Unum 2007 Annual Report Download - page 86

We are subject to various market risk exposures, including interest rate risk and foreign exchange rate risk. The following discussion
regarding our risk management activities includes forward-looking statements that involve risk and uncertainties. Estimates of future
performance and economic conditions are reflected assuming certain changes in market rates and prices were to occur (sensitivity
analysis). Caution should be used in evaluating our overall market risk from the information presented below, as actual results may differ.
We employ various derivative programs to manage these material market risks. See Notes 4 and 5 of the “Notes to Consolidated Financial
Statements” for further discussions of the qualitative aspects of market risk, including derivative financial instrument activity.
Interest Rate Risk
Our operations are subject to risk resulting from interest rate fluctuations, primarily long-term U.S. interest rates. Changes in interest rates
and individuals’ behavior affect the amount and timing of asset and liability cash flows. We continually model and test asset and liability
portfolios to improve interest rate risk management and net yields. Testing the asset and liability portfolios under various interest rate and
economic scenarios allows us to choose the most appropriate investment strategy, as well as to prepare for disadvantageous outcomes.
This analysis is the precursor to our activities in derivative financial instruments. We use interest rate swaps, interest rate forward contracts,
exchange-traded interest rate futures contracts, and options to hedge interest rate risks and to match asset durations and cash flows with
corresponding liabilities.
Assuming an immediate increase of 100 basis points in interest rates from year end levels, the net hypothetical decrease in stockholders’
equity related to financial and derivative instruments was estimated to be $1.2 billion and $1.4 billion at December 31, 2007 and 2006,
respectively. The fair values of mortgage loans, which are reported in our consolidated balance sheets at amortized cost, would decrease
by approximately $60 million and $50 million at December 31, 2007 and 2006, respectively.
At December 31, 2007 and 2006, assuming a 100 basis point decrease in long-term interest rates from year end levels, the fair values
of our short-term and long-term debt would increase approximately $140 million and $210 million, respectively.
The effect of a change in interest rates on asset prices was determined using a duration implied methodology for corporate bonds,
private placement securities, 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 is 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 of long-term debt were determined using discounted cash flows analyses. Because we actively manage our investments
and liabilities, actual changes could be less than those estimated above.
84 Unum 2007 Annual Report
Quantitative and Qualitative Disclosure
About Market Risk