Unum 2009 Annual Report Download - page 37

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Unum 2009 Annual Report
temporary. The significance of the decline in value and the length of time during which there has been a significant decline are also important
factors, but we generally do not record an impairment loss based solely on these two factors, since often other more relevant factors will
impact our evaluation of a security.
While determining other-than-temporary impairments is a judgmental area, we utilize a formal, well-defined, and disciplined process to
monitor and evaluate our fixed income investment portfolio, supported by issuer specific research and documentation as of the end of each
period. The process results in a thorough evaluation of problem investments and the recording of losses on a timely basis for investments
determined to have an other-than-temporary impairment.
If we determine that the decline in value of an investment is other than temporary, the investment is written down to fair value, and
an impairment loss is recognized in the current period, either in earnings or in both earnings and other comprehensive income, as applicable.
For those fixed maturity securities with an unrealized loss for which we have not recognized an other-than-temporary impairment, we
believe we will recover the entire amortized cost, we do not intend to sell the security, and we do not believe it is more likely than not
we will be required to sell the security before recovery of its amortized cost. There have been no defaults in the repayment obligations
of any securities for which we have not recorded an other-than-temporary impairment.
Other-than-temporary impairment losses on fixed maturity securities which we intend to sell or more likely than not will be required
to sell before recovery in value are recognized in earnings and equal the entire difference between the security’s amortized cost basis and
its fair value. For securities which we do not intend to sell and it is not more likely than not that we will be required to sell before recovery
in value, other-than-temporary impairment losses recognized in earnings generally represent the difference between the amortized cost of
the security and the present value of our best estimate of cash flows expected to be collected, discounted using the effective interest rate
implicit in the security at the date of acquisition. The determination of cash flows is inherently subjective, and methodologies may vary
depending on the circumstances specific to the security. The timing and amount of our cash flow estimates are developed using historical and
forecast financial information from the issuer, including its current and projected liquidity position. We also consider industry analyst reports
and forecasts, sector credit ratings, future business prospects and earnings trends, issuer refinancing capabilities, actual and/or potential
asset sales by the issuer, and other data relevant to the collectibility of the contractual cash flows of the security. We take into account the
probability of default, expected recoveries, third party guarantees, quality of collateral, and where our debt security ranks in terms of
subordination. We may use the estimated fair value of collateral as a proxy for the present value of cash flows if we believe the security is
dependent on the liquidation of collateral for recovery of our investment. For fixed maturity securities for which we have recognized an other-
than-temporary impairment loss through earnings, if through subsequent evaluation there is a significant increase in expected cash flows,
the difference between the new amortized cost basis and the cash flows expected to be collected is accreted as net investment income.
We use a comprehensive rating system to evaluate the investment and credit risk of our mortgage loans and to identify specific
properties for inspection and reevaluation. Mortgage loans are considered 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 establish
an allowance for probable losses on mortgage loans based on a review of individual loans and the overall loan portfolio, considering
the value of the underlying collateral. Mortgage loans are not reported at fair value in our consolidated balance sheets unless the
decline in value is considered to be other than temporary, in which case the reduction is recognized as a realized investment loss in
our consolidated statements of income.
There are a number of significant risks inherent in the process of monitoring our investments 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 signicant impact on the borrower
than anticipated, and as such, the investment may not recover in value.
• New information may become available concerning the security, such as disclosure of accounting irregularities, fraud, or corporate
governance issues.
• Signicant changes in credit spreads may occur in the related industry.
• Signicant 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.