Unum 2012 Annual Report Download - page 130

Notes To Consolidated Financial Statements
128 UNUM 2012 ANNUAL REPORT
Note 5. Liability for Unpaid Claims and Claim Adjustment Expenses
Changes in the liability for unpaid claims and claim adjustment expenses are as follows:
(in millions of dollars) 2012 2011 2010
Balance at January 1 $24,586.5 $24,339.4 $24,585.7
Less Reinsurance Recoverable 2,042.6 2,028.2 2,179.3
Net Balance at January 1 22,543.9 22,311.2 22,406.4
Incurred Related to
Current Year 4,946.2 4,684.4 4,517.9
Prior Years
Interest 1,247.6 1,262.9 1,268.9
All Other Incurred (175.7) 209.1 (61.3)
Foreign Currency 101.1 (10.9) (73.9)
Total Incurred 6,119.2 6,145.5 5,651.6
Paid Related to
Current Year (1,715.4) (1,588.6) (1,514.8)
Prior Years (4,386.6) (4,324.2) (4,232.0)
Total Paid (6,102.0) (5,912.8) (5,746.8)
Net Balance at December 31 22,561.1 22,543.9 22,311.2
Plus Reinsurance Recoverable 2,006.0 2,042.6 2,028.2
Balance at December 31 $24,567.1 $24,586.5 $24,339.4
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 2012, 2011, and 2010.
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 $196.0 million, as adjusted for the January 1, 2012 retrospective adoption of the accounting
standards update related to deferred acquisition costs, 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.