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121
Unum 2010 Annual Report
which was recognized in other comprehensive income and $14.3 million as a component of net realized investment gain or loss. The debt
associated with this hedge continues to be outstanding as of December 31, 2010.
We previously owned certain principal protected equity linked trust certificates that contained an embedded derivative with a notional
amount of $50.0 million as of December 31, 2008. This embedded derivative represented forward contracts that were accounted for as
cash ow hedges. The purpose of these forward contracts was to hedge the risk of changes in cash ows related to the anticipated
purchase of certain equity securities. The equity linked trust certificates were subsequently sold in 2009.
For the year ended December 31, 2010, there was no material ineffectiveness related to our cashow hedges. For the year ended
December 31, 2009, we reclassied $12.3 million of net gains into earnings as a result of the discontinuance of cash ow hedges due to the
improbability of the original forecasted transactions occurring during the time period originally anticipated. During 2010 and 2009, no
component of the derivative instruments’ gain or loss was excluded from the assessment of hedge effectiveness.
As of December 31, 2010, we expect to amortize approximately $30.0 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 and interest and debt expense. The estimated amortization includes the impact of certain derivative contracts that
have not yet been terminated as of December 31, 2010. Fluctuations in fair values of these derivatives between December 31, 2010 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, 2010, we are hedging the variability of future cashows associated with forecasted transactions through
the year 2038.
Fair Value Hedges
As of December 31, 2010 and 2009, 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
oating rate securities, which are used to fund our oating rate long-term debt. Changes in the fair value of the derivative and changes in
the fair value of the hedged item attributable to the risk being hedged are recognized in current earnings as a component of net realized
investment gain or loss during the period of change in fair value. For the years ended December 31, 2010 and 2009, the change in fair
value of the hedged fixed maturity securities attributable to the hedged benchmark interest rate resulted in a gain (loss) of $7.7 million and
$(15.3) million, respectively, with an offsetting gain or loss on the related interest rate swaps.
During 2010, we entered into a $350.0 million notional amount receive fixed, pay variable interest rate swap to hedge the changes in
the fair value of certainxed rate long-term debt. This swap effectively converts the associated xed rate long-term debt into oating rate
debt and provides for a better matching of interest rates with our short-term investments, which have frequent interest rate resets similar
to a oating rate security. For the year ended December 31, 2010, the change in fair value of the hedgedxed debt attributable to the
hedged benchmark interest rate resulted in a gain of $14.4 million, with an offsetting loss on the related interest rate swaps.
For the years ended December 31, 2010 and 2009, 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.