Unum 2006 Annual Report Download - page 92

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The interest adjusted loss ratio for 2005 was stable in comparison to 2004, excluding the reserve charges noted in
the preceding financial metrics. Claim recovery rates were lower in 2005 relative to 2004, while claim incidence
rates improved. Excluding the charges related to the settlement agreements, operating expenses were lower in 2005
compared to 2004 due primarily to our overall expense management initiatives.
Segment Outlook
We continue to examine strategies to improve the capital efficiency of our closed block of individual income
protection business. Because we cannot reprice this closed block of business, our focus has been on continuing to
manage this large block of business consistently while at the same time exploring opportunities for improving
capital management. Our three major operating segments, which at December 31, 2006 were supported by
approximately $6.5 billion of allocated capital, produce a return on equity that is generally consistent with our
current plan and on target to attain our long-term goal for return on equity. This closed block of individual income
protection business is supported by approximately $2.6 billion of allocated capital, and our return on equity for this
business generally is in the low single digits. With the successful completion of the securitization of a small block
of our group long-term income protection claim reserves in 2006, we are cautiously optimistic that we can complete
a similar transaction for our closed block of individual income protection claim reserves, although any such
transaction is subject to regulatory, market, and other conditions. We believe that a transaction of this nature would
allow us to divert some of the capital currently supporting this block of business to support other initiatives and
therefore increase our total consolidated return on equity.
We believe that the interest adjusted loss ratio for this block of business will be relatively flat over the long term, but
the segment may experience quarterly volatility. Claim resolution rates are very sensitive to operational and
environmental changes and can be volatile over short periods of time. We consider the recent variability in our
claim resolution rate experience to be primarily the result of a temporary reduction in the operating effectiveness of
our claims management performance. It is possible that this variability could continue into 2007, but we believe that
the actual rates in 2007 will more align with our expected rates. Our claim resolution rate assumption used in
determining reserves is our expectation of the resolution rate we will experience over the life of the block of
business and will vary from actual experience in any one period. It is possible, however, that continued variability
in our reserve assumptions could result in a material impact on our reserve levels.