Unum 2009 Annual Report Download - page 74

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72
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum
2009
The following table shows our fixed maturity securities with a gross unrealized loss of $10.0 million or greater, by industry type.
Gross Unrealized Losses $10.0 Million or Greater on Fixed Maturity Securities
As of December 31, 2009
(in millions of dollars) Gross
Unrealized Number
Classification Fair Value Loss of Issuers
Investment-Grade
U.S. Government Agencies and Municipalities $541.8 $59.7 2
Financial Institutions 168.4 27.5 3
Consumer Cyclical 22.6 10.6 1
Total $732.8 $97.8 6
Below-Investment-Grade
Basic Industry $ 24.9 $15.6 1
Financial Institutions 23.5 10.1 1
Total $ 48.4 $25.7 2
We held one security at December 31, 2009 with a gross unrealized loss of $20.0 million or greater. The security, which was issued by
the Federal Home Loan Mortgage Corporation, had a fair value of $511.0 million and a gross unrealized loss of $49.7 million. The security
has been in a loss position for a period of greater than three years. The security was rated AAA by S&P as of December 31, 2009, with no
negative outlook by any major rating agencies. The decline in the fair value of this security relates to changes in interest rates subsequent
to purchase of the security as well as concerns related to the overall mortgage market. We believe the decline in fair value of this security
is temporary. We do not intend to sell this security or believe it is more likely than not we will be required to sell this security before
recovery of the amortized cost. See “Critical Accounting Estimates” contained herein and Note 4 of the “Notes to Consolidated Financial
Statements” for a discussion of the process we use to monitor and evaluate our fixed maturity securities for determining other-than-
temporary impairments.
At December 31, 2009, our mortgage/asset-backed securities had an average life of 5.66 years, effective duration of 4.61 years, and a
weighted average credit rating of AAA. The mortgage/asset-backed securities are valued on a monthly basis using valuations supplied by
the brokerage firms that are dealers in these securities as well as independent pricing services. The primary risk involved in investing in
mortgage/asset-backed securities is the uncertainty of the timing of cash flows from the underlying loans due to prepayment of principal
with the possibility of reinvesting the funds in a lower interest rate environment. We use models which incorporate economic variables
and possible future interest rate scenarios to predict future prepayment rates. The timing of prepayment cash flows may also cause
volatility in our recognition of investment income. We recognize investment income on these securities using a constant effective yield
based on projected prepayments of the underlying loans and the estimated economic life of the securities. Actual prepayment experience
is reviewed periodically, and effective yields are recalculated when differences arise between prepayments originally projected and the
actual prepayments received and currently projected. The effective yield is recalculated on a retrospective basis, and the adjustment is
reflected in net investment income.
We have not invested in mortgage-backed derivatives, such as interest-only, principal-only, or residuals, where market values can be
highly volatile relative to changes in interest rates. All of our mortgage-backed securities have fixed rate coupons. The credit quality of our
mortgage-backed securities portfolio has not been negatively impacted by the recent issues in the market concerning subprime mortgage
loans. The change in value of our mortgage-backed securities portfolio has moved in line with that of prime agency-backed mortgage-
backed securities.