Unum 2006 Annual Report Download - page 77

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Segment Persistency and Renewal of Existing Business
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
We monitor persistency of our existing business and reflect adverse changes in persistency in the current period’s
amortization of deferred policy acquisition costs. Persistency for each of the product lines during 2006 was generally
higher than or consistent with 2005 and was consistent with our expectations.
A continuing part of our strategy for Unum US group business involves executing our renewal programs and
managing persistency in our existing blocks of business. Our renewal programs have generally been successful in
retaining business that is relatively more profitable than business that terminated. While we expect that the
additional premium and related profits associated with renewal activity will continue to emerge, we intend to
balance the renewal program with the need to maximize persistency and retain broker relationships. As previously
discussed, we expect persistency for the large case group market segment to decline during 2007 because of our
2007 strategy for this market.
As previously discussed, we will adopt the provisions of SOP 05-1 effective January 1, 2007. SOP 05-1 provides
guidance on accounting for deferred acquisition costs on internal replacements and effectively shortens the
amortization period for deferred policy acquisition costs for many of our group products. The definition of an
internal replacement is such that many of our group products which go through our normal renewal process are now
considered to be internal replacements even though the relationship with the group policyholder has not been
severed. We estimate that the amount of the cumulative effect adjustment, which will equal the difference between
the amount of deferred policy acquisition cost asset in our balance sheet at December 31, 2006, prior to the
application of SOP 05-1, and the asset remaining as a result of applying these provisions, will decrease the deferred
policy acquisition cost asset for Unum US in the range of approximately $540.0 million to $600.0 million. We do
not expect that SOP 05-1 will have a material effect on amortization expense for Unum US subsequent to adoption.
During the second quarter of 2006, trade associations representing companies that provide disability income
protection insurance in California reached an agreement with the California DOI concerning certain provisions
within disability insurance policies. This agreement confirms the direction the California DOI set last year when we
entered into the settlement agreement with the California DOI in the third quarter of 2005. We believe the trade
association agreement is a major step in a process that should eventually result in consistency across our industry in
California. The agreement, which is unique to California, required individual insurance companies to submit
revised policies to the California DOI within 60 days from the date the agreement was signed for review and
approval. Our products, as written, had already been revised and are fully compliant. The revisions we previously
made in our group income protection product requirements for policies issued in California have not materially
impacted sales, renewals, or persistency for our Unum US segment.
In January of 2006, we began a process of filing a request with various state insurance departments for rate
adjustments on one older series of individual long-term care policies and have through mid-January of 2007
received approvals in 40 states. The rate adjustment will bring the rates for this policy series closer to today’s
market, better reflecting current interest rates, higher expected future claims, persistency, experience, and other
factors related to pricing individual long-term care coverage. Overall, the average increase will be in the 20 to 30
percent range and may affect up to 130,000 policyholders, or less than 16 percent of our total long-term care block
of business. Increases are subject to state review and approval and will be effective on the policy anniversary
following the state approval and only after the proper state-specific notification requirements have been satisfied. In
states for which a rate increase is submitted and approved, customers will also be given options for coverage
changes or other approaches that might fit their current financial and insurance needs.
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
Persistency during 2005 for the overall block of fully-insured group long-term income protection, on average, was
level with 2004, but was higher than expected. Persistency for fully insured group short-term income protection, on
average, declined marginally during 2005 compared to the prior year and was slightly less than expected. Included
in the 2005 policy terminations was a group policyholder who did not terminate the relationship with us, but
transferred from fully insured short-term income protection to ASO. Adjusting persistency for this policyholder’s