Unum 2014 Annual Report Download - page 33

UNUM • 2014 ANNUAL REPORT 31
Potential impact, positive or negative, of variations in reserve
(in millions of dollars) assumptions on our December 31, 2014 claim reserve balance
Unum US group long-term disability 3.6% $250
Closed Block individual disability 2.5% $245
In addition, we consider variability in our reserve assumptions related to long-term care policy reserves. These reserves are held under
the gross premium valuation method with assumptions established as of December 31, 2014, the date of loss recognition. Assumptions
for policy reserves do not change after the date of loss recognition unless reserves are again determined to be deficient. As such, positive
developments will result in the accumulation of reserve margin, while adverse developments would result in an additional reserve charge.
Policy reserves for long-term care are based upon a number of key assumptions, and each assumption has various factors which may
impact the long-term outcome. Key assumptions with respect to morbidity, mortality, persistency, interest rates, and future premium rate
increases must incorporate extended views of expectations for many years into the future. Reserves are highly sensitive to these estimates.
For example, a 25 basis point change in the assumed discount rate over the lifetime of this business would impact reserves by approximately
$475 million, assuming all other factors held constant.
Key assumptions and related impacts are also heavily interrelated in both their outcome and in their effects on reserves. For example,
changes in the view of morbidity and mortality might be mitigated by either potential future premium rate increases and/or morbidity
improvements due to general improvement in health and/or medical breakthroughs. There is potentially a wide range of outcomes for
each assumption and in totality.
We believe that these ranges provide a reasonable estimate of the possible changes in reserve balances for those product lines
where we believe it is possible that variability in the assumptions, in the aggregate, could result in a material impact on our reserve levels,
but we record our reserves based on our long-term best estimate. Because these product lines have long-term claim payout periods,
there is a greater potential for significant variability in claim costs, either positive or negative. We closely monitor emerging experience
and use these results to inform our view of long-term assumptions.
Deferred Acquisition Costs (DAC)
We defer incremental direct costs associated with the successful acquisition of new or renewal insurance contracts and amortize
(expense) these costs over the life of the related policies. Deferred costs include certain commissions, other agency compensation,
selection and policy issue expenses, and field expenses. Acquisition costs that do not vary with the production of new business, such as
commissions on group products which are generally level throughout the life of the policy, are excluded from deferral.
Approximately 83.7 percent of our DAC relates to non interest-sensitive products, and we amortize DAC for these products in
proportion to the premium income we expect to receive over the life of the policies. DAC related to interest-sensitive policies is amortized
over the lives of the policies in relation to the present value of estimated gross profits from surrender charges, mortality margins, investment
returns, and expense margins. Key assumptions used in developing the future amortization of DAC are persistency, premium income, and
for our interest-sensitive products, mortality margins and investment returns. We use our own historical experience and expectation of the
future performance of our businesses in determining our assumptions. For non-interest sensitive products, the estimated premium income
in the early years of the amortization period is generally higher than in the later years due to the anticipated cumulative effect of policy
persistency in the early years, which results in a greater proportion of the costs being amortized in the early years of the life of the policy.
During 2014, our key assumptions used to develop the future amortization of acquisition costs deferred during 2014 did not change
materially from those used in 2013. Generally, we do not expect our key assumptions to change significantly in the short-term, and to the
extent that these trends do change, we expect those changes to be gradual over a longer period of time.