Unum 2015 Annual Report Download - page 35

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Unum 2015 Annual Report
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. The market
sources from which we obtain or derive the fair values of our assets and liabilities carried at market value include quoted market prices for
actual trades, price quotes from third party 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.
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.
Certain of our investments do not have readily determinable market prices and/or observable inputs or may at times be affected by
the lack of market liquidity. For these securities, we use internally prepared valuations combining matrix pricing with vendor purchased
software programs, including valuations based on estimates of future profitability, to estimate the fair value. Additionally, we may obtain
prices from independent third-party brokers to aid in establishing valuations for certain of these securities. Key assumptions used by us to
determine fair value for these securities include risk-free interest rates, risk premiums, performance of underlying collateral (if any), and
other factors involving significant assumptions which may or may not reflect those of an active market.
As of December 31, 2015, the key assumptions we generally used to estimate the fair value of these types of securities included
those listed below. Where appropriate, we have noted the assumption used for the prior period as well as the reason for the change.
• Risk-free interest rates of 1.76 percent for five-year maturities to 3.02 percent for 30-year maturities were derived from the
December 31, 2015 yield curve for U.S. Treasury Bonds with similar maturities. This compares to interest rates of 1.65 percent for
five-year maturities to 2.75 percent for 30-year maturities used at December 31, 2014.
• Baa corporate bond spread adjustments ranging from 1.60 percent to 3.30 percent were added to the risk-free rate to reflect
additional credit risk and the lack of liquidity. We used spread adjustments ranging from 1.21 percent to 2.54 percent at December 31,
2014. The changes were based on observable market spreads. Newly issued private placement securities have historically offered
yield premiums higher than a similar interest rate spread on comparable newly issued public securities.
• Additional basis points were added as deemed appropriate for foreign investments, certain industries, and individual securities in
certain industries that are considered to be of greater risk.
As of December 31, 2015, approximately 6.8 percent of our fixed maturity securities were categorized as Level 1, 88.9 percent as
Level 2, and 4.3 percent as Level 3. Level 1 is the highest category of the three-level fair value hierarchy classification wherein inputs are
unadjusted and represent quoted prices in active markets for identical assets or liabilities. The Level 2 category includes assets or liabilities
valued using inputs (other than those included in the Level 1 category) that are either directly or indirectly observable for the asset or
liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. The Level 3
category is the lowest category of the fair value hierarchy and reflects the judgment of management regarding what market participants
would use in pricing assets or liabilities at the measurement date using unobservable inputs to extrapolate an estimated fair value.
Rapidly changing credit and equity market conditions can materially impact the valuation of securities, and the period to period
changes in value can vary significantly.
See Note 2 of the “Notes to Consolidated Financial Statements” contained herein.