Unum 2010 Annual Report Download - page 30

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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum
2010
28
information available only to the broker. In weighing a broker quote as an input to fair value, we place less reliance on quotes that do not
reect the result of market transactions. We also consider the nature of the quote, particularly whether the quote is a binding offer. If prices
in an inactive market do not reect current prices for the same or similar assets, adjustments may be necessary to arrive at fair value.
When relevant market data is unavailable, which may be the case during periods of market uncertainty, the income approach can, in
suitable circumstances, provide a more appropriate fair value. During 2010, we have applied valuation techniques on a consistent basis to
similar assets and liabilities and consistent with those techniques used at year end 2009.
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 reect 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 reect 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.
Inputs that may be used include the following:
• Broker market maker prices and price levels
• Trade Reporting and Compliance Engine (TRACE) pricing
• Prices obtained from external pricing services
• Benchmark yields (Treasury and interest rate swap curves)
• Transactional data for new issuance and secondary trades
• Security cash ows and structures
• Recent issuance/supply
• Sector and issuer level spreads
• Security credit ratings/maturity/capital structure/optionality
• Corporate actions
• Underlying collateral
• Prepayment speeds/loan performance/delinquencies/weighted average life/seasoning
• Public covenants
• Comparative bond analysis
• Derivative spreads
• Relevant reports issued by analysts and rating agencies
• Audited nancial statements
We review all prices obtained to ensure they are consistent with a variety of observable market inputs and to verify the validity of a
security’s price. The overall valuation process for determining fair values may include adjustments to valuations obtained from our pricing
sources when they do not represent a valid exit price. These adjustments may be made when, in our judgment and considering our
knowledge of the financial conditions and industry in which the issuer operates, certain features of the financial instrument require that an
adjustment be made to the value originally obtained from our pricing sources. These features may include the complexity of the financial
instrument, the market in which the financial instrument is traded, counterparty credit risk, credit structure, concentration, or liquidity.
Additionally, an adjustment to the price derived from a model typically reects our judgment of the inputs that other participants in the
market for the financial instrument being measured at fair value would consider in pricing that same financial instrument.
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 modied to reect direct or indirect impacts on asset
classes from changes in market conditions.