Unum 2011 Annual Report Download - page 64

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum 2011 Annual Report
62
Segment Outlook
We expect the quality of our investment portfolio to remain strong in 2012. 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. While we intend to maintain our disciplined approach to risk management throughout
2012, we believe we are well positioned with substantial flexibility to preserve our capital strength and at the same time explore
opportunities to deploy the excess capital that is generated each period.
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 flows from operations and allow us to hold our securities through periods where significant
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. We have no direct exposure to sovereign debt of certain countries in the European Union, specifically
Greece, Ireland, Italy, Portugal, and Spain. At December 31, 2011, 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. At December 31, 2011, we held $294.1 million fair value ($318.5 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 securities, 3 percent in tax credit funds, 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 finance 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: