Unum 2009 Annual Report Download - page 75

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Unum 2009 Annual Report
As of December 31, 2009, the amortized cost and fair value of our below-investment-grade fixed maturity securities was
$2,671.8 million and $2,589.8 million, respectively. Below-investment-grade securities are inherently more risky than investment-grade
securities since the risk of default by the issuer, by definition and as exhibited by bond rating, is higher. Also, the secondary market for
certain below-investment-grade issues can be highly illiquid. Additional downgrades may occur, but we do not anticipate any liquidity
problems resulting from our investments in below-investment-grade securities, nor do we expect these investments to adversely affect
our ability to hold our other investments to maturity.
Mortgage Loans
Our mortgage loan portfolio was $1,404.0 million and $1,274.8 million on an amortized cost basis at December 31, 2009 and 2008,
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 continues to
be low. Due to conservative underwriting, we expect the level of problem loans to remain low relative to the industry. At December 31, 2009,
we held one mortgage loan which was delinquent more than 30 days as to interest or principal payments and which we consider impaired.
This loan is carried at the estimated net realizable value of $2.0 million, net of a valuation allowance of $3.2 million. At December 31, 2008,
impaired mortgage loans totaled $5.2 million. We had no valuation allowance for mortgage loans at December 31, 2008.
See Note 4 of the “Notes to Consolidated Financial Statements” for further discussion of our investments.
Derivative Financial Instruments
We use derivative financial instruments primarily to manage reinvestment risk, duration, and currency risk. Historically, we have utilized
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. Our current
credit exposure on derivatives, which is limited to the value of those contracts in a net gain position less collateral held, was $7.0 million
at December 31, 2009. The carrying value of fixed maturity securities posted as collateral to our counterparties was $123.1 million at
December 31, 2009. 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 further discussion of our derivative financial instruments.
Other
Our exposure to non-current investments, defined as foreclosed real estate and invested assets which are delinquent as to interest
and/or principal payments, totaled $35.5 million and $11.8 million on a fair value basis at December 31, 2009 and 2008, respectively.
Liquidity and Capital Resources
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.
We have established an investment strategy that we believe will provide for adequate cash flows from operations. We attempt to
match our asset cash flows and durations with expected liability cash flows and durations to meet the funding requirements of our business.
However, deterioration in the credit market may delay our ability to sell our positions in certain of our fixed maturity securities in a timely
manner, which may negatively impact our cash flows. Furthermore, if we experience defaults on securities held in the investment portfolios
of our insurance subsidiaries, this will negatively impact statutory capital, which could reduce our insurance subsidiaries’ capacity to pay
dividends to our holding companies. A reduction in dividends to our holding companies could force us to seek external financing to avoid
impairing our ability to pay our stockholder dividends or meet our debt and other payment obligations.