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Notes To Consolidated Financial Statements
94
Unum
2010
risk management objective and strategy for undertaking the hedging transaction, as well as the designation of the hedge as either a fair
value hedge or a cash ow hedge. Included in this documentation is how the hedging instrument is expected to hedge the designated
risk(s) related to specific assets or liabilities on the balance sheet or to specific forecasted transactions as well as a description of the
method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness and the method that will be
used to measure ineffectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting
the designated risk(s) of the hedged item. Hedge effectiveness is formally assessed at inception and periodically throughout the life of the
designated hedging relationship, using qualitative and quantitative methods. Qualitative methods include comparison of critical terms of
the derivative to the hedged item. Quantitative methods include regression or other statistical analysis of changes in fair value or cash
ows associated with the hedge relationship. For those derivatives that are designated and qualify as hedging instruments, the derivative
is designated, based upon the exposure being hedged, as one of the following:
• Fair value hedge. Changes in the fair value of the derivative, including amounts measured as ineffectiveness, 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. The gain or loss on the termination of a fair value hedge is
recognized in current earnings as a component of net realized investment gain or loss. When interest rate swaps are used in hedge
accounting relationships, periodic settlements are recorded in the same income statement line as the related settlements of the
hedged items.
• Cash ow hedge. To the extent it is effective, changes in the fair value of the derivative are reported in other comprehensive income
and reclassified into earnings and reported on the same income statement line item as the hedged item and in the same period or
periods during which the hedged item affects earnings. The ineffective portion of the hedge, if any, is recognized in current earnings
as a component of net realized investment gain or loss during the period of change in fair value. The gain or loss on the termination
of an effective cashow hedge is reported in other comprehensive income and reclassied into earnings and reported on the same
income statement line item as the hedged item and in the same period or periods during which the hedged item affects earnings.
Gains or losses on the termination of ineffective hedges are reported in current earnings as a component of net realized investment
gain or loss. In the event a hedged item is disposed of or the anticipated transaction being hedged is no longer likely to occur, we will
terminate the related derivative and recognize the gain or loss on termination in current earnings as a component of net realized investment
gain or loss. In the event a hedged item is disposed of subsequent to the termination of the hedging transaction, we reclassify any
remaining gain or loss on the cash ow hedge out of accumulated other comprehensive income into current earnings as a component of
the same income statement line item wherein we report the gain or loss on disposition of the hedged item.
Our freestanding derivatives all qualify as hedges and have been designated as either cash ow hedges or fair value hedges. We do
not have any speculative positions in our freestanding derivatives. For a derivative not designated as a hedging instrument, the change in
fair value is recognized in earnings during the period of change. Changes in the fair values of certain embedded derivatives are reported as
realized investment gains and losses during the period of change.
In our consolidated balance sheets, we do not offset fair value amounts recognized for derivatives executed with the same
counterparty under a master netting agreement and fair value amounts recognized for the right to reclaim cash collateral or the obligation
to return cash collateral arising from those master netting agreements.
Fair Value Measurement: All of our fixed maturity securities are reported at fair value. Our derivative financial instruments, including
certain derivative instruments embedded in other contracts, are reported as either assets or liabilities and measured at fair value. We hold
an immaterial amount of equity securities, which are also reported at fair value. We define fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value
represents an exit price, not an entry price. The exit price objective applies regardless of our intent and/or ability to sell the asset or transfer
the liability at the measurement date.
Valuation techniques used for assets and liabilities accounted for at fair value are generally categorized into three types: the market
approach, the income approach, and the cost approach. We use valuation techniques that are appropriate in the circumstances and for