Unum 2014 Annual Report Download - page 42

40 UNUM • 2014 ANNUAL REPORT
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
In describing our results, we may at times note certain items and exclude the impact on financial ratios and metrics to enhance the
understanding and comparability of our operational performance and the underlying fundamentals, but this exclusion is not an indication
that similar items may not recur. See “Reconciliation of Non-GAAP Financial Measures” contained herein for additional discussion of
these items.
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 relative to the preceding
period, 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 relative to the prior period. Our weighted average pound/dollar exchange
rate was 1.646, 1.566, and 1.584 for years ended 2014, 2013, and 2012, respectively. If the 2013 and 2012 results for our U.K. operations
had been translated at the higher exchange rate of 2014, our operating revenue by segment in 2013 and 2012 would have been higher
by approximately $37.0 million and $32.9 million, respectively, and our operating income in 2013 and 2012 would have been higher by
approximately $6.7 million and $5.1 million, respectively. 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 item and not a reflection of operations or profitability in the U.K.
Premium income for 2014 increased relative to the prior year, with premium growth in each of our principal operating business
segments due to increased sales, premium rate increases, and favorable persistency in most of our product lines. While we are pleased
with the improvement we saw throughout 2014, our premium growth rates remain below our long-term expectations for each of our
principal operating business segments. For 2013, we reported premium growth in our Unum US and Colonial Life segments relative to 2012,
but premium income in total declined for 2013, as we believe growth in many of our product lines was unfavorably impacted during 2013
by the weak pace of economic growth, low levels of employment growth, the competitive environment, and the distraction caused by
political instability and the implementation of healthcare reform. Also unfavorably impacting year over year comparisons for 2013 relative
to 2012 were the reinsurance agreements we entered into during 2013 to cede a portion of certain product lines in Unum US individual
disability and in Unum UK group life. Premium income continues to decline year over year, as expected, in our Closed Block segment.
Net investment income declined in 2014 relative to 2013 due primarily to a decrease in yield on invested assets and lower
miscellaneous income, which includes income from bond call premiums, mortgage fees and payoffs, and partnership investments,
partially offset by an increase in the level of invested assets. Net investment income was lower in 2013 relative to 2012 due primarily
to a decline in the yield on invested assets, partially offset by a higher level of invested assets.
We recognized net realized investment gains of $16.1 million, $6.8 million, and $56.2 million in 2014, 2013, and 2012, respectively.
The net realized investment gain for 2014 includes a $13.1 million hedge gain associated with the early retirement of a portion of the
outstanding debt issued by one of our U.K. subsidiaries and an other-than-temporary impairment loss on fixed maturity securities of
$13.5 million. The 2013 net realized investment gain includes a $30.0 million loss related to the sale of lower yielding securities during a
period when interest rates increased, and we advantageously reinvested the proceeds into higher yielding investments, thereby increasing
our investment yield and also improving the credit quality of our fixed maturity securities portfolio. Also included in net realized investment
gains is the change in the fair value of an embedded derivative in a modified coinsurance arrangement, which resulted in realized gains
of $3.3 million, $30.7 million, and $51.8 million in 2014, 2013, and 2012, respectively. See Notes 4 and 8 of the “Notes to Consolidated
Financial Statements” contained herein for further discussion of the hedge gain related to the retirement of debt in 2014.