Unum 2013 Annual Report Download - page 82

80 / UNUM 2013 ANNUAL REPORT
Quantitative and Qualitative Disclosures
About Market Risk
We are subject to various market risk exposures, including interest rate risk and foreign exchange rate risk. The following discussion
regarding our risk management activities includes forward-looking statements that involve risk and uncertainties. Estimates of future
performance and economic conditions are reflected assuming certain changes in market rates and prices were to occur (sensitivity analysis).
Caution should be used in evaluating our overall market risk from the information presented below, as actual results may differ.
See “Investments” and Notes 2, 3, and 4 of the “Notes to Consolidated Financial Statements” contained herein for further discussions
of the qualitative aspects of market risk, including derivative financial instrument activity.
Interest Rate Risk
Our exposure to interest rate changes results from our holdings of financial instruments such as fixed rate investments, derivatives,
and interest-sensitive liabilities. Fixed rate investments include fixed maturity securities, mortgage loans, policy loans, and short-term
investments. Fixed maturity securities include U.S. and foreign government bonds, securities issued by government agencies, public utility
bonds, corporate bonds, mortgage-backed securities, and redeemable preferred stock, all of which are subject to risk resulting from interest
rate fluctuations. Certain of our financial instruments, fixed maturity securities and derivatives, are carried at fair value in our consolidated
balance sheets. The fair value of these financial instruments may be adversely affected by changes in interest rates. A rise in interest rates
may decrease the net unrealized gain related to these financial instruments, but may improve our ability to earn higher rates of return on
new purchases of fixed maturity securities. Conversely, a decline in interest rates may increase the net unrealized gain, but new securities
may be purchased at lower rates of return. Although changes in fair value of fixed maturity securities and derivatives due to changes in
interest rates may impact amounts reported in our consolidated balance sheets, these changes will not cause an economic gain or loss
unless we sell investments, terminate derivative positions, determine that an investment is other than temporarily impaired, or determine
that a derivative instrument is no longer an effective hedge.
Other fixed rate investments, such as mortgage loans and policy loans, are carried at amortized cost and unpaid balances, respectively,
rather than fair value in our consolidated balance sheets. These investments may have fair values substantially higher or lower than the
carrying values reflected in our balance sheets. A change in interest rates could impact our financial position if we sold our mortgage loan
investments at times of low market value. A change in interest rates would not impact our financial position at repayment of policy loans,
as ultimately the cash surrender values or death benefits would be reduced for the carrying value of any outstanding policy loans. Carrying
amounts for short-term investments approximate fair value, and we believe we have minimal interest rate risk exposure from these
investments.
We believe that the risk of being forced to liquidate investments or terminate derivative positions is minimal, primarily due to the level
of capital at our insurance subsidiaries, the level of cash and marketable securities at our holding companies, and our investment strategy
which we believe provides for adequate cash flows to meet the funding requirements of our business. We may in certain circumstances,
however, need to sell investments due to changes in regulatory or capital requirements, changes in tax laws, rating agency decisions,
and/or unexpected changes in liquidity needs.