Unum 2007 Annual Report Download - page 28

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
26 Unum 2007 Annual Report
2006 Significant Transactions and Events
Revised Claim Reassessment Reserve Estimate
In the first quarter of 2006, we completed an analysis of our assumptions related to the reserves we established for our claim reassessment
process. Our analysis was based on preliminary data as of the end of the first quarter of 2006, when actual results to date were considered
credible enough to enable us to update our initial expectations of costs related to the reassessment process. We concluded that a change
in our initial assumptions, primarily related to the number of claimants for whom payments will continue because the claimant remains
eligible for disability payments, was warranted. We based our conclusion and our revised estimate on the information that existed at
that time, which was the actual cost related to approximately 20 percent of the projected ultimate total number of claims expected to be
reassessed. The characteristics, profile, and cost of those initial 20 percent of claims were more statistically credible than the information
on which we based the initial charges in 2004 and 2005. Based on our analysis, in the first quarter of 2006 we recorded a charge of
$86.0 million before tax, or $55.9 million after tax, to reflect our then current estimate of future obligations for benefit costs for claims
reopened in the reassessment. The first quarter charge decreased 2006 before-tax operating results for our Unum US group disability line
of business $72.8 million and our Individual Disability — Closed Block segment $13.2 million.
In the third quarter of 2006, we increased our provision for the cost of the reassessment process $325.4 million before tax and
$211.5 million after tax based on changes in our emerging experience for the number of decisions being overturned by the reassessment
process and the average cost per reassessed claim. The revised third quarter estimate was based on the cost of approximately 55 percent
of the projected ultimate total number of claims expected to be reassessed. The third quarter charge was comprised of $310.4 million to
reflect our revised estimate of future obligations for benefit costs for claims reopened in the reassessment and $15.0 million for additional
incremental direct claim reassessment operating expenses because of the additional time then estimated to complete the process. Our
best estimate of $310.4 million for the reopened claims assumed that the nature and characteristics of the approximately 45 percent
remaining claims estimated to be reassessed at that time would be similar to the average profile of the 55 percent already reviewed at
that time. The third quarter charge decreased before-tax operating results for our Unum US group disability line of business $291.4 million
and our Individual Disability — Closed Block segment $34.0 million.
Regulatory Investigations
Beginning in 2004, several of our insurance subsidiaries’ insurance regulators requested information relating to the subsidiaries’ policies
and practices on one or more aspects of broker compensation, quoting insurance business, and related matters. Additionally, we responded
to investigations about certain of these same matters by state attorneys general and the U.S. Department of Labor (DOL). Following highly
publicized litigation involving the alleged practices of a major insurance broker, the NAIC has undertaken to provide a uniform Compensation
Disclosure Amendment to the Producer Licensing Model Act that can be adopted by states in an effort to provide uniform guidance to
insurers, brokers, and customers relating to disclosure of broker compensation. We expect there to be continued uncertainty surrounding
this matter until clearer regulatory guidelines are established.
In June 2004, we received a subpoena from the NYAG requesting documents and information relating to compensation arrangements
between insurance brokers or intermediaries and us and our subsidiaries. In November 2006 we entered into a settlement agreement
on broker compensation with the NYAG in the form of an assurance of discontinuance that provided for a national restitution fund of
$15.5 million and a fine of $1.9 million. We expect that the restitution fund will be fully distributed by December 2008.
We support the full disclosure of compensation paid to both brokers and agents and have implemented policies to facilitate customers
obtaining information regarding broker compensation from their brokers. Additionally, we provide appropriate notices to customers stating
our policy surrounding disclosure and provide information on our Company website about our broker compensation programs. Under
these policies, any customer who wants specific broker compensation related information can obtain this information by contacting our
Broker Compensation Services at a toll-free number. Other changes implemented during 2006 included requiring customer approval of
compensation paid by us to the broker when the customer is also paying a fee to the broker and strengthening certain policies and
procedures associated with new business and quoting activities.