Unum 2009 Annual Report Download - page 119

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117
Unum 2009 Annual Report
For the years ended December 31, 2009 and 2008, we reclassified $12.3 million and $0.6 million, respectively, of net gains into earnings
as a result of the discontinuance of cash flow hedges due to the improbability of the original forecasted transactions occurring during the
time period originally anticipated. During 2009 and 2008, no component of the derivative instruments’ gain or loss was excluded from the
assessment of hedge effectiveness.
As of December 31, 2009, we expect to amortize approximately $28.5 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, other income, and/or interest and debt expense. The estimated amortization includes the impact of certain derivative contracts that
have not yet been terminated as of December 31, 2009. Fluctuations in fair values of these derivatives between December 31, 2009 and the
date of termination will vary our projected amortization. Amounts that will 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, 2009, we are hedging the variability of future cash flows associated with forecasted transactions through the year 2038.
Fair Value Hedges
As of December 31, 2009 and 2008, we had $174.0 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. For the year ended December 31, 2009, the $15.3 million loss on the
hedged fixed maturity securities attributable to the hedged benchmark interest rate was offset by a gain of $15.3 million on the related
interest rate swaps.
For the years ended December 31, 2009 and 2008, 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
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.