Unum 2008 Annual Report Download - page 120

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Changes in assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the
year ended December 31, 2008 are as follows:
Fixed DIG Other
Maturity Issue B36 Long-term
(in millions of dollars) Securities Derivative Investments Total
 $ 421.0 $ (68.8) $ 1.5 $ 353.7
Total Realized and Unrealized Gains (Losses)
Included in Earnings    
Included in Other Comprehensive Income or Loss    
Net Purchases and Sales    
Level 3 Transfers
Into    
Out of    
 $ 745.5 $(360.5) $ 1.5 $ 386.5
Realized and unrealized investment gains and losses presented in the preceding table represent gains and losses only for the time
during which the applicable financial instruments were classified as Level 3. The transfers between levels resulted primarily from a change in
observability of three inputs used to determine fair values of the securities transferred: (1) transactional data for new issuance and secondary
trades, (2) broker/dealer quotes and pricing, primarily related to the lack of an active and orderly market, and (3) comparable bond metrics
from which to perform an analysis. For fair value measurements of financial instruments that were transferred either into or out of Level 3,
we reflect the transfers using the fair value at the beginning of the period. The amount of losses for the year ended December 31, 2008
which is included in earnings and is attributable to the change in unrealized gains or losses relating to assets or liabilities valued using
significant unobservable inputs and still held at December 31, 2008 was $291.7 million. This amount relates entirely to the change in fair value
of an embedded derivative associated with a modified coinsurance arrangement which is reported as realized investment gains and losses,
as required under DIG Issue B36.
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We use swaps, forwards, 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.
We analyze credit default swap spreads relative to the average credit spread embedded within the London Interbank Offered Rate (LIBOR)
setting syndicate in determining the effect of credit risk on our derivatives’ fair values. If counterparty credit risk for a derivative asset is
determined to be material and is not adequately reflected in the LIBOR-based fair value obtained from our pricing sources, we adjust the
valuations obtained from our pricing sources. In regards to our own credit risk component, we adjust the valuation of derivative liabilities
wherein the counterparty is exposed to our credit risk when the LIBOR-based valuation of our derivatives obtained from pricing sources
does not effectively include an adequate credit component for our own credit risk.
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