Unum 2013 Annual Report Download - page 65

UNUM 2013 ANNUAL REPORT / 63
Year Ended December 31, 2012 Compared with Year Ended December 31, 2011
Net investment income was lower in 2012 compared to 2011 due to lower asset levels, a lower proportion of assets invested at
long-term interest rates, a decrease in bond call premiums, and a decrease in investment income attributable to tax credit partnerships.
Other income was lower in 2012 compared to 2011 due primarily to $17.5 million of interest income recognized in 2011 related to a
settlement of our appeal to the IRS related to tax years 1996 to 2004.
Interest and other expenses were lower in 2012 compared to 2011 due primarily to the maturity of $225.1 million of 7.625%
senior notes in March 2011, a lower level of expense accruals during 2012, comparatively higher expenses in 2011 due in part to corporate
initiatives, and state income taxes recognized during 2011 as a result of the repatriation of U.K. dividends from our U.K. subsidiaries in 2011.
Partially offsetting these decreases was an impairment of a long-lived fixed asset recognized during 2012 and higher interest expense due
to the issuance of the $250.0 million senior notes in August 2012.
Segment Outlook
We expect the quality of our investment portfolio to remain strong. The impact on net investment income attributable to tax credit
partnerships is likely to continue to negatively impact net investment income for our Corporate segment throughout 2014. However, this is
offset by a lower income tax rate due to the tax benefits recognized as a result of these investments. 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 our statutory earnings. While we intend to maintain our disciplined approach to risk management, 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.
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 partnerships, 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/asset backed securities, bank
loans, 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: