Unum 2008 Annual Report Download - page 37

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during and following a recessionary period, particularly in our Unum US operations. Given the current weakening economy, it is possible
that our claim incidence rates for this type of product may increase.
Actual new money interest rates varied throughout 2008 but generally trended downward for all segments and product lines during
2007 and 2006. The assumptions we use to discount our reserves generally trended downward slightly for all segments and product lines
during 2008, 2007, and 2006. Reserve discount rate assumptions for new policies and new claims have been adjusted to reflect our current
and expected net investment returns. Changes in our discount rate assumptions tend to occur gradually over a longer period of time
because of the long duration investment portfolio needed to support the reserves for the majority of our lines of business.
Both the mortality rate experience and the retirement rate experience for our block of group pension products have remained stable
and consistent with expectations.
Claim resolution rates have a greater chance of significant variability in a shorter period of time than our other reserve assumptions.
These rates are reviewed on a quarterly basis for the death and recovery components separately. Claim resolution rates in our Unum US
segment group and individual long-term disability product lines and our Individual Disability — Closed Block segment have over the last
several years exhibited some variability. Relative to the resolution rate we expect to experience over the life of the block of business, actual
quarterly rates during the period 2006 through 2008 have varied by +7 and -5 percent in our Unum US group long-term disability line of
business, between +10 and -5 percent in our Unum US individual disability — recently issued line of business, and between +8 and -6 percent
in our Individual Disability — Closed Block segment.
Claim resolution rates are very sensitive to operational and environmental changes and can be volatile over short periods of time.
During 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 Unum US and Individual Disability — Closed Block segment claims management
performance. During 2007 and continuing throughout 2008, we gained more stability in our claims management performance, and our claim
resolution rates were more consistent with our long-term assumptions. Our claim resolution rate assumption used in determining reserves is
our expectation of the resolution rate we will experience over the life of the block of business and will vary from actual experience in any
one period, both favorably and unfavorably.
We monitor and test our reserves for adequacy relative to all of our assumptions in the aggregate. In our estimation, scenarios based
on reasonably possible variations in each of our reserve assumptions, when modeled together in aggregate, could produce a potential
result, either positive or negative, in our Unum US group disability line of business that would change our reserve balance by +/- 2.5
percent. Using our actual claim reserve balance at December 31, 2008, this variation would have resulted in an approximate change (either
positive or negative) of $200 million to our claim reserves. Using the same sensitivity analysis approach for our Individual Disability —
Closed Block segment, the claim reserve balance could potentially vary by +/- 2.2 percent of our reported balance, which at December 31,
2008, would have resulted in an approximate change (either positive or negative) of $225 million to our claim reserves. The major contributor
to the variance for both the group long-term disability line of business and the Individual Disability — Closed Block segment is the claim
resolution rate. We believe that these ranges provide a reasonable estimate of the possible changes in reserve balances for those product
lines where we believe it is possible that variability in the assumptions, in the aggregate, could result in a material impact on our reserve
levels, but we record our reserves based on our long-term best estimate. Because these product lines have long-term claim payout periods,
there is a greater potential for significant variability in claim costs, either positive or negative.
Deferred Acquisition Costs (DAC)
We defer certain costs incurred in acquiring new business and amortize (expense) these costs over the life of the related policies.
Deferred costs include certain commissions, other agency compensation, selection and policy issue expenses, and field expenses.
Acquisition costs that do not vary with the production of new business, such as commissions on group products which are generally level
throughout the life of the policy, are excluded from deferral.
Over 90 percent of our DAC relates to traditional non interest-sensitive products, and we amortize DAC in proportion to the premium
income we expect to receive over the life of the policies in accordance with the provisions of Statement of Financial Accounting Standards
No. 60, Accounting and Reporting by Insurance Enterprises. Key assumptions used in developing the future amortization of DAC are future
persistency and future premium income. We use our own historical experience and expectation of the future performance of our businesses