Unum 2014 Annual Report Download - page 97

UNUM • 2014 ANNUAL REPORT 95
The amortization of value of business acquired, which is included in other expenses in the consolidated statements of income, was
$3.5 million, $4.5 million, and $7.5 million for the years ended December 31, 2014, 2013, and 2012, respectively. We periodically review the
carrying amount of value of business acquired using the same methods used to evaluate deferred acquisition costs.
Policy and Contract Benefits: Policy and contract benefits represent amounts paid and expected to be paid based on reported losses
and estimates of incurred but not reported losses for non interest-sensitive life and accident and health products. For interest-sensitive
products, benefits are the amounts paid and expected to be paid on insured claims in excess of the policyholders’ policy fund balances.
Reserves for Policy and Contract Benefits: Policy reserves represent future policy and contract benefits for claims not yet incurred.
Policy reserves for non interest-sensitive life and accident and health products are determined using the net level premium method. The
reserves are calculated based upon assumptions as to interest, persistency, morbidity, and mortality that were appropriate at the date of
issue. Discount rate assumptions are based on actual and expected net investment returns. Persistency assumptions are based on our
actual historical experience adjusted for future expectations. Claim incidence and claim resolution rate assumptions related to morbidity
and mortality are based on actual experience or industry standards adjusted as appropriate to reflect our actual experience and future
expectations. The assumptions vary by plan, year of issue, and policy duration and include a provision for adverse deviation.
Policy reserves for group single premium annuities are developed on a net single premium method. The reserves are calculated based
on assumptions as to interest, mortality, and retirement that were appropriate at the date of issue. Mortality assumptions are based upon
industry standards adjusted as appropriate to reflect our actual experience and future expectations. The assumptions vary by year of issue.
Policy reserves for interest-sensitive products are principally policyholder account values.
Policy reserves require ongoing loss recognition testing. We perform loss recognition tests on our policy reserves annually, or more
frequently if appropriate, using best estimate assumptions as of the date of the test, without a provision for adverse deviation. We group
the policy reserves for each major product line within a segment when we perform the loss recognition tests. If the policy reserves
determined using these best estimate assumptions are higher than our existing policy reserves net of any deferred acquisition cost balance,
the existing policy reserves are increased or deferred acquisition costs are reduced to immediately recognize the deficiency. This becomes
the new basis for policy reserves going forward, subject to future loss recognition testing.
Claim reserves represent future policy and contract benefits for claims that have been incurred or are estimated to have been incurred
but not yet reported to us. Our claim reserves relate primarily to disability policies and are calculated based on assumptions as to interest
and claim resolution rates that are currently appropriate. Claim resolution rate assumptions are based on our actual experience. The interest
rate assumptions used for discounting claim reserves are based on projected portfolio yield rates, after consideration for defaults and
investment expenses, for the assets supporting the liabilities for the various product lines. Unlike policy reserves for which assumptions are
generally established and locked in at the time of policy issuance, claim reserves are subject to revision as current claim experience and
projections of future factors affecting claim experience change. See Note 6.
Policyholders’ Funds: Policyholders’ funds represent customer deposits plus interest credited at contract rates. We control interest rate
risk by investing in quality assets which have an aggregate duration that closely matches the expected duration of the liabilities.
Income Tax: Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial statement purposes and the amounts used for income tax purposes. Deferred taxes have been measured using enacted
statutory income tax rates and laws that are currently in effect. We record deferred tax assets for tax positions taken in the U.S. and other
tax jurisdictions based on our assessment of whether a position is more likely than not to be sustained upon examination based solely on
its technical merits. A valuation allowance is established for deferred tax assets when it is more likely than not that an amount will not be
realized. See Note 7.