Unum 2006 Annual Report Download - page 60

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statements. See “Discontinued Operations” contained herein in Item 7 and Note 2 of the “Notes to Consolidated
Financial Statements” contained herein in Item 8 for further discussion of our discontinued operations.
In 2004, GENEX acquired Integrated Benefits Management, a provider of case management services, at a purchase
price of $0.7 million.
In conjunction with the restructuring of our Argentinean operation, we reduced our ownership position in this
operation to 40 percent during 2004 and reported a before-tax loss of $4.7 million. We also recognized from this
transaction a tax benefit of $7.4 million, for a net after-tax gain of $2.7 million on the 2004 transaction.
Income Tax
During 2004, we recognized tax benefits as a result of settlements with the IRS of certain tax issues (primarily
related to insurance tax reserves and investment losses) affecting the federal income tax liability related to our 1996
through 1998 tax years. During the fourth quarter of 2004, we obtained a judgment in refund litigation for federal
income tax paid for tax year 1984, plus interest, and as a result became entitled to a refund of tax plus interest for all
tax years subsequent to tax year 1984 in which the IRS took inconsistent positions on the deductibility of insurance
tax reserves that were the subject of the litigation and for which we paid tax based on the IRS’ inconsistent
positions. Included in 2004 operating results is income of $14.0 million before tax and approximately $59.3 million
after tax attributable to these prior year tax items.
Critical Accounting Estimates
We prepare our financial statements in accordance with U.S. generally accepted accounting principles (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. The accounting estimates we deem to
be most critical to our results of operations and balance sheets are those related to reserves for policy and contract
benefits, deferred policy acquisition costs, investments, and income taxes. 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.
For additional information, refer to our significant accounting policies in Note 1 of the “Notes to Consolidated
Financial Statements” in Part II, Item 8.
Reserves for Policy and Contract Benefits
Our largest liabilities are reserves for 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. These reserves equaled $36.9 billion
and $35.0 billion at December 31, 2006 and 2005, respectively, or approximately 80 percent of our total liabilities.
Reserves ceded to reinsurers were $7.6 billion and $7.3 billion at December 31, 2006 and 2005, 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 traditional non interest-sensitive products, including our individual income protection, individual
and group long-term care, and voluntary workplace benefits products in our Unum US segment; individual income
protection products in our Unum UK segment; income protection and cancer and critical illness policies in our
Colonial segment; and, the Individual Income Protection – Closed Block segment products. The reserves are