Unum 2009 Annual Report Download - page 42

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40
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum
2009
The comparability of our financial results between years is affected by the fluctuation in the British pound sterling to dollar exchange
rate. The functional currency of our U.K. operations is the British pound sterling. In periods when the pound weakens, translating pounds
into dollars decreases current period results relative to the prior period. In periods when the pound strengthens, translating pounds into
dollars increases current period results in relation to the prior period. Our weighted average pound/dollar exchange rate was 1.554, 1.871,
and 2.004 for the years ended 2009, 2008, and 2007, respectively. Our operating revenue and operating income by segment would have
been higher in 2009 by approximately $233.1 million and $77.0 million, respectively, and higher in 2008 by approximately $86.7 million and
$24.2 million, respectively, if the results for our U.K. operations had been translated at a constant exchange rate of 2.004, the rate for 2007.
However, it is important to distinguish between translating and converting foreign currency. Except for a limited number of transactions, we
do not actually convert pounds into dollars. As a result, we view foreign currency translation as a financial reporting issue and not a reflection
of operations or profitability in the U.K.
Consolidated premium income for both 2009 and 2008 includes premium growth, relative to the preceding years, for Unum US
supplemental and voluntary lines of business and Colonial Life. Unum US group disability and group life and accidental death and
dismemberment lines of business experienced year over year declines in premium income during 2009 and 2008 relative to the prior
years. A portion of this decline was expected and is attributable to our continued pricing discipline for our Unum US group business and
our strategy of developing a more balanced business mix. However, during 2009, premium growth for Unum US group business was also
negatively impacted by lower premium growth from existing customers due to lower salary growth and lower growth in the number of
employees covered under an existing policy. Unum UK premium income, in local currency, declined during 2009 relative to 2008 due to
lower premium growth from existing customers, similar to Unum US, and also due to a decline in the in-force block of business resulting
from lower persistency and sales in 2008 and 2007. The decline in the in-force block also unfavorably impacted Unum UK premium growth
during 2008 relative to 2007. Premium income in the Individual Disability — Closed Block segment continues to decline, as expected, in this
closed block of business.
Net investment income was lower in 2009 relative to the prior year due to several factors: (i) the weaker pound in 2009 relative to
2008 unfavorably affected translated results for net investment income, (ii) we received lower interest income during 2009 on bonds in
Unum UK for which interest income is linked to a U.K. inflation index, the impact of which was largely offset by lower claim reserves due to
lower claim payments which are also linked to inflation, (iii) during 2009 we earned lower interest rates on our floating rate invested assets,
largely offset by lower interest expense on our floating rate debt, and (iv) we received fewer bond call premiums and consent fees during
2009 compared to 2008. Somewhat mitigating the impact of these items is continued growth in the level of invested assets, an increase in
the level of prepayment income on mortgage-backed securities, and an increase in our portfolio yield due to the investment of new cash at
higher rates than that of prior periods.
Net investment income was marginally lower in 2008 relative to 2007. During 2008, we received fewer bond call premiums, and the
level of prepayment income on mortgage-backed securities declined relative to the preceding year. The weaker pound in 2008 relative to
2007 also unfavorably affected translated results for net investment income. The impact of these items was mostly offset by continued
growth in the level of invested assets and a slight increase in our portfolio yield due to the investment of new cash at higher rates.