Unum 2014 Annual Report Download - page 82

80 UNUM • 2014 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 flow analyses. Because we actively manage our investments and
liabilities, actual changes could be less than those estimated above.
Sustained periods of low interest rates may result in lower than expected profitability. Assuming interest rates and credit spreads
remained constant throughout 2015 at the January 2015 market levels, our net investment income would decrease by approximately
$1 million in 2015 and $7 million in 2016 relative to our current expectations. This interest rate scenario does not give consideration to
the effect of other factors which could impact these results, such as changes in the bond market and changes in hedging strategies and
positions, nor does it consider the potential change to our discount rate reserve assumptions and any mitigating factors such as pricing
adjustments. In addition, a continued low or declining interest rate environment may also result in an increase in the net periodic benefit
costs for our pension plans, but we do not believe it would materially affect net income in 2015 or 2016.
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 our U.K. operations.
Assuming the pound to dollar exchange rate decreased 10 percent from the December 31, 2014 and 2013 levels, stockholders’ equity
as reported in U.S. dollars would have been lower by approximately $100 million at each of those year end periods. Assuming the pound
to dollar average exchange rate decreased 10 percent from the actual average exchange rates for 2014 and 2013, before-tax operating
income, as reported in U.S. dollars, would have decreased approximately $15 million in each of those two years.
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 “Risk Factors” contained in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and
“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 identication and prioritization
• Risk and capital modeling
• Risk management activities
• Risk reporting