Unum 2010 Annual Report Download - page 62

Download and view the complete annual report

Please find page 62 of the 2010 Unum annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 162

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum
2010
60
Segment Outlook
Our investment portfolio quality remains very strong, with low default experience during 2010. We are currently holding capital at our
insurance subsidiaries and holding companies at levels that exceed our long-term requirements. We expect to continue to generate excess
capital on an annual basis through strong statutory earnings. During 2011, while we intend to maintain our disciplined approach to risk
management, we believe we are well-positioned wherein we have substantial exibility to preserve our capital strength and at the same
time explore opportunities to deploy the excess capital that is generated each period.
Interest and debt expense is expected to remain generally consistent with the level of 2010 due to $225.1 million of debt which will
mature in March 2011 and no expected issuances of new debt in 2011. We do not expect litigation costs to remain at the elevated level of
2010, and pension expenses are expected to remain generally consistent in 2011 with the level of 2010.
Investments
Overview
Our investment portfolio is well diversified by type of investment and industry sector. We have established an investment strategy
that we believe will provide for adequate cash ows from operations and allow us to hold our securities through periods where signicant
decreases in fair value occur. We believe our emphasis on risk management in our investment portfolio, including credit and interest rate
management, has positioned us well and generally reduced the volatility in our results.
We have no exposure to subprime mortgages, “Alt-A” loans, or collateralized debt obligations in our asset-backed, mortgage-backed
securities, or public bond portfolios. At December 31, 2010, we had minimal exposure to investments for which the payment of interest and
principal is guaranteed under a financial guaranty insurance policy, and all such securities are rated investment-grade absent the guaranty
insurance policy. We held $378.0 million fair value ($374.3 million amortized cost) of perpetual debentures, or “hybrid” securities, that
generally have no fixed maturity date. Interest on these securities due on any payment date may be deferred by the issuer. The interest
payments are generally deferrable only to the extent that the issuer has suspended dividends or other distributions or payments to any of
its shareholders or any other perpetual debt instrument.
Below is a summary of our formal investment policy, including the overall quality and diversification objectives:
• The majority of investments are in high quality publicly traded securities to ensure the desired liquidity and preserve the capital
value of our portfolios.
• The long-term nature of our insurance liabilities also allows us to invest in less liquid investments to obtain superior returns. A
maximum of 10 percent of the total investment portfolio may be invested in below-investment-grade securities, 2 percent in equity
type instruments, up to 35 percent in private placements, and 10 percent in commercial mortgage loans. The remaining assets can
be held in publicly traded investment-grade corporate securities, mortgage-backed securities, bank loans, asset-backed securities,
government and government agencies, and municipal securities.
• We intend to manage the risk of losses due to changes in interest rates by matching asset duration with liabilities, in the aggregate.
• The weighted average credit quality rating of the portfolio should be Baa1 or higher.
• The maximum investment per issuer group is limited based on internal limits reviewed by the nance committee of Unum Group’s
board of directors and approved by the boards of directors of our insurance subsidiaries and is more restrictive than the five percent
limit generally allowed by the state insurance departments which regulate the type of investments our insurance subsidiaries are
allowed to own. These internal limits are as follows: