Unum 2011 Annual Report Download - page 134

Notes To Consolidated Financial Statements
Unum 2011 Annual Report
132
The majority of the net balances are related to disability claims with long-tail payouts on which interest earned on assets backing
liabilities is an integral part of pricing and reserving. Interest accrued on prior year reserves has been calculated on the opening reserve
balance less one-half year’s cash payments at our average reserve discount rate used during 2011, 2010, and 2009.
We generally perform loss recognition tests on our deferred acquisition costs and policy reserves in the fourth quarter of each year, but
more frequently if appropriate, using best estimate assumptions as of the date of the test. Included in our analysis for the long-term care
product line during the fourth quarter of 2011 was a review of our reserve discount rate, mortality, and morbidity assumptions. Our analysis
of reserve discount rate assumptions considered the significant decline in long-term interest rates which occurred late in the third quarter
of 2011 due to the European Union debt crisis and the Federal Reserve Board’s actions, including the announcement of “Operation Twist.”
We also considered an updated industry study for long-term care experience which was made available mid-year 2011 from the Society
of Actuaries. Our analysis of this study, which was completed during the fourth quarter of 2011, showed that lower termination rates than
we had previously assumed were beginning to emerge in industry and in our own company experience. Based on our analysis, as of
December 31, 2011 we lowered the discount rate assumption to reflect the low interest rate environment and our expectation of future
investment portfolio yield rates. We also changed our mortality assumptions to reflect emerging experience due to an increase in life
expectancies which increases the ultimate number of people who will utilize long-term care benefits and also lengthens the amount of
time a claimant receives long-term care benefits. We changed our morbidity assumptions to reflect emerging industry experience as well
as our own company experience. While our morbidity experience is still emerging and is not fully credible, we modified our assumptions
to align more closely with the recently published industry study. Using our revised best estimate assumptions, as of December 31, 2011
we determined that deferred acquisition costs of $289.8 million were not recoverable and that our policy and claim reserves should be
increased by $573.6 million to reflect our current estimate of future benefit obligations. Of this amount, $248.1 million was related to claim
reserves, and approximately $215.0 million can be attributed to prior year incurred claims, thereby impacting the results shown in the
preceding chart.
In December 2011, we analyzed our reserve assumptions for individual disability closed block claim reserves. Claim reserves
supporting our individual disability closed block of business are calculated using assumptions based on actual experience believed to be
currently appropriate. Claim reserves are subject to revision as current claim experience emerges and alters our view of future expectations.
Claim resolution rates, which measure the resolution of claims from recovery, deaths, settlements, and benefit expirations, are very
sensitive to operational and environmental changes and can be volatile. 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. We are now able, with a higher degree
of confidence, to assess our own experience for older ages in our long duration lifetime claim block as our data has become credible. There
is very little industry experience for lifetime disability benefits, as our insurance companies were the primary disability companies in the
insurance industry at the time lifetime disability benefits were offered. These benefits were offered during the 1980s and 1990s, recent
enough such that claimants are just reaching the older ages and providing us with data to build our claim experience base. Emerging
experience indicates a longer life expectancy for our older age, longer duration disabled claimants, which lengthens the time a claimant
receives disability benefits. As a result of this experience, as of December 31, 2011 we adjusted our mortality assumption within our claim
resolution rate assumption and, as a result, increased our claim reserves for our individual disability closed block of business by
$183.5 million. Of this amount, approximately $176.0 million can be attributed to prior year incurred claims, thereby impacting the
results shown in the preceding chart.
“Incurred Related to Prior Years — All Other Incurred,” excluding the 2011 reserve charges discussed in the preceding paragraphs,
declined in 2011 relative to the prior two years. The decrease relates primarily to a continued increased rate of claim recoveries for our
Unum US group long-term disability line of business and our Closed Block individual disability line of business. Throughout the period 2009
to 2011, we had generally stable to improving claims management performance, and our claim resolution rates were fairly consistent with
or slightly favorable to our long-term assumptions. Our claims management performance during 2011 for Unum US group long-term
disability exceeded our long-term assumptions for claim resolution rates. For the Closed Block individual disability line of business, the
claims management performance in 2011 was slightly favorable relative to 2010. 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.