Unum 2010 Annual Report Download - page 99

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Unum 2010 Annual Report
Policy reserves for interest-sensitive products are principally policyholder account values.
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
than our existing policy reserves net of any deferred acquisition cost balance, the existing policy reserves are increased or deferred
acquisition costs are reduced to immediately recognize the deficiency.
Claim reserves represent future policy and contract benefits for claims that have been incurred or are estimated to have been incurred
but not yet reported to us. Our claim reserves relate primarily to disability policies and are calculated based on assumptions as to interest
and claim resolution rates that are currently appropriate. Claim resolution rate assumptions are based on our actual experience. The interest
rate assumptions used for discounting claim reserves are based on projected portfolio yield rates, after consideration for defaults and
investment expenses, for the assets supporting the liabilities for the various product lines. Unlike policy reserves, claim reserves are subject
to revision as current claim experience and projections of future experience change.
Policyholders’ Funds: Policyholders’ funds represent customer deposits plus interest credited at contract rates. We control interest rate
risk by investing in quality assets which have an aggregate duration that closely matches the expected duration of the liabilities.
Income Tax: Deferred taxes reect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial statement purposes and the amounts used for income tax purposes. Deferred taxes have been measured using enacted
statutory income tax rates and laws that are currently in effect. We record deferred tax assets for tax positions taken in the U.S. and other
tax jurisdictions based on our assessment of whether a position is more likely than not to be sustained upon examination based solely on
its technical merits. A valuation allowance is established for deferred tax assets when it is more likely than not that an amount will not
be realized.
Short-term and Long-term Debt: Short-term and long-term debt are carried at the unpaid principal balance, net of unamortized
discount or premium. Short-term debt is debt due within the next twelve months, including that portion of debt otherwise classified as
long-term. Original issue discount or premium as well as debt issue costs are recognized as a component of interest expense over the
period the debt is expected to be outstanding. The carrying amount of long-term debt that is part of a fair value hedge program includes
an adjustment to reect the effect of the change in fair value attributable to the risk being hedged. Net interest settlements for fair value
hedges on our long-term debt are recognized as a component of interest expense.
Treasury Stock: Treasury stock is reected as a reduction of stockholders’ equity at cost.
Revenue Recognition: Traditional life and accident and health products are long-duration contracts, and premium income is
recognized as revenue when due from policyholders. If the contracts are experience rated, the estimated ultimate premium is recognized
as revenue over the period of the contract. The estimated ultimate premium, which is revised to reect current experience, is based on
estimated claim costs, expenses, and profit margins.
For interest-sensitive products, the amounts collected from policyholders are considered deposits, and only the deductions during the
period for cost of insurance, policy administration, and surrenders are included in revenue. Policyholders’ funds represent funds deposited
by contract holders and are not included in revenue.
Reinsurance: We routinely enter into reinsurance agreements with other insurance companies to spread risk and thereby limit losses
from large exposures. For each of our reinsurance agreements, we determine if the agreement provides indemnification against loss or
liability relating to insurance risk in accordance with applicable accounting standards. If we determine that a reinsurance agreement does
not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, we record the agreement using the deposit
method of accounting.