Unum 2013 Annual Report Download - page 99

UNUM 2013 ANNUAL REPORT / 97
In our consolidated balance sheets, we do not offset fair value amounts recognized for derivatives executed with the same
counterparty under a master netting agreement and fair value amounts recognized for the right to reclaim cash collateral or the obligation
to return cash collateral arising from those master netting agreements. See Notes 2 and 4.
Fair Value Measurement: Certain assets and liabilities are reported at fair value in our consolidated balance sheets and in our notes to
our consolidated financial statements. 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.
Assets or liabilities with readily available actively quoted prices or for which fair value can be measured from actively quoted prices in
active markets generally have more pricing observability and less judgment utilized in measuring fair value. When actively quoted prices
are not available, fair values are based on quoted prices in markets that are not active, quoted prices for similar but not identical assets or
liabilities, or other observable inputs. If observable inputs are not available, unobservable inputs and/or adjustments to observable inputs
requiring management judgment are used to determine fair value. 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 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. See Note 3.
Deferred Acquisition Costs: Incremental direct costs associated with the successful acquisition of new or renewal insurance contracts
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.
Deferred acquisition costs related to traditional policies are amortized over the premium paying period of the related policies in
proportion to the ratio of the present value of annual expected premium income to the present value of total expected premium income.
Deferred acquisition costs related to interest-sensitive policies are amortized over the lives of the policies in relation to the present value of
estimated gross profits from surrender charges, mortality margins, investment returns, and expense margins. Deviations from projections
result in a change to the rate of amortization in the period during which such events occur. Generally, the amortization periods for these
policies approximate the estimated lives of the policies.
For certain products, policyholders can elect to modify product benefits, features, rights, or coverages by exchanging a contract for
a new contract or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. These
transactions are known as internal replacement transactions. Internal replacement transactions wherein the modification does not
substantially change the policy are accounted for as continuations of the replaced contracts. Unamortized deferred acquisition costs from
the original policy continue to be amortized over the expected life of the new policy, and the costs of replacing the policy are accounted
for as policy maintenance costs and expensed as incurred. Internal replacement transactions, principally on group contracts, that result in
a policy that is substantially changed are accounted for as an extinguishment of the original policy and the issuance of a new policy.
Unamortized deferred acquisition costs on the original policy that was replaced are immediately expensed, and the costs of acquiring the
new policy are capitalized and amortized in accordance with our accounting policies for deferred acquisition costs.
Loss recognition is performed on an annual basis, or more frequently if appropriate, using best estimate assumptions as to future
experience as of the date of the test. Insurance contracts are grouped for each major product line within a segment when we perform
the loss recognition tests. If loss recognition testing indicates that deferred acquisition costs are not recoverable, the deficiency is charged
to expense.