Unum 2010 Annual Report Download - page 121

Download and view the complete annual report

Please find page 121 of the 2010 Unum annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 162

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162

119
Unum 2010 Annual Report
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 $14.8 million at December 31, 2010. We held cash collateral of $39.1 million and $24.9 million from our counterparties
as of December 31, 2010 and 2009, respectively. This unrestricted cash collateral is included in short-term investments and the associated
obligation to return the collateral to our counterparties is included in other liabilities in our consolidated balance sheets. We post either fixed
maturity securities or cash as collateral to our counterparties. The carrying value of fixed maturity securities posted as collateral to our
counterparties was $158.8 million and $123.1 million at December 31, 2010 and 2009, respectively. No cash was posted as collateral to our
counterparties as of December 31, 2010 or 2009.
The majority of our derivative instruments contain provisions that require us to maintain specified issuer credit ratings and financial
strength ratings. Should our ratings fall below these specified levels, we would be in violation of the provisions, and our derivatives
counterparties could terminate our contracts and request immediate payment. The aggregate fair value of all derivative instruments with
credit risk-related contingent features that were in a liability position as of December 31, 2010 and 2009 was $199.6 million and
$144.6 million, respectively.
During 2008, we terminated certain of our outstanding derivatives when the credit ratings of the counterparty fell below our internal
investment policy guidelines. At the time of termination, the contracts were in a loss position of $39.1 million. Consistent with our
collateralization agreement, we had previously posted securities as collateral. During 2009, after further discussion with the counterparty it
was determined that we would not receive the value of our collateral or pay the termination amount due to the counterparty. As a result,
we were relieved of our previous liability and recorded a net realized investment loss of $2.3 million on the disposal of the securities posted
as collateral.