Unum 2011 Annual Report Download - page 130

Notes To Consolidated Financial Statements
Unum 2011 Annual Report
128
During 2010, we entered into and subsequently terminated $115.6 million notional amount of forward treasury locks used to minimize
interest rate risk associated with the anticipated disposal of certain fixed maturity securities. The treasury locks were terminated in 2010 at
the time the securities were called and/or sold. We recognized a loss of $1.0 million on the termination of these hedges. This loss was
recognized as a component of net realized investment gain or loss or of net investment income.
During 2009, we terminated certain currency swaps and forward currency contracts used to hedge the foreign currency risk associated
with the U.S. dollar-denominated debt issued by one of our U.K. subsidiaries due in part to the improbability of the original forecasted
transactions occurring during the time period originally anticipated and also to reduce our counterparty exposure for those transactions still
anticipated to occur as originally forecasted. We recognized a gain of $56.3 million on the termination of these hedges, $42.0 million of
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 flow hedges. The purpose of these forward contracts was to hedge the risk of changes in cash flows related to the anticipated
purchase of certain equity securities. The equity linked trust certificates were subsequently sold in 2009.
For the years ended December 31, 2011 and 2010, there was no material ineffectiveness related to our cash flow hedges. For the year
ended December 31, 2009, we reclassified $12.3 million 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. For the years ended
December 31, 2011, 2010, and 2009, no component of the derivative instruments’ gain or loss was excluded from the assessment
of hedge effectiveness.
As of December 31, 2011, we expect to amortize approximately $35.1 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, 2011. Fluctuations in fair values of these derivatives between December 31, 2011 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, 2011, we are hedging the variability of future cash flows associated with forecasted transactions through
the year 2038.
Fair Value Hedges
As of December 31, 2011 and 2010, 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. 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, 2011, 2010, and 2009, the change in
fair value of the hedged fixed maturity securities attributable to the hedged benchmark interest rate resulted in gains (losses) of
$8.1 million, $7.7 million, and $(15.3) million, respectively, with offsetting gains or losses, as applicable, on the related interest rate swaps.
As of December 31, 2011 and 2010, we had a $350.0 million notional amount receive fixed, pay variable interest rate swap to hedge
the changes in the fair value of certain fixed rate long-term debt. This swap effectively converts the associated fixed rate long-term debt
into floating 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 floating rate security. For the years ended December 31, 2011 and 2010, the change in fair value of the hedged fixed
debt attributable to the hedged benchmark interest rate resulted in a gain (loss) of $(23.2) million and $14.4 million, respectively, with an
offsetting gain or loss on the related interest rate swaps.