Unum 2012 Annual Report Download - page 30

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
28 UNUM 2012 ANNUAL REPORT
Trends in Key Assumptions
Generally, we do not expect our mortality and morbidity claim incidence trends or our persistency trends to change significantly in the
short-term, and to the extent that these trends do change, we expect those changes to be gradual over a longer period of time. However,
we have historically experienced an increase in our group long-term disability morbidity claim incidence trends during and following a
recessionary period, particularly in our Unum US operations. During 2012 and 2011, claim incidence rates for Unum US group long-term
disability continued to be slightly elevated relative to the level of 2010. Given the current economic conditions, it is possible that our claim
incidence rates for this type of product may increase.
During the fourth quarter of 2011, we completed an extensive review of experience factors for our long-term care business using
emerging industry experience as well as our own company experience. An updated industry study for long-term care experience was
made available mid-year 2011 from the Society of Actuaries which allowed us to compare our limited company experience to broader
industry experience and trends. The trends reflected in emerging industry experience, as well as our own company experience, resulted in
a modification to our mortality and morbidity assumptions, which together with the decline in interest rates as noted below, resulted in our
recognition of a loss deficiency in our long-term care closed block of business as of December 31, 2011. During 2012, we observed elevated
claims experience for our long-term care line of business which we view as temporary in nature. See “Long-term Care Strategic Review”
contained herein.
Throughout the period 2010 to 2012, actual new money interest rates varied with the changing market conditions, and the
assumptions we used to discount our reserves during this period generally trended downward slightly for all segments and product lines.
In 2011, long-term interest rates declined significantly due to the European Union debt crisis and the Federal Reserve Board’s actions,
including the announcement of “Operation Twist.” Interest rates have continued to remain low relative to historical norms throughout 2012.
Reserve discount rate assumptions for new policies and new claims have been adjusted to reflect our current and expected net investment
returns. Changes in our average discount rate assumptions tend to occur gradually over a longer period of time because of the long-
duration investment portfolio needed to support the reserves for the majority of our lines of business.
Both the mortality rate experience and the retirement rate experience for our block of group pension products have remained stable
and consistent with expectations.
Claim resolution rates have a greater chance of significant variability in a shorter period of time than our other reserve assumptions.
These rates are reviewed on a quarterly basis for the death and recovery components separately. Claim resolution rates in our Unum US
segment group and individual long-term disability product lines and our Closed Block individual disability product line have over the last
several years exhibited some variability. Relative to the resolution rate we expect to experience over the life of the block of business, actual
quarterly rates during 2011 and 2012 have varied by +5 and -4 percent in our Unum US group long-term disability line of business, between
+14 and -13 percent in our Unum US individual disability — recently issued line of business, and between +4 and -4 percent in our Closed
Block individual disability line of business. Claim resolution rates are very sensitive to operational and environmental changes and can be
volatile over short periods of time. Throughout the period 2010 to 2012, we had generally stable to improving claims management
performance, and our claim resolution rates were fairly consistent with or slightly favorable to our long-term assumptions. 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, both favorably and unfavorably.
As our claims data for older ages in our long duration lifetime claim block in our Closed Block individual disability line of business
has become credible, we are now able, with a higher degree of confidence, to assess our own experience for this particular claim block.
Emerging experience indicates a longer life expectancy for our older age, longer duration disabled claimants, which 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, resulting in an increase of $183.5 million in our Closed Block individual disability line of business claim
reserves. Experience in 2012 remained generally consistent with our updated mortality assumption. See “Claim Reserve Increase for
Individual Disability Closed Block Business” contained herein.