Unum 2015 Annual Report Download - page 95

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Unum 2015 Annual Report
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. Therefore, 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 non-interest sensitive policies are amortized in proportion to the premium income we expect to
receive over the life of the policies. 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.
Goodwill: Goodwill is the excess of the amount paid to acquire a business over the fair value of the net assets acquired. We review
the carrying amount of goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that
the carrying amount might not be recoverable. Goodwill impairment testing compares the fair value of a reporting unit with its carrying
amount, including goodwill. The fair values of the reporting units are determined using discounted cash flow models. The critical estimates
necessary in determining fair value are projected earnings and the discount rate. We set our discount rate assumption based on an
expected risk adjusted cost of capital. If the fair value of the reporting unit to which the goodwill relates is less than the carrying amount of
the unamortized goodwill, the carrying amount is reduced with a corresponding charge to expense.