Unum 2010 Annual Report Download - page 100

Notes To Consolidated Financial Statements
98
Unum
2010
Reinsurance activity is accounted for on a basis consistent with the terms of the reinsurance contracts and the accounting used for
the original policies issued. Premium income and benefits and change in reserves for future benefits are presented in our consolidated
statements of income net of reinsurance ceded. Ceded policy and contract benefits, ceded future policy and contract benefits, ceded
unearned premiums, and ceded policy loans are reported on a gross basis in our consolidated balance sheets. Our reinsurance recoverable
includes the balances due from reinsurers under the terms of the reinsurance agreements for these ceded balances as well as settlement
amounts currently due.
Where applicable, gains or losses on reinsurance transactions are deferred and amortized into earnings based upon expected future
premium income for traditional insurance policies and estimated future gross profits for interest-sensitive insurance policies. The deferred
gain on reinsurance included in other liabilities in our consolidated balance sheets at December 31, 2010 and 2009 was $100.2 million and
$123.1 million, respectively.
Under ceded reinsurance agreements wherein we are not relieved of our legal liability to our policyholders, if the assuming reinsurer
is unable to meet its obligations, we remain contingently liable. We evaluate the financial condition of reinsurers and monitor concentration
of credit risk to minimize this exposure. We may also require assets in trust, letters of credit, or other acceptable collateral to support our
reinsurance recoverable balances. In the event that reinsurers do not meet their obligations to us under the terms of the reinsurance
agreements, certain amounts reported in our reinsurance recoverable could become uncollectible, in which case the reinsurance
recoverable balances are stated net of allowances for uncollectible reinsurance.
Premium Tax Expense: Premium tax expense is included in other operating expenses in the consolidated statements of income. For the
years ended December 31, 2010, 2009, and 2008, premium tax expense was $129.4 million, $130.2 million, and $133.2 million, respectively.
Stock-Based Compensation: The cost of stock-based compensation is generally measured based on the grant-date fair value of
the award. We use the Black-Scholes options valuation model for estimating the fair value of stock options and the Monte-Carlo model for
estimating the fair value of our performance restricted stock units. Nonvested stock awards are valued based on the market value of
common stock at the grant date, and cash-settled awards are measured each reporting period based on the current stock price. Stock-based
awards that do not require future service are expensed immediately, and stock-based awards that require future service are amortized over
the relevant service period, with an offsetting increase to additional paid-in capital in stockholders’ equity.
Earnings Per Share: We compute basic earnings per share by dividing net income by the weighted average number of common shares
outstanding for the period. Earnings per share assuming dilution is computed by dividing net income by the weighted average number of
shares outstanding for the period plus the shares representing the dilutive effect of stock-based awards. We use the treasury stock method
to account for the effect of outstanding stock options, nonvested stock awards, and performance restricted stock units on the computation
of earnings per share assuming dilution.
Translation of Foreign Currency: Revenues and expenses of our foreign operations are translated at average exchange rates. Assets
and liabilities are translated at the rate of exchange on the balance sheet dates. The translation gain or loss is generally reported in
accumulated other comprehensive income, net of deferred tax.
Accounting for Participating Individual Life Insurance: Participating policies issued by one of our subsidiaries prior to its 1986
conversion from a mutual to a stock life insurance company will remain participating as long as the policies remain in-force. A Participation
Fund Account (PFA) was established for the benefit of all such individual participating life and annuity policies and contracts. The assets of
the PFA provide for the benefit, dividend, and certain expense obligations of the participating individual life insurance policies and annuity
contracts. The assets of the PFA were $364.4 million and $359.8 million at December 31, 2010 and 2009, respectively.
Accounting Updates Adopted in 2010:
Accounting Standards Codication (ASC 310) “Receivables.” In July 2010, the Financial Accounting Standards Board (FASB) issued an
update to require additional disclosures regarding the credit quality of financing receivables, including the entity’s credit risk exposure, its
assessment of risk in estimating its allowance for credit losses, changes in the allowance for credit losses, and the reason for those changes.
The disclosure requirements of this update have staggered effective dates. We adopted the disclosures around the entity’s credit risk