Unum 2006 Annual Report Download - page 95

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We actively manage our asset and liability cash flow match, as well as our asset and liability duration match to
minimize interest rate risk. We may redistribute investments within our different lines of business, when necessary,
to adjust the cash flow and/or duration of the asset portfolios to better match the cash flow and duration of the
liability portfolios. Asset and liability portfolio modeling is updated on a quarterly basis and is used as part of the
overall interest rate risk management strategy. Cash flows from the inforce asset and liability portfolios are
projected at current interest rate levels and also at levels reflecting an increase and a decrease in interest rates to
obtain a range of projected cash flows under the different interest rate scenarios. These results enable us to assess
the impact of projected changes in cash flows and duration resulting from potential changes in interest rates. Testing
the asset and liability portfolios under various interest rate scenarios enables us to choose the most appropriate
investment strategy as well as to minimize the risk of disadvantageous outcomes. This analysis is a precursor to our
activities in derivative financial instruments, which are used to hedge interest rate risk and to manage duration
match. At December 31, 2006, the weighted average duration of our policyholder liability portfolio was
approximately 7.97 years, and the weighted average duration of our investment portfolio supporting those
policyholder liabilities was approximately 7.66 years.
Below is a summary of our formal investment policy, including the overall quality and diversification objectives.
• The majority of investments are in high quality publicly traded securities to ensure the desired liquidity and
preserve the capital value of our portfolios.
• The long-term nature of our insurance liabilities also allows us to invest in less liquid investments to obtain
superior returns. A maximum of 10 percent of the total investment portfolio may be invested in below-
investment-grade securities, 2 percent in equity type instruments, up to 35 percent in private placements,
and 5 percent in commercial mortgage loans. The remaining assets can be held in publicly traded
investment-grade corporate securities, mortgage-backed securities, asset-backed securities, and U.S.
government agencies and municipal securities.
• We intend to manage the risk of losses due to changes in interest rates by matching asset duration with
liabilities, in the aggregate, to within a range of +/- ten percent of the liability duration.
• The weighted average credit quality rating of the portfolio should be BBB or higher.
• The maximum investment per issuer group is limited based on internal limits established by our board of
directors and is more restrictive than the five percent limit generally allowed by the state insurance
departments which regulate the type of investments our insurance subsidiaries are allowed to own. These
internal limits are as follows:
Rating Internal Limit
($ in millions)
AAA/A $150
BBB+ 125
BBB 100
BBB- 75
BB+ 60
BB/BB- 50
B 20
• The portfolio is to be diversified across industry classification and geographic lines.
• Derivative instruments may be used to hedge interest rate risk and foreign currency risk and match liability
duration and cash flows consistent with the plan approved by the board of directors.
• Asset mix guidelines and limits are established by us and approved by the board of directors.
• The allocation of assets and the selection and timing of the acquisition and disposition of investments are
subject to ratification by the investment subcommittee of the board of directors on a weekly basis. These
actions are also reviewed and approved by the board of directors on a quarterly basis.
• These investment policies and guidelines are reviewed and appropriately adjusted by the board of directors
annually, or more frequently if deemed necessary.