Unum 2008 Annual Report Download - page 40

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36
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approach can, in appropriate circumstances, provide a more appropriate fair value. During 2008, we have applied valuation techniques on a
consistent basis to similar assets and liabilities and consistent with those techniques used at year end 2007. Due to recent market conditions,
the mix and availability of observable inputs for valuation techniques have been volatile, and the risk inherent in the inputs is elevated
relative to prior periods.
Inputs to Valuation Techniques
Inputs refer broadly to the assumptions that market participants use in pricing assets or liabilities, including assumptions about risk, for
example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inherent
in the inputs to the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed
based on market data obtained from independent sources.
Unobservable inputs are inputs that reflect our own assumptions about the assumptions market participants would use in pricing
the asset or liability developed based on the best information available in the circumstances.
Observable inputs which we utilize to determine the fair values of our investments and derivative financial instruments include
indicative broker prices and prices obtained from external pricing services. At December 31, 2008, approximately 87.6 percent of our fixed
maturity securities were valued based on active trades and/or broker quotes or prices obtained from pricing services that generally use
observable inputs in their valuation techniques, with no additional adjustments to the prices. These assets were classified as either Level 1
or Level 2, with the categorization dependent on whether the price was for an actual representative sale, for identical assets actively
traded, and/or the quote binding or non-binding. We generally obtain, on average, one quote per nancial instrument. We review the
prices obtained to ensure they are consistent with a variety of observable market inputs and to verify the validity of a security’s price.
These inputs, along with our knowledge of the financial conditions and industry in which the issuer operates, will be considered in
determining whether the quoted or indicated price, as well as the change in price from quarter to quarter, are valid.
On selected securities where there is not an indicated price or where we cannot validate the price, some combination of market inputs
may be used to determine a price using a pricing matrix, or we may use pricing inputs from a comparable security. At December 31, 2008,
we valued approximately 9.8 percent of our fixed maturity securities using this method. These assets were classified as Level 2. The
parameters and inputs used to validate a price on a security may be adjusted for assumptions about risk and current market conditions
on a quarter to quarter basis, as certain features may be more significant drivers of valuation at the time of pricing. Changes to inputs in
valuations are not changes to valuation methodologies; rather, the inputs are modied to reect direct or indirect impacts on asset classes
from changes in market conditions.
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 as Level 3.
Inputs that may be used include the following:
• Benchmark yields (Treasury and swap curves)
• Transactional data for new issuance and secondary trades
• Broker/dealer quotes and pricing
• Security cash ows and structures
• Recent issuance/supply
• Sector and issuer level spreads
• Credit ratings/maturity/weighted average life/seasoning/capital structure
• Security optionality
• Corporate actions
• Underlying collateral
• Prepayment speeds/loan performance/delinquencies
• Public covenants