Unum 2008 Annual Report Download - page 42

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38
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Fair Value Hierarchy
Financial instruments measured at fair value are categorized into a three-level classification. The lowest level input that is significant to
the fair value measurement of a financial instrument is used to categorize the instrument and reflects the judgment of management. Financial
assets and liabilities presented at fair value in our consolidated balance sheets generally are categorized as follows:
• Level 1 — Inputs are unadjusted and represent quoted prices in active markets for identical assets or liabilities at the measurement date.
• Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability
through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Level 2
inputs include, for example, indicative prices obtained from brokers or pricing services validated to other observable market data and
quoted prices for similar assets or liabilities.
• Level 3 — Inputs reect our best estimate of what market participants would use in pricing the asset or liability at the measurement
date. Generally, assets and liabilities carried at fair value and included in this category are comprised of certain mortgage and asset-
backed securities, certain corporate fixed maturity securities, certain private equity investments, and certain derivatives. Financial
assets and liabilities presented at fair value and categorized as Level 3 are generally those that are valued using unobservable inputs
to extrapolate an estimated fair value. The inputs reflect our assumptions about the assumptions that market participants would
use in pricing the instrument in a current period transaction, and outputs represent an exit price and expected future cash flows.
Unobservable inputs are primarily internally derived credit spread assumptions and lack of liquidity assumptions and are unobservable
due to the lack of an active market pertaining to these securities.
As of December 31, 2008, approximately 9.4 percent of our fixed maturity securities were categorized as Level 1, 88.3 percent as Level 2,
and 2.3 percent as Level 3. During 2008, we transferred $672.6 million of fixed maturity securities into Level 3 and $160.0 million of fixed maturity
securities out of Level 3. The reclassifications between levels resulted primarily from a change in observability of three inputs used to determine
fair values of the securities reclassied: (1) transactional data for new issuance and secondary trades, (2) broker/dealer quotes and pricing,
primarily related to the lack of an active and orderly market, 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 4 of the “Notes to Consolidated Financial Statements.”
Other than Temporary Impairment Analysis for Investments
In determining other than temporary impairments for our investment portfolio, we evaluate the following factors, as applicable for
each type of investment:
• The probability of recovering principal and interest.
• Our ability and intent to retain the security for a sufcient period of time for it to recover.
• 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 signicant 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 actions.
• Bid and offering prices and the level of trading activity.
• Adverse changes in estimated cash ows for securitized investments.
• Any other key measures for the related security.