Unum 2012 Annual Report Download - page 34

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
32 UNUM 2012 ANNUAL REPORT
pricing vendors, price quotes we obtain from outside brokers, matrix pricing, discounted cash flow, and observable prices for similar publicly
traded or privately traded issues that incorporate the credit quality and industry sector of the issuer. Our fair value measurements could
differ significantly based on the valuation technique and available inputs.
When using a pricing service, we obtain the vendor’s pricing documentation to ensure we understand their methodologies.
We periodically review and approve the selection of our pricing vendors to ensure we are in agreement with their current methodologies.
When markets are less active, brokers may rely more on models with inputs based on the information available only to the broker. Our
internal investment management professionals, which include portfolio managers and analysts, monitor securities priced by brokers and
evaluate their prices for reasonableness based on benchmarking to available primary and secondary market information. In weighing
a broker quote as an input to fair value, we place less reliance on quotes that do not reflect 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 reflect 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 2012, we have applied valuation techniques on a consistent basis to similar assets and liabilities and consistent with those
techniques used at year end 2011.
Inputs to Valuation Techniques
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. We use observable and unobservable inputs in measuring the fair value of
our financial instruments.
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.
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 flows 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 financial statements