Unum 2008 Annual Report Download - page 32

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Effective December 31, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 158 (SFAS 158), Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).
SFAS 158 requires an employer to recognize the overfunded or underfunded status of defined benefit pension and other postretirement
plans as an asset or liability in its balance sheet and to recognize changes in that funded status through comprehensive income. Also,
under SFAS 158, defined benefit pension and other postretirement plan assets and obligations are to be measured as of the date of the
employer’s fiscal year-end. The adoption of SFAS 158, which resulted in an $84.1 million decrease in accumulated other comprehensive
income in stockholders’ equity, had no effect on our results of operations.
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We prepare our financial statements in accordance with GAAP. The preparation of financial statements in conformity with GAAP
requires us to make estimates and assumptions that affect amounts reported in our financial statements and accompanying notes. The
accounting estimates we deem to be most critical to our results of operations and balance sheets are those related to reserves for policy
and contract benefits, deferred acquisition costs, valuation of investments, pension and postretirement benefit plans, and income taxes.
Estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported
and disclosed in our financial statements.
For additional information, refer to our significant accounting policies in Note 1 of the “Notes to Consolidated Financial Statements.”
Reserves for Policy and Contract Benefits
Our largest liabilities are reserves for claims that we estimate we will eventually pay to our policyholders. The two primary categories of
reserves are policy reserves for claims not yet incurred and claim reserves for claims that have been incurred or are estimated to have been
incurred but not yet reported to us. These reserves equaled $37.2 billion and $36.9 billion at December 31, 2008 and 2007, respectively, or
approximately 85 percent of our total liabilities. Reserves ceded to reinsurers were $6.7 billion and $6.6 billion at December 31, 2008 and
2007, respectively, and are reported as a reinsurance recoverable in our consolidated balance sheets.
Policy Reserves
Policy reserves are established in the same period we issue a policy and equal the difference between projected future policy benefits
and future premiums, allowing a margin for expenses and profit. These reserves relate primarily to our traditional non interest-sensitive
products, including our individual disability, individual and group long-term care, and voluntary benets products in our Unum US segment;
individual disability products in our Unum UK segment; disability and cancer and critical illness policies in our Colonial Life segment; and, the
Individual Disability — Closed Block segment products. The reserves are calculated based on assumptions that were appropriate at the date
the policy was issued and are not subsequently modified unless the policy reserves become inadequate (i.e., loss recognition occurs).
• Persistency assumptions are based on our actual historical experience adjusted for future expectations.
• Claim incidence and claim resolution rate assumptions related to mortality and morbidity are based on actual experience or industry
standards adjusted as appropriate to reflect our actual experience and future expectations.
• Discount rate assumptions are based on our current and expected net investment returns.
In establishing policy reserves, we use assumptions that reflect our best estimate while considering the potential for adverse
variances in actual future experience, which results in a total policy reserve balance that has an embedded reserve for adverse deviation.
We do not, however, establish an explicit and separate reserve as a provision for adverse deviation from our assumptions.
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