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UNUM 2012 ANNUAL REPORT 71
Spain
We have no direct exposure to Spanish financial institutions, although we do own fixed maturity securities of a certain United Kingdom
subsidiary of a Spanish financial institution. We believe there are risks associated with Spain’s high unemployment, large budget deficit,
banking sector problems, recessionary pressures, and potential regional secession issues. All but one of our Spanish domiciled securities were
rated investment-grade as of December 31, 2012, and all were current on their obligations to us. We believe they will continue to have
the ability to meet their debt obligations. For those securities in an unrealized loss position, we have the intent to hold these investments
to recovery in value. As a result, we did not recognize any other-than-temporary impairment losses on these investments as of
December 31, 2012.
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.
Potential risks for these corporate holdings include a lack of access to credit in their countries of domicile and redenomination risk as
it pertains to their outstanding liabilities. Under either of these scenarios, 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 $1,712.7 million and $1,612.3 million on an amortized cost basis at December 31, 2012 and 2011,
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, 2012 and 2011 which were considered impaired and were carried at the estimated net
realizable values of $17.4 million and $22.5 million, respectively, net of a valuation allowance of $1.5 million at each period end.
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 $8.7 million at December 31,
2012. We held no cash collateral from our counterparties at December 31, 2012. The carrying value of cash and fixed maturity securities
posted as collateral to our counterparties was $1.8 million and $108.6 million, respectively, at December 31, 2012. We believe that our
credit risk is mitigated by our use of multiple counterparties, all of which have a median credit rating of A3 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 $63.3 million and $58.6 million on a fair value basis at December 31, 2012 and 2011, 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.