding policy is to contribute amounts to the plan sufficient to meet the
minimum funding requirements set forth in the Employee Retirement Income
Security Act of 1974, plus additional amounts as the Parent may determine to be
appropriate from time to time up to the maximum permitted, and to charge each
subsidiary an allocable amount based on its employee census. Pension costs
allocated to the Company amounted to $6,349, $5,327 and $6,902 for 2009, 2008
and 2007, respectively.
The Parent sponsors a defined contribution plan covering substantially all
employees. The defined contribution plan provides benefits payable to
participants on retirement or disability and to beneficiaries of participants in
the event of the participant's death. The amounts expensed by the Company
related to this plan were $6,206, $5,927 and $5,853 for 2009, 2008 and 2007,
respectively.
F-30
<Page>
With respect to retirement benefits, the Company participates in other health
care and life insurance benefit plans (postretirement benefits) for retired
employees, sponsored by the Parent. Heath care benefits, either through the
Parent's sponsored retiree plan for retirees under age 65 or through a cost
offset for individually purchased Medigap policies for retirees over age 65, are
available to employees who retire on or after January 1, 1993, at age 55 or
older, with 10 years or more service. Life insurance, on a retiree pay all
basis, is available to those who retire on or after January 1, 1993. The Company
made contributions to the postretirement benefit plans of $1,500, $1,152 and
$1,108 in 2009, 2008 and 2007, respectively, as claims were incurred. During
2009, 2008 and 2007 the Company incurred expenses related to retirement benefits
of $981, $1,284 and $1,522, respectively.
12. DEFERRED POLICY ACQUISITION COSTS
Information about deferred policy acquisition costs follows:
<Table>
<Caption>
DECEMBER 31,
2009 2008 2007
--------------------------------------------------------------------------------
Beginning balance $43,020 $50,575 $63,571
Costs deferred 38,608 35,680 33,063
Amortization (43,720) (43,235) (39,724)
Cumulative effect of change in
accounting principle -- -- (6,335)
--------- --------- ---------
ENDING BALANCE $37,908 $43,020 $50,575
--------- --------- ---------
</Table>
13. GOODWILL, VOBA AND INTANGIBLES
Information about goodwill is as follows:
<Table>
<Caption>
GOODWILL FOR THE YEARS ENDED DECEMBER 31,
2009 2008 2007
--------------------------------------------------------------------------------
Balance as of January 1: $156,817 $156,817 $156,817
Impairments* (75,244) -- --
---------- ----------- -----------
Goodwill 156,817 156,817 156,817
Accumulated impairment losses (75,244) -- --
---------- ----------- -----------
BALANCE AS OF DECEMBER 31: $81,573 $156,817 $156,817
---------- ----------- -----------
</Table>
* See Notes 2 and 4 for further information.
In accordance with ASC Topic 350, goodwill is deemed to have an indefinite life
and should not be amortized, but rather must be tested, at least annually, for
impairment. In addition, goodwill should be tested for impairment between annual
tests if an event occurs or circumstances change that would "more likely than
not" reduce the fair value of the reporting unit below its net book value.
The goodwill impairment test has two steps. Step 1 of the test identifies
potential impairments, by comparing the estimated fair value of the Company to
its net book value. If the estimated fair value exceeds its net book value,
there is no impairment of goodwill and Step 2 is unnecessary. However, if the
net book value exceeds the estimated fair value, then Step 1 is failed, and Step
2 is performed to determine the amount of the potential impairment.
Since the Company failed the Step 1 test, we were required to perform a Step 2
test to determine the amount of the potential impairment. Step 2 utilizes
acquisition accounting guidance and requires the fair value calculation of all
individual assets and liabilities of the Company (excluding goodwill, but
including any unrecognized intangible assets). The net fair value of assets less
liabilities is then compared to the total estimated fair value as calculated in
Step 1. The excess of estimated fair value over the net asset value equals the
implied fair value of goodwill. The implied fair value of goodwill is then
compared to the carrying value of goodwill to determine the Company's goodwill
impairment. Based on our Step 2 test it was determined that 48% of the goodwill
of the Company was impaired, resulting in a non-cash charge of $75,244. This
impairment reflects the challenging near term growth environment for the Company
and an increased net book value, primarily related to its investment portfolio.
Management remains confident in the long-term prospects of the Company.
