Unum 2011 Annual Report Download - page 99

Unum 2011 Annual Report
Unum
2011
97
Mortgage Loans: Mortgage loans are generally held for investment and are carried at amortized cost less an allowance for probable
losses. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Prepayment penalties
are recognized as investment income when received.
We use a comprehensive rating system to evaluate the investment and credit risk of our mortgage loans and to identify specific
properties for further inspection, analysis, and reevaluation. For mortgage loans on which collection of investment income is uncertain,
we discontinue the accrual of investment income and recognize investment income in the period when an interest payment is received.
We typically do not resume the accrual of interest on mortgage loans on nonaccrual status until there are significant improvements in the
underlying financial condition of the borrower. We consider a loan to be delinquent if full payment is not received in accordance with the
contractual terms of the loan. 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 considering the underlying collateral, the value of which is
periodically assessed. Additions and reductions to our allowance are reported as a component of net realized investment gain or loss.
We do not purchase mortgage loans with existing credit impairments. See also Note 3.
Policy Loans: Policy loans are presented at unpaid balances directly related to policyholders. Interest income is accrued on the
principal amount of the loan based on the loan’s contractual interest rate. Included in policy loans are $2,838.3 million and $2,790.5 million
of policy loans ceded to reinsurers at December 31, 2011 and 2010, respectively.
Other Long-term Investments: Other long-term investments are comprised primarily of freestanding derivatives with a positive
fair value, tax credit partnerships, and private equity partnerships. Freestanding derivatives are more fully described in the derivatives
accounting policy which follows.
Tax credit partnerships in which we have invested were formed for the purpose of investing in the construction and rehabilitation of
low-income housing. Because the partnerships are structured such that there is no return of principal, the primary sources of investment
return from our tax credit partnerships are tax credits and tax benefits derived from passive losses on the investments, both of which may
exhibit variability over the life of the investment. These partnerships are accounted for using either the equity or the effective yield
method, depending primarily on whether the tax credits are guaranteed through a letter of credit, a tax indemnity agreement, or another
similar arrangement. Tax credits received from these partnerships are reported in our consolidated statements of income as either a reduction
of state premium taxes, which are a component of other expenses, or a reduction of income tax. For those partnerships accounted for
under the equity method, the amortization of the principal amount invested in these partnerships is reported as a component of net
investment income. For those partnerships accounted for under the effective yield method, amortization of the principal amount invested
is reported as a component of income tax or other expenses.
Our investments in private equity partnerships are passive in nature. The underlying investments held by these partnerships include
both equity and debt securities and are accounted for using the equity or cost method, depending on the level of ownership and the
degree of our influence over partnership operating and financial policies. For partnerships accounted for under the equity method, our
portion of partnership earnings is reported as a component of net investment income in our consolidated statements of income. For those
partnerships accounted for under the cost method, we record income received from partnership distributions as either a component of net
investment income or of net realized investment gain or loss, in accordance with the source of the funds distributed from the partnership.
Short-term Investments: Short-term investments are carried at cost. Short-term investments include investments maturing within
one year, such as corporate commercial paper and U.S. Treasury bills, bank term deposits, and other cash accounts and cash equivalents
earning interest.