Unum 2006 Annual Report Download - page 28

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In general, the maximum amount of risk retained by our U.S. insurance subsidiaries and not ceded is $0.6 million on
any group or individual life policy and $0.6 million on group and individual accidental death and dismemberment
insurance. For Unum Limited, we generally retain 50 percent of the risk after any surplus reinsurance and reinsure
the other 50 percent on each life insured. The amount of risk retained on individual income protection products
varies by policy type and year of issue. Other than catastrophic reinsurance coverage, we generally do not reinsure
group or individual income protection policies issued subsequent to 1999.
We have catastrophic reinsurance coverage which includes three layers of coverage to limit our exposure under life,
accidental death and dismemberment, long-term care, and income protection policies. Our catastrophic coverage is
for any accident involving seventeen, twenty-eight, and fifty-five or more lives for the three layers, respectively, in a
single event. In total, the three layers provide $110.0 million of catastrophic reinsurance coverage, after a $20.0
million deductible. We have 100 percent reinsurance coverage in the first layer and 80 percent reinsurance coverage
in the second and third layers. The first $30.0 million layer includes terrorism coverage other than that resulting
from nuclear, biological, and chemical terrorism, whereas the second and third layers each provide $40.0 million of
coverage for all catastrophic events, including acts of war and any type of terrorism. Events may occur which limit
or eliminate the availability of catastrophic reinsurance coverage in future years.
The reinsurance recoverable of $5,512.2 million at December 31, 2006 relates to 85 companies. Thirteen major
companies account for approximately 91 percent of the reinsurance recoverable at December 31, 2006, and are all
companies rated A or better by A.M. Best Company (AM Best) or are fully securitized by letters of credit or
investment-grade fixed maturity securities held in trust. Virtually all of the remaining nine percent of the
reinsurance recoverable relates to business reinsured either with companies rated A- or better by AM Best, with
overseas entities with equivalent ratings or backed by letters of credit or trust agreements, or through reinsurance
arrangements wherein we retain the assets in our general account. Less than one percent of the reinsurance
recoverable is held by companies either rated below A- by AM Best or not rated.
The collectibility of our reinsurance recoverable is primarily a function of the solvency of the individual reinsurers.
Although we have controls to minimize our exposure, the insolvency of a reinsurer or the inability or unwillingness
of a reinsurer to comply with the terms of a reinsurance contract could have a material adverse effect on our results
of operations.
See Note 13 of the “Notes to Consolidated Financial Statements” contained herein in Item 8 for further discussion of
our reinsurance activities.
Reserves
The applicable insurance laws under which insurance companies operate require that they report, as liabilities, policy
reserves to meet future obligations on their outstanding policies. These reserves are the amounts which, with the
additional premiums to be received and interest thereon compounded annually at certain assumed rates, are
calculated to be sufficient to meet the various policy and contract obligations as they mature. These laws specify
that the reserves shall not be less than reserves calculated using certain specified mortality and morbidity tables,
interest rates, and methods of valuation.
The reserves reported in our financial statements contained herein are calculated in conformity with U.S. generally
accepted accounting principles (GAAP) and differ from those specified by the laws of the various states and reported
in the statutory financial statements of our life insurance subsidiaries. These differences result from the use of
mortality and morbidity tables and interest assumptions which we believe are more representative of the expected
experience for these policies than those required for statutory accounting purposes and also result from differences in
actuarial reserving methods.
The assumptions we use to calculate our reserves are intended to represent an estimate of experience for the period
that policy benefits are payable. If actual experience is not less favorable than our reserve assumptions, then
reserves should be adequate to provide for future benefits and expenses. If experience is less favorable than the
reserve assumptions, additional reserves may be required. The key experience assumptions include disability claim
incidence rates, disability claim recovery rates, mortality rates, policy persistency, and interest rates. We
periodically review our experience and update our policy reserves for new issues and reserves for all claims
incurred, as we believe appropriate.