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UNUM • 2014 ANNUAL REPORT 123
For the years ended December 31, 2014, 2013, and 2012 there was no material ineffectiveness related to our cash flow hedges,
and no component of the derivative instruments’ gain or loss was excluded from the assessment of hedge effectiveness.
As of December 31, 2014, we expect to amortize approximately $50.2 million of net deferred gains on derivative instruments during
the next twelve months. This amount will be reclassified from accumulated other comprehensive income into earnings and reported on the
same income statement line item as the hedged item. The income statement line items that will be affected by this amortization are net
investment income and interest and debt expense. The remaining principal balance of the U.S. dollar-denominated debt issued by one of
our U.K. subsidiaries is scheduled to mature during the fourth quarter of 2015, at which time we will reclassify the remaining deferred cash
flow hedge gain of approximately $28.4 million from accumulated other comprehensive income to realized investment gain in our
consolidated statements of income. Additional amounts that may be reclassified from accumulated other comprehensive income into
earnings to offset the earnings impact of foreign currency translation of hedged items are not estimable.
As of December 31, 2014, we are hedging the variability of future cash flows associated with forecasted transactions through
the year 2038.
Fair Value Hedges
As of December 31, 2014 and 2013, we had $150.0 million notional amount of receive variable, pay fixed interest rate swaps to
hedge the changes in fair value of certain fixed rate securities held. These swaps effectively convert the associated fixed rate securities into
floating rate securities, which are used to fund our floating rate long-term debt. The change in fair value of the hedged fixed maturity
securities attributable to the hedged benchmark interest rate resulted in a loss of $5.3 million, $11.5 million, and $1.2 million for the years
ended December 31, 2014, 2013, and 2012, respectively, with an offsetting gain on the related interest rate swaps.
As of December 31, 2014 and 2013, we had $600.0 million notional amount of receive fixed, pay variable interest rate swaps to hedge
the changes in the fair value of certain fixed rate long-term debt. These swaps effectively convert the associated fixed rate long-term debt
into floating rate debt and provide for a better matching of interest rates with our short-term investments, which have frequent interest rate
resets similar to a floating rate security. The change in fair value of the hedged debt attributable to the hedged benchmark interest rate
resulted in a gain (loss) of $(5.5) million, $21.1 million, and $(6.6) million for the years ended December 31, 2014, 2013, and 2012,
respectively, with an offsetting gain or loss on the related interest rate swaps.
For the years ended December 31, 2014, 2013, and 2012, there was no material ineffectiveness related to our fair value hedges, and
no component of the derivative instruments’ gain or loss was excluded from the assessment of hedge effectiveness. There were no instances
wherein we discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.
Derivatives not Designated as Hedging Instruments
During 2014, we entered into $125.4 million notional amount of foreign currency interest rate swaps in conjunction with the previously
discussed transaction wherein we de-designated foreign currency interest rate swaps with a notional amount of $97.0 million. The
derivatives were not designated as hedges, and as such, changes in fair value related to these derivatives will be reported in earnings as
a component of net realized investment gain or loss. We expect the changes in fair value of these derivatives to materially offset the
changes in fair value related to the de-designated derivatives.
As of December 31, 2014 and 2013, we held $97.0 million notional amount of single name credit default swaps. We entered into these
swaps in order to mitigate the credit risk associated with specific securities owned.
We have an embedded derivative in a modified coinsurance arrangement for which we 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. There are no credit-related
counterparty triggers, and any accumulated embedded derivative gain or loss reduces to zero over time as the reinsured business
winds down.