Unum 2008 Annual Report Download - page 115

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111

We are the sole beneficiary of two special purpose entities which support our investment objectives and which are consolidated
under the provisions of Interpretation No. 46 (FIN 46(R)), Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin (ARB) No. 51. These entities are securitized asset trusts and contain specific financial instruments that do not include our
common stock or debt. One of these entities is a trust holding forward contracts to purchase unrelated equity securities. This trust also
holds a defeasance swap contract for highly rated bonds to provide principal protection for the investments. There are no restrictions on
the assets held in this trust, and the trust is free to dispose of the assets at any time. We have not previously provided financial or other
support to this trust and do not anticipate any need to do so in the future. The fair values of the underlying forward and swap contracts
equaled $50.3 million as of December 31, 2008, and are reported as fixed maturity securities in the consolidated balance sheets.
The second entity is a trust containing a highly rated bond for principal protection, non-redeemable preferred stock, and several
partnership equity investments. We contributed the bond and partnership investments into the trust at the time it was established. The
purpose of this trust is to allow us to maintain our investment in the partnerships while at the same time protecting the principal of the
investment. There are no restrictions on the assets held in this trust, and the trust is free to dispose of the assets at any time. Because the
assets in the trust are not liquid investments, we periodically provide funding to the underlying partnerships in the trust upon satisfaction
of contractual notice from the partnerships. At December 31, 2008, we had commitments to fund approximately $1.9 million to the
underlying partnerships. These amounts may or may not be funded during the life of the partnerships. The amount of funding provided to
the partnerships was $0.6 million in 2006 and de minimis during 2008 and 2007. The fair values of the bond, non-redeemable preferred
stock, and partnerships were $85.6 million, $0.6 million, and $13.7 million, respectively, as of December 31, 2008. The bonds are reported
as fixed maturity securities, and the non-redeemable preferred stock and partnerships are reported as other long-term investments in
the consolidated balance sheets.
We have a significant investment in, but are not the primary beneficiary of, a special purpose entity which is a collateralized bond
obligation asset trust (CBO) in which we hold interests in several of the tranches and for which we act as investment manager of the
underlying securities. We issued the CBO in 1998, and its purpose is to securitize high yield bonds and earn a spread over the cost of the
funds from the different tranches issued. In determining whether we are the primary beneficiary under the consolidation requirements
of FIN 46(R), we projected the expected cash flows generated by the underlying assets in the trust using various interest rate and credit
quality assumptions and assigned the projected cash flows to the various beneficiaries of the trust in accordance with the legal terms set
forth by the trust agreement. Based on our analysis, we determined that we were not the primary beneficiary as we would not absorb
the majority of the trust’s expected losses or receive the majority of its expected residual gains. The outstanding balance of all tranches
at December 31, 2008 was $75.7 million, $39.1 million of which is held by third parties with no recourse against us. We provide no
financial or other support to the trust, other than acting as investment manager of the underlying securities. The total fair value of the
underlying securities in the CBO was $5.5 million at December 31, 2008. The fair value of our investment in the CBO, and therefore our
maximum exposure to loss, was $2.5 million at December 31, 2008. This investment is reported as a fixed maturity security in the
consolidated balance sheets.
At December 31, 2008, we had commitments of approximately $35.9 million to fund certain of our private placement securities. The funds
are due upon satisfaction of contractual notice from the issuer. These amounts may or may not be funded during the term of the securities.
In the normal course of business, we receive collateral from unaffiliated third parties through transactions which include both securities
lending and also short-term agreements to purchase securities with the agreement to resell them at a later, specified date. For both types
of transactions, we require that a minimum of 102 percent of the fair value of the securities loaned or securities purchased under repurchase
agreements be maintained as collateral. Generally, cash is received as collateral under these agreements. In the event that securities are received
as collateral, we are not permitted to sell or re-post them. We also post our fixed maturity securities as collateral to unaffiliated third parties
through transactions including both securities lending and also short-term agreements to sell securities with the agreement to repurchase
them at a later, specified date. At December 31, 2008, the carrying value of fixed maturity securities posted as collateral to third parties under
these programs was $80.6 million. See Note 5 for discussion of collateral posted to our derivatives counterparties.