Unum 2009 Annual Report Download - page 86

The effect of a change in interest rates on asset prices was determined using a duration implied methodology for corporate bonds and
government and government agency securities whereby the duration of each security was used to estimate the change in price for the
security assuming an increase of 100 basis points in interest rates. The effect of a change in interest rates on the mortgage-backed securities
was estimated using a mortgage analytic system which takes into account the impact of changing prepayment speeds resulting from a 100
basis point increase in interest rates on the change in price of the mortgage-backed securities. These hypothetical prices were compared to
the actual prices for the period to compute the overall change in market value. The changes in the fair values shown in the chart above for
all other items were determined using discounted cash flows analyses. Because we actively manage our investments and liabilities, actual
changes could be less than those estimated above.
Foreign Currency Risk
The functional currency of our U.K. operations is the British pound sterling. We are exposed to foreign currency risk arising from
fluctuations in the British pound sterling to U.S. dollar exchange rates primarily as they relate to the translation of the financial results of our
U.K. operations. Fluctuations in the pound to dollar exchange rate have an effect on our reported financial results. We do not hedge against
the possible impact of this risk. Because we do not actually convert pounds into dollars except for a limited number of transactions, we
view foreign currency translation as a financial reporting issue and not a reflection of operations or profitability in the U.K.
Assuming the pound to dollar exchange rate decreased 10 percent from the December 31, 2009 and 2008 levels, stockholders’ equity
as reported in U.S. dollars as of and for the periods then ended would have been lower by approximately $98.6 million and $72.8 million,
respectively. Assuming the pound to dollar average exchange rate decreased 10 percent from the actual average exchange rates for 2009
and 2008, segment operating income, which excludes net realized investment gains and losses and income tax, as reported in U.S. dollars
would have decreased approximately $27.1 million and $33.5 million, respectively, for the years then ended.
Dividends paid by Unum Limited are generally held at our U.K. finance subsidiary. If these funds are repatriated to our U.S. holding
company, we would at that time be subject to foreign currency risk as the value of the dividend, when converted into U.S. dollars, would be
dependent upon the foreign exchange rate at the time of conversion.
We are also exposed to foreign currency risk related to certain foreign investment securities denominated in local currencies and U.S.
dollar-denominated debt issued by one of our U.K. subsidiaries. We use current and forward currency swaps and currency forward contracts
to hedge or minimize the foreign exchange risk associated with these instruments.
See “Unum UK Segment” contained herein for further information concerning foreign currency translation.
Risk Management
As an insurer, we are in the business of risk management. Effectively taking and managing risks is essential to the success of our
Company. To facilitate this effort, we have an Enterprise Risk Management (ERM) program. Our ERM program strives to:
• Identify, measure, mitigate, and report on our risk positions and exposures, including notable risk events;
• Assess material risks, including how they affect us, how individual risks interrelate, and how management addresses these risks;
• Practice strong risk management, including diversication across and within business units and systematic limit monitoring;
• Identify emerging risks and analyze how material future risks might affect us; and
• Fulll regulatory, rating agency, and governance objectives.
Through adherence to these objectives, we believe we are better positioned to fulfill our corporate mission, improve and protect
stockholder value, and reduce reputational risk.
Our approach to risk management is defined by these fundamental principles:
• Our risk management strategy begins with our business strategy. We are a specialty insurance carrier focused on providing benets
through employer-sponsored plans. We have market leadership positions in the product lines we offer and more than 160 years of
experience. This combination of focused expertise and deep experience is the foundation of our approach to risk management.
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Quantitative and Qualitative Disclosures
About Market Risk
Unum
2009