Unum 2009 Annual Report Download - page 36

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34
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum
2009
• Approximately 9.9 percent of our xed maturity securities were valued based on prices of comparable securities, matrix pricing,
market models, and/or internal models or were valued based on non-binding quotes with no other observable market data. These
assets were classified as either Level 2 or Level 3, with the categorization dependent on whether there was other observable market
data. Level 3 is the lowest category of the fair value hierarchy and reflects the judgment of management regarding what market
participants would use in pricing assets or liabilities at the measurement date. Financial assets and liabilities categorized as Level 3
are generally those that are valued using unobservable inputs to extrapolate an estimated fair value.
We consider transactions in inactive or disorderly markets to be less representative of fair value. We use all available observable
inputs when measuring fair value, but when significant other unobservable inputs and adjustments are necessary, we classify these
assets or liabilities as Level 3.
As of December 31, 2009, approximately 11.6 percent of our fixed maturity securities were categorized as Level 1, 86.1 percent as
Level 2, and 2.3 percent as Level 3. During 2009, we transferred $352.4 million of fixed maturity securities into Level 3 and $363.8 million
of fixed maturity securities out of Level 3. The transfers between levels resulted primarily from a change in observability of three inputs
used to determine fair values of the securities transferred: (1) transactional data for new issuance and secondary trades, (2) broker/dealer
quotes and pricing, primarily related to changes in the level of activity in the market and whether the market was considered orderly, and
(3) comparable bond metrics from which to perform an analysis. For fair value measurements of financial instruments that were transferred
either into or out of Level 3, we reflect the transfers using the fair value at the beginning of the period. We believe this allows for greater
transparency as all changes in fair value that arise during the reporting period of the transfer are disclosed as a component of our Level 3
reconciliation as shown in Note 3 of the “Notes to Consolidated Financial Statements.”
Other-Than-Temporary Impairment Analysis for Investments
In determining when a decline in fair value below amortized cost of a fixed maturity security is other than temporary, we evaluate
the following factors:
• Whether we expect to recover the entire amortized cost basis of the security.
• Whether we intend to sell the security or will be required to sell the security before the recovery of its amortized cost basis.
• Whether the security is current as to principal and interest payments.
• The signicance of the decline in value.
• The time period during which there has been a signicant decline in value.
• Current and future business prospects and trends of earnings.
• The valuation of the security’s underlying collateral.
• Relevant industry conditions and trends relative to their historical cycles.
• Market conditions.
• Rating agency and governmental actions.
• Bid and offering prices and the level of trading activity.
• Adverse changes in estimated cash ows for securitized investments.
• Changes in fair value subsequent to the balance sheet date.
• Any other key measures for the related security.
We evaluate available information, including the factors noted above, both positive and negative, in reaching our conclusions. In
particular, we also consider the strength of the issuer’s balance sheet, its debt obligations and near term funding requirements, cash flow
and liquidity, the profitability of its core businesses, the availability of marketable assets which could be sold to increase liquidity, its
industry fundamentals and regulatory environment, and its access to capital markets. Although all available and applicable factors are
considered in our analysis, our expectation of recovering the entire amortized cost basis of the security, whether we intend to sell the
security, whether it is more likely than not we will be required to sell the security before recovery of its amortized cost, and whether the
security is current on principal and interest payments are the most critical factors in determining whether impairments are other than