Unum 2006 Annual Report Download - page 104

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Almost all hedging transactions are associated with the individual and group long-term care and the individual and
group income protection products. All other product portfolios are periodically reviewed to determine if hedging
strategies would be appropriate for risk management purposes.
During 2006, we completed a program to reset the interest rates of several receive fixed, pay variable forward
starting interest rate swaps by terminating various existing swaps and adding new swaps at current market interest
rates and identical cash flow dates. This allowed us to increase our utilization of cash flows as well as reduce our
credit exposure to our counterparties. Under this program, we added and terminated swaps with a notional amount
of $1,515.0 million each, resulting in a gain of $136.4 million which we reported in other comprehensive income
(loss). The anticipated cash flows hedged by these derivatives are still probable, and the gains from the terminated
swaps along with the replacement swaps continue to be highly effective cash flow hedges. These terminations and
the associated gain are included in the hedging activity discussed in the following two paragraphs.
During the years ended December 31, 2006, 2005, and 2004, we recognized net gains of $183.6 million, $120.7
million, and $29.1 million, respectively, on the termination of cash flow hedges and reported $183.6 million, $121.0
million, and $29.2 million, respectively, in other comprehensive income (loss). During the years ended December
31, 2005, and 2004, we reported net losses of $0.3 million and $0.1 million, respectively, as a component of realized
investment gains and losses. We amortized $30.0 million, $21.8 million, and $20.7 million of net deferred gains
into net investment income in 2006, 2005, and 2004, respectively.
Our current credit exposure on derivatives, which is limited to the value of those contracts in a net gain position, was
$19.9 million at December 31, 2006. Additions and terminations, in notional amounts, to our hedging programs
during 2006 were $2,139.8 million and $2,972.2 million, respectively, and in 2005 were $1,269.4 million and
$1,458.8 million, respectively. Additions and terminations include roll activity, which is the closing out of an old
contract and initiation of a new one when a contract is about to mature but the need for it still exists. Additions and
terminations also include those resulting from swap interest rate reset programs, such as that previously described
for 2006. The notional amount of derivatives outstanding under the hedge programs was $3,774.1 million at
December 31, 2006 and $4,606.5 million at December 31, 2005.
As of December 31, 2006 and 2005, we had $2,125.0 million and $2,700.0 million, respectively, notional amount of
forward starting interest rate swaps outstanding to lock in the reinvestment rates on future anticipated cash flows
through the year 2013 for certain of our long-term product portfolios.
During 2005, we initiated a derivatives strategy to hedge the foreign currency risk associated with the U.S. dollar
denominated debt issued by one of our U.K. subsidiaries. As of December 31, 2006 and 2005, we had $367.8
million and $400.0 million, respectively, notional amount of currency swaps and $216.3 million notional amount of
forward currency contracts outstanding under this program.
As of December 31, 2006 and 2005, we had $658.4 million and $684.5 million, respectively, notional amount of
open current and forward foreign currency swaps to hedge fixed income Canadian dollar denominated securities.
As of December 31, 2006 and 2005, we had $170.0 million and $348.0 million, respectively, notional amount of
open options on forward interest rate swaps under the hedging program used to lock in a reinvestment rate floor for
the reinvestment of cash flows from renewals on policies with a one to two year minimum premium rate guarantee.
We have invested in certain structured fixed maturity securities that contain embedded derivatives with a notional
amount of $176.6 million as of December 31, 2006 and 2005. These embedded derivatives represent forward
contracts and are accounted for as cash flow hedges. The purpose of these forward contracts is to hedge the risk of
changes in cash flows related to the anticipated purchase of certain equity securities in the years 2020 through
2022.
We have entered into an interest rate swap with a notional amount of $60.0 million as of December 31, 2006 and
2005 whereby we receive a fixed rate of interest and pay a variable rate of interest. The purpose of this swap is to
hedge the variable cash flows associated with a floating rate security we own. The variable rate we pay on the swap
is offset by the amount we receive on the variable rate security.