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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
76 Unum 2007 Annual Report
During 2008, we intend to retain sufficient capital in our traditional U.S. insurance subsidiaries to maintain a weighted average RBC
ratio in excess of our stated long-term objective of 300 percent. We also intend to maintain our leverage ratio at or slightly below our target
levels. We expect that holding company liquidity will be in excess of $300.0 million at the end of 2008.
Our cash flows from discontinued operations are combined with cash flows from continuing operations within each cash flow
statement category in our consolidated statements of cash flows for the applicable periods. The absence of cash flows from discontinued
operations has not, nor is it expected to, materially affect liquidity and capital resources.
Consolidated Cash Flows
Operating Cash Flows
Net cash provided by operating activities was $1,750.3 million for the year ended December 31, 2007, compared to $1,431.9 million and
$1,503.6 million for the comparable periods of 2006 and 2005. Operating cash flows are primarily attributable to the receipt of premium
and investment income, offset by payments of claims, commissions, expenses, and income taxes. Premium income growth is dependent
not only on new sales, but on renewals of existing business, renewal price increases, and stable persistency. Investment income growth
is dependent on the growth in the underlying assets supporting our insurance reserves and on the level of portfolio yield rates. Increases
in commissions and operating expenses are attributable primarily to new sales growth and the first year acquisition expenses associated
with new business. The level of paid claims is due partially to the growth and aging of the block of business and also to the general economy,
as previously discussed in the operating results by segment. Included in operating cash flows for 2007, 2006 and 2005 are voluntary pension
contributions to our U.S. qualified defined benefit plan of $110.0 million, $92.0 million and $23.0 million, respectively. We also had increased
cash inflows of approximately $211.4 million in 2007 due to the reinsurance recapture of a small block of individual disability business.
The year to year fluctuation in the income tax adjustment to reconcile net income to net cash provided by operating activities is due
mostly to a tax benefit recognized during 2006 which resulted from the reversal of tax liabilities related primarily to group relief benefits
recognized from the use of net operating losses in a foreign jurisdiction.
Investing Cash Flows
Investing cash inflows consist primarily of the proceeds from the sales and maturities of investments. Investing cash outflows consist
primarily of payments for purchases of investments. Net cash used by investing activities was $1,855.0 million for the year ended
December 31, 2007 compared to $1,222.0 million and $1,635.6 million for the comparable periods of 2006 and 2005, respectively.
We had lower proceeds from sales and maturities of available-for-sale securities in 2007 compared to 2006, primarily due to a
decrease in scheduled maturities of fixed maturity securities as well as a lower level of proceeds from principal prepayments on mortgage-
backed securities. Somewhat offsetting this decline was the sale of a block of available-for-sale securities to generate the liquidity
needed to repurchase debt in the fourth quarter as part of our capital redeployment plan.
Proceeds from sales and maturities of available-for-sale securities in 2006 were higher than in 2005 due to the sale of floating rate
bonds in the first quarter of 2006 which were initially purchased in the fourth quarter of 2005 with the proceeds from a debt issuance.
We invested the 2005 fourth quarter debt proceeds in short-term investments and floating-rate bonds to provide liquidity needed for our
$400.0 million purchase of debt in the first quarter of 2006. The proceeds from the subsequent sale in 2006 of these short-term investments
and floating-rate bonds are included in sales of bonds and net purchases of short-term investments in 2006. We also had higher proceeds
from maturities of investments in 2006 than in 2005 due to an increase in fixed maturity security principal proceeds from bond calls and
scheduled maturities, offset somewhat by a decrease in principal prepayments on mortgage-backed securities.
Purchases of available-for-sale securities increased during 2007, in part due to the investing of the net cash inflows of $98.8 million
from the sale of GENEX and the $211.4 million cash inflows from the reinsurance recapture.