Variable Interest Entities

6 Months Ended

Jun. 30, 2012

Variable Interest Entities

Variable Interest Entities

2.  Variable Interest Entities

We have relationships with and may have a variable interest in various types of special purpose entities. Following is a discussion of our interest in entities that meet the definition of a VIE. When we are the primary beneficiary, we are required to consolidate the entity in our financial statements. The primary beneficiary of a VIE is defined as the enterprise with (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. On an ongoing basis, we assess whether we are the primary beneficiary of VIEs we have relationships with.

Consolidated Variable Interest Entities

Grantor Trusts

We contributed undated subordinated floating rate notes to three grantor trusts. The trusts separated the cash flows by issuing an interest-only certificate and a residual certificate related to each note contributed. Each interest-only certificate entitles the holder to interest on the stated note for a specified term, while the residual certificate entitles the holder to interest payments subsequent to the term of the interest-only certificate and to all principal payments. We retained the interest-only certificates and the residual certificates were subsequently sold to third parties. We have determined these grantor trusts are VIEs due to insufficient equity to sustain them. We determined we are the primary beneficiary as a result of our contribution of securities into the trusts and our continuing interest in the trusts.

Collateralized Private Investment Vehicles

We invest in synthetic collateralized debt obligations, collateralized bond obligations, collateralized loan obligations and other collateralized structures, which are VIEs due to insufficient equity to sustain the entities (collectively known as “collateralized private investment vehicles”). The performance of the notes of these structures is primarily linked to a synthetic portfolio by derivatives; each note has a specific loss attachment and detachment point. The notes and related derivatives are collateralized by a pool of permitted investments. The investments are held by a trustee and can only be liquidated to settle obligations of the trusts. These obligations primarily include derivatives and the notes due at maturity or termination of the trusts. We determined we are the primary beneficiary for certain of these entities because we act as the investment manager of the underlying portfolio and we have an ownership interest.

Commercial Mortgage-Backed Securities

We sold commercial mortgage loans to a real estate mortgage investment conduit trust. The trust issued various commercial mortgage-backed securities (“CMBS”) certificates using the cash flows of the underlying commercial mortgages it purchased. This is considered a VIE due to insufficient equity to sustain itself. We have determined we are the primary beneficiary as we retained the special servicing role for the assets within the trust as well as the ownership of the bond class that controls the unilateral kick out rights of the special servicer.

Hedge Funds

We are a general partner with insignificant equity ownership in various hedge funds. These entities were deemed VIEs due to the equity owners not having decision-making ability. We determined we were the primary beneficiary of these entities due to our control through our management relationships, related party ownership and our fee structure in certain of these funds.

In the second quarter of 2012, the hedge funds were no longer consolidated. We determined we were no longer the primary beneficiary due to the increase in external ownership in the funds. As a result of deconsolidation, total assets decreased $587.2 million and liabilities and noncontrolling interest decreased $586.1 million.

The carrying amounts of our consolidated VIE assets, which can only be used to settle obligations of consolidated VIEs, and liabilities of consolidated VIEs for which creditors do not have recourse are as follows:

			Collateralized
			private investment
	Grantor trusts		vehicles		CMBS		Hedge funds (2)		Total
	(in millions)
June 30, 2012
Fixed maturities, available-for-sale	$	184.8	$	7.6	$	—	$	—	$	192.4
Fixed maturities, trading	—		132.4		—		—		132.4
Other investments	—		—		83.6		—		83.6
Accrued investment income	0.6		—		0.5		—		1.1
Total assets	$	185.4	$	140.0	$	84.1	$	—	$	409.5
Deferred income taxes	$	1.9	$	—	$	—	$	—	$	1.9
Other liabilities (1)	133.9		135.9		50.9		—		320.7
Total liabilities	$	135.8	$	135.9	$	50.9	$	—	$	322.6
December 31, 2011
Fixed maturities, available-for-sale	$	199.2	$	15.0	$	—	$	—	$	214.2
Fixed maturities, trading	—		132.4		—		—		132.4
Equity securities, trading	—		—		—		207.6		207.6
Other investments	—		—		97.5		0.3		97.8
Cash and cash equivalents	—		—		—		317.7		317.7
Accrued investment income	1.2		0.1		0.6		—		1.9
Premiums due and other receivables	—		—		—		39.1		39.1
Total assets	$	200.4	$	147.5	$	98.1	$	564.7	$	1,010.7
Deferred income taxes	$	2.2	$	—	$	—	$	—	$	2.2
Other liabilities (1)	136.9		143.8		64.5		220.0		565.2
Total liabilities	$	139.1	$	143.8	$	64.5	$	220.0	$	567.4

(1)Grantor trusts contain an embedded derivative of a forecasted transaction to deliver the underlying securities; collateralized private investment vehicles include derivative liabilities and obligation to redeem notes at maturity or termination of the trust; CMBS includes obligation to the bondholders; and hedge funds include liabilities to securities brokers.