Information about VOBA and intangibles are as follows:
<Table>
<Caption>
VOBA FOR THE YEARS ENDED DECEMBER 31, INTANGIBLES FOR THE YEARS ENDED DECEMBER 31,
2009 2008 2007 2009 2008 2007
---------------------------------------------------------------------------------------------------------------------------------
Beginning Balance $21,461 $22,816 $26,667 $25,485 $27,273 $29,061
Acquisitions -- 2,088 -- -- -- --
Amortization, net of
interest accrued (2,678) (3,443) (3,851) (1,788) (1,788) (1,788)
--------- --------- --------- --------- --------- ---------
ENDING BALANCE $18,783 $21,461 $22,816 $23,697 $25,485 $27,273
--------- --------- --------- --------- --------- ---------
</Table>
F-31
<Page>
As of December 31, 2009, the majority of the outstanding balance of VOBA relates
to the Company's preneed business. VOBA in this segment assumes an interest rate
ranging from 5.4% to 7.5%.
At December 31, 2009 the estimated amortization of VOBA for the next five years
and thereafter is as follows:
<Table>
<Caption>
YEAR AMOUNT
--------------------------------------------------------------------------------
2010 $2,086
2011 1,863
2012 1,729
2013 1,550
2014 1,425
Thereafter 10,130
---------
TOTAL $18,783
---------
</Table>
Intangibles assets that have finite lives, including customer relationships,
customer contracts and other intangible assets are amortized over their
estimated useful lives. At December 31, 2009, the estimated amortization of
intangibles with finite lives for the next five years is as follows:
<Table>
<Caption>
YEAR AMOUNT
--------------------------------------------------------------------------------
2010 $1,788
2011 1,788
2012 1,788
2013 1,788
2014 1,788
Thereafter 14,757
---------
TOTAL $23,697
---------
</Table>
14. OTHER COMPREHENSIVE INCOME (LOSS)
The Company's components of other comprehensive income (loss) net of tax at
December 31 are as follows:
<Table>
<Caption>
ACCUMULATED OTHER
UNREALIZED GAINS COMPREHENSIVE INCOME
(LOSSES) ON SECURITIES OTTI (LOSS)
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007 $5,696 $ -- $5,696
Activity in 2008 (171,408) -- (171,408)
----------- -------- -----------
Balance at December 31, 2008 (165,712) -- (165,712)
----------- -------- -----------
Cumulative effect of change in accounting principle
(after-tax) (1) (14,203) (2,221) (16,424)
----------- -------- -----------
Activity in 2009 210,552 6,177 216,729
----------- -------- -----------
BALANCE AT DECEMBER 31, 2009 $30,637 $3,956 $34,593
----------- -------- -----------
</Table>
(1) Related to the adoption of the new OTTI guidance for debt securities. See
Notes 3 and 4 for further information.
The amounts in the unrealized gains (losses) on securities column are net of
reclassification adjustments of $(14,951), $(82,824) and $(13,827), net of tax,
in 2009, 2008 and 2007, respectively, for net realized gains (losses) on sales
of securities included in net income. The amounts in the OTTI column are net of
reclassification adjustments of $(753), net of tax, in 2009, for net realized
gains (losses) on sales of securities included in net income.
15. RELATED PARTY TRANSACTIONS
The Company receives various services from the Parent and its affiliates. These
services include assistance in benefit plan administration, corporate insurance,
accounting, tax, auditing, investment, information technology and other
administrative functions. The fees paid to the Parent for these services for
years ended December 31, 2009, 2008 and 2007, were $33,398, $28,525 and $27,581,
respectively. Net expenses paid to affiliates were $12,986, $25,324 and $26,714,
for the years ended December 31, 2009, 2008 and 2007. Information technology
expenses were $20,309, $22,451and $43,369 for years ended December 31, 2009,
2008 and 2007, respectively.
Administrative expenses allocated for the Company may be greater or less than
the expenses that would be incurred if the Company were operating on its own.
In, 2008, the Company assumed the remaining business not already reinsured
through an existing, but amended agreement with its affiliate, UFLIC. Later in
2008, Assurant sold UFLIC to IA American Life Insurance Company. The Company has
assumed premiums from IA American Life Insurance Company of $8,157 and $9,450
and reserves of $473,088 and $498,663 for the years ended December 31, 2009 and
2008 respectively. In 2007, premiums and reserves assumed from UFLIC were $8,146
and $520,904, respectively.
F-32
<Page>
The Company assumes group disability business from its affiliate, Union Security
Life Insurance Company of New York ("USLICONY"). The Company assumed $4,777,
$7,806 and $6,813 of premiums from USLICONY in 2009, 2008 and 2007,
respectively. The Company assumed $30,149, $30,802 and $29,569 of reserves in
2009, 2008 and 2007, respectively, from USLICONY. This agreement between the
Company and its affiliate USICONY was discontinued effective January 1st, 2010,
for new incurrals.
16. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease office space and equipment under
operating lease arrangements. Certain facility leases contain escalation clauses
based on increases in the lessors' operating expenses. At December 31, 2009, the
aggregate future minimum lease payments under these operating lease agreements
that have initial or non-cancelable terms in excess of one year are:
<Table>
2010 $8,463
2011 7,158
2012 2,196
2013 1,109
2014 503
Thereafter 769
---------
TOTAL MINIMUM FUTURE LEASE PAYMENTS $20,198
---------
</Table>
Rent expense was $8,760, $7,961 and $8,277 for 2009, 2008 and 2007,
respectively.
The Company is involved in litigation in the ordinary course of business, both
as a defendant and as a plaintiff. The Company may from time to time be subject
to a variety of legal and regulatory actions relating to the Company's current
and past business operations. While the Company cannot predict the outcome of
any pending or future litigation, examination or investigation and although no
assurances can be given, the Company does not believe that any pending matter
will have a material adverse effect individually or in the aggregate, on the
Company's financial condition, results of operations or cash flows.
On January 21, 2010, the SEC filed a civil complaint in the United States
District Court for the Southern District of New York in connection with the
previously disclosed SEC investigation into a finite reinsurance arrangement
entered into by the Parent. In the complaint, the SEC charged the Parent with
violating Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange
Act of 1934, as amended, and Rules 12b-20, 13a-11 and 13a-13 thereunder. As
previously disclosed by the Parent in a Current Report on Form 8-K on January
21, 2010, the Parent entered into a settlement with the SEC in which the Parent
consented, without admitting or denying the allegations in the complaint, to the
entry of a judgment requiring payment of a civil penalty of $3,500 and enjoining
the Parent from violating the aforementioned federal securities laws. The court
approved the settlement in a final judgment entered on January 25, 2010 and the
Parent has paid the penalty.
As part of the settlement, the SEC granted permanent relief to the Company,
exempting it from limitations on serving as depositor to investment companies
under Section 9(a) of the Investment Company Act of 1940.
In the course of implementing procedures for compliance with the new mandatory
reporting requirements under the Medicare, Medicaid, and SCHIP Extension Act of
2007, the Parent's Health segment identified a possible ambiguity in the
Medicare Secondary Payer Act and related regulations about which the Company has
since had a meeting with representatives of the Centers for Medicare and
Medicaid Services ("CMS"). The Parent believes that its historical
interpretation and application of such laws and regulations is correct and has
requested that CMS issue a written determination to that effect. CMS has not
made a determination. The Company does not believe that any loss relating to
this issue is probable, nor can the Company make any estimate of any possible
loss or range of possible loss associated with this issue.
17. BUSINESS COMBINATIONS
On October 1, 2009, the Company acquired, through a reinsurance agreement, a
block of business from Shenandoah Life Insurance Company ("Shenandoah"). The
Company will assume, on a coinsurance basis, 100% of the group life, disability,
dental and vision insurance business in force with Shenandoah. There were no
goodwill or intangible assets associated with this agreement.
18. SUBSEQUENT EVENTS
On March 23, 2010, President Obama signed the Patient Protection and Affordable
Care Act into law. The Company is in the process of evaluating the law's impact
on its operations, which may be materially adverse.
