Unum 2010 Annual Report Download - page 82

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Unum
2010
80
We are subject to various market risk exposures, including interest rate risk and foreign exchange rate risk. The following discussion
regarding our risk management activities includes forward-looking statements that involve risk and uncertainties. Estimates of future
performance and economic conditions are reected assuming certain changes in market rates and prices were to occur (sensitivity
analysis). Caution should be used in evaluating our overall market risk from the information presented below, as actual results may differ.
See “Investments” contained herein and Notes 2, 3, and 4 of the “Notes to Consolidated Financial Statements” for further discussions of
the qualitative aspects of market risk, including derivative financial instrument activity.
Interest Rate Risk
Our exposure to interest rate changes results from our holdings of financial instruments such as fixed rate investments, derivatives,
and interest-sensitive liabilities. Fixed rate investments include fixed maturity securities, mortgage loans, policy loans, and short-term
investments. Fixed maturity securities include U.S. and foreign government bonds, securities issued by government agencies, corporate
bonds, mortgage-backed securities, and redeemable preferred stock, all of which are subject to risk resulting from interest rate uctuations.
Certain of our financial instruments, fixed maturity securities and derivatives, are carried at fair value in our consolidated balance sheets.
The fair value of these financial instruments may be adversely affected by changes in interest rates. A rise in interest rates may increase
the net unrealized loss related to these financial instruments, but may improve our ability to earn higher rates of return on new purchases
of fixed maturity securities. Conversely, a decline in interest rates may decrease the net unrealized loss, but new securities may be
purchased at lower rates of return. Although changes in fair value of fixed maturity securities and derivatives due to changes in interest
rates may impact amounts reported in our consolidated balance sheets, these changes will not cause an economic gain or loss unless we
sell investments, terminate derivative positions, determine that an investment is other than temporarily impaired, or determine that a
derivative instrument is no longer an effective hedge.
Other fixed rate investments, such as mortgage loans and policy loans, are carried at amortized cost and unpaid balances,
respectively, rather than fair value in our consolidated balance sheets. These investments may have fair values substantially higher or
lower than the carrying values reected in our balance sheets. A change in interest rates could impact our nancial position if we sold our
mortgage loan investments at times of low market value. A change in interest rates would not impact our financial position at repayment
of policy loans, as ultimately the cash surrender values or death benefits would be reduced for the carrying value of any outstanding policy
loans. Carrying amounts for short-term investments approximate fair value, and we believe we have minimal interest rate risk exposure
from these investments.
We believe that the risk of being forced to liquidate investments or terminate derivative positions is minimal, primarily due to the level
of capital at our insurance subsidiaries, the level of cash and marketable securities at our holding companies, and our investment strategy
which we believe provides for adequate cash ows to meet the funding requirements of our business. We may in certain circumstances,
however, need to sell investments due to changes in regulatory or capital requirements, changes in tax laws, rating agency decisions,
and/or unexpected changes in liquidity needs.
Quantitative and Qualitative Disclosures
About Market Risk