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UNUM 2012 ANNUAL REPORT 67
Embedded Derivative in a Modified Coinsurance Arrangement
We report changes in the fair value of an embedded derivative in a modified coinsurance arrangement as realized investment gains
and losses, as required under the provisions of GAAP. GAAP requires us to 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, and any accumulated embedded
derivative gain or loss reduces to zero over time as the reinsured business winds down. We therefore view the effect of realized gains and
losses recognized for this embedded derivative as a reporting requirement that will not result in a permanent change in assets or
stockholders’ equity.
The change in fair value of this embedded derivative recognized as a realized gain or loss during 2012, 2011, and 2010, resulted
primarily from a change in credit spreads in the overall investment market. The fair value of this embedded derivative was $(83.9) million
at December 31, 2012, compared to $(135.7) million at December 31, 2011, and is reported in other liabilities in our consolidated
balance sheets.
Fixed Maturity Securities
The fair values and associated unrealized gains and losses of our fixed maturity securities portfolio, by industry classification,
are as follows:
Fixed Maturity Securities — By Industry Classification
As of December 31, 2012
(in millions of dollars)
Fair Value of Fair Value of
Fixed Maturity Fixed Maturity
Net Securities Gross Securities Gross
Unrealized with Gross Unrealized with Gross Unrealized
Classification Fair Value Gain Unrealized Loss Loss Unrealized Gain Gain
Basic Industry $ 2,593.2 $ 311.5 $ 165.9 $10.2 $ 2,427.3 $ 321.7
Capital Goods 3,898.3 556.4 173.6 6.0 3,724.7 562.4
Communications 3,112.2 555.9 108.5 3.3 3,003.7 559.2
Consumer Cyclical 1,228.2 179.9 85.8 0.7 1,142.4 180.6
Consumer Non-Cyclical 6,035.6 1,027.5 65.8 2.0 5,969.8 1,029.5
Energy (Oil & Gas) 3,949.9 763.5 45.2 1.3 3,904.7 764.8
Financial Institutions 3,611.5 404.9 121.8 7.6 3,489.7 412.5
Mortgage/Asset-Backed 2,216.5 288.6 8.2 0.5 2,208.3 289.1
Sovereigns 1,507.0 226.6 — — 1,507.0 226.6
Technology 1,047.1 147.1 71.5 0.4 975.6 147.5
Transportation 1,434.4 267.1 — — 1,434.4 267.1
U.S. Government Agencies and Municipalities 3,155.6 636.3 79.4 8.9 3,076.2 645.2
Public Utilities 11,144.2 1,849.9 257.9 15.1 10,886.3 1,865.0
Redeemable Preferred Stocks 39.3 6.3 — — 39.3 6.3
Total $44,973.0 $7,221.5 $1,183.6 $56.0 $43,789.4 $7,277.5