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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum
2010
68
Unrealized Loss on Below-Investment-Grade Fixed Maturity Securities
Length of Time in Unrealized Loss Position
2010 2009
(in millions of dollars) December 31 September 30 June 30 March 31 December 31
Fair Value < 100% >= 70% of Amortized Cost
<= 90 Days $ 5.1 $ 0.5 $ 8.8 $ 3.8 $ 0.1
> 90 <= 180 Days 0.1 1.9 1.4 — —
> 180 <= 270 Days 4.1 — — — 0.1
> 1 Year <= 2 Years — 1.5 12.3 13.8 48.0
> 2 Years <= 3 Years 14.0 28.9 41.5 48.8 45.7
> 3 Years 28.8 28.5 38.7 23.0 24.3
Sub-total 52.1 61.3 102.7 89.4 118.2
Fair Value < 70% >= 40% of Amortized Cost
> 1 Year <= 2 Years — — — 9.9 10.9
> 2 Years <= 3 Years — — 4.2 1.4 1.3
> 3 Years 0.4 1.7 2.2 12.2 19.7
Sub-total 0.4 1.7 6.4 23.5 31.9
Total $52.5 $63.0 $109.1 $112.9 $150.1
At December 31, 2010, our mortgage/asset-backed securities had an average life of 4.43 years, effective duration of 3.82 years, and
a weighted average credit rating of AAA. The mortgage/asset-backed securities are valued on a monthly basis using valuations supplied by
the brokerage firms that are dealers in these securities as well as independent pricing services. One of the risks involved in investing in
mortgage/asset-backed securities is the uncertainty of the timing of cash ows from the underlying loans due to prepayment of principal
with the possibility of reinvesting the funds in a lower interest rate environment. We use models which incorporate economic variables and
possible future interest rate scenarios to predict future prepayment rates. The timing of prepayment cash ows may also cause volatility in
our recognition of investment income. We recognize investment income on these securities using a constant effective yield based on
projected prepayments of the underlying loans and the estimated economic life of the securities. Actual prepayment experience is
reviewed periodically, and effective yields are recalculated when differences arise between prepayments originally projected and the
actual prepayments received and currently projected. The effective yield is recalculated on a retrospective basis, and the adjustment is
reected in net investment income.
We have not invested in mortgage-backed derivatives, such as interest-only, principal-only, or residuals, where market values can be
highly volatile relative to changes in interest rates. All of our mortgage-backed securities have fixed rate coupons. The credit quality of our
mortgage-backed securities portfolio has not been negatively impacted by the issues in the market concerning subprime mortgage loans. The
change in value of our mortgage-backed securities portfolio has moved in line with that of prime agency-backed mortgage-backed securities.
As of December 31, 2010, the amortized cost and fair value of our below-investment-grade fixed maturity securities was
$2,668.9 million and $2,755.0 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.