Unum 2011 Annual Report Download - page 62

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum 2011 Annual Report
60
The deferral of acquisition costs was higher in 2011 relative to 2010 due to the increase in deferrable expenses associated with higher
sales of group long-term care products. The amortization of deferred acquisition costs was lower in 2011 than in 2010 due to lower levels of
accelerated amortization related to favorable premium persistency relative to assumptions for certain issue years. As previously discussed,
at December 31, 2011 we determined that our long-term care deferred acquisition costs of $289.8 million were not recoverable, and we
recognized an impairment charge at that time. See “Long-term Care Strategic Review” included herein for discussion of the reserve charge
and the impairment.
In late 2010, we began a process of filing requests with various state insurance departments for a rate increase on certain of our
individual long-term care policies. The rate increase reflects current interest rates and claim experience, higher expected future claims,
persistency, and other factors related to pricing individual long-term care coverage. In states for which a rate increase is submitted and
approved, customers are also given options for coverage changes or other approaches that might fit their current financial and insurance
needs. Higher premium income associated with the rate increase is expected to begin to emerge during 2012.
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
The slight increase in premium income for 2010 relative to 2009 was driven by favorable persistency and higher sales of group
long-term care, which increased 15.2 percent in 2010 compared to 2009. Net investment income for 2010 was higher than 2009 due to
an increase in the level of assets supporting this line of business, an increase in the level of prepayment income on mortgage-backed
securities, and an increase in bond call premiums.
The interest adjusted loss ratio for long-term care increased in 2010 relative to 2009 due primarily to an increase in the active life
reserve and higher paid claim incidence rates. Commissions and the deferral of acquisition costs were lower in 2010 relative to 2009 due
primarily to the discontinuance of individual long-term care sales. The amortization of acquisition costs increased in 2010 relative to 2009
due primarily to an acceleration of amortization resulting from lower persistency in certain older issue years.
All Other
Our other insurance products had generally consistent performance year over year, with the exception of higher litigation costs in 2010.
Segment Outlook
We expect that this segment may experience volatility in net investment income due to the variability in interest rates on floating rate
assets and also due to volatility of bond call premiums relative to historical levels. A portion of the volatility in interest income will be offset
by commensurate changes in the interest expense on our individual disability floating rate debt.
We expect that operating revenue and income for this segment will continue to decline over time as these closed blocks of business
wind down, although we do expect higher premium income associated with long-term care rate increases. We also expect a small amount
of new group long-term care business to continue to be sold through features contractually allowable on existing group policies. Profitability
of our long-tailed products is affected by claims experience related to mortality and morbidity, investment returns, and persistency. We
believe that the interest adjusted loss ratios for the individual disability and long-term care lines of business will be relatively flat over the
long term, but these product lines may experience quarterly volatility. 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 and will vary from actual experience in any one period. It is possible that variability in any of our reserve
assumptions, including, but not limited to, interest rates, mortality, morbidity, and persistency, could result in a material impact on our
reserve levels.