Unum 2011 Annual Report Download - page 73

Unum 2011 Annual Report
Unum
2011
71
Risk Management
While we have no direct sovereign holdings in the aforementioned countries, we have performed comprehensive stress testing and
scenario analyses on all of our corporate holdings of issuers domiciled in these countries. We have performed stress tests under a number
of scenarios including deep recession, liquidity crisis, and currency redenomination with significant devaluation. We continue to closely
monitor this situation.
A potential risk for these corporate holdings is access to bank lines in their countries of domicile and redenomination risk as it pertains
to their outstanding liabilities. Even in the scenario of currency redenomination and liquidity crisis, we believe the risk is largely mitigated
because our holdings in these countries are non-financial and operate in defensive industries that provide essential services. Most are
market leaders with access to diverse, global capital markets. Current developments regarding ratings downgrades, bailout packages, or
higher sovereign interest rates have not had a material impact on our financial condition or results of operations.
Mortgage Loans
Our mortgage loan portfolio was $1,612.3 million and $1,516.8 million on an amortized cost basis at December 31, 2011 and
December 31, 2010, respectively. Our mortgage loan portfolio is comprised entirely of commercial mortgage loans. We believe our
mortgage loan portfolio is well diversified geographically and among property types. The incidence of problem mortgage loans and
foreclosure activity continues to be low. Due to conservative underwriting, we expect the level of problem loans to remain low relative to
the industry.
We held two mortgage loans at December 31, 2011 and 2010 which were considered impaired. These mortgage loans were carried
at the estimated net realizable values of $22.5 million and $22.9 million, respectively, net of a valuation allowance of$1.5 million at each
period end. During 2011, we foreclosed on two impaired mortgage loans and transferred them into other long-term investments in our
consolidated balance sheets. No realized loss was recognized on the foreclosures. During 2011, we sold one mortgage loan and recognized
a loss of $0.2 million on the sale.
Derivative Financial Instruments
We use derivative financial instruments primarily to manage reinvestment risk, duration, and currency risk. Historically, we have
utilized current and forward interest rate swaps and options on forward interest rate swaps, current and forward currency swaps, forward
treasury locks, currency forward contracts, and forward contracts on specific fixed income securities. Our current credit exposure on
derivatives, which is limited to the value of those contracts in a net gain position less collateral held, was $19.9 million at December 31,
2011. We held $45.6 million of cash collateral from our counterparties at December 31, 2011. The carrying value of fixed maturity securities
posted as collateral to our counterparties was $114.9 million at December 31, 2011. We believe that our credit risk is mitigated by our use
of multiple counterparties, all of which have a median credit rating of A or better, and by our use of cross-collateralization agreements.
Other
Our exposure to non-current investments, defined as foreclosed real estate and invested assets which are delinquent
as to interest and/or principal payments, totaled $58.6 million and $56.2 million on a fair value basis at December 31, 2011 and
December 31, 2010, respectively.
See Notes 3 and 4 of the “Notes to Consolidated Financial Statements” contained herein for further discussion of our investments and
our derivative financial instruments.