Unum 2007 Annual Report Download - page 106

Notes to Consolidated Financial Statements
104 Unum 2007 Annual Report
We have two special purpose entities which support our investment objectives and which are consolidated under the provisions of
Interpretation No. 46 (FIN 46(R)), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51.
These entities are securitized asset trusts and contain specific financial instruments that do not include our common stock or debt. One of
these entities is a trust holding forward contracts to purchase unrelated equity securities. This trust also holds a defeasance swap contract
for highly rated bonds to provide principal protection for the investments. The fair values of the underlying forward and swap contracts
equaled $79.8 million as of December 31, 2007, and are reported as fixed maturity securities in the consolidated balance sheets. The second
entity is a trust containing a highly rated bond for principal protection and several partnership equity investments. We contributed the
bond and partnership investments into the trust at the time it was established. The purpose of this trust was to allow us to maintain our
investment in the partnerships while at the same time protecting the principal of the investment. The fair values of the bond and
partnerships were $89.6 million and $26.2 million, respectively, as of December 31, 2007, and are reported as fixed maturity securities
and other long-term investments, respectively, in the consolidated balance sheets.
We have a significant investment in, but are not the primary beneficiary of, a special purpose entity which is a collateralized bond
obligation asset trust (CBO) in which we hold interests in several of the tranches and for which we act as investment manager of the
underlying securities. This special purpose entity does not meet the consolidation requirements of FIN 46(R). We issued the CBO in 1998,
and its purpose is to securitize high yield bonds and earn a spread over the cost of the funds from the different tranches issued. The
outstanding balance of all tranches at December 31, 2007 was $100.2 million, $54.7 million of which is held by third parties. These third
parties have no recourse against us. The total fair value of the underlying securities in the CBO was $27.1 million at December 31, 2007.
The fair value of our investment in the CBO, and therefore our maximum exposure to loss, was $12.0 million at December 31, 2007. This
investment is reported as a fixed maturity security in the consolidated balance sheets.
At December 31, 2007, we had commitments of approximately $35.9 million to fund certain of our private placement fixed maturity
and equity securities. The funds are due upon satisfaction of contractual notice from the issuer. These amounts may or may not be funded
during the term of the securities.
In the normal course of business, we receive collateral from unaffiliated third parties through transactions which include both
securities lending and also short-term agreements to purchase securities with the agreement to resell them at a later, specified date. For
both types of transactions, we require that a minimum of 102 percent of the fair value of the securities loaned or securities purchased
under repurchase agreements be maintained as collateral. Generally, cash is received as collateral under these agreements. In the event
that securities are received as collateral, we are not permitted to sell or repledge them. We also pledge our fixed maturity securities
as collateral to unaffiliated third parties through transactions including both securities lending and also short-term agreements to sell
securities with the agreement to repurchase them at a later, specified date. At December 31, 2007, the carrying value of fixed maturity
securities pledged as collateral to third parties under these programs was $2.0 million. See Note 5 for discussion of collateral pledged
to our derivatives counterparties.
Mortgage Loans
At December 31, 2007, mortgage loans were collateralized by office buildings (39.1 percent), industrial buildings (30.9 percent), retail
stores (16.5 percent), and other properties (13.5 percent). Our mortgage loan portfolio is geographically dispersed within the United States,
with the largest concentrations in Pennsylvania (13.2 percent) and California (13.9 percent).
Mortgage loans are impaired when, based on current information and events, it is probable that we will be unable to collect all
amounts due according to the contractual terms of the loan agreement. We did not have any impaired mortgage loans as of December 31,
2007. At December 31, 2006, impaired mortgage loans totaled $2.8 million.
At December 31, 2007, we had commitments of approximately $22.8 million for commercial mortgage loan originations. The funds
will be due at closing of the mortgage loans.