F-33
<Page>
UNION SECURITY INSURANCE COMPANY
AT DECEMBER 31, 2009
SCHEDULE I -- SUMMARY OF INVESTMENTS OTHER -- THAN -- INVESTMENTS IN RELATED
PARTIES
<Table>
<Caption>
COST OR AMOUNT AT
AMORTIZED FAIR WHICH SHOWN IN
COST VALUE BALANCE SHEET
(IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------------
FIXED MATURITY SECURITIES:
United States Government and government $2,888 $3,012 $3,012
agencies and authorities
States, municipalities and political 58,962 58,394 58,394
subdivisions
Foreign governments 34,969 35,128 35,128
Asset-backed 3,782 3,780 3,780
Commercial mortgage-backed 20,369 20,322 20,322
Residential mortgage-backed 122,036 127,529 127,529
Corporate 2,250,259 2,307,698 2,307,698
------------- ------------- -------------
TOTAL FIXED MATURITY SECURITIES 2,493,265 2,555,863 2,555,863
------------- ------------- -------------
EQUITY SECURITIES:
Non-redeemable preferred stocks 160,510 157,993 157,993
Commercial mortgage loans on real estate, at 772,912 782,922 772,912
amortized cost
Policy loans 13,981 13,981 13,981
Short-term investments 70,367 70,367 70,367
Collateral held under securities lending 108,186 106,896 106,896
Other investments 88,736 88,736 88,736
------------- ------------- -------------
TOTAL INVESTMENTS $3,707,957 $3,776,758 $3,766,748
------------- ------------- -------------
</Table>
F-34
<Page>
UNION SECURITY INSURANCE COMPANY
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 & 2007
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
<Table>
<Caption>
FUTURE
DEFERRED POLICY CLAIMS AND
ACQUISITION BENEFITS AND UNEARNED BENEFITS PREMIUM
COSTS EXPENSES PREMIUMS PAYABLE REVENUES
---------------------------------------------------------------------------------------------------------
2009 $37,908 $2,675,069 $37,692 $1,751,501 $1,092,512
------- ---------- -------- ---------- ----------
2008 $43,020 $2,687,488 $35,962 $1,778,563 $1,173,790
------- ---------- -------- ---------- ----------
2007 $50,575 $2,675,363 $40,147 $1,840,353 $1,259,930
------- ---------- -------- ---------- ----------
<Caption>
BENEFITS AMORTIZATION
CLAIMS, LOSSES OF DEFERRED
NET AND POLICY OTHER*
INVESTMENT SETTLEMENT ACQUISITION OPERATING
INCOME EXPENSES COSTS EXPENSES
---------- ----------------------------------------------------------------------------------
2009 $216,725 $849,531 $43,720 $418,264
--------- --------- --------- ---------
2008 $238,451 $889,498 $43,235 $357,217
--------- --------- --------- ---------
2007 $286,235 $934,609 $39,724 $386,957
--------- --------- --------- ---------
</Table>
* Includes goodwill impairment and other expenses
F-35
<Page>
UNION SECURITY INSURANCE COMPANY
FOR THE YEARS ENDED DECEMBER 31, 2009
SCHEDULE IV -- REINSURANCE
<Table>
<Caption>
ASSUMED FROM
CEDED TO OTHER OTHER
DIRECT AMOUNT COMPANIES COMPANIES
(IN THOUSANDS)
--------------------------------------------------------------------------------------------------------------------------
LIFE INSURANCE IN FORCE $74,478,037 $14,220,902 $8,661,374
------------- ------------- ------------
PREMIUMS:
Life insurance 314,216 112,043 11,258
Accident and health insurance 843,340 89,845 125,586
------------- ------------- ------------
TOTAL EARNED PREMIUMS $1,157,556 $201,888 $136,844
------------- ------------- ------------
BENEFITS:
Life insurance $457,403 $290,203 $31,302
Accident and health insurance 678,945 139,858 111,942
------------- ------------- ------------
TOTAL POLICYHOLDER BENEFITS $1,136,348 $430,061 $143,244
------------- ------------- ------------
<Caption>
PERCENTAGE
OF AMOUNT
ASSUMED
TO NET
NET AMOUNT
(IN THOUSANDS)
-------------------------------------- ----------------------------------------
LIFE INSURANCE IN FORCE 68,918,509 12.6%
-------------
PREMIUMS:
Life insurance 213,431 5.3%
Accident and health insurance 879,081 14.3%
-------------
TOTAL EARNED PREMIUMS $1,092,512 12.5%
-------------
BENEFITS:
Life insurance $198,502 15.8%
Accident and health insurance 651,029 17.2%
-------------
TOTAL POLICYHOLDER BENEFITS $849,531 16.9%
-------------
</Table>
F-36
<Page>
UNION SECURITY INSURANCE COMPANY
FOR THE YEARS ENDED DECEMBER 31, 2008
SCHEDULE IV -- REINSURANCE
<Table>
<Caption>
ASSUMED FROM
CEDED TO OTHER OTHER
DIRECT AMOUNT COMPANIES COMPANIES
(IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------------------------
LIFE INSURANCE IN FORCE $80,291,791 $14,159,840 $1,734,842
------------- ------------- ------------
PREMIUMS:
Life insurance 350,710 127,910 9,861
Accident and health insurance 901,072 87,337 127,394
------------- ------------- ------------
TOTAL EARNED PREMIUMS $1,251,782 $215,247 $137,255
------------- ------------- ------------
BENEFITS:
Life insurance $606,408 $439,880 $34,399
Accident and health insurance 666,924 95,127 116,774
