Fair Value of Assets and Liabilities

Fair value is defined 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. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the Condensed Consolidated Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:

Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.

Level 2: Assets and liabilities whose values are based on the following:


(a)	Quoted prices for similar assets or liabilities in active markets;


(b)	Quoted prices for identical or similar assets or liabilities in markets that are not active; or


(c)	Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.

The availability of observable inputs varies by instrument. In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment. The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3. In many instances, valuation inputs used to measure fair value fall into different levels of the fair value hierarchy. The category level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.

The Company is responsible for the determination of fair value and the supporting assumptions and methodologies. The Company gains assurance that assets and liabilities are appropriately valued through the execution of various processes and controls designed to ensure the overall reasonableness and consistent application of valuation methodologies, including inputs and assumptions, and compliance with accounting standards. For fair values received from third parties or internally estimated, the Company’s processes and controls are designed to ensure that the valuation methodologies are appropriate and consistently applied, the inputs and assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded. For example, on a continuing basis, the Company assesses the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from valuation service providers or brokers or derived from internal models. The Company performs procedures to understand and assess the methodologies, processes and controls of valuation service providers. In addition, the Company may validate the reasonableness of fair values by comparing information obtained from valuation service providers or brokers to other third party valuation sources for selected securities. The Company performs ongoing price validation procedures such as back-testing of actual sales, which corroborate the various inputs used in internal models to market observable data. When fair value determinations are expected to be more variable, the Company validates them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investment transactions.

The Company has two types of situations where investments are classified as Level 3 in the fair value hierarchy. The first is where quotes continue to be received from independent third-party valuation service providers and all significant inputs are market observable; however, there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity such that the degree of market observability has declined to a point where categorization as a Level 3 measurement is considered appropriate. The indicators considered in determining whether a significant decrease in the volume and level of activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, the level of credit spreads over historical levels, applicable bid-ask spreads, and price consensus among market participants and other pricing sources.

The second situation where the Company classifies securities in Level 3 is where specific inputs significant to the fair value estimation models are not market observable. This primarily occurs in the Company’s use of broker quotes to value certain securities where the inputs have not been corroborated to be market observable, and the use of valuation models that use significant non-market observable inputs.

Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans, limited partnership interests, bank loans and policy loans. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after initial recognition and the resulting remeasurement is reflected in the condensed consolidated financial statements. In addition, derivatives embedded in fixed income securities are not disclosed in the hierarchy as free-standing derivatives since they are presented with the host contracts in fixed income securities.

In determining fair value, the Company principally uses the market approach which generally utilizes market transaction data for the same or similar instruments. To a lesser extent, the Company uses the income approach which involves determining fair values from discounted cash flow methodologies. For the majority of Level 2 and Level 3 valuations, a combination of the market and income approaches is used.

Summary of significant valuation techniques for assets and liabilities measured at fair value on a recurring basis

Level 1 measurements


•	Fixed income securities: Comprise certain U.S. Treasury fixed income securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.


•	Equity securities: Comprise actively traded, exchange-listed equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.


•	Short-term: Comprise actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access.


•	Separate account assets: Comprise actively traded mutual funds that have daily quoted net asset values for identical assets that the Company can access. Net asset values for the actively traded mutual funds in which the separate account assets are invested are obtained daily from the fund managers.


•	Assets held for sale: Comprise U.S. Treasury fixed income securities, short-term investments and separate account assets. The valuation is based on the respective asset type as described above.

Level 2 measurements


•	Fixed income securities:

U.S. government and agencies: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.

Municipal: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.

Corporate, including privately placed: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. Also included are privately placed securities valued using a discounted cash flow model that is widely accepted in the financial services industry and uses market observable inputs and inputs derived principally from, or corroborated by, observable market data. The primary inputs to the discounted cash flow model include an interest rate yield curve, as well as published credit spreads for similar assets in markets that are not active that incorporate the credit quality and industry sector of the issuer.

Foreign government: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.

ABS and RMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads. Certain ABS are valued based on non-binding broker quotes whose inputs have been corroborated to be market observable.

CMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, collateral performance and credit spreads.

Redeemable preferred stock: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, underlying stock prices and credit spreads.


•	Equity securities: The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that are not active.


•	Short-term: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. For certain short-term investments, amortized cost is used as the best estimate of fair value.


