Unum 2011 Annual Report Download - page 36

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum 2011 Annual Report
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and forecast financial information from the issuer, including its current and projected liquidity position. We also consider industry analyst
reports and forecasts, sector credit ratings, future business prospects and earnings trends, issuer refinancing capabilities, actual and/or
potential asset sales by the issuer, and other data relevant to the collectibility of the contractual cash flows of the security. We take into
account the probability of default, expected recoveries, third party guarantees, quality of collateral, and where our debt security ranks in
terms of subordination. We may use the estimated fair value of collateral as a proxy for the present value of cash flows if we believe the
security is dependent on the liquidation of collateral for recovery of our investment. For fixed maturity securities for which we have
recognized an other-than-temporary impairment loss through earnings, if through subsequent evaluation there is a significant increase in
expected cash flows, the difference between the new amortized cost basis and the cash flows expected to be collected is accreted as net
investment income.
We use a comprehensive rating system to evaluate the investment and credit risk of our mortgage loans and to identify specific
properties for inspection and reevaluation. Mortgage loans are considered impaired when, based on current information and events, it is
probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. We establish an
allowance for probable losses on mortgage loans based on a review of individual loans, considering the value of the underlying collateral.
Mortgage loans are not reported at fair value in our consolidated balance sheets unless the mortgage loan is considered impaired, in which
case the impairment is recognized as a realized investment loss in our consolidated statements of income.
There are a number of significant risks inherent in the process of monitoring our investments for impairments and determining when
and if an impairment is other than temporary. These risks and uncertainties include the following possibilities:
• The assessment of a borrower’s ability to meet its contractual obligations will change.
• The economic outlook, either domestic or foreign, may be less favorable or may have a more significant impact on the borrower
than anticipated, and as such, the investment may not recover in value.
• New information may become available concerning the security, such as disclosure of accounting irregularities, fraud, or corporate
governance issues.
• Significant changes in credit spreads may occur in the related industry.
• Significant increases in interest rates may occur and may not return to levels similar to when securities were initially purchased.
• Adverse rating agency actions may occur.
Pension and Postretirement Benefit Plans
We sponsor several defined benefit pension and other postretirement benefit (OPEB) plans for our employees, including non-qualified
pension plans. The U.S. pension plans comprise the majority of our total benefit obligation and pension expense. Our U.K. operation
maintains a separate defined benefit plan for eligible employees. The U.K. defined benefit pension plan was closed to new entrants on
December 31, 2002.
Our net periodic benefit costs and the value of our benefit obligations for these plans are determined based on a set of economic and
demographic assumptions that represent our best estimate of future expected experience. Major assumptions used in accounting for these
plans include the expected discount (interest) rate and the long-term rate of return on plan assets. We also use, as applicable, expected
increases in compensation levels and a weighted average annual rate of increase in the per capita cost of covered benefits, which reflects a
health care cost trend rate, and the U.K. pension plan also uses expected cost of living increases to plan benefits.
The assumptions chosen for our pension and OPEB plans are reviewed annually, using a December 31 measurement date for each of
our plans. The discount rate assumptions and expected long-term rate of return assumptions have the most significant effect on our net
periodic benefit costs associated with these plans. In addition to the effect of changes in our assumptions, the net periodic cost or benefit
obligation under our pension and OPEB plans may change due to factors such as actual experience being different from our assumptions,
special benefits to terminated employees, or changes in benefits provided under the plans.
Discount Rate Assumptions
The discount rate is an interest assumption used to convert the benefit payment stream to a present value. We set the discount rate
assumption at the measurement date for each of our retirement-related benefit plans to reflect the yield of a portfolio of high quality fixed