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69
Unum 2015 Annual Report
Mortgage Loans
Our mortgage loan portfolio was $1,883.6 million and $1,856.6 million on an amortized cost basis at December 31, 2015 and 2014,
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 no impaired mortgage loans at December 31, 2015. We held one impaired mortgage loan at December 31, 2014 that was
carried at the estimated net realizable value of $13.1 million, net of a valuation allowance of $1.5 million.
Derivative Financial Instruments
We use derivative financial instruments primarily to manage reinvestment, duration, foreign currency, and credit risks. Historically, we
have utilized current and forward interest rate swaps and options on forward interest rate swaps and U.S. Treasury rates, current and
forward currency swaps, forward treasury locks, currency forward contracts, forward contracts on specific fixed income securities, and
credit default swaps. Our current credit exposure on derivatives, which is limited to the value of those contracts in a net gain position,
including accrued interest receivable less collateral held, was $8.5 million at December 31, 2015. We held $36.4 million of cash collateral
from our counterparties at December 31, 2015. The carrying value of fixed maturity securities posted as collateral to our counterparties was
$27.3 million at December 31, 2015. We had no cash collateral posted to our counterparties at December 31, 2015. We believe that our
credit risk is mitigated by our use of multiple counterparties, all of which have an investment-grade credit rating, 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 $36.8 million and $40.4 million on a fair value basis at December 31, 2015 and 2014, 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.
Liquidity and Capital Resources
Overview
Our liquidity requirements are met primarily by cash flows provided from operations, principally in our insurance subsidiaries.
Premium and investment income, as well as maturities and sales of invested assets, provide the primary sources of cash. Debt and/or
securities offerings provide additional sources of liquidity. Cash is applied to the payment of policy benefits, costs of acquiring new
business (principally commissions), operating expenses, and taxes, as well as purchases of new investments.
We have established an investment strategy that we believe will provide for adequate cash flows from operations. We attempt to match
our asset cash flows and durations with expected liability cash flows and durations to meet the funding requirements of our business. However,
deterioration in the credit market may delay our ability to sell our positions in certain of our fixed maturity securities in a timely manner
and adversely impact the price we receive for such securities, which may negatively impact our cash flows. Furthermore, if we experience
defaults on securities held in the investment portfolios of our insurance subsidiaries, this will negatively impact statutory capital, which
could reduce our insurance subsidiaries’ capacity to pay dividends to our holding companies. A reduction in dividends to our holding
companies could force us to seek external financing to avoid impairing our ability to pay dividends to our stockholders or meet our debt
and other payment obligations. As requirements of Dodd-Frank continue to take effect in 2016 and in subsequent years, to the extent that
we enter into derivatives that are subject to centralized exchanges and cleared through a regulated clearinghouse, we may be subject to
stricter collateral requirements which could have an adverse effect on our overall liquidity.