------------- ------------- ------------
TOTAL POLICYHOLDER BENEFITS $1,273,332 $535,007 $151,173
------------- ------------- ------------
<Caption>
PERCENTAGE
OF AMOUNT
ASSUMED
TO NET
NET AMOUNT
(IN THOUSANDS)
-------------------------------------- -----------------------------------
LIFE INSURANCE IN FORCE $67,866,793 2.6%
-------------
PREMIUMS:
Life insurance 232,661 4.2%
Accident and health insurance 941,129 13.5%
-------------
TOTAL EARNED PREMIUMS $1,173,790 11.7%
-------------
BENEFITS:
Life insurance $200,927 17.1%
Accident and health insurance 688,571 17.0%
-------------
TOTAL POLICYHOLDER BENEFITS $889,498 17.0%
-------------
</Table>
F-37
<Page>
UNION SECURITY INSURANCE COMPANY
FOR THE YEARS ENDED DECEMBER 31, 2007
SCHEDULE IV -- REINSURANCE
<Table>
<Caption>
ASSUMED FROM
CEDED TO OTHER OTHER
DIRECT AMOUNT COMPANIES COMPANIES
(IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------------------------
LIFE INSURANCE IN FORCE $84,912,189 $15,365,458 $1,641,309
------------- ------------- ------------
PREMIUMS:
Life insurance 380,188 142,295 11,322
Accident and health insurance 917,129 84,219 177,805
------------- ------------- ------------
TOTAL EARNED PREMIUMS $1,297,317 $226,514 $189,127
------------- ------------- ------------
BENEFITS:
Life insurance $777,527 $592,582 $32,556
Accident and health insurance 622,418 81,665 176,355
------------- ------------- ------------
TOTAL POLICYHOLDER BENEFITS $1,399,945 $674,247 $208,911
------------- ------------- ------------
<Caption>
PERCENTAGE
OF AMOUNT
ASSUMED
TO NET
NET AMOUNT
(IN THOUSANDS)
-------------------------------------- -----------------------------------
LIFE INSURANCE IN FORCE $71,188,040 2.3%
-------------
PREMIUMS:
Life insurance 249,215 4.5%
Accident and health insurance 1,010,715 17.6%
-------------
TOTAL EARNED PREMIUMS $1,259,930 15.0%
-------------
BENEFITS:
Life insurance $217,501 15.0%
Accident and health insurance 717,108 24.6%
-------------
TOTAL POLICYHOLDER BENEFITS $934,609 22.4%
-------------
</Table>
F-38
<Page>
UNION SECURITY INSURANCE COMPANY
AS OF DECEMBER 31, 2009, 2008 AND 2007
SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO CHARGED TO
YEAR COSTS AND OTHER
EXPENSES ACCOUNTS
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------------------
2009:
Valuation allowance for deferred tax
assets $7,195 $(390) $3,610
Valuation allowance for mortgage
loans on real estate 3,252 5,300 --
Valuation allowance for uncollectible
agents balances 4,840 (21) --
--------- ------- -------
TOTAL $15,287 $4,889 $3,610
--------- ------- -------
2008:
Valuation allowance for deferred tax
assets $ -- $7,195 $ --
Valuation allowance for mortgage
loans on real estate 3,018 234 --
Valuation allowance for uncollectible
agents balances 5,622 (424) --
--------- ------- -------
TOTAL $8,640 $7,005 $ --
--------- ------- -------
2007:
Valuation allowance for mortgage
loans on real estate $2,706 $319 $ --
Valuation allowance for uncollectible
agents balances 6,613 (953) --
--------- ------- -------
TOTAL $9,319 $(634) $ --
--------- ------- -------
<Caption>
BALANCE AT
END OF
DEDUCTIONS YEAR
(IN THOUSANDS)
-------------------------------------- ----------------------------------------------
2009:
Valuation allowance for deferred tax
assets $ -- $10,415
Valuation allowance for mortgage
loans on real estate -- 8,552
Valuation allowance for uncollectible
agents balances 8 $4,811
----- ---------
TOTAL $8 $23,778
----- ---------
2008:
Valuation allowance for deferred tax
assets $ -- $7,195
Valuation allowance for mortgage
loans on real estate -- 3,252
Valuation allowance for uncollectible
agents balances 358 4,840
----- ---------
TOTAL $358 $15,287
----- ---------
2007:
Valuation allowance for mortgage
loans on real estate $7 $3,018
Valuation allowance for uncollectible
agents balances 38 5,622
----- ---------
TOTAL $45 $8,640
----- ---------
</Table>
F-39
<Page>
PART II
<Page>
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not applicable.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Union Security's By-Laws provide for indemnity and payment of expenses of
Union Security's officers, directors and employees in connection with
certain legal proceedings, judgments, and settlements arising by reason of
their service as such, all to the extent and in the manner permitted by
law. Applicable Iowa law generally permits payment of such indemnification
and expenses if the person seeking indemnification has acted in good faith
and in a manner that he reasonably believed to be in the best interests of
the Company and if such person has received no improper personal benefit,
and in a criminal proceeding, if the person seeking indemnification also
has no reasonable cause to believe his conduct was unlawful.
