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Notes To Consolidated Financial Statements
122 Unum 2015 Annual Report
Note 4. Derivative Financial Instruments
Purpose of Derivatives
We are exposed to certain risks relating to our ongoing business operations. The primary risks managed by using derivative
instruments are interest rate risk, risk related to matching duration for our assets and liabilities, foreign currency risk, and credit risk.
Historically, we have utilized current and forward interest rate swaps and options on forward interest rate swaps and U.S. Treasury rates,
current and forward currency swaps, forward treasury locks, currency forward contracts, forward contracts on specific fixed income
securities, and credit default swaps. Transactions hedging interest rate risk are primarily associated with our individual and group long-term
care and individual and group disability products. All other product portfolios are periodically reviewed to determine if hedging strategies
would be appropriate for risk management purposes. We do not use derivative financial instruments for speculative purposes.
Derivatives designated as cash flow hedges and used to reduce our exposure to interest rate and duration risk are as follows:
• Interest rate swaps are used to hedge interest rate risks and to improve the matching of assets and liabilities. An interest rate swap is
an agreement in which we agree with other parties to exchange, at specified intervals, the difference between fixed rate and
variable rate interest amounts. We use interest rate swaps to hedge the anticipated purchase of fixed maturity securities thereby
protecting us from the potential adverse impact of declining interest rates on the associated policy reserves. We also use interest rate
swaps to hedge the potential adverse impact of rising interest rates in anticipation of issuing fixed rate long-term debt.
• Forward treasury locks are used to minimize interest rate risk associated with the anticipated purchase or disposal of fixed maturity
securities. A forward treasury lock is a derivative contract without an initial investment where we and the counterparty agree to
purchase or sell a specific U.S. Treasury bond at a future date at a pre-determined price.
• Options on U.S. Treasury rates are used to hedge the interest rate risk associated with the anticipated purchase of fixed maturity
securities. These options give us the right, but not the obligation, to receive a specific interest rate for a specified period of time.
These options enable us to lock in a minimum investment yield to hedge the potential adverse impact of declining interest rates.
Derivatives designated as fair value hedges and used to reduce our exposure to interest rate and duration risk are as follows:
• Interest rate swaps are used to effectively convert certain of our fixed rate securities into floating rate securities which are used to
fund our floating rate long-term debt. Under these swap agreements, we receive a variable rate of interest and pay a fixed rate of
interest. Additionally, we use interest rate swaps to effectively convert certain fixed rate, long-term debt into floating rate long-term
debt. Under these swap agreements, we receive a fixed rate of interest and pay a variable rate of interest.
Derivatives designated as cash flow hedges and used to reduce our exposure to foreign currency risk are as follows:
• Foreign currency interest rate swaps have historically been used to hedge the currency risk of certain foreign currency-denominated
fixed maturity securities owned for portfolio diversification and to hedge the currency risk associated with certain of the principal and
interest payments of the U.S. dollar-denominated debt issued by one of our U.K. subsidiaries. For hedges of fixed maturity securities,
we agree to pay, at specified intervals, fixed rate foreign currency-denominated principal and interest payments in exchange for fixed
rate payments in the functional currency of the operating segment. For hedges of debt issued, we paid, at specified intervals, fixed
rate foreign currency-denominated principal and interest payments to the counterparty in exchange for fixed rate U.S. dollar-
denominated principal and interest payments.