•	Other investments: Free-standing exchange listed derivatives that are not actively traded are valued based on quoted prices for identical instruments in markets that are not active.

OTC derivatives, including interest rate swaps, foreign currency swaps, foreign exchange forward contracts, certain options and certain credit default swaps, are valued using models that rely on inputs such as interest rate yield curves, currency rates, and counterparty credit spreads that are observable for substantially the full term of the contract. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.


•	Assets held for sale: Comprise U.S. government and agencies, municipal, corporate, foreign government, ABS, RMBS and CMBS fixed income securities, and short-term investments. The valuation is based on the respective asset type as described above.

Level 3 measurements


•	Fixed income securities:

Municipal: Comprise municipal bonds that are not rated by third party credit rating agencies but are rated by the National Association of Insurance Commissioners (“NAIC”). The primary inputs to the valuation of these municipal bonds include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields and credit spreads. Also included are municipal bonds valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable. Also includes auction rate securities (“ARS”) primarily backed by student loans that have become illiquid due to failures in the auction market and are valued using a discounted cash flow model that is widely accepted in the financial services industry and uses significant non-market observable inputs, including the anticipated date liquidity will return to the market.

Corporate, including privately placed: Primarily valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable. Also included are equity-indexed notes which are valued using a discounted cash flow model that is widely accepted in the financial services industry and uses significant non-market observable inputs, such as volatility. Other inputs include an interest rate yield curve, as well as published credit spreads for similar assets that incorporate the credit quality and industry sector of the issuer.

ABS and CMBS: Valued based on non-binding broker quotes received from brokers who are familiar with the investments and where the inputs have not been corroborated to be market observable.


•	Equity securities: The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements.

•

Other investments: Certain OTC derivatives, such as interest rate caps, certain credit default swaps and certain options (including swaptions), are valued using models that are widely accepted in the financial services industry. These are categorized as Level 3 as a result of the significance of non-market observable inputs such as volatility. Other primary inputs include interest rate yield curves and credit spreads.


•	Assets held for sale: Comprise municipal, corporate, ABS and CMBS fixed income securities. The valuation is based on the respective asset type as described above.

•

Contractholder funds: Derivatives embedded in certain life and annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for the embedded derivatives within a block of contractholder liabilities. The models primarily use stochastically determined cash flows based on the contractual elements of embedded derivatives, projected option cost and applicable market data, such as interest rate yield curves and equity index volatility assumptions. These are categorized as Level 3 as a result of the significance of non-market observable inputs.


•	Liabilities held for sale: Comprise derivatives embedded in life and annuity contracts. The valuation is the same as described above for contractholder funds.

Assets and liabilities measured at fair value on a non-recurring basis

Mortgage loans written-down to fair value in connection with recognizing impairments are valued based on the fair value of the underlying collateral less costs to sell. Limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments are valued using net asset values. The carrying value of the LBL business was written-down to fair value in connection with being classified as held for sale.

The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2014.



($ in millions)	Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Counterparty and cash collateral netting			Balance as of September 30, 2014
Assets
Fixed income securities:
U.S. government and agencies	$	146		$	634		$	—					$	780
Municipal	—			3,446			101						3,547
Corporate	—			20,177			839						21,016
Foreign government	—			739			—						739
ABS	—			604			114						718
RMBS	—			656			—						656
CMBS	—			612			5						617
Redeemable preferred stock	—			17			—						17
Total fixed income securities	146			26,885			1,059						28,090
Equity securities	1,138			54			37						1,229
Short-term investments	76			686			—						762
Other investments: Free-standing derivatives	—			75			3			$	(5	)	73
Separate account assets	4,521			—			—						4,521
Other assets	—			—			1						1
Total recurring basis assets	5,881			27,700			1,100			(5		)	34,676
Non-recurring basis ⁽¹⁾	—			—			15						15
Total assets at fair value	$	5,881		$	27,700		$	1,115		$	(5	)	$	34,691
% of total assets at fair value	17.0		%	79.8		%	3.2		%	—		%	100.0		%

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—		$	—		$	(321	)				$	(321	)
Other liabilities: Free-standing derivatives	—			(27		)	(9		)	$	5		(31		)
Total liabilities at fair value	$	—		$	(27	)	$	(330	)	$	5		$	(352	)
% of total liabilities at fair value	—		%	7.7		%	93.7		%	(1.4		)%	100.0		%

____________


⁽¹⁾	Includes $15 million of limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments.

