Unum 2008 Annual Report Download - page 49

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We reported a net realized investment loss of $465.9 million in 2008 compared to a loss of $65.2 million in 2007 and a gain of $2.2 million
in 2006. Included in 2008 realized investment losses are $174.2 million of net realized investment losses from sales and write-downs of
investments. The 2008 losses relate primarily to fixed maturity securities in the financial institutions, automotive, and media sectors that
we either sold or considered other than temporarily impaired during the third and fourth quarters of 2008. Also reported as realized investment
gains and losses is the change in the fair value of an embedded derivative, as required under the provisions of Statement of Financial Accounting
Standards No. 133 Implementation Issue B36 (DIG Issue B36), Embedded Derivatives: Modified Coinsurance Arrangements and Debt
Instruments That Incorporate Credit Risk Exposure That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor Under
Those Instruments. During 2008, changes in the fair value of the embedded derivative resulted in net realized losses of $291.7 million
compared to net realized losses of $57.3 million and $5.3 million in 2007 and 2006, respectively. The DIG Issue B36 losses in both 2008 and
2007 resulted primarily from a widening of credit spreads in the overall investment market.
DIG Issue B36 relates to one modified coinsurance arrangement entered into in 2000 wherein we assumed the profits and losses
related to a closed block of individual disability business. DIG Issue B36 requires us to include in our realized investment gains and losses a
calculation intended to estimate the value of the option of our reinsurance counterparty to cancel the reinsurance contract with us. However,
neither party can unilaterally terminate the reinsurance agreement except in extreme circumstances resulting from regulatory supervision,
delinquency proceedings, or other direct regulatory action. Cash settlements or collateral related to this embedded derivative are not
required at any time during the reinsurance contract or at termination of the reinsurance contract, and any accumulated embedded derivative
gain or loss reduces to zero over time as the reinsured business winds down. We therefore view DIG Issue B36 as a reporting requirement
that will not result in a permanent reduction of assets or stockholders’ equity. See “Investments” contained herein for further discussion.
The reported ratio of benefits and change in reserves for future benefits to premium income was 85.1 percent in 2008 compared to
88.4 percent in 2007 and 95.3 percent for 2006, with improved risk results in each of our segments and in most lines of business within
the Unum US segment. As previously discussed, our reported benefits and change in reserves for future benefits in 2007 and 2006 include
charges pertaining to our claim reassessment process required by the regulatory settlement agreements. Excluding these charges, the
ratio of benefits and change in reserves for future benefits to premium income was 87.6 percent for 2007 and 90.3 percent for 2006. See
“Segment Results” as follows for discussions of line of business risk results and claims management performance in each of our segments.
Interest and debt expense for 2008 is lower than 2007 due to lower rates of interest on our outstanding debt, primarily as a result of
the replacement of older fixed rate debt with non-recourse floating rate debt, and due to lower cost for early retirement of debt. Interest
and debt expense in 2007 increased from the level of 2006 due to an increase in cost related to early retirement of debt, offset partially by
the reduction in our outstanding debt. The cost related to early retirement of debt is minimal in 2008. Costs related to early retirement of
debt for 2007 and 2006 were $58.8 million and $25.8 million, respectively, and were related to our $769.5 million and $732.0 million debt
repurchases during those two years. See “Debt” contained herein for additional information.
The deferral and amortization of deferred acquisition costs was higher in both 2008 and 2007 relative to the prior year comparable
period due primarily to continued growth in certain of our product lines. Amortization also increased in 2008 due to an increase in the
amortization related to Unum US internal replacement transactions that result in a policy that is substantially changed as well as slightly
elevated persistency in certain policy issue years.
Operating expenses have increased year over year for expenditures related to our investment in brand and product promotion and an
increase in product and service development costs in our core lines of business. In addition to the adjustments to other operating expenses
as noted in the preceding chart, additional expenses of note in 2008 include a $5.6 million settlement regarding broker compensation as
well as litigation expenses related to two pending cases in our individual disability — closed block segment. During 2007, expenses include
an $11.6 million settlement related to a plan beneficiary class action. We intend to aggressively manage our expenses while continuing
to increase the effectiveness of our operating processes.
Income tax for 2006 includes tax benefits of $91.9 million as a result of the reversal of tax liabilities related primarily to group relief
benefits recognized from the use of net operating losses in a foreign jurisdiction in which our businesses operate.