Unum 2012 Annual Report Download - page 86

84 UNUM 2012 ANNUAL REPORT
Quantitative and Qualitative Disclosures
About Market Risk
The effect of a change in interest rates on asset prices was determined using a duration implied methodology for corporate bonds
and government and government agency securities whereby the duration of each security was used to estimate the change in price for the
security assuming an increase of 100 basis points in interest rates. The effect of a change in interest rates on the mortgage-backed securities
was estimated using a mortgage analytic system which takes into account the impact of changing prepayment speeds resulting from a
100 basis point increase in interest rates on the change in price of the mortgage-backed securities. These hypothetical prices were compared
to the actual prices for the period to compute the overall change in market value. The changes in the fair values shown in the chart above
for all other items were determined using discounted cash flows analyses. Because we actively manage our investments and liabilities,
actual changes could be less than those estimated above.
Foreign Currency Risk
The functional currency of our U.K. operations is the British pound sterling. We are exposed to foreign currency risk arising from
fluctuations in the British pound sterling to U.S. dollar exchange rates primarily as they relate to the translation of the financial results of our
U.K. operations. Fluctuations in the pound to dollar exchange rate have an effect on our reported financial results. We do not hedge against
the possible impact of this risk. Because we do not actually convert pounds into dollars except for a limited number of transactions, we
view foreign currency translation as a financial reporting issue and not a reflection of operations or profitability in the U.K.
Assuming the pound to dollar exchange rate decreased 10 percent from the December 31, 2012 and 2011 levels, stockholders’ equity
as reported in U.S. dollars as of and for the periods then ended would have been lower by approximately $109.5 million and $107.9 million,
respectively. Assuming the pound to dollar average exchange rate decreased 10 percent from the actual average exchange rates for 2012
and 2011, segment operating income, which excludes net realized investment gains and losses and income tax, as reported in U.S. dollars
would have decreased approximately $12.6 million and $18.8 million, respectively, for the years then ended.
Dividends paid by Unum Limited are generally held at our U.K. finance subsidiary or our U.K. holding company. If these funds are
repatriated to our U.S. holding company, we would at that time be subject to foreign currency risk as the value of the dividend, when
converted into U.S. dollars, would be dependent upon the foreign exchange rate at the time of conversion.
We are also exposed to foreign currency risk related to certain foreign investment securities denominated in local currencies and
U.S. dollar-denominated debt issued by one of our U.K. subsidiaries. We use current and forward currency swaps to hedge or minimize the
foreign exchange risk associated with these instruments.
See “Consolidated Operating Results” and “Unum UK Segment” contained herein for further information concerning foreign
currency translation.
Risk Management
Effectively taking and managing risks is essential to the success of our Company. To facilitate this effort, we have a formal Enterprise
Risk Management (ERM) program, with a framework comprising the following key components:
• Risk culture and governance
• Risk appetite policy
• Risk identification and prioritization
• Risk and capital modeling
• Risk management activities
• Risk reporting