Unum 2007 Annual Report Download - page 97

Unum 2007 Annual Report 95
Value of Business Acquired: Value of business acquired is included in other assets in the consolidated balance sheets and represents
the present value of future profits recorded in connection with the acquisition of a block of insurance policies. The asset is amortized
based upon expected future premium income for traditional insurance policies and estimated future gross profits for interest-sensitive
insurance policies. The accumulated amortization for value of business acquired was $110.9 million and $101.9 million as of December 31,
2007 and 2006, respectively. We periodically review the carrying amount of value of business acquired using the same methods used to
evaluate deferred acquisition costs.
Revenue Recognition: Traditional life and accident and health products are long duration contracts, and premium income is recognized
as revenue when due from policyholders. If the contracts are experience rated, the estimated ultimate premium is recognized as revenue
over the period of the contract. The estimated ultimate premium, which is revised to reflect current experience, is based on estimated
claim costs, expenses, and profit margins.
For interest-sensitive products, the amounts collected from policyholders are considered deposits, and only the deductions during
the period for cost of insurance, policy administration, and surrenders are included in revenue. Policyholders’ funds represent funds
deposited by contract holders and are not included in revenue.
Policy and Contract Benefits: Policy and contract benefits represent amounts paid and expected to be paid based on reported losses
and estimates of incurred but not reported losses for traditional life and accident and health products. For interest-sensitive products,
benefits are the amounts paid and expected to be paid on insured claims in excess of the policyholders’ policy fund balances.
Policy and Contract Benefits Liabilities: Policy reserves represent future policy and contract benefits for claims not yet incurred.
Policy reserves for traditional life and accident and health products are determined using the net level premium method. The reserves
are calculated based upon assumptions as to interest, persistency, morbidity, and mortality that were appropriate at the date of issue.
Interest rate assumptions are based on actual and expected net investment returns. Persistency assumptions are based on our actual
historical experience adjusted for future expectations. Morbidity and mortality assumptions are based on actual experience or industry
standards adjusted as appropriate to reflect our actual experience and future expectations. The assumptions vary by plan, year of issue,
and policy duration and include a provision for adverse deviation.
Policy reserves for group single premium annuities have been provided on a net single premium method. The reserves are calculated
based on assumptions as to interest, mortality, and retirement that were appropriate at the date of issue. Mortality assumptions are based
upon industry standards adjusted as appropriate to reflect our actual experience and future expectations. The assumptions vary by year
of issue.
Policy reserves for interest-sensitive products are principally policyholder account values.
We perform loss recognition tests on our policy reserves annually, or more frequently if appropriate, using best estimate assumptions
as of the date of the test, without a provision for adverse deviation. We group the policy reserves for each major product line within a
segment when we perform the loss recognition tests. If the policy reserves determined using these best estimate assumptions are higher
than our existing policy reserves net of any deferred acquisition cost balance, the existing policy reserves are increased or deferred
acquisition costs are reduced to immediately recognize the deficiency.
Claim reserves represent future policy and contract benefits for claims that have been incurred or are estimated to have been incurred
but not yet reported to us. Our claim reserves relate primarily to disability policies and are calculated based on assumptions as to interest
and claim resolution rates that are currently appropriate. Claim resolution rate assumptions are based on our actual experience. The
interest rate assumptions used for discounting claim reserves are based on projected portfolio yield rates, after consideration for defaults
and investment expenses, for the assets supporting the liabilities for the various product lines. Unlike policy reserves, claim reserves are
subject to revision as current claim experience and projections of future experience change.