Unum 2013 Annual Report Download - page 97

UNUM 2013 ANNUAL REPORT / 95
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. 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. See Notes 2 and 3.
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. For mortgage loans on which collection of interest income is uncertain, we
discontinue the accrual of interest and recognize it 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.
We evaluate each of our mortgage loans individually for impairment based on a comprehensive rating system used to evaluate the
credit risk of the loan. 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 impairment. If we determine that it is probable we will be unable to collect all amounts
due under the contractual terms of a 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 flows of 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. We do not purchase mortgage loans with existing credit impairments. See 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 $3,043.7 million and $2,912.7 million
of policy loans ceded to reinsurers at December 31, 2013 and 2012, respectively.
Other Long-term Investments: Other long-term investments are comprised primarily of tax credit partnerships and private
equity partnerships.
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 net realized investment gain or loss, in accordance with the source of the funds distributed from the partnership. See Notes 2 and 3.