Unum 2006 Annual Report Download - page 56

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Separately, we are offering to reassess private label, acquired, and reinsured block claims, as well as claims
administered on behalf of certain employers from January 1, 1997, through January 18, 2005 (and through
September 30, 2005 for California residents). These approximately 24,000 claims were not included in the 2004
multistate settlement agreements, but the offer being made generally follows the reassessment procedures contained
in those agreements.
Based on the settlement agreement and related matters as they existed at that time period, in the third quarter of 2005
we recorded a charge of $75.0 million before tax, or $51.6 million after tax, comprised of four elements: $14.3
million of incremental direct operating expenses to conduct the reassessment process; $37.3 million for benefit costs
and reserves from claims reopened from the reassessment; $15.4 million for additional benefit costs and reserves for
claims already incurred and currently in inventory that were anticipated as a result of the claim process changes
being implemented; and the $8.0 million civil penalty. The charge decreased before-tax operating results for the
Unum US segment group income protection line of business and supplemental and voluntary lines of business $37.4
million and $3.3 million, respectively, and the Individual Income Protection – Closed Block segment $34.3 million.
The ongoing costs of changes in the claims handling process and governance improvements have subsequently been
included in our operating expenses as incurred. See “2006 Significant Transactions and Events – Revised Claim
Reassessment Reserve Estimates” for a discussion of subsequent increases to our 2005 charge.
Acquisitions and Dispositions
During 2005, GENEX acquired Independent Review Services, Inc., a provider of medical diagnostic networks and
independent medical examinations, at a price of $3.5 million.
During 2005, Unum UK completed the sale of its Netherlands branch. The gain on the sale was approximately $4.0
million after tax.
During 2005, we disposed of our remaining 40 percent ownership position in our Argentinean operation and
recognized an after tax gain of approximately $0.4 million.
Income Tax
Under the Life Insurance Company Tax Act of 1959, U.S. stock life insurance companies were required to maintain
a policyholders’ surplus account containing the accumulated portion of income which had not been subjected to
income tax in the year earned. The Deficit Reduction Act of 1984 required that no future amounts be added after
1983 to the policyholders’ surplus account and that any future distributions to shareholders from the account would
become subject to federal income tax at the general corporate federal income tax rate then in effect. During 2004,
the Homeland Investment Act of 2004 was enacted. The Homeland Investment Act of 2004 provided in part, that
distributions from policyholders’ surplus accounts during 2005 and 2006 would be taxed.
The amount of the policyholders’ surplus accounts of our U.S. insurance subsidiaries at December 31, 2004, was
approximately $228.8 million. Distributions made during 2005 by these life insurance subsidiaries, including
dividend distributions, were deemed to occur first from the policyholders’ surplus accounts. As a result, our U.S.
life insurance subsidiaries distributed as dividends the remaining balance of their policyholders’ surplus accounts to
the holding company during 2005. This resulted in the elimination of a future potential tax of approximately $80.1
million which had not previously been provided for in current or deferred taxes because management considered the
conditions under which such a tax would be paid to be remote. This will also allow us to engage in transactions in
the future without concern for triggering a tax liability related to distributions from the policyholders’ surplus
accounts.
In April 2005, the Internal Revenue Service (IRS) completed its examination of tax years 1999 through 2001 and
issued its revenue agent’s report (RAR). Income tax liabilities of approximately $32.0 million that related primarily
to interest on the timing of expense deductions were released in the first quarter of 2005, all of which was reflected
as a reduction to income tax expense. In the fourth quarter of 2005, we paid the IRS proposed adjustments for its
1999 through 2001 tax years and subsequently filed claims for refund on disputed issues.