Unum 2009 Annual Report Download - page 68

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66
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum
2009
• During 2009, we recognized an other-than-temporary impairment loss of $23.7 million on principal protected equity linked trust
certificates representing our investment in a trust which held forward contracts to purchase shares of a Vanguard S&P 500 index
mutual fund. We recognized the other-than-temporary impairment loss because we intended to sell the security. At the time of the
impairment loss, these securities had been in an unrealized loss position for a period of greater than one year but less than two years.
• During 2009, we recognized an other-than-temporary impairment loss of $20.1 million on securities issued by a large specialty
chemical company. The company reported fourth quarter 2008 earnings that were weaker than expected, which limited its
prospects of refinancing its 2009 debt maturities. The company had been pursuing asset sales to raise cash but was unable to
do so in time to avoid a financial restructuring. During the first quarter of 2009, the company filed for bankruptcy protection. At
the time of the impairment loss, these securities had been in an unrealized loss position for a period of greater than two years
but less than three years.
• During 2009, we recognized an other-than-temporary impairment loss of $19.5 million on securities issued by a U.S. automotive
parts company. The majority of the company’s revenues are generated by sales to a single domestic automobile manufacturer.
Due to the weak economy, automobile production had decreased dramatically, with the expectation of further production cuts.
The U.S. government made available a $5 billion credit facility to several automotive parts companies to help maintain automotive
supplier liquidity. However, with their largest customer likely to undergo a major financial restructuring and/or bankruptcy filing, the
company faced increased challenges. In March 2009 its external auditors stated there was “substantial doubt” about the company’s
ability to continue as a going concern if the automotive industry’s financial problems were not resolved soon. At the time of the
impairment loss, these securities had been in an unrealized loss position for a period of greater than three years.
• During 2009, we recognized an other-than-temporary impairment loss of $17.5 million on securities issued by a U.K. nancial institution.
During 2008, a significant decrease in funding liquidity ultimately required the U.K. government to nationalize this institution. In this
process, the government provided guarantees on deposits, senior debt, and loans. Since 2008, the company initiated several programs
to improve its liquidity and to repay the loans to the government. In the first quarter of 2009, the company announced it had developed
a plan for a legal and capital restructuring of the company, which it expected to complete in the second half of 2009. During the second
quarter of 2009, the company submitted its plan to the European Commission (EC) and requested permission to begin the program
under EC competition rules. The EC released various aspects of the company’s restructuring plan, which included splitting the company
into multiple entities. It appeared we would be unable to recover the entire cost basis of our securities, which are subordinate to the
government’s debt as well as other creditors. At the time of the impairment loss, these securities had been in an unrealized loss position
for a period of greater than two years but less than three years.
• During 2008, we recognized an other-than-temporary impairment loss of $39.3 million on a principal protected equity linked note
which contained an embedded forward contract to purchase shares of a Vanguard S&P 500 index mutual fund. The note also provided
principal protection through the substitution of highly rated bonds in place of the underlying S&P 500 index mutual fund, should a
specified trigger event occur. At the time of the impairment loss, the decline in the S&P 500 index had not been significant enough
to trigger the substitution of the highly rated bonds, but due to the then recent steep decline in the S&P 500 index, we could no
longer conclude that the value of the underlying S&P 500 index mutual fund would equate to or exceed the par value of the security
at maturity. At the time of the impairment loss, these securities had been in an unrealized loss position for a period of greater than
three years.
• During 2008, we recognized an other-than-temporary impairment loss of $32.0 million on securities issued by a U.S. based automobile
manufacturer and its captive finance subsidiary. The company experienced a decline in profitability and cash flow due to the weak
economic environment. Although at the time of the impairment loss the company had not yet received government bailout money,
the probability of receiving some form of government financial aid had significantly increased. Other U.S. automakers that had received
bailout money were expected to request their bondholders to accept a significant reduction in principal. In order for this company to
stay competitive with other U.S. automakers, it was likely that it, too, would seek debt relief from its bondholders and that we would
not recover our entire principal for these securities. At the time of the impairment loss, these securities had been in an unrealized loss
position for a period of greater than three years.