NATURE OF OPERATIONS AND ITEMS IMPACTING BASIS OF PRESENTATION

Overview: 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, group vision insurance, supplemental worksite insurance, small employer group health insurance and pre-funded funeral insurance (“preneed”). As previously announced, Assurant, Inc. (the "Parent") sold its Assurant Employee Benefits ("AEB") segment on March 1, 2016 mainly through a series of reinsurance transactions with United States branch of Sun Life Assurance Company of Canada ("Sun Life"), a subsidiary of Sun Life Financial Inc. The products affected by the sale are group life, group dental, group vision, group disability, and supplemental worksite insurance products. In addition we reinsured disability and life products through our former affiliate, Disability Reinsurance Management Services, Inc. ("DRMS") which was also sold to Sun Life. The sale of AEB had a material impact to the results of operations, cash flows and financial condition of the Company.

The Company is a wholly-owned subsidiary of 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 U.S. states except New York.

Sale of Assurant Employee Benefits: On March 1, 2016, the Parent completed the sale of its Assurant Employee Benefits segment through a series of transactions with Sun Life, for net cash consideration of $926,174 and contingent consideration of $16,000 related to specified account renewals. The condition for the recognition of the $16,000 contingent consideration was met later in 2016, which was subsequently collected from Sun Life. The Company received their allocated portion of $15,200. The Company's allocated cash consideration was $884,357(and the remaining cash consideration was attributable to other Assurant affiliates). The transaction was primarily structured as a reinsurance arrangement, as well as the sale of certain legal entities that included ceding commission and other consideration. The reinsurance transaction does not extinguish the Company's primary liability on the policies it has issued or assumed, thus any gains associated with the prospective component of the reinsurance transaction are deferred and amortized over the contract period, including contractual renewal periods, in proportion to the amount of insurance coverage provided. The Company also has an obligation to continue to write and renew certain policies for a period of time until Sun Life commences policy writing and renewal.

The Company was required to allocate the proceeds considering the relative fair value of the reinsurance for existing claims (accounted for as retroactive reinsurance) and reinsurance for inforce policies with remaining terms and future business (primarily accounted for as prospective reinsurance). During 2016, the Company recorded an estimated gain of $604,135 (of which $491,365 was required to be deferred and amortized) based on proceeds compared to the relative net assets transferred and other expenses, with realized gains on invested assets transferred, as well as its share of the contingent consideration and final closing adjustments.

The total deferred gain amount will primarily be recognized as revenue over the contract period in proportion to the amount of insurance coverage provided, including estimated contractual renewals pursuant to rate guarantees. Over 90% of the deferred gain related to this transaction is expected to be earned by the end of 2018. The Company recognized $340,934 of amortization of the deferred gains for the twelve months ended December 31, 2016. The remaining deferred gain related to this transaction was $150,431 as of December 31, 2016. The ultimate amortization pattern will be dependent on a number of factors including the exact timing of when Sun Life commences directly writing and renewing policies and the sales and persistency on business the Company is obligated to write and renew in the interim.

The total pre-tax gain recognized by the Company during the year ended December 31, 2016 was $453,704.

The following represents a summary of the pre-tax gain recognized in 2016 by transaction component, including other related transaction components, as well as the related classification within the Consolidated Financial Statements:



Total expected gains, after adjustment and contingent consideration	$	604,135

Initial transaction components:
Gain on sale of entities	6,602
Novations (b)	59,096
Loss on retroactive reinsurance component, before realized gains (c)	(109,590		)
Net loss prior to realized gains on transferred securities supporting retroactive reinsurance component(a)	(43,892		)
Realized gains on transferred securities supporting retroactive reinsurance component (c)	141,462
Net gains on initial transaction	$	97,570

Realized gains related to contingent consideration (d)	15,200

Deferred gains as of March 1, 2016, after transaction adjustments	491,365
Amortization of deferred gains for the year ended December 31, 2016 (d)	340,934
Deferred gains as of December 31, 2016 (e)	150,431
Total net gains realized for 2016 (f)	$	453,704

(a) Amount classified within underwriting, general, and administrative expenses within the consolidated statements of

operations.

(b) Novations of certain insurance policies directly to Sun Life allowed for immediate gain recognition.

immediately. However, upon transfer of the associated assets supporting the liabilities, the Company recognized

realized gains which more than offset the loss on the retroactive reinsurance component. The Company was required to

classify the realized gains as part of net realized gains on investments, within the consolidated statements of operations.

as part of net realized gains on investments, within the consolidated statements of operations.

(d) Amount classified as amortization of deferred gains and gains on disposal of businesses within the consolidated

statements of operations.

(e) Amount classified as a component of the deferred gains on disposal of businesses within the consolidated balance

sheets.

(f) Total net gains realized for 2016 consists of the sum of the net gains on initial transaction of $97,570, realized gains related

to contingent consideration of $15,200 and the amortization of deferred gains for the year ended December 31, 2016 of

$340,934.

The Company will review and evaluate the estimates affecting the deferred gain each period or when significant information affecting the estimates becomes known, and will adjust the prospective revenue to be recognized accordingly.

Dividends to Parent: The Company declared and paid dividends of $890,000 during the year ended December 31, 2016, primarily using the proceeds from the sale of AEB. The Company was required to first deduct the dividends from available retained earnings of ($376,018) with the remaining from additional paid in capital. The dividends were paid in the form of cash and investments of $379,333 and $510,667, respectively.

Impairment of Goodwill: Due to the Assurant Employee Benefits sale to Sun Life, the Company no longer expects to have sufficient income from continuing operations that will support the realization of its goodwill. As a result of this change, the Company impaired all of its goodwill of $17,285 during 2016.

Other transactional impacts: The Company also received a capital contribution of $54,271 from an affiliated entity related to the sale of AEB based on the difference in contractual and allocated consideration attributable to that entity.

Income from AEB presented in the financial statements: The pre-tax income for AEB (prior to the sale of Sun Life) was $14,025, $72,764 and $73,038 for the years ended December 31, 2016, 2015 and 2014, respectively.