Unum 2012 Annual Report Download - page 31

UNUM 2012 ANNUAL REPORT 29
We monitor and test our reserves for adequacy relative to all of our assumptions in the aggregate. In our estimation, scenarios
based on reasonably possible variations in each of our reserve assumptions, when modeled together in aggregate, could produce a potential
result, either positive or negative, in our Unum US group disability line of business that would change our claim reserve balance by
+/- 3.1 percent. Using our actual claim reserve balance at December 31, 2012, this variation would have resulted in an approximate change
(either positive or negative) of $230 million to our claim reserves. Using the same sensitivity analysis approach for our Closed Block
individual disability line of business, the claim reserve balance could potentially vary by +/- 2.3 percent of our reported balance, which at
December 31, 2012, would have resulted in an approximate change (either positive or negative) of $230 million to our claim reserves. The
major contributor to the variance for both the Unum US group long-term disability line of business and the Closed Block individual disability
line of business is the claim resolution rate. In addition, we consider variability in our reserve assumptions related to long-term care policy
reserves. These reserves are held under the gross premium valuation method with assumptions established as of December 31, 2011,
the date of loss recognition. Assumptions for policy reserves do not change after the date of loss recognition unless reserves are again
determined to be deficient. As such, positive developments will result in the accumulation of reserve margin, while adverse developments
would result in an additional reserve charge. Variability in our reserve assumptions for long-term care may be mitigated by potential future
rate increases, particularly those variations associated with long-term changes in morbidity or mortality experience as well as investment
yields. When modeled in the aggregate, downside scenarios based on reasonably possible adverse variations in each of our reserve
assumptions, including the potential impact of future rate increases on expected future premiums we will receive, could require a reserve
increase of 7.3 percent of our reported balance, which at December 31, 2012, would have resulted in an approximate increase of
$400 million to our policy reserves. We believe that these ranges provide a reasonable estimate of the possible changes in reserve
balances for those product lines where we believe it is possible that variability in the assumptions, in the aggregate, could result in a
material impact on our reserve levels, but we record our reserves based on our long-term best estimate. Because these product lines
have long-term claim payout periods, there is a greater potential for significant variability in claim costs, either positive or negative.
Deferred Acquisition Costs (DAC)
We defer incremental direct costs associated with the successful acquisition of new or renewal insurance contracts and amortize
(expense) these costs over the life of the related policies. Deferred costs include certain commissions, other agency compensation,
selection and policy issue expenses, and field expenses. Acquisition costs that do not vary with the production of new business, such as
commissions on group products which are generally level throughout the life of the policy, are excluded from deferral.
Approximately 84 percent of our DAC relates to traditional non interest-sensitive products, and we amortize DAC for these products in
proportion to the premium income we expect to receive over the life of the policies. DAC related to interest-sensitive policies is amortized
over the lives of the policies in relation to the present value of estimated gross profits from surrender charges, mortality margins,
investment returns, and expense margins. Key assumptions used in developing the future amortization of DAC are persistency, premium
income, and for our interest-sensitive products, mortality margins and investment returns. We use our own historical experience and
expectation of the future performance of our businesses in determining our assumptions. For traditional products, the estimated premium
income in the early years of the amortization period is generally higher than in the later years due to the anticipated cumulative effect of
policy persistency in the early years, which results in a greater proportion of the costs being amortized in the early years of the life of the
policy. During 2012, our key assumptions used to develop the future amortization of acquisition costs deferred during 2012 did not change
materially from those used in 2011. Generally, we do not expect our key assumptions 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.