The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2013.



($ in millions)	Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Counterparty and cash collateral netting			Balance as of December 31, 2013
Assets
Fixed income securities:
U.S. government and agencies	$	145		$	621		$	—					$	766
Municipal	—			3,185			119						3,304
Corporate	—			20,308			1,008						21,316
Foreign government	—			792			—						792
ABS	—			895			112						1,007
RMBS	—			790			—						790
CMBS	—			763			1						764
Redeemable preferred stock	—			16			1						17
Total fixed income securities	145			27,370			1,241						28,756
Equity securities	593			51			6						650
Short-term investments	129			461			—						590
Other investments: Free-standing derivatives	—			268			9			$	(11	)	266
Separate account assets	5,039			—			—						5,039
Assets held for sale	1,854			9,812			362						12,028
Total recurring basis assets	7,760			37,962			1,618			(11		)	47,329
Non-recurring basis ⁽¹⁾	—			—			17						17
Total assets at fair value	$	7,760		$	37,962		$	1,635		$	(11	)	$	47,346
% of total assets at fair value	16.4		%	80.2		%	3.4		%	—		%	100.0		%

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—		$	—		$	(307	)				$	(307	)
Other liabilities: Free-standing derivatives	—			(185		)	(14		)	$	7		(192		)
Liabilities held for sale	—			—			(246		)				(246		)
Total recurring basis liabilities	—			(185		)	(567		)	7			(745		)
Non-recurring basis⁽²⁾	—			—			(11,088		)				(11,088		)
Total liabilities at fair value	$	—		$	(185	)	$	(11,655	)	$	7		$	(11,833	)
% of total liabilities at fair value	—		%	1.6		%	98.5		%	(0.1		)%	100.0		%

____________


⁽¹⁾	Includes $8 million of mortgage loans and $9 million of limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments.


⁽²⁾	Relates to LBL business held for sale (see Note 2). The total fair value measurement includes $15,593 million of assets held for sale and $(14,899) million of liabilities held for sale, less $12,028 million of assets and $(246) million of liabilities measured at fair value on a recurring basis.

The following table summarizes quantitative information about the significant unobservable inputs used in Level 3 fair value measurements.



($ in millions)	Fair value			Valuation technique	Unobservable input	Range	Weighted average
September 30, 2014
Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options	$	(269	)	Stochastic cash flow model	Projected option cost	1.0 - 2.0%	1.76	%
December 31, 2013
Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options	$	(247	)	Stochastic cash flow model	Projected option cost	1.0 - 2.0%	1.75	%
Liabilities held for sale – Equity-indexed and forward starting options	$	(246	)	Stochastic cash flow model	Projected option cost	1.0 - 2.0%	1.91	%

If the projected option cost increased (decreased), it would result in a higher (lower) liability fair value.

As of September 30, 2014 and December 31, 2013, Level 3 fair value measurements include $980 million and $1.15 billion, respectively, of fixed income securities valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable. As of December 31, 2013, Level 3 fair value measurements for assets held for sale include $319 million of fixed income securities valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable. The Company does not develop the unobservable inputs used in measuring fair value; therefore, these are not included in the table above. However, an increase (decrease) in credit spreads for fixed income securities valued based on non-binding broker quotes would result in a lower (higher) fair value.

The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the three months ended September 30, 2014.



($ in millions)				Total gains (losses) included in:
	Balance as of June 30, 2014			Net income⁽¹⁾		OCI			Transfers into Level 3		Transfers out of Level 3
Assets
Fixed income securities:
Municipal	$	102		$	—	$	—		$	—	$	—
Corporate	883			3		(13		)	18		—
ABS	105			—		1			—		—
CMBS	5			—		—			—		—
Total fixed income securities	1,095			3		(12		)	18		—
Equity securities	7			—		—			—		—
Free-standing derivatives, net	(5		)	—		—			—		—
Other assets	1			—		—			—		—
Total recurring Level 3 assets	$	1,098		$	3	$	(12	)	$	18	$	—

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	(331	)	$	9	$	—		$	—	$	—
Total recurring Level 3 liabilities	$	(331	)	$	9	$	—		$	—	$	—