(2)The consolidated statements of financial position included a $343.6 million noncontrolling interest for hedge funds as of December 31, 2011.

We did not provide financial or other support to investees designated as VIEs for the six months ended June 30, 2012 and 2011.

Unconsolidated Variable Interest Entities

Invested Securities

We hold a variable interest in a number of VIEs where we are not the primary beneficiary. Our investments in these VIEs are reported in fixed maturities, available-for-sale; fixed maturities, trading and other investments in the consolidated statements of financial position and are described below.

VIEs include CMBS, residential mortgage-backed pass-through securities (“RMBS”) and other asset-backed securities (“ABS”). All of these entities were deemed VIEs because the equity within these entities is insufficient to sustain them. We determined we are not the primary beneficiary in any of the entities within these categories of investments. This determination was based primarily on the fact we do not own the class of security that controls the unilateral right to replace the special servicer or equivalent function.

As previously discussed, we invest in several types of collateralized private investment vehicles, which are VIEs. These include cash and synthetic structures that we do not manage. We have determined we are not the primary beneficiary of these collateralized private investment vehicles primarily because we do not control the economic performance of the entities and were not involved with the design of the entities.

We have invested in various VIE trusts as a debt holder. All of these entities are classified as VIEs due to insufficient equity to sustain them. We have determined we are not the primary beneficiary primarily because we do not control the economic performance of the entities and were not involved with the design of the entities.

We have invested in partnerships, some of which are classified as VIEs. The partnership returns are in the form of income tax credits and investment income. These entities are classified as VIEs as the general partner does not have an equity investment at risk in the entity. We have determined we are not the primary beneficiary because we are not the general partner, who makes all the significant decisions for the entity.

The carrying value and maximum loss exposure for our unconsolidated VIEs were as follows:

			Maximum exposure to
	Asset carrying value		loss (1)
	(in millions)
June 30, 2012
Fixed maturities, available-for-sale:
Corporate	$	526.8	$	396.3
Residential mortgage-backed pass-through securities	3,298.2		3,095.7
Commercial mortgage-backed securities	3,744.9		4,128.1
Collateralized debt obligations	366.1		438.4
Other debt obligations	3,480.2		3,525.5
Fixed maturities, trading:
Residential mortgage-backed pass-through securities	103.3		103.3
Commercial mortgage-backed securities	3.5		3.5
Collateralized debt obligations	50.6		50.6
Other debt obligations	16.9		16.9
Other investments:
Other limited partnership interests	126.3		126.3
December 31, 2011
Fixed maturities, available-for-sale:
Corporate	$	544.0	$	392.6
Residential mortgage-backed pass-through securities	3,343.0		3,155.8
Commercial mortgage-backed securities	3,413.7		3,894.3
Collateralized debt obligations	338.8		399.7
Other debt obligations	3,570.2		3,606.9
Fixed maturities, trading:
Residential mortgage-backed pass-through securities	105.6		105.6
Commercial mortgage-backed securities	12.0		12.0
Collateralized debt obligations	51.4		51.4
Other debt obligations	64.9		64.9
Other investments:
Other limited partnership interests	122.1		122.1

(1)Our risk of loss is limited to our initial investment measured at amortized cost for fixed maturities, available-for-sale and other investments. Our risk of loss is limited to our initial investment measured at fair value for our fixed maturities, trading.

Sponsored Investment Funds

We are the investment manager for certain money market mutual funds that are deemed to be VIEs. We are not the primary beneficiary of these VIEs since our involvement is limited primarily to being a service provider, and our variable interest does not absorb the majority of the variability of the entities’ net assets. As of June 30, 2012 and December 31, 2011, these VIEs held $1.5 billion and $1.7 billion in total assets, respectively. We have no contractual obligation to contribute to the funds.

We provide asset management and other services to certain investment structures that are considered VIEs as we generally earn performance-based management fees. We are not the primary beneficiary of these entities as we do not have the obligation to absorb losses of the entities that could be potentially significant to the VIE or the right to receive benefits from these entities that could be potentially significant.