Unum 2007 Annual Report Download - page 98

Notes to Consolidated Financial Statements
96 Unum 2007 Annual Report
Policyholders’ Funds: Policyholders’ funds represent customer deposits plus interest credited at contract rates. We control interest
rate risk by investing in quality assets which have an aggregate duration that closely matches the expected duration of the liabilities.
Income Tax: Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial statement purposes and the amounts used for income tax purposes. Deferred taxes have been measured using
enacted statutory income tax rates and laws that are currently in effect. We record deferred tax assets for tax positions taken in the U.S.
and other tax jurisdictions based on our assessment of whether a position is more likely than not to be sustained upon examination based
solely on its technical merits. A valuation allowance is established for deferred tax assets when it is more likely than not that an amount
will not be realized.
Deferred Gain or Loss on Reinsurance: Where applicable, gains or losses on reinsurance transactions are deferred and amortized into
earnings based upon expected future premium income for traditional insurance policies and estimated future gross profits for interest-sensitive
insurance policies. The deferred gain on reinsurance included in other liabilities in our consolidated balance sheets at December 31, 2007
and 2006 was $177.8 million and $181.3 million, respectively.
Premium Tax Expense: Premium tax expense is included in other operating expenses in the consolidated statements of income. For the
years ended December 31, 2007, 2006, and 2005, premium tax expense was $130.8 million, $140.5 million, and $137.4 million, respectively.
Separate Accounts: The separate account amounts shown in our consolidated balance sheets represent contributions by contract
holders to variable-benefits and fixed-benefits pension plans. The contract purchase payments and the assets of the separate accounts
are segregated from other funds for both investment and administrative purposes. Contract purchase payments received under variable
annuity contracts are subject to deductions for sales and administrative fees. Also, the sponsoring companies of the separate accounts
receive management fees based on the net asset values of the separate accounts.
Translation of Foreign Currency: Revenues and expenses of our foreign operations are translated at average exchange rates. Assets
and liabilities are translated at the rate of exchange on the balance sheet date. The translation gain or loss is generally reported in accumulated
other comprehensive income, net of deferred tax.
Accounting for Participating Individual Life Insurance: Participating policies issued by one of our subsidiaries prior to its 1986 conversion
from a mutual to a stock life insurance company will remain participating as long as the policies remain in force. A Participation Fund
Account (PFA) was established for the benefit of all such individual participating life and annuity policies and contracts. The assets of the
PFA provide for the benefit, dividend, and certain expense obligations of the participating individual life insurance policies and annuity
contracts. The PFA was $362.0 million and $349.8 million at December 31, 2007 and 2006, respectively, and represented approximately
0.7 percent of consolidated assets and 0.8 and 0.7 percent of consolidated liabilities at December 31, 2007 and 2006, respectively.
Accounting Pronouncements Adopted: Effective January 1, 2007, we adopted the provisions of Statement of Position 05-1 (SOP 05-1),
Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts.
SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance
and investment contracts other than those specifically described in Statement of Financial Accounting Standards No. 97, Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. An
internal replacement is defined as a modification in product benefits, features, or coverages that occurs by the exchange or replacement
of an existing insurance policy for a new policy. The cumulative effect of applying the provisions of SOP 05-1 decreased our 2007 opening
balance of retained earnings $445.2 million.