Unum 2009 Annual Report Download - page 70

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68
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum
2009
Realized Investment Losses $10.0 Million or Greater from Sale of Fixed Maturity Securities
• During 2009, we recognized a loss of $14.2 on the sale of securities issues by a large publisher of yellow page advertising. The
company had suffered from deterioration in print directories’ advertising as well as a significant rise in bad debt expenses due to
the impact of the recession on small business customers. The company maintained significant amounts of available cash and was
still generating free cash flows despite the weakening economy. However, during the first quarter of 2009, the company announced
that it had hired a financial adviser to review its capital structure alternatives regarding debt payments due in 2010. At the time of
disposition, these securities had been in an unrealized loss position for a period of greater than three years.
• During 2008, we recognized a loss of $16.2 million on the sale of securities, issued by a large investment banking rm, for which we
had recorded an impairment loss in 2008, as previously discussed.
• During 2008, we recognized a loss of $10.1 million on the disposition of the principal protected equity linked note as previously
discussed. The note’s substitution clause was triggered in the fourth quarter of 2008 due to the continued decline in the S&P 500
index. At the time of the triggering event, we made the decision to take ownership in the underlying Vanguard S&P 500 index
mutual fund shares rather than accept the zero coupon bonds issued by the financial services company. At the time of disposition,
this note had been continuously in an unrealized loss position for a period of less than ninety days.
We had no individual realized investments losses $10.0 million or greater from the sale of fixed maturity securities during 2007.
Embedded Derivative in a Modified Coinsurance Arrangement
We report changes in the fair value of an embedded derivative in a modified coinsurance arrangement as realized investment gains and
losses, as required under the provisions of GAAP. GAAP requires us to include in our realized investment gains and losses a calculation intended
to estimate the value of the option of our reinsurance counterparty to cancel the reinsurance contract with us. However, neither party can
unilaterally terminate the reinsurance agreement except in extreme circumstances resulting from regulatory supervision, delinquency
proceedings, or other direct regulatory action. Cash settlements or collateral related to this embedded derivative are not required at any time
during the reinsurance contract or at termination of the reinsurance contract, and any accumulated embedded derivative gain or loss reduces
to zero over time as the reinsured business winds down. We therefore view the effect of realized gains and losses recognized for this
embedded derivative as a reporting requirement that will not result in a permanent change in assets or stockholders’ equity.
The changes in fair value of this embedded derivative recognized as realized gains and losses during 2009, 2008 and 2007 resulted
primarily from a change in credit spreads in the overall investment market. The fair value of this embedded derivative was $(117.4) million at
December 31, 2009 compared to $(360.5) million at December 31, 2008 and is reported in other liabilities in our consolidated balance sheets.