Unum 2008 Annual Report Download - page 84

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80




We have a significant interest in, but are not the primary beneficiary of, a special purpose entity which is a collateralized bond obligation
asset trust (CBO) in which we hold interests in several of the tranches and for which we act as investment manager of the underlying high-
yield securities. This entity is a cash flow CBO and was fully funded at the time of issuance. Our potential losses in this CBO are limited to our
investment in the entity. Our investment in this entity is reported at fair value with fixed maturity securities in the consolidated balance
sheets. The fair value of this investment was derived from the fair value of the underlying assets. The fair value and amortized cost of this
investment were $2.5 million and $2.4 million, respectively, at December 31, 2008, and $12.0 million and $11.8 million, respectively, at
December 31, 2007.
Mortgage Loans
Our mortgage loan portfolio was $1,274.8 million and $1,068.9 million on an amortized cost basis at December 31, 2008 and 2007,
respectively. Our mortgage loan portfolio is comprised entirely of commercial mortgage loans. We expect that we will continue to add
investments in this category either through the secondary market or through loan originations. We believe our mortgage loan portfolio is
well diversified geographically and among property types. The incidence of problem mortgage loans and foreclosure activity is currently
low. Due to conservative underwriting, we expect the level of delinquencies and problem loans to remain low relative to the industry.
At December 31, 2008, delinquent mortgage loans, or those past due more than 30 days as to interest or principal payments, totaled
$5.2 million and were considered impaired loans. The impaired loans were deemed permanently impaired and are reported at the estimated
net realizable value. We had no delinquent or impaired mortgage loans at December 31, 2007 and no valuation allowance for mortgage
loans at December 31, 2008 or 2007.
Derivative Financial Instruments
We use derivative financial instruments to manage reinvestment risk, duration, and currency risk. Historically, we have utilized interest
rate futures contracts, current and forward interest rate swaps and options on forward interest rate swaps, current and forward currency
swaps, interest rate forward contracts, forward treasury locks, currency forward contracts, and forward contracts on specific fixed income
securities. All of these freestanding derivative transactions are hedging in nature and not speculative. Positions under our hedging programs
for derivative activity that were open during 2008 involved current and forward interest rate swaps, current and forward currency swaps,
currency forward contracts, forward treasury locks, and options on forward interest rate swaps. Almost all hedging transactions are
associated with the individual and group long-term care and the individual and group disability products. All other product portfolios are
periodically reviewed to determine if hedging strategies would be appropriate for risk management purposes.
Our current credit exposure on derivatives, which is limited to the value of those contracts in a net gain position less collateral held,
was $37.7 million at December 31, 2008. The carrying value of fixed maturity securities pledged as collateral to our counterparties was
$107.9 million at December 31, 2008. We believe that our credit risk is mitigated by our use of multiple counterparties, all of whom are
rated A or better by both Moody’s and S&P. See Note 5 of the “Notes to Consolidated Financial Statements” for additional information.
Other
Our exposure to non-current investments, on a fair value basis, totaled $11.8 million and $2.6 million at December 31, 2008 and
2007, respectively.

Our liquidity requirements are met primarily by cash flows provided from operations, principally in our insurance subsidiaries. Premium
and investment income, as well as maturities and sales of invested assets, provide the primary sources of cash. Debt and/or securities
offerings provide an additional source of liquidity. Cash is applied to the payment of policy benefits, costs of acquiring new business
(principally commissions), operating expenses, and taxes, as well as purchases of new investments.