Unum 2011 Annual Report Download - page 30

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum 2011 Annual Report
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The following 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, 2011
and 2010.
Balance Remaining as a % DAC Balances
Amortization of Initial Deferral at December 31
Period Year 3 Year 10 Year 15 2011 2010
Unum US
Group Disability 7 25% 0% 0% $ 120.1 $ 119.0
Group Life and Accidental
Death & Dismemberment 7 25% to 30% 0% 0% 102.7 93.8
Supplemental and Voluntary:
Individual Disability — Recently Issued 20 75% 50% 25% 619.4 639.7
Voluntary Benefits 15 55% to 60% 15% 0% 550.1 509.7
Unum UK
Group Disability 3 7% 0% 0% 14.8 16.3
Group Life 3 7% 0% 0% 9.3 7.9
Supplemental and Voluntary 20 57% 17% 7% 35.3 34.0
Colonial Life
Accident, Sickness, and Disability 15 48% 13% 1% 397.0 366.1
Life 25 73% 39% 20% 254.3 252.3
Cancer and Critical Illness 19 62% 28% 11% 197.9 186.6
Closed Block
Long-term Care — — — — — 295.7
Totals $2,300.9 $2,521.1
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. Conversely, we may also experience longer amortization periods if policies terminate later 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 by performing loss recognition tests in the fourth quarter of each year, but more frequently if appropriate, using best
estimate assumptions as of the date of the test. Insurance contracts are grouped for each major product line within a segment when we
perform loss recognition tests. If loss recognition testing indicates that DAC is not recoverable, the deficiency is charged to expense.
Our testing during the fourth quarter of 2011 indicated impairment of our long-term care DAC, and the balance of $289.8 million as of
December 31, 2011 was charged to expense. Our testing indicates that our remaining DAC balance as of December 31, 2011 is recoverable.
See “Long-term Care Strategic Review” contained herein for further discussion.
In October 2010, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update, now included in Accounting
Standards Codification 944 “Financial Services — Insurance,” 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. The amendments in the update
modify the existing guidance and require that only incremental direct costs associated with the successful acquisition of a new or renewal
insurance contract can be capitalized. All other costs are to be expensed as incurred. The amendments in this update are effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2011, and permit retrospective application. Our
retrospective adoption of this standard during the first quarter of 2012 is expected to result in a cumulative effect decrease in stockholders’
equity as of January 1, 2012, 2011, and 2010 of approximately $407 million, $459 million, and $455 million, respectively. Net income