Unum 2006 Annual Report Download - page 33

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Beginning in March 2005, several of our insurance subsidiaries received requests from various regulatory agencies
seeking information relating to finite reinsurance. The requests seek information on such matters as our use of finite
reinsurance, controls relating to proper accounting treatment, existence of side agreements, and maintenance of
underwriting files on the reinsurance agreements. We have responded to all requests.
On March 29, 2006, we received a subpoena from the Securities and Exchange Commission (SEC) seeking
information regarding certain reinsurance transactions and transactions regarding “Non Traditional Products” entered
into after January 1, 2002. We are cooperating fully with the SEC in its investigation.
See further discussion under “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and Note 15 of the “Notes to Consolidated Financial Statements” contained herein in Items 7 and 8,
respectively.
Capital Requirements
Risk-based capital (RBC) standards for U.S. life insurance companies have been prescribed by the NAIC. The
domiciliary states of our U.S. insurance subsidiaries have all adopted a version of the RBC model formula of the
NAIC, which prescribes a system for assessing the adequacy of statutory capital and surplus for all life and health
insurers. The basis of the system is a risk-based formula that applies prescribed factors to the various risk elements
in a life and health insurer’s business to report a minimum capital requirement proportional to the amount of risk
assumed by the insurer. The life and health RBC formula is designed to measure annually (i) the risk of loss from
asset defaults and asset value fluctuations, (ii) the risk of loss from adverse mortality and morbidity experience, (iii)
the risk of loss from mismatching of asset and liability cash flow due to changing interest rates, and (iv) business
risks. The formula is used as an early warning tool to identify companies that are potentially inadequately
capitalized. The formula is intended to be used as a regulatory tool only and is not intended as a means to rank
insurers generally. Unum Limited is subject to regulation, including capital adequacy requirements and minimum
solvency margins, by the FSA in the U.K. See further discussion in “Risk Factors – Capital Adequacy” contained
herein in Item 1A and “Liquidity and Capital Resources” contained herein in Item 7.
Insurance Holding Company Regulation
The insurance holding company laws and regulations of the states of Maine, Massachusetts, Tennessee, South
Carolina, New York, and California require the registration of and periodic reporting of financial and other
information about operations, including inter-company transactions within the system, by insurance companies
domiciled within their jurisdiction which control or are controlled by other corporations or persons so as to
constitute an insurance holding company system.
Unum Group is registered under such laws as an insurance holding company system in Maine, Massachusetts,
Tennessee, South Carolina, New York, and California. Most states, including the states in which our insurance
subsidiaries are domiciled, have laws and regulations that require regulatory approval of a change in control of an
insurer or an insurer’s holding company. Where such laws and regulations apply to the Company and its insurance
subsidiaries, there can be no effective change in control of the Company unless the person seeking to acquire control
has filed a statement with specified information with the insurance regulators and has obtained prior approval for the
proposed change from such regulators. The usual measure for a presumptive change of control pursuant to these
laws is the acquisition of 10 percent or more of the voting stock of an insurance company or its parent, although this
presumption is rebuttable. Consequently, a person acquiring 10 percent or more of the voting stock of an insurance
company or its parent without the prior approval of the insurance regulators in the states in which the company’s
insurance subsidiaries are domiciled or deemed to be domiciled will be in violation of these laws. Such a person
may also be subject to one or more of the following actions: (i) injunctive action requiring the disposition or seizure
of those securities by the applicable insurance regulator; (ii) prohibition of voting of such shares; and, (iii) other
actions determined by the relevant insurance regulator. Further, many states’ insurance laws require prior
notification of state insurance regulators of a change of control of a non-domiciled insurance company doing
business in that state. These pre-notification statutes do not authorize the state insurance regulators to disapprove the
change in control; however, they do authorize regulatory action in the affected state if particular conditions exist