Unum 2007 Annual Report Download - page 46

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
44 Unum 2007 Annual Report
Interest and debt expense continues to decline year over year due to the reduction in our outstanding debt.
Cost related to early retirement of debt includes costs associated with our $769.5 million and $732.0 million debt repurchases during
2007 and 2006. See “Debt” contained herein for additional information.
Excluding amounts related to claim reassessment and broker compensation settlements, our expense ratio improved in 2006 relative
to 2005 but increased in 2007. The increase was due primarily to the decrease in premium income, as well as the second quarter of 2007
litigation settlement expense and additional expenses associated with the development of new product offerings in our core lines of
business. We intend to aggressively manage our expenses while continuing to increase the effectiveness of our operating processes.
As previously noted, during the third quarter of 2007, we recorded a reduction of $1.7 million to our income tax expense to reflect
the impact of the enactment of the U.K. tax rate change on our net deferred tax liability related to our U.K. operations. During the second
half of 2007, our income tax expense reflected the lower U.K. tax rate, and we expect that our overall effective tax rate in the future will
also be reduced by an amount proportional to earnings from our U.K. operations. Income tax for 2006 includes tax benefits of $91.9 million
as a result of the reversal of tax liabilities related primarily to group relief benefits recognized from the use of net operating losses in a
foreign jurisdiction in which our businesses operate. In addition, we recorded a net tax benefit of $1.3 million related to interest and tax
refunds on prior year tax items in excess of what was previously provided. Income tax for 2005 includes tax benefits of $42.8 million
related to the reduction of income tax liabilities in the first and third quarters of 2005 and a net tax benefit of $3.3 million recorded in
connection with the repatriation of unremitted foreign earnings from our U.K. subsidiaries under the Homeland Investment Act of 2004.
Consolidated Sales Results
Year Ended December 31
(in millions of dollars) 2007 % Change 2006 % Change 2005
Unum US
Fully Insured Products $ 631.0 (6.1)% $ 671.8 4.0)% $ 645.8
Administrative Services Only (ASO) Products 7.2 (47.4) 13.7 80.3 7.6
Total Unum US 638.2 (6.9) 685.5 4.9 653.4
Unum UK 105.4 4.3 101.1 (23.6) 132.3
Colonial Life 334.9 6.3 315.1 10.0 286.4
Individual Disability — Closed Block
3.0 (31.8) 4.4 (32.3) 6.5
Consolidated $ 1,081.5 (2.2) $ 1,106.1 2.5 $ 1,078.6
Sales results shown in the preceding chart generally represent the annualized premium or annualized fee income on new sales
which we expect to receive and report as premium income or fee income during the next 12 months following or beginning in the initial
quarter in which the sale is reported, depending on the effective date of the new sale. Sales do not correspond to premium income or fee
income reported as revenue in accordance with GAAP. This is because new annualized sales premiums reflect current sales performance
and what we expect to recognize as premium or fee income over a 12 month period, while premium income and fee income reported in
our financial statements are reported on an “as earned” basis rather than an annualized basis and also include renewals and persistency
of in force policies written in prior years as well as current new sales.
Premiums for fully insured products are reported as premium income. Fees for ASO products (those where the risk and responsibility
for funding claim payments remain with the customer and we only provide services) are included in other income. Sales, persistency
of the existing block of business, and the effectiveness of the renewal program are indicators of growth in our premium and fee income.
Trends in new sales, as well as existing market share, also indicate our potential for growth in our respective markets and the level
of market acceptance of price changes and new product offerings. Sales results may fluctuate significantly due to case size and timing
of sales submissions.