Unum 2013 Annual Report Download - page 24

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
22 / UNUM 2013 ANNUAL REPORT
The two fundamental assumptions in the development of the group life waiver reserve are mortality and recovery. Our emerging
experience and that which continues to emerge within the industry indicate an increase in life expectancies, which decreases the ultimate
anticipated death benefits to be paid under the group life waiver benefit. Emerging experience also reflects an improvement in claim
recovery rates, which also lessens the likelihood of payment of a death benefit while the insured is disabled.
During the fourth quarter of 2013, we completed a review of our assumptions and modified our mortality and claim recovery
assumptions for our Unum US group life waiver reserves and, as a result, reduced the applicable claim reserves by $85.0 million and
increased net income $55.2 million.
2013 Retirement Benefit Changes
In 2013, we adopted plan amendments which freeze participation and benefit accruals in our defined benefit pension plans in the U.S.
and U.K., effective December 31, 2013 for the U.S. plans and June 30, 2014 for the U.K. plan. As a result of these plan amendments we
recognized a net before-tax curtailment gain of $3.0 million during 2013. Because the amendments eliminate all future service accruals
subsequent to the effective dates of the amendments, we were also required to remeasure the benefit obligations of our pension plans,
which decreased our net pension liability approximately $330 million during 2013, with a corresponding increase in other comprehensive
income, less applicable income tax of approximately $115 million. Concurrent with our amendments to our defined benefit pension plans,
we adopted amendments to increase the benefits under our defined contribution plans commensurate with the effective dates of the
pension plan amendments.
Further discussion is included in “Consolidated Operating Results,” “Reconciliation of Non-GAAP Financial Measures,” “Segment
Results,” “Investments,” “Liquidity and Capital Resources,” and the “Notes to Consolidated Financial Statements” contained herein.
2011 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. 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 2011. 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 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 net income $500.3 million.