Unum 2007 Annual Report Download - page 101

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Unum 2007 Annual Report 99
Note 3. Fair Values of Financial Instruments
We use the following methods and assumptions in estimating the fair values of our financial instruments:
Fixed Maturity Securities: Fair values are based on quoted market prices, where available. For fixed maturity securities not actively
traded, fair values are estimated using values obtained from independent pricing services. For private placements, fair values are estimated
using internally prepared valuations combining matrix pricing with vendor purchased software programs, including valuations based on
estimates of future profitability. Additionally, we obtain prices from independent third-party brokers to establish valuations for certain of
these securities. See Note 4 for the amortized cost and fair values of securities by security type and by maturity date.
Derivatives: Fair values are based on market quotes or pricing models and represent the net amount of cash we would have received
or paid if the contracts had been settled or closed as of the last day of the year.
DIG Issue B36 Embedded Derivatives: Fair values are estimated using internal pricing models and represent the hypothetical value of
the duration mismatch of assets and liabilities, interest rate risk, and third party credit risk embedded in certain reinsurance agreements
we have entered.
Mortgage Loans: Fair values are estimated using discounted cash flow analyses and interest rates currently being offered for similar
mortgage loans to borrowers with similar credit ratings and maturities. Mortgage loans with similar characteristics are aggregated for
purposes of the calculations.
Policy Loans and Other Long-Term Investments: Carrying amounts approximate fair value.
Short-Term Investments: Carrying amounts for short-term investments, which generally consist of investment-grade corporate
commercial paper, U.S. Treasury bills, and bank term deposits, approximate fair value.
Policyholders’ Funds: Carrying amounts for deferred annuity products and other policyholders’ funds, which include guaranteed
investment contracts (GICs) and supplementary contracts without life contingencies, approximate fair value.
Fair values for insurance contracts other than investment contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in our overall management of interest rate risk, which minimizes
exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.
Short-Term and Long-Term Debt: Fair values are obtained from independent pricing services or discounted cash flow analyses based
on current incremental borrowing rates for similar types of borrowing arrangements.