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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
62 UNUM 2012 ANNUAL REPORT
Interest and debt expense was lower in 2011 compared to 2010 due to a decline in the amount of outstanding debt issued by
Northwind Holdings as a result of principal repayments. The deferral of acquisition costs was higher in 2011 relative to 2010 due to the
increase in deferrable expenses associated with higher sales of group long-term care products. The amortization of deferred acquisition
costs was lower in 2011 than in 2010 due to lower levels of accelerated amortization related to favorable premium persistency relative to
assumptions for certain issue years. As previously discussed, at December 31, 2011, we determined that our long-term care deferred
acquisition costs were not recoverable, and we recognized an impairment charge at that time. The other expense ratio was favorable in
2011 compared to 2010 due primarily to lower claim litigation costs and lower expenses related to claim volumes.
Segment Outlook
We expect that this segment may experience volatility in net investment income due to the variability in interest rates on floating rate
assets and also due to volatility of bond call premiums relative to historical levels. A portion of this volatility in interest income will be offset
by commensurate changes in the interest expense on our individual disability floating rate debt.
We expect that operating revenue and income for this segment will continue to decline over time as these closed blocks of business
wind down, although we do expect additional premium income associated with long-term care rate increases. We also expect a small
amount of new group long-term care business to continue to be issued where we are required to do so under the terms of existing group
policies. Profitability of our long-tailed products is affected by claims experience related to mortality and morbidity, investment returns,
and persistency. We believe that the interest adjusted loss ratios for the individual disability and long-term care lines of business will be
relatively flat over the long term, but these product lines may experience quarterly volatility, particularly in the near-term for our long-term
care product lines as our claim block matures. 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 and will vary from actual experience in any one period. It is possible that variability in any of our reserve assumptions, including,
but not limited to, interest rates, mortality, morbidity, and persistency, could result in a material impact on our reserve levels, including
adjustments to reserves previously established under loss recognition.