Unum 2009 Annual Report Download - page 50

48
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum
2009
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
Premium income for group disability declined in 2009 relative to the prior year, a portion of which was expected and is attributable
to our pricing, renewal, and risk selection strategy. Premium income for our Unum US group business, both disability and life, was also
negatively impacted by lower premium growth from existing customers due to lower salary growth and lower growth in the number of
employees covered under an existing policy. Premium persistency increased for group short-term disability in both the core and large case
segments. Premium persistency for group long-term disability increased in the core market segment but decreased in the large case
segment, resulting in an overall persistency decline for group long-term disability. Case persistency declined due to a higher number of
terminated cases in the smaller size case market within the core segment. These terminations did not affect premium persistency negatively
to the degree they affected case persistency due to a lower average premium per terminated case. Net investment income was consistent
in 2009 relative to 2008, with an increase in the level of assets offset by lower interest rates on floating rate assets. Other income includes
ASO fees of $59.2 million and $64.8 million for 2009 and 2008, respectively.
The benefit ratio for 2009 was lower than the benefit ratio for the prior year due primarily to a higher rate of claim recoveries for
group long-term disability and a decrease in the paid claim incidence rates for group short-term disability. Paid claim incidence rates for
group long-term disability were higher in 2009 relative to 2008, but the average size of new claims was lower.
Interest and debt expense related to the debt issued by Tailwind Holdings decreased in 2009 relative to the prior year due to a decrease
in the variable rate of interest during 2009 and a decrease in the amount of outstanding debt resulting from principal repayments.
The deferral of acquisition costs increased in comparison to 2008 due to a higher level of deferrable expenses partially resulting from
increased group short-term disability sales. Amortization was lower in 2009 relative to the prior year due to a decrease in amortization
related to internal replacement transactions. These transactions are accounted for as an extinguishment of the original policy and the
issuance of a new policy.
The other expense ratio increased in 2009 compared to the prior year due primarily to the decline in premium income and an increase
in policy maintenance expenses associated with the change in the mix of in-force policies from the large case market to the core market
segment. Included in 2008 other expenses was $4.4 million related to a 2008 broker compensation settlement agreement.
During 2009, Unum America entered into a quota share reinsurance agreement with RGA Americas Reinsurance Company, Ltd. under
which Unum America will cede a closed block of group long-term disability claims. The reinsurance transaction does not meet the conditions
for reinsurance accounting and is therefore accounted for as a deposit. As such, there is no effect on reported premium income or benefits.
The only impact on the income statement is the risk charge paid to the reinsurer.
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
Premium income for group disability decreased in 2008 relative to 2007 due primarily to our pricing, renewal, and risk selection strategy
as well as the termination of one large case group in September 2007. However, premium persistency and case persistency both improved
in 2008 over 2007 in both the core and large case markets. Net investment income declined in 2008 in comparison to 2007 primarily due to
a lower yield on assets supporting this line of business resulting from the investment of new cash at a lower yield than that of the existing
portfolio and also due to a decrease in bond call premiums. The decline in yield and bond call premiums was partially offset by an increase
in the level of assets in the portfolio. ASO fees were $64.8 million and $65.2 million in 2008 and 2007, respectively.
The benefit ratio for 2008 was lower than the benefit ratio for 2007, excluding the 2007 revision to our estimate for the claim reassessment
costs, due primarily to a higher rate of claim recoveries in group long-term disability and lower paid claims in short-term disability. Claim
incidence rates for both group long-term and short-term disability were slightly lower in 2008 than 2007.
Interest and debt expense was lower in 2008 compared to the prior year due to a lower variable rate of interest and a decrease in the
amount of outstanding debt resulting from principal repayments.
Amortization of deferred acquisition costs was higher in 2008 relative to 2007 due to an increase in amortization related to internal
replacement transactions.
The other expense ratio increased in 2008 compared to 2007 due primarily to the decline in premium income and an increase in policy
maintenance expenses and product service and development costs. Also contributing to the increase in the other expense ratio was $4.4
million of expense related to the broker compensation settlement.