Unum 2010 Annual Report Download - page 117
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115
Unum 2010 Annual Report
We evaluate each of our mortgage loans individually for impairment and assign an internal credit quality rating based on a
comprehensive rating system used to evaluate the credit risk of the loan. The factors we use to derive our internal credit ratings may
include the following:
• Loan-to-value ratio
• Debt service coverage ratio based on current operating income
• Property location, including regional economics, trends and demographics
• Age, condition, and construction quality of property
• Current and historical occupancy of property
• Lease terms relative to market
• Tenant size and nancial strength
• Borrower’s nancial strength
• Borrower’s equity in transaction
• Additional collateral, if any
Although all available and applicable factors are considered in our analysis, loan-to-value and debt service coverage ratios are the
most critical factors in determining whether we will initially issue the loan and also in assigning values and determining impairment.
We assign an overall rating to each loan using an internal rating scale of Aa (highest quality) to Ba (lowest quality). We review and adjust,
as needed, our internal credit quality ratings on an annual basis. This review process is performed more frequently for mortgage loans
deemed to have a higher risk of delinquency.
Mortgage loans, sorted by the applicable credit quality indicators, are as follows:
(in millions of dollars) December 31, 2010
Internal Rating
Aa $ 19.0
A 744.4
Baa 732.9
Ba 20.5
Total $1,516.8
Loan-to-Value Ratio
<= 65% $ 425.3
> 65% <= 75% 869.2
> 75% <= 85% 161.9
> 85% <= 100% 60.4
Total $1,516.8
Based on an analysis of the above risk factors, as well as other current information, if we determine that it is probable we will be
unable to collect all amounts due under the contractual terms of the mortgage loan, we establish an allowance for credit loss. If we expect
to foreclose on the property, the amount of the allowance typically equals the excess carrying value of the mortgage loan over the fair
value of the underlying collateral. If we expect to retain the mortgage loan until payoff, the allowance equals the excess carrying value of
the mortgage loan over the expected future cash ows of the loan. The projection of future cash ows or a determination that the borrower
can make the contractual payments is inherently subjective, and methodologies may vary depending on the circumstances specific to the
loan. Additions and reductions to our allowance for credit losses on mortgage loans are reported as a component of net realized investment
gains and losses. There have been no changes to our accounting policies or methodology from the prior period regarding estimating the
allowance for credit losses on our mortgage loans.