Unum 2007 Annual Report Download - page 108
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Notes to Consolidated Financial Statements
106 Unum 2007 Annual Report
Note 5. Derivative Financial Instruments
We use swaps, forwards, futures, and options to hedge interest rate and currency risks and to match assets with our insurance liabilities.
Derivative Risks
The basic types of risks associated with derivatives are market risk (that the value of the derivative will be adversely impacted by
changes in the market, primarily the change in interest and exchange rates) and credit risk (that the counterparty will not perform
according to the terms of the contract). The market risk of the derivatives should generally offset the market risk associated with the
hedged financial instrument or liability.
To help limit the credit exposure of the derivatives, we enter into master netting agreements with our counterparties whereby contracts
in a gain position can be offset against contracts in a loss position. We also typically enter into bilateral, cross-collateralization agreements
with our counterparties to help limit the credit exposure of the derivatives. These agreements require the counterparty in a loss position
to submit acceptable collateral with the other counterparty in the event the net loss position meets or exceeds an agreed upon amount.
Our current credit exposure on derivatives, which is limited to the value of those contracts in a net gain position less collateral held,
was $47.9 million at December 31, 2007. The carrying value of fixed maturity securities pledged as collateral to our counterparties was
$265.8 million at December 31, 2007.
Hedging Activity
The table below summarizes by notional amounts the activity for each category of derivatives.
Swaps
Receive Fixed/ Receive Fixed/
(in millions of dollars) Pay Fixed Pay Variable Forwards Options Total
Balance at December 31, 2004 $ 707.3 $ 3,127.0 $ 176.6 $ 785.0 $ 4,795.9
Additions 400.0 560.0 278.4 31.0 1,269.4
Terminations 16.9 927.0 46.9 468.0 1,458.8
Balance at December 31, 2005 1,090.4 2,760.0 408.1 348.0 4,606.5
Additions — 1,860.0 109.8 170.0 2,139.8
Terminations 64.2 2,435.0 125.0 348.0 2,972.2
Balance at December 31, 2006 1,026.2 2,185.0 392.9 170.0 3,774.1
Additions — 407.5 179.5 230.0 817.0
Terminations 80.6 947.5 257.3 320.0 1,605.4
Balance at December 31, 2007 $ 945.6 $ 1,645.0 $ 315.1 $ 80.0 $ 2,985.7
The following table summarizes the timing of anticipated settlements of interest rate swaps outstanding at December 31, 2007,
whereby we receive a fixed rate and pay a variable rate. The weighted average interest rates assume current market conditions.
(in millions of dollars) 2008 2009 2010 2011 2012 2013 Total
Receive Fixed/Pay Variable
Notional Value $485.0 $380.0 $240.0 $205.0 $185.0 $150.0 $1,645.0
Weighted Average Receive Rate 5.73% 5.75% 6.51% 6.58% 6.49% 6.66% 6.12%
Weighted Average Pay Rate 4.70% 4.70% 4.70% 4.70% 4.70% 4.70% 4.70%