Unum 2012 Annual Report Download - page 67

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UNUM 2012 ANNUAL REPORT 65
Rating Internal Limit
($ in millions)
AAA/AA $200
A 175
BBB+ 150
BBB 125
BBB- 90
BB+ 75
BB 60
BB- 50
B+ 30
B/B- 20
CCC 10
• The portfolio is to be diversified across industry classification and geographic lines.
• Derivative instruments may be used to replicate permitted asset classes, hedge interest rate risk and foreign currency risk, and match
liability duration and cash flows consistent with the plan reviewed by the finance committee of Unum Group’s board of directors and
approved by the boards of directors of our insurance subsidiaries.
• Asset mix guidelines and limits are established by us, reviewed by the finance committee of Unum Group’s board of directors, and
approved by the boards of directors of our insurance subsidiaries.
• The allocation of assets and the selection and timing of the acquisition and disposition of investments are subject to ratification,
on a weekly basis, by an investment subcommittee appointed by the boards of directors of our insurance subsidiaries. These actions
are also reviewed by the finance committee of Unum Group’s board of directors on a quarterly basis.
• We review these investment policies and guidelines annually, or more frequently if deemed necessary, and recommend
adjustments, as appropriate. Any revisions are reviewed by the finance committee of Unum Group’s board of directors and must be
approved by the boards of directors of our insurance subsidiaries.
See “Critical Accounting Estimates” contained herein for further discussion of our valuation of investments.
Investment Results
Net investment income was slightly lower in 2012 relative to 2011 due primarily to a decline in yield on invested assets, an increase
in the amortization of the principal amount invested in our tax credit partnerships, and lower income on our Unum UK inflation index-linked
bonds. These declines were partially offset by a higher level of invested assets, higher bond call premiums, an increase in income from
private equity partnership investments, and higher prepayment income on mortgage-backed securities.
Net investment income increased slightly in 2011 relative to 2010 due primarily to continued growth in invested assets and higher
bond call premiums, partially offset by an increase in the amortization of the principal amount invested in our to tax credit partnerships,
a decrease in income on other partnership investments, and lower prepayment income on mortgage-backed securities.
The duration weighted book yield on the fixed income securities in our investment portfolio was 6.47 percent as of December 31, 2012,
compared to a yield of 6.67 percent as of December 31, 2011. We actively manage our asset and liability cash flow match and our asset and
liability duration match with the objective of reducing interest rate risk. Duration is a measure of the percentage change in the fair values of
assets and liabilities for a given change in interest rates. Cash flows from the in-force asset and liability portfolios are projected at current
interest rate levels and also at levels reflecting an increase and a decrease in interest rates to obtain a range of projected cash flows under
the different interest rate scenarios. These results enable us to assess the impact of projected changes in cash flows and duration resulting
from potential changes in interest rates.