Unum 2006 Annual Report Download - page 69

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factors involve significant assumptions and may not reflect those of an active market. We believe that generally
these private placement securities carry an average credit quality comparable to companies rated Baa or BBB by
major credit rating organizations.
As of December 31, 2006, the key assumptions used to estimate the fair value of private placement fixed maturity
securities included the following:
• Risk free interest rates of 4.69 percent for five-year maturities to 4.81 percent for 30-year maturities were
derived from the current yield curve for U.S. Treasury Bonds with similar maturities.
• Current Baa corporate bond spreads ranging from 0.59 percent to 1.66 percent plus an additional 20 basis
points were added to the risk free rate to reflect the lack of liquidity.
• An additional five basis points were added to the risk free rates for foreign investments.
• Additional basis points were added as deemed appropriate for certain industries and for individual
securities in certain industries that are considered to be of greater risk.
Increasing the 20 basis points added to the risk free rate for lack of liquidity by 1.5 basis points, increasing the five
basis points added to the risk free rates for foreign investments by one basis point, and increasing the additional
basis points added to each industry considered to be of greater risk by one basis point would have decreased the
December 31, 2006 net unrealized gain in the fixed maturity securities portfolio by approximately $1.4 million.
Historically, our realized gains or losses on dispositions of private placement fixed maturity securities have not
varied significantly from amounts estimated under the valuation methodology described above.
Changes in the fair value of fixed maturity securities, other than declines that are determined to be other than
temporary, are reported as a component of other comprehensive income in stockholders’ equity. If we subsequently
determine that any of these securities are other than temporarily impaired, the impairment loss is reported as a
realized investment loss in our consolidated statements of operations. The recognition of the impairment loss does
not affect total stockholders’ equity to the extent that the decline in value had been previously reflected in other
comprehensive income.
There are a number of significant risks inherent in the process of monitoring our fixed maturity securities for
impairments and determining when and if an impairment is other than temporary. These risks and uncertainties
include the following possibilities:
• The assessment of a borrower’s ability to meet its contractual obligations will change.
• The economic outlook, either domestic or foreign, may be less favorable or may have a more significant
impact on the borrower than anticipated, and as such, the security may not recover in value.
• New information may become available concerning the security, such as disclosure of accounting
irregularities, fraud, or corporate governance issues.
• Significant changes in credit spreads may occur in the related industry.
• Significant increases in interest rates may occur and may not return to levels similar to when securities
were initially purchased.
• Adverse rating agency actions may occur.
Income Taxes
We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be
realized. Our valuation allowance relates primarily to assets for foreign net operating loss carryforwards and assets
for our basis in certain of our foreign subsidiaries that are not likely to be realized in the future based on our
expectations using currently available evidence. In evaluating the ability to recover deferred tax assets, we have
considered all available positive and negative evidence including past operating results, the existence of cumulative
losses in the most recent years, forecasted earnings, future taxable income, and prudent and feasible tax planning
strategies. In the event we determine that we most likely would not be able to realize all or part of our deferred tax
assets in the future, an increase to the valuation allowance would be charged to earnings in the period such
determination is made. Likewise, if it is later determined that it is more likely than not that those deferred tax assets
would be realized, the previously provided valuation allowance would be reversed.