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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum
2010
64
• During 2008, we recognized an other-than-temporary impairment loss of $39.3 million on a principal protected equity linked note
which contained an embedded forward contract to purchase shares of a Vanguard S&P 500 index mutual fund. The note also
provided principal protection through the substitution of highly rated bonds in place of the underlying S&P 500 index mutual fund,
should a specified trigger event occur. At the time of the impairment loss, the decline in the S&P 500 index had not been significant
enough to trigger the substitution of the highly rated bonds, but due to the then recent steep decline in the S&P 500 index, we could
no longer conclude that the value of the underlying S&P 500 index mutual fund would equate to or exceed the par value of the
security at maturity. At the time of the impairment loss, these securities had been in an unrealized loss position for a period of
greater than three years.
• During 2008, we recognized an other-than-temporary impairment loss of $32.0 million on securities issued by a U.S. based
automobile manufacturer and its captive nance subsidiary. The company experienced a decline in protability and cash ow due to
the weak economic environment. Although at the time of the impairment loss the company had not yet received government
bailout money, the probability of receiving some form of government financial aid had significantly increased. Other U.S. automakers
that had received bailout money were expected to request their bondholders to accept a significant reduction in principal. In order for
this company to stay competitive with other U.S. automakers, it was likely that it, too, would seek debt relief from its bondholders
and that we would not recover our entire principal for these securities. At the time of the impairment loss, these securities had been
in an unrealized loss position for a period of greater than three years.
• During 2008, we recognized an other-than-temporary impairment loss of $27.8 million on securities issued by a large investment
banking firm. The company experienced a rapid deterioration in its credit and derivatives portfolio, which made it impossible for the
firm to raise additional capital or to sell assets to increase liquidity. The inability to raise capital forced the company to file for
bankruptcy protection in the third quarter of 2008. The firm was rated A2 by Moody’s and A by S&P at the time of the bankruptcy
filing. At the time of the impairment loss, these securities had been in an unrealized loss position for a period of greater than two
years but less than three years.
• During 2008, we recognized an other-than-temporary impairment loss of $21.6 million on securities issued by a large publisher of
yellow page advertising. The outlook for this industry had continued to worsen due to the secular change impacting the industry and
due to weak economic conditions. The company’s third quarter 2008 earnings were down significantly as compared to prior periods,
and bad debt expense and financial leverage increased significantly. These financial results increased the likelihood that the company
might violate bank covenants and seek waivers from its bondholders. Additionally, the company had hired external consultants to
advise it on potential capital restructuring alternatives. These events increased the likelihood that the company would seek to tender
its bonds at a discounted value and that our bonds would not fully recover in value. At the time of the impairment loss, these
securities had been in an unrealized loss position for a period of greater than one year but less than two years.
• During 2008, we recognized an other-than-temporary impairment loss of $12.9 million on securities issued by a large international
chemical company. The company’s third quarter 2008 operating results were weak due to recessionary industry conditions and the
negative impact of hurricane activity on its oil refinery operations. Due to these factors, the company experienced a significant
decline in its liquidity. In late December 2008, lenders denied the company’s request to obtain additional funding from its existing
line of credit. As a result, the company’s liquidity was insufcient to fund required cash outows, and the company hired external
consultants to advise it on potential capital restructuring alternatives. At the time of the impairment loss, these securities had been
in an unrealized loss position for a period of greater than one year but less than two years.
• During 2008, we recognized an other-than-temporary impairment loss of $12.1 million on securities issued by a large newspaper
publishing company. The outlook for this industry had continued to deteriorate due to the secular change away from newspaper
advertising and weak economic conditions. The company reported poor third quarter 2008 operating results. The increase in leverage
and lower cash ows increased the likelihood that the company might violate its bank covenants. The company had attempted to sell
non-core assets to reduce its debt, but it had been unable to execute a sale. As a result, it was likely that our bonds would not fully
recover in value. At the time of the impairment loss, these securities had been in an unrealized loss position for a period of greater
than two years but less than three years.