Unum 2007 Annual Report Download - page 65

Unum 2007 Annual Report 63
Year Ended December 31, 2007 Compared with Year Ended December 31, 2006
The decrease in premium income for 2007 relative to the prior year is due to the expected decline in this block of closed business, as
well as an adjustment to premium income for a small block of ceded business for which the contract was modified during 2007. Partially
offsetting these declines is an increase in premium income due to the reinsurance recapture of a small block of business, with an effective
date of January 1, 2007, and an annualized premium income of approximately $7.0 million. Neither the contract modification nor the
recapture had a material effect on operating results for this segment.
Net investment income decreased slightly in 2007 compared to the prior year due to a decrease in the level of assets supporting
this business and the decline in the overall portfolio yield rate. As previously noted, during the fourth quarter of 2007, we entered into
an intercompany reinsurance transaction whereby approximately 95 percent of our Individual Disability — Closed Block segment was
ceded from Paul Revere Life, Provident, and Unum America to Northwind Re. With the risk transfer to Northwind Re, we released excess
statutory capital previously supporting this reinsured closed block business. As a result, the capital allocated to our Individual Disability —
Closed Block segment declined, with a resulting decrease in net investment income due to the lower asset levels needed to support
allocated capital. Because this is an intercompany reinsurance arrangement, reported results remain unchanged for this segment other
than the lower net investment income.
Other income includes the underlying results of certain blocks of reinsured business.
The interest adjusted loss ratio was lower in 2007 than the ratio for the prior year, excluding the revisions to the claim reassessment
reserve estimate noted previously, due primarily to a higher rate of claim recoveries and a lower rate of submitted claims.
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
During the third quarter of 2005, we recaptured a closed block of individual disability business with approximately $1.6 billion in
invested assets and $185.0 million of annual premium. Before the recapture, the underlying operating results of the reinsurance contract
were reflected in other income. The recapture did not have a material effect on operating results for this segment.
The increase in premium income for 2006 relative to 2005 is due to the recapture of the ceded block of business, which increased
reported premium income for 2006 by approximately $114.7 million relative to what was reported as premium income for the recaptured
block of business in the prior year. Net investment income was higher in 2006 compared to 2005 because of the investment income
related to the bonds transferred to one of our insurance subsidiaries in conjunction with the reinsurance recapture and due to an increase
in bond call premiums. This increase was partially offset by a decline in the overall portfolio yield rate and a decline in prepayment
income on mortgage-backed securities.
Other income includes the underlying results of certain blocks of reinsured business, including the results of the recaptured block
of business before the recapture date.
Excluding the reserve charges noted previously, the 2006 interest adjusted loss ratio of 92.9 percent was higher than the prior year
ratio of 87.3 percent due primarily to higher submitted claim incidence and a lower rate of claim recoveries.
Other expenses, excluding charges related to the settlement agreements, decreased in 2006 in comparison to 2005 due to a 2005
payment of a judgment in a lawsuit and also to our ongoing expense management.
Segment Outlook
As a result of the decline in capital allocated to this segment, net investment income will decrease in 2008 relative to 2007 due to
the lower asset levels needed to support allocated capital. We also expect that operating revenue and income will decline over time as
this closed block of business winds down. 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. During 2005 and 2006, we experienced quarter to quarter
variability in our claim resolution rates. We believe this variability was primarily the result of a short-term reduction in the operating
effectiveness of our claims management performance. During 2007, we gained more stability in our claims management performance,
and our claim resolution rates were more consistent with our long-term assumptions.