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Unum 2007 Annual Report 107
Our freestanding derivatives all qualify as hedges and have been designated as cash flow hedges. Our significant cash flow hedging
programs are described as follows.
We have executed a series of cash flow hedges for certain of our long-term product portfolios using forward starting interest rate
swaps and forward contracts. The purpose of these hedges is to lock in the reinvestment rates on future anticipated cash flows through
the year 2013 and protect us from the potential adverse impact of declining interest rates on the associated policy reserves. We plan on
terminating these forward interest rate swaps and forward contracts at the time the projected cash flows are used to purchase fixed
income securities. As of December 31, 2007 and 2006, we had $1,645.0 million and $2,125.0 million, respectively, notional amount of the
forward starting interest rate swaps outstanding under this program. We did not have any forward contracts outstanding under this
program as of December 31, 2007 or 2006.
As of December 31, 2007 and 2006, we had $612.1 million and $658.4 million, respectively, notional amount of open current and
forward foreign currency swaps to hedge fixed income foreign dollar denominated securities.
As of December 31, 2007 and 2006, we had $333.5 million and $367.8 million, respectively, notional amount of currency swaps and
$216.3 million notional amount of forward currency contracts 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, 2007 and 2006, we had $80.0 million and $170.0 million, respectively, notional amount of open options on forward
interest rate swaps to lock in a reinvestment rate floor for the reinvestment of cash flows, through the year 2008, 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
$98.8 million and $176.6 million as of December 31, 2007 and 2006, respectively. 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.
As of December 31, 2006 we had $60.0 million notional amount of an interest rate swap outstanding whereby we received a fixed
rate of interest and paid a variable rate of interest. The purpose of this swap was to hedge the variable cash flows associated with a
floating rate security we owned. The variable rate we paid on the swap was offset by the amount we received on the variable rate
security. The swap and associated security matured in December 2007.
We also have embedded derivatives in modified coinsurance contracts recognized under DIG Issue B36. Due to the change in fair value
of these embedded derivatives, we recognized $57.3 million, $5.3 million, and $7.9 million of net realized investment losses during 2007,
2006, and 2005, respectively. One of the reinsurance contracts for which DIG Issue B36 was applicable was recaptured during 2005. Prior
to recapture, we included in other assets a deposit asset for the applicable reinsurance contract. At the time of recapture, the receivable
in the deposit asset was settled, the derivative was terminated, and the assets were recorded using the market value of $1,621.7 million
that existed on that date. The difference in the book value transferred out of the deposit asset account, which was $1,472.7 million, and
the market value recorded equaled the embedded derivative market value component of $149.0 million. The time value component of
$9.4 million was recognized as a realized investment loss. The fair value of the embedded derivative related to the remaining applicable
reinsurance contract was $(68.8) million as of December 31, 2007.
During 2007 and 2006, we entered into foreign currency forward contracts to hedge the variability of functional currency cash flows
anticipated to be received related to the disposition of fixed maturity securities. In 2007 and 2006, we had $12.2 million and $15.2 million,
respectively, notional amounts of these derivatives that were terminated, for cash, at the time the foreign currency proceeds were received.
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 paragraph.