Unum 2015 Annual Report Download - page 105

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Unum 2015 Annual Report
Fair Value Measurements for Financial Instruments Carried at Fair Value
We report fixed maturity securities, derivative financial instruments, and unrestricted equity securities at fair value in our consolidated
balance sheets. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of
pricing observability. Financial instruments with readily available active 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. An active
market for a financial instrument is a market in which transactions for an asset or a similar asset occur with sufficient frequency and
volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair
value and should be used to measure fair value whenever available. Conversely, financial instruments rarely traded or not quoted have
less observability and are measured at fair value using valuation techniques that require more judgment. Pricing observability is generally
impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and
not yet established, the characteristics specific to the transaction, and overall market conditions.
Valuation techniques used for assets and liabilities accounted for at fair value are generally categorized into three types. The market
approach uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities. The income
approach converts future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. The cost approach is
based upon the amount that currently would be required to replace the service capacity of an asset, or the current replacement cost.
We use valuation techniques that are appropriate in the circumstances and for which sufficient data are available that can be obtained
without undue cost and effort. In some cases, a single valuation technique will be appropriate (for example, when valuing an asset or
liability using quoted prices in an active market for identical assets or liabilities). 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. We believe the market approach valuation technique provides more observable
data than the income approach, considering the type of investments we hold. 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 2015, we have applied valuation techniques on a consistent basis to similar assets and
liabilities and consistent with those techniques used at year end 2014.