Unum 2009 Annual Report Download - page 32

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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum
2009
amortization period is generally higher than in the later years due to higher anticipated policy persistency in the early years, which results
in a greater proportion of the costs being amortized in the early years of the life of the policy. During 2009, our key assumptions used to
develop the future amortization did not change materially from those used in the prior year. Generally, we do not expect our persistency
or interest rates to change significantly in the short-term, and to the extent that these trends do change, we expect those changes to be
gradual over a longer period of time.
Presented below are our current assumptions regarding the length of our amortization periods, the approximate DAC balance that remains
at the end of years 3, 10, and 15 as a percentage of the cost initially deferred, and our DAC balances as of December 31, 2009 and 2008.
Balance Remaining as a % DAC Balances
Amortization of Initial Deferral at December 31
(in millions of dollars) Period Year 3 Year 10 Year 15 2009 2008
Unum US
Group Disability 6 25% 0% 0% $ 123.5 $ 128.3
Group Life and Accidental
Death & Dismemberment 6 25% to 30% 0% 0% 87.8 85.7
Supplemental and Voluntary
Individual Disability — Recently Issued 20 75% 50% 25% 667.7 683.0
Long-term Care 20 80% 55% 30% 310.9 320.4
Voluntary Benefits 15 55% to 60% 15% 0% 472.5 444.4
Unum UK
Group Disability 4 10% 0% 0% 18.4 20.3
Group Life 4 10% 0% 0% 5.8 4.2
Individual Disability 15 60% 15% 0% 34.7 30.2
Colonial Life 17 60% 25% 10% 761.2 755.9
Totals $2,482.5 $2,472.4
Amortization of DAC on traditional products is adjusted to reflect the actual policy persistency as compared to the anticipated experience,
and as a result, the unamortized balance of DAC reflects actual persistency. We may experience accelerated amortization if policies terminate
earlier than projected. Because our actual experience regarding persistency and premium income has varied very little from our assumptions
during the last three years, we have had minimal adjustments to our projected amortization of DAC during those years. We measure the
recoverability of DAC annually by performing gross premium valuations. Our testing indicates that our DAC is recoverable.
In December 2009, the Financial Accounting Standards Board issued a proposed Accounting Standards Update which is intended to
address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts
qualify as deferred acquisition costs. If the proposed guidance is adopted as currently written, this update will result in a decrease in the
level of costs we defer, effective January 1, 2011. We have not yet quantified the impact on our financial position or results of operations.
Valuation of Investments
All of our fixed maturity securities are classified as available-for-sale and are reported at fair value. Our derivative financial instruments,
including certain derivative instruments embedded in other contracts, are reported as either assets or liabilities and measured at fair value.
We hold an immaterial amount of equity securities, which are also reported at fair value.
Definition of Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date and, therefore, represents an exit price, not an entry price. The exit price objective applies
regardless of a reporting entity’s intent and/or ability to sell the asset or transfer the liability at the measurement date.