Unum 2011 Annual Report Download - page 41

Unum 2011 Annual Report
Unum
2011
39
foreign currency. Except for a limited number of transactions, we do not actually convert pounds into dollars. As a result, we view foreign
currency translation as a financial reporting item and not a reflection of operations or profitability in the U.K.
Consolidated premium income for both 2011 and 2010 includes premium growth, relative to the preceding years, for our Unum US
group life and accidental death and dismemberment and voluntary benefits lines of business as well as for Colonial Life. Our Unum US
group disability line of business experienced declines in premium income during both 2011 and 2010 relative to prior years due primarily to
the ongoing high levels of unemployment and the competitive environment which impact sales growth and premium growth from existing
customers. In particular, premium growth from existing customers continues to be unfavorably impacted by lower salary growth and lower
growth in the number of employees covered under an existing policy. Premium income for Unum US individual disability — recently issued
increased in 2011 and decreased in 2010 relative to prior years due primarily to the volume of sales. Unum UK premium income, in local
currency, increased in 2011 but declined in 2010 relative to the prior year periods. Premium growth in Unum UK continues to be pressured
by pricing actions resulting from the competitive U.K. market. Premium income for our individual disability closed block of business
continued its expected decline in both 2011 and 2010. Our long-term care closed block of business experienced premium growth in both
2011 and 2010 relative to prior years due to higher persistency and group long-term care sales.
Net investment income was higher in 2011 relative to 2010 due primarily to continued growth in the level of invested assets and
higher bond call premiums, partially offset by an increase in the amortization of the principal amount invested in our tax credit partnerships
due to the higher level of investment in this asset class, a decrease in income on other partnership investments, and a decline in the level
of prepayment income on mortgage-backed securities. Net investment income was higher in 2010 relative to 2009 due primarily to growth
in the level of invested assets and higher bond call premiums. We also received higher interest income during 2010 on bonds for which
interest income is linked to a U.K. inflation index. We invest in index-linked bonds to support the claim reserves associated with Unum UK
group policies that provide for inflation-linked increases in benefits. Although over the intermediate-term the investment return from
index-linked bonds generally matches the index-linked claim payments and reserves, the effect on investment income from the inflation
index-linked bonds may not be completely offset by a similar change in claim payments and reserves in each quarterly or annual period.
We recognized in earnings a net realized investment loss of $4.9 million in 2011 compared to gains of $24.7 million and $11.7 million
in 2010 and 2009, respectively. Included in these amounts were other-than-temporary impairment losses on fixed maturity securities of
$19.9 million, $15.9 million, and $215.5 million in 2011, 2010, and 2009, respectively, all of which were recognized in earnings other than a
loss of $3.7 million in 2009 which was recognized in other comprehensive income.
Also recognized in earnings through realized investment gains and losses was the change in the fair value of an embedded derivative
in a modified coinsurance arrangement. Changes in the fair value of this embedded derivative resulted in a realized loss of $39.4 million in
2011 compared to realized gains of $21.1 million and $243.1 million in 2010 and 2009, respectively. Gains and losses on this embedded
derivative result primarily from changes in credit spreads in the overall investment market.
The reported benefit ratio was 95.9 percent in 2011. Excluding the reserve charges for our long-term care and individual disability
closed blocks of business, the benefit ratio was 85.9 percent in 2011, compared to 85.5 percent and 84.2 percent in 2010 and 2009,
respectively, with unfavorable year over year risk results in our Unum UK and Colonial Life segments partially offset by favorable risk results
in our Unum US segment. Further discussion of our line of business risk results and claims management performance for each of our
segments is included in “Segment Results” as follows.
Interest and debt expense in 2011 was marginally higher than 2010 due primarily to the September 2010 issuance of $400.0 million of
debt, mostly offset by the maturity of $225.1 million of debt in March 2011. We also experienced lower interest expense in 2011 compared
to 2010 on $350.0 million of debt which we effectively converted into floating rate debt through the use of an interest rate swap entered
into during the fourth quarter of 2010. Interest and debt expense for 2010 was higher than in 2009 due to higher levels of outstanding
debt, partially offset by lower rates of interest on our floating rate debt issued by Northwind Holdings and Tailwind Holdings. See “Debt”
contained herein for additional information.
The deferral of acquisition costs increased in both 2011 and 2010 relative to the prior year periods, with continued growth in certain of
our product lines and the associated increase in deferrable expenses more than offsetting the lower level of deferrable costs in product
lines with lower growth.