Unum 2014 Annual Report Download - page 23

UNUM • 2014 ANNUAL REPORT 21
Although the low interest rate environment and tighter credit spreads continue to place pressure on our profit margins by impacting
our net investment income yields, our invested asset quality remains strong. The net unrealized gain on our fixed maturity securities
was $6.3 billion at December 31, 2014 compared to $4.1 billion at December 31, 2013, with the increase due primarily to a decline in U.S.
Treasury rates during 2014. The earned book yield on our investment portfolio was 5.48 percent for 2014 compared to a yield of
5.57 percent for 2013.
We believe our capital and financial positions are strong. At December 31, 2014, the RBC ratio for our traditional U.S. insurance
subsidiaries, calculated on a weighted average basis using the NAIC Company Action Level formula, was in excess of 400 percent and
generally consistent with the prior year. During 2014, we repurchased 8.7 million shares of Unum Group common stock at a cost of
approximately $301 million under our share repurchase program. Cash equivalents and marketable securities held at Unum Group
and our other intermediate holding companies, which are a significant source of liquidity for us, were approximately $575 million at
December 31, 2014.
2014 Long-term Care Reserve Increase
Policy reserves for our long-term care block of business are determined using the gross premium valuation method and, prior to
the fourth quarter of 2014, were valued based on assumptions established as of December 31, 2011, the date of the initial loss recognition.
Gross premium valuation assumptions do not change after the date of loss recognition unless reserves are again determined to be
deficient. We undertake a review of policy reserve adequacy annually during the fourth quarter of each year, or more frequently if
appropriate, using best estimate assumptions as of the date of the review.
Included in our fourth quarter of 2014 review was an analysis of our reserve assumptions, including those for the discount rate,
mortality and morbidity rates, persistency, and premium rate increases. Our analysis of reserve discount rate assumptions considered the
continued historic low interest rate environment, future market expectations, and our view of future portfolio yields. The assumptions we
established in 2011 were set at a level that we estimated would be sustainable in a low interest rate environment for three to five years, with
improvements in market yields beginning after the third year. Since that time, however, interest rates have continued to hover near historic
lows, and credit spreads have tightened. Our assumption update for mortality incorporates the last three years of Company-specific
experience and emerging trends as well as industry data, where available and appropriate, and reflects improvements in life expectancies
beyond what was initially anticipated in 2011. Our morbidity assumptions were updated to reflect trends from our own emerging Company
experience in claim incidence and terminations, as well as trends based on available and appropriate industry data and studies. Our
premium rate increase assumptions were updated to reflect progress-to-date and our on-going rate increase strategy.
Based on our analysis, as of December 31, 2014 we lowered the discount rate assumption to reflect the low interest rate environment
and our revised expectation of future investment portfolio yield rates. Our revised assumptions anticipate the low interest rate environment
persisting for the next three to five years, with a return to more historical averages over the following five year period. We updated 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 may receive long-term care benefits.
We changed our morbidity assumptions to reflect emerging industry experience as well as our own company experience, and we updated
our projection of future premium rate increase approvals. Using our revised best estimate assumptions, as of December 31, 2014 we
determined that our policy and claim reserves should be increased $698.2 million to reflect our current estimate of future benefit
obligations. This charge decreased our 2014 net income $453.8 million. We do not expect these reserve charges to have a material
impact on future cash flows available from our subsidiaries or on our capital management plans.