Unum 2006 Annual Report Download - page 102

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For those fixed maturity securities with an unrealized loss and on which we have not recorded an impairment loss,
we believe that the decline in fair value below amortized cost is temporary. We have the ability and intent to hold
our securities to the earlier of recovery or maturity. If information becomes available that changes our assessment as
to whether we will receive contractual payments related to a fixed maturity security and the security is also not
projected to recover in value, the related security is generally sold. We may also in certain circumstances sell a
security in an unrealized loss position because of changes in tax laws, when a merger or the disposition of a segment
or product line results in positions outside of our investment guidelines, due to changes in regulatory or capital
requirements, due to unexpected changes in liquidity needs, to better match portfolio cash flows, or to take
advantage of relative value opportunities or tender offers that recover up to or beyond the cost of the investment.
For those securities with a gross unrealized loss of $10.0 million or greater, further discussed as follows are (a) the
factors which we believe resulted in the impairment and (b) the information we considered, both positive and
negative, in reaching the conclusion that the impairments were not other than temporary.
• The first fixed maturity bond of the U.S. government sponsored mortgage funding company was issued
by the Federal Home Loan Bank. The bond was rated AAA by Standard & Poor’s Corporation (S&P)
as of December 31, 2006, with no negative outlook by rating agencies or in analysts’ reports. The
change in the market value of this security relates to changes in interest rates after the purchase of the
bond. We believe that the decline in fair value of this security is temporary. The market value of this
security will increase if interest rates decline to levels similar to when the bonds were purchased. We
believe this is likely to occur over the life of the security. We have the ability to hold this security to the
earlier of recovery or maturity.
• The second fixed maturity bond of the U.S. government sponsored mortgage funding company was
issued by the Federal Home Loan Mortgage Corporation. The bond was rated AAA by S&P as of
December 31, 2006, with no negative outlook by rating agencies or in analysts’ reports. The change in
the market value of this security relates to changes in interest rates after the purchase of the bond. We
believe that the decline in fair value of this security is temporary. The market value of this security will
increase if interest rates decline to levels similar to when the bonds were purchased. We believe this is
likely to occur over the life of the security. We have the ability to hold this security to the earlier of
recovery or maturity.
• The principal protected equity linked note is a zero coupon bond, issued by a large, well capitalized
Fortune 500 financial services company, the return of which is linked to a Vanguard S&P 500 index
mutual fund. This bond matures on August 24, 2020 and carried the AA rating of the issuer, as
determined by S&P as of December 31, 2006. This note has an embedded derivative contract and
substitutes highly rated bonds in place of the underlying S&P 500 index mutual fund to provide
principal protection if there is a significant decline in the equities market. The note derives its value
from the underlying S&P 500 index mutual fund. The reduction in the market value of this note was the
result of the decline in the S&P 500 index after the purchase date of the note. Based on historical long-
term returns of the S&P 500 index, we believe that the value of the underlying S&P 500 index mutual
fund will equate to or exceed the par value of the security at maturity. We believe that the decline in
fair value of the note is temporary. We have the ability to hold this security to the earlier of recovery or
maturity.
Our investment in mortgage-backed and asset-backed securities was approximately $3.8 billion and $4.2 billion on
an amortized cost basis at December 31, 2006 and 2005, respectively. At December 31, 2006, the mortgage-backed
securities had an average life of 7.8 years and effective duration of 6.3 years. The mortgage-backed and asset-
backed securities are valued on a monthly basis using valuations supplied by the brokerage firms that are dealers in
these securities. The primary risk involved in investing in mortgage-backed and 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. 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.