Unum 2011 Annual Report Download - page 101

Unum 2011 Annual Report
Unum
2011
99
Fair Value Measurement: All of our fixed maturity securities are reported at fair value. Our derivative financial instruments, including
certain derivative instruments embedded in other contracts, are reported as either assets or liabilities and measured at fair value. We hold
an immaterial amount of equity securities, which are also reported at fair value. We define fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value represents
an exit price, not an entry price. The exit price objective applies regardless of our intent and/or ability to sell the asset or transfer the
liability at the measurement date.
Valuation techniques used for assets and liabilities accounted for at fair value are generally categorized into three types: the market
approach, the income approach, and the cost approach. We use valuation techniques that are appropriate in the circumstances and for
which sufficient data are available. In some cases, a single valuation technique will be appropriate. In other cases, multiple valuation
techniques will be appropriate. If we use multiple valuation techniques to measure fair value, we evaluate and weigh the results, as
appropriate, considering the reasonableness of the range indicated by those results. A fair value measurement is the point within that
range that is most representative of fair value in the circumstances.
The selection of the valuation method(s) to apply considers the definition of an exit price and depends on the nature of the asset or
liability being valued. For assets and liabilities accounted for at fair value, we generally use valuation techniques consistent with the market
approach, and to a lesser extent, the income approach. Inputs to valuation techniques 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 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.
We prioritize the inputs to fair valuation techniques and use unobservable inputs to the extent that observable inputs are not
available. We categorize our assets and liabilities measured at estimated fair value into a three-level hierarchy, based on the significance of
the inputs. The fair value hierarchy gives the highest priority to inputs which are unadjusted and represent quoted prices in active markets
for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). See also Note 2.
Realized Investment Gains and Losses: Realized investment gains and losses are reported as a component of revenue in the
consolidated statements of income and are based upon specific identification of the investments sold. If we determine that the decline in
value of an investment is other than temporary, the investment is written down to fair value, and an impairment loss is recognized in the
current period, either in earnings or in both earnings and other comprehensive income, as applicable. Other-than-temporary impairment
losses on fixed maturity securities which we intend to sell or more likely than not will be required to sell before recovery in value are
recognized in earnings and equal the entire difference between the security’s amortized cost basis and its fair value. For securities which
we do not intend to sell and it is not more likely than not that we will be required to sell before recovery in value, other-than-temporary
impairment losses recognized in earnings generally represent the difference between the amortized cost of the security and the present
value of our best estimate of cash flows expected to be collected, discounted using the effective interest rate implicit in the security at the
date of acquisition. For fixed maturity securities for which we have recognized an other-than-temporary impairment loss through earnings,
if through subsequent evaluation there is a significant increase in expected cash flows, the difference between the new amortized cost
basis and the cash flows expected to be collected is accreted as net investment income.
Deferred Acquisition Costs: Certain costs of acquiring new business that vary with and are primarily related to the production of new
business have been deferred. Such costs include commissions, other agency compensation, certain selection and policy issue expenses,
and certain field expenses. Acquisition costs that do not vary with the production of new business, such as commissions on group products
which are generally level throughout the life of the policy, are excluded from deferral. Deferred acquisition costs are subject to
recoverability testing at the time of policy issue and loss recognition testing in subsequent years.