There are agreements in place under which the underwriter and affiliated
persons of the Registrant may be indemnified against liabilities arising
out of acts or omissions in connection with the offer of the Contracts;
provided however, that so such indemnity will be made to the underwriter or
affiliated persons of the Registrant for liabilities to which they would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the period beginning on December 1, 2008 and ending on the date of
effectiveness of this registration statement, the Registrant may be deemed
to have inadvertently offered insurance contracts pursuant to registration
statements on Form S-1 that were not in full compliance with Rule 415(a)(5)
under the Securities Act of 1933, as amended. The affected transactions did
not involve the sale of new contracts or the receipt of proceeds from new
contract holders by the Registrant, because the Registrant ceased offering
contracts on December 31, 2002; rather, they consisted of investment
reallocations and additional investments by existing contract holders with
respect to certain of the contracts previously offered by the Registrant.
The contract holders at all times received all material information
relating to the securities in question prior to such transactions,
including the complete prospectus from the existing registration statement
on file with the Commission. Promptly upon discovery of the technical
violation of Rule 415(a)(5), the Registrant filed this registration
statement on Form S-1 with the Commission in order to comply with the
requirements of Rule 415(a)(5) for a continuous offering. The Registrant
has implemented new procedures to ensure compliance with the requirements
of Rule 415(a)(5) henceforth.
<Page>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------------------------------------------------------------------------------------------------------------
1 Underwriting Agreement Incorporated by reference to Post-Effective
Amendment No. 12 to Registration Statement on Form
N-4, File No. 333-65231 filed on April 29, 2009.
3 (a) Restated Articles of Incorporation Incorporated by reference to Post-Effective
Amendment No. 24 to Registration Statement on Form
N-4, File No. 033-63935 filed on November 16,
2009.
3 (b) Restated By-laws Incorporated by reference to Post-Effective
Amendment No. 24 to Registration Statement on Form
N-4, File No. 033-63935 filed on November 16,
2009.
4 Variable Annuity Contract Incorporated by reference to the initial
Registration Statement File No. 333-65233 filed on
October 2, 1998.
5 Opinion re legality Filed herewith.
21 Subsidiaries of the Registrant Incorporated by reference to Post-Effective
Amendment No. 19 to Registration Statement File
No. 333-79701 filed on May 3, 2010.
23 (a) Legal Consent Filed herewith as Exhibit 5.
23 (b) Consent of PricewaterhouseCoopers LLP, Filed herewith.
Independent Registered Public Accounting
Firm
24 Copy of Power of Attorney Filed herewith.
</Table>
<Page>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
i. To include any Prospectus required by section 10(a)(3) of
the Securities Act of 1933;
ii. To reflect in the Prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
iii. To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Simsbury, State of
Connecticut on this 3rd day of May, 2010.
UNION SECURITY INSURANCE COMPANY
<Table>
By: John Steven Roberts *By: /s/ Richard J. Wirth
----------------------------------------------- -----------------------
John Steven Roberts Richard J. Wirth
President and Chief Executive Officer, Attorney-in-Fact
Director*
</Table>
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<Table>
S. Craig Lemasters, Director*
Christopher J. Pagano, Director*
Michael J. Peninger, Chairman of the Board*
John Steven Roberts, President and Chief Executive
Officer, Director* *By: /s/ Richard J. Wirth
-----------------------
Sylvia R. Wagner, Director* Richard J. Wirth
Miles B. Yakre, Senior Vice President, Chief Attorney-in-Fact
Financial Officer and Treasurer* Date: May 3, 2010
</Table>
<Page>
EXHIBIT INDEX
<Table>
5 Opinion and Consent of Counsel.
23(a) Legal Consent filed as part of Exhibit 5.
23(b) Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.
24 Copy of Power of Attorney.
</Table>