Unum 2012 Annual Report Download - page 127

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UNUM 2012 ANNUAL REPORT 125
Fair Value Hedges
As of December 31, 2012 and 2011, we had $174.0 million notional amounts 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, 2012, 2011, and 2010, the change in
fair value of the hedged fixed maturity securities attributable to the hedged benchmark interest rate resulted in a gain (loss) of $(1.2) million,
$8.1 million, and $7.7 million, respectively, with an offsetting gain or loss on the related interest rate swaps.
We use receive fixed, pay variable interest rate swaps to hedge the changes in fair value of certain of our fixed rate long-term debt.
These swaps effectively convert the associated fixed rate long-term debt into floating rate debt and provide for a better matching of interest
rates with our short-term investments, which have frequent interest rate resets similar to a floating rate security. During the year ended
December 31, 2012, we entered into an additional $250.0 million notional amount interest rate swap, bringing our total as of December 31,
2012 and 2011, to $600.0 million and $350.0 million, respectively. For the years ended December 31, 2012, 2011, and 2010, the change in
fair value of the hedged debt attributable to the hedged benchmark interest rate resulted in a gain (loss) of $(6.6) million, $(23.2) million,
and $14.4 million, respectively, with an offsetting gain or loss on the related interest rate swaps.
For the years ended December 31, 2012, 2011, and 2010, 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.