Unum 2014 Annual Report Download - page 27

UNUM • 2014 ANNUAL REPORT 25
Critical Accounting Estimates
We prepare our financial statements in accordance with GAAP. The preparation of financial statements in conformity with GAAP
requires us to make estimates and assumptions that affect amounts reported in our financial statements and accompanying notes.
Estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported
and disclosed in our financial statements. The accounting estimates deemed to be most critical to our financial position and results of
operations are those related to reserves for policy and contract benefits, deferred acquisition costs, valuation of investments, pension
and postretirement benefit plans, income taxes, and contingent liabilities. For additional information, refer to our significant accounting
policies in Note 1 of the “Notes to Consolidated Financial Statements” contained herein.
Reserves for Policy and Contract Benefits
Reserves for policy and contract benefits are our largest liabilities and represent claims that we estimate we will eventually pay to
our policyholders. The two primary categories of reserves are policy reserves for claims not yet incurred and claim reserves for claims that
have been incurred or are estimated to have been incurred but not yet reported to us. Reserves for policy and contract benefits equaled
$41.3 billion and $40.5 billion at December 31, 2014 and 2013, respectively, or approximately 76.6 percent and 79.8 percent of our total
liabilities, respectively. Reserves ceded to reinsurers were $6.9 billion and $6.8 billion at December 31, 2014 and 2013, respectively, and
are reported as a reinsurance recoverable in our consolidated balance sheets.
Policy Reserves
Policy reserves are established in the same period we issue a policy and equal the difference between projected future policy benefits
and future premiums, allowing a margin for expenses and profit. These reserves relate primarily to our non interest-sensitive products,
including our individual disability and voluntary benefits products in our Unum US segment; individual disability products in our Unum UK
segment; disability and cancer and critical illness policies in our Colonial Life segment; and individual disability, long-term care, and other
products in our Closed Block segment. The reserves are calculated based on assumptions that were appropriate at the date the policy was
issued and are not subsequently modified unless the policy reserves become inadequate (i.e. loss recognition occurs).
• Persistency assumptions are based on our actual historical experience adjusted for future expectations.
• Claim incidence and claim resolution rate assumptions related to mortality and morbidity are based on actual experience or industry
standards adjusted as appropriate to reflect our actual experience and future expectations.
• Discount rate assumptions are based on our current and expected net investment returns.
In establishing policy reserves, we use assumptions that reflect our best estimate while considering the potential for adverse
variances in actual future experience, which results in a total policy reserve balance that has an embedded reserve for adverse deviation.
We do not, however, establish an explicit and separate reserve as a provision for adverse deviation from our assumptions.
We perform loss recognition tests on our policy reserves annually, or more frequently if appropriate, using best estimate assumptions
as of the date of the test, without a provision for adverse deviation. We group the policy reserves for each major product line within a
segment when we perform the loss recognition tests. If the policy reserves determined using these best estimate assumptions are higher
than our existing policy reserves net of any deferred acquisition cost balance, the existing policy reserves are increased or deferred
acquisition costs are reduced to immediately recognize the deficiency. Thereafter, the policy reserves for the product line are calculated
using the same method we used for the loss recognition testing, referred to as the gross premium valuation method, wherein we use our
best estimate as of the gross premium valuation (loss recognition) date rather than the initial policy issue date to determine the expected
future claims, commissions, and expenses we will pay and the expected future gross premiums we will receive.