Unum 2009 Annual Report Download - page 54

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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum
2009
rate. The interest adjusted loss ratio for long-term care increased in 2009 relative to the prior year due primarily to an increase in paid claim
incidence rates. The benefit ratio for voluntary benefits decreased in 2009 as compared to 2008 due primarily to an increase in premium income,
partially offset by an increase in the paid claim incidence rate for the voluntary disability product line.
The deferral of acquisition costs decreased in 2009 as compared to 2008 due to the decrease in acquisition-related expenses resulting
from lower sales. The amortization of acquisition costs was higher in 2009 due to an acceleration of amortization resulting from lower
persistency in certain of the product lines. The other expense ratio in 2009 was consistent with the prior year.
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
Premium income increased in 2008 relative to 2007 due to sales growth in our supplemental and voluntary product lines, the impact of
premium rate increases implemented for individual long-term care, and overall stable persistency. Net investment income increased in 2008
relative to 2007 primarily from growth in the level of assets supporting these lines of business.
The decrease in the interest adjusted loss ratio for the individual disability — recently issued line of business for 2008 relative to 2007 is
due primarily to a decrease in paid claim incidence rates, partially offset by a lower claim recovery rate. The interest adjusted loss ratio for
long-term care was lower in 2008 than in 2007 due primarily to higher premium income, partially offset by an increase in claim incidence
rates. The benefit ratio for voluntary benefits decreased in 2008 as compared to 2007, due primarily to a lower rate of paid claim incidence
for the disability line of business and a lower mortality rate for the life line of business.
The increase in commissions and the deferral and amortization of acquisition costs in 2008 relative to 2007 is due primarily to growth
in these lines of business. The other expense ratio decreased slightly in 2008 in comparison to 2007 due to a higher rate of premium growth
relative to expense growth.
Segment Outlook
During 2009, we experienced an unfavorable impact on premium growth which we believe was caused by the uncertain economic
environment. Our 2009 sales were also negatively impacted by the economy, particularly sales to existing accounts. Opportunities for premium
and sales growth are expected to re-emerge as the economy improves and employment growth resumes. We expect continued volatility
in net investment income during 2010 as a result of fluctuations in bond calls and other types of miscellaneous net investment income. We
intend to manage our expense levels relative to premium levels through operating effectiveness and performance management. Unum
US has goodwill of approximately $190.0 million at year end 2009, none of which is currently believed to be at risk for future impairment.
Periods of economic downturns have historically affected disability claim incidence rates and, to a lesser extent, disability claim recovery
rates in certain sectors of the market. Certain risks and uncertainties are inherent in disability business. Components of claims experience,
such as incidence and recovery rates, may be worse than we expect. Disability claim incidence and claim recovery rates may be influenced
by, among other factors, the rate of unemployment and consumer confidence. Within the group disability market, pricing and renewal
actions can be taken to react to higher claim rates, but these actions take time to implement, and there is a risk that the market will not
sustain increased prices. In addition, changes in economic and external conditions may not manifest themselves in claims experience for an
extended period of time. The current economic downturn may lead to a higher rate of claim incidence or lower levels of claim recoveries.
We have previously taken steps to improve our risk profile, including reducing our exposure to volatile business segments through diversification
by market size, product segment, and industry segment. We believe our claims management organization is positioned for stable and
sustainable performance levels. Although we did not experience significantly higher levels of disability claims incidence during 2009, we
did experience slightly elevated levels in the second half of 2009. We are uncertain as to whether the higher claim incidence is due to the
normal volatility that occurs in our group disability business or is related to the economy. We continuously monitor key indicators to assess
our risk to the economic slowdown and attempt to adjust our business plans accordingly.
We believe our Unum US growth strategy is sound. We continue to see future growth opportunity based on employee choice, defined
employer funding, simple administration, and effective communication. Our strategies for growth focus on (i) delivering product choice
through an integrated, easy-to-manage, and flexible platform, (ii) providing communications to employees with a focus on education and
enrollment efficiencies, (iii) continued expansion and improvement in distribution, and (iv) developing strong capabilities to cross-sell,
re-enroll, and retain customers.