Unum 2012 Annual Report Download - page 24

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
22 UNUM 2012 ANNUAL REPORT
2011 Long-term Care Review and Individual Disability Closed Block Reserves
Long-term Care Strategic Review
Following a comprehensive and strategic review of our long-term care business, in February 2012 we announced that we would
discontinue selling group long-term care. We discontinued selling individual long-term care during 2009. Because both group and individual
long-term care are considered closed blocks of business, effective December 31, 2011, we reclassified our long-term care products from
the Unum US segment to the Closed Block segment. We also reclassified our other insurance products not actively marketed, including
individual life and corporate-owned life insurance, reinsurance pools and management operations, group pension, health insurance, and
individual annuities, which were previously reported in the Corporate and Other segment to the Closed Block segment. The inclusion of all
closed blocks of business into one operating segment aligns with our reporting and monitoring of our closed blocks of business within a
discrete segment and is consistent with our separation of these blocks of business from the lines of business which actively market new
products. Prior period segment results have been restated to reflect these changes in our reporting classifications.
As part of the strategic review, and as is typical in the fourth quarter of each year, we analyzed our reserve assumptions for long-term
care in conjunction with our annual loss recognition testing. 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 the analysis was a review of our reserve discount rate assumptions and 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. These charges decreased our 2011 net income by $500.3 million.
The increase in reserves represented a 10.5 percent increase in long-term care policy and claim reserves as of December 31, 2011, which
equaled $5.4 billion subsequent to the charge.
Claim Reserve Increase for Individual Disability Closed Block Business
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