Unum 2009 Annual Report Download - page 31

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Unum 2009 Annual Report
of time. However, we have historically experienced an increase in our group long-term disability morbidity claim incidence trends during
and following a recessionary period, particularly in our Unum US operations. During the second half of 2009, claim incidence rates for Unum
US group long-term disability were slightly elevated. Given the current economic conditions, it is possible that our claim incidence rates for
this type of product may increase.
Throughout the period 2007 to 2009, actual new money interest rates varied with the changing market conditions, and the assumptions
we used to discount our reserves generally trended downward slightly for all segments and product lines. 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 2007 through 2009 have varied by +3 and -4 percent in our Unum US group long-term disability line of
business, between +13 and -12 percent in our Unum US individual disability — recently issued line of business, and between +8 and -7 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 2007 and continuing throughout 2008 and 2009, we gained more stability in our claims management performance relative to 2006,
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, 2009, 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 +/- 2.6 percent of our reported balance, which at December 31, 2009, would
have resulted in an approximate change (either positive or negative) of $260 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.
Approximately 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. 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 in determining the expected persistency and premium income. The estimated premium income in the early years of the