Unum 2012 Annual Report Download - page 25

UNUM 2012 ANNUAL REPORT 23
lengthens the time a claimant receives disability benefits. As a result of this experience, as of December 31, 2011 we adjusted our mortality
assumption within our claim resolution rate assumption and, as a result, increased our claim reserves for our individual disability closed
block of business by $183.5 million and decreased net income by $119.3 million. The increase in reserves represented a 1.5 percent increase
in individual disability policy and claim reserves as of December 31, 2011, which equaled $11.9 billion subsequent to the charge.
Critical Accounting Estimates
We prepare our financial statements in accordance with GAAP. The preparation of financial statements in conformity with GAAP
requires us to make estimates and assumptions that affect amounts reported in our financial statements and accompanying notes.
Estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported
and disclosed in our financial statements. The accounting estimates deemed to be most critical to our financial position and results of
operations are those related to reserves for policy and contract benefits, deferred acquisition costs, valuation of investments, pension and
postretirement benefit plans, income taxes, and contingent liabilities. For additional information, refer to our significant accounting policies
in Note 1 of the “Notes to Consolidated Financial Statements” contained herein.
Reserves for Policy and Contract Benefits
Our largest liabilities are reserves for claims that we estimate we will eventually pay to our policyholders. The two primary categories
of reserves are policy reserves for claims not yet incurred and claim reserves for claims that have been incurred or are estimated to have
been incurred but not yet reported to us. These reserves equaled $39.9 billion and $39.3 billion at December 31, 2012 and 2011, respectively,
or approximately 74.4 percent and 76.5 percent of our total liabilities, respectively. Reserves ceded to reinsurers were $6.7 billion at both
December 31, 2012 and 2011, and are reported as a reinsurance recoverable in our consolidated balance sheets.
Policy Reserves
Policy reserves are established in the same period we issue a policy and equal the difference between projected future policy benefits
and future premiums, allowing a margin for expenses and profit. These reserves relate primarily to our traditional non interest-sensitive
products, including our individual disability and voluntary benefits products in our Unum US segment; individual disability products in our
Unum UK segment; disability and cancer and critical illness policies in our Colonial Life segment; and individual disability and long-term care
products in our Closed Block segment. The reserves are calculated based on assumptions that were appropriate at the date the policy was
issued and are not subsequently modified unless the policy reserves become inadequate (i.e. loss recognition occurs).
• Persistency assumptions are based on our actual historical experience adjusted for future expectations.
• Claim incidence and claim resolution rate assumptions related to mortality and morbidity are based on actual experience or industry
standards adjusted as appropriate to reflect our actual experience and future expectations.
• Discount rate assumptions are based on our current and expected net investment returns.
In establishing policy reserves, we use assumptions that reflect our best estimate while considering the potential for adverse
variances in actual future experience, which results in a total policy reserve balance that has an embedded reserve for adverse deviation.
We do not, however, establish an explicit and separate reserve as a provision for adverse deviation from our assumptions.
We perform loss recognition tests on our policy reserves annually, or more frequently if appropriate, using best estimate assumptions
as of the date of the test, without a provision for adverse deviation. We group the policy reserves for each major product line within a
segment when we perform the loss recognition tests. If the policy reserves determined using these best estimate assumptions are higher
than our existing policy reserves net of any deferred acquisition cost balance, the existing policy reserves are increased or deferred
acquisition costs are reduced to immediately recognize the deficiency. Thereafter, the policy reserves for the product line are calculated
using the same method we used for the loss recognition testing, referred to as the gross premium valuation method, wherein we use our
best estimate as of the gross premium valuation (loss recognition) date rather than the initial policy issue date to determine the expected
future claims, commissions, and expenses we will pay and the expected future gross premiums we will receive.