	Purchases		Sales			Issues		Settlements			Balance as of September 30, 2014
Assets
Fixed income securities:
Municipal	$	—	$	(1	)	$	—	$	—		$	101
Corporate	4		(3		)	—		(53		)	839
ABS	10		—			—		(2		)	114
CMBS	—		—			—		—			5
Total fixed income securities	14		(4		)	—		(55		)	1,059
Equity securities	30		—			—		—			37
Free-standing derivatives, net	—		—			—		(1		)	(6		)	⁽²⁾
Other assets	—		—			—		—			1
Total recurring Level 3 assets	$	44	$	(4	)	$	—	$	(56	)	$	1,091

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—	$	—		$	—	$	1		$	(321	)
Total recurring Level 3 liabilities	$	—	$	—		$	—	$	1		$	(321	)

____________


⁽¹⁾	The effect to net income totals $12 million and is reported in the Condensed Consolidated Statements of Operations and Comprehensive Income as follows: $3 million in net investment income, $5 million in interest credited to contractholder funds and $4 million in contract benefits.


⁽²⁾	Comprises $3 million of assets and $9 million of liabilities.

The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the nine months ended September 30, 2014.



($ in millions)				Total gains (losses) included in:
	Balance as of December 31, 2013			Net income⁽¹⁾			OCI			Transfers into Level 3		Transfers out of Level 3
Assets
Fixed income securities:
Municipal	$	119		$	(1	)	$	3		$	—	$	(17	)
Corporate	1,008			14			(4		)	18		(26		)
ABS	112			—			2			—		(12		)
CMBS	1			—			—			—		—
Redeemable preferred stock	1			—			—			—		—
Total fixed income securities	1,241			13			1			18		(55		)
Equity securities	6			—			—			—		—
Free-standing derivatives, net	(5		)	1			—			—		—
Other assets	—			1			—			—		—
Assets held for sale	362			(1		)	2			4		(2		)
Total recurring Level 3 assets	$	1,604		$	14		$	3		$	22	$	(57	)

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	(307	)	$	(5	)	$	—		$	—	$	—
Liabilities held for sale	(246		)	17			—			—		—
Total recurring Level 3 liabilities	$	(553	)	$	12		$	—		$	—	$	—



	Sold in LBL disposition⁽³⁾			Purchases/ Issues⁽⁴⁾			Sales			Settlements			Balance as of September 30, 2014
Assets
Fixed income securities:
Municipal	$	—		$	—		$	(3	)	$	—		$	101
Corporate	—			16			(92		)	(95		)	839
ABS	—			21			—			(9		)	114
CMBS	4			—			—			—			5
Redeemable preferred stock	—			—			(1		)	—			—
Total fixed income securities	4			37			(96		)	(104		)	1,059
Equity securities	—			31			—			—			37
Free-standing derivatives, net	—			2			—			(4		)	(6		)	⁽²⁾
Other assets	—			—			—			—			1
Assets held for sale	(351		)	—			(8		)	(6		)	—
Total recurring Level 3 assets	$	(347	)	$	70		$	(104	)	$	(114	)	$	1,091

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—		$	(13	)	$	—		$	4		$	(321	)
Liabilities held for sale	230			(4		)	—			3			—
Total recurring Level 3 liabilities	$	230		$	(17	)	$	—		$	7		$	(321	)

____________


⁽¹⁾	The effect to net income totals $26 million and is reported in the Condensed Consolidated Statements of Operations and Comprehensive Income as follows: $8 million in realized capital gains and losses, $9 million in net investment income, $5 million in interest credited to contractholder funds, $8 million in contract benefits and $(4) million in loss on disposition of operations.


⁽²⁾	Comprises $3 million of assets and $9 million of liabilities.


⁽³⁾	Includes transfers from held for sale that took place in first quarter 2014 of $4 million for CMBS and $(4) million for Assets held for sale.


⁽⁴⁾	Represents purchases for assets and issues for liabilities.

The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the three months ended September 30, 2013.



($ in millions)				Total gains (losses) included in:
	Balance as of June 30, 2013			Net income⁽¹⁾			OCI			Transfers into Level 3			Transfers out of Level 3
Assets
Fixed income securities:
Municipal	$	225		$	—		$	1		$	—		$	—
Corporate	1,255			8			1			21			—
ABS	190			—			15			—			—
CMBS	5			—			2			—			—
Redeemable preferred stock	1			—			—			—			—
Total fixed income securities	1,676			8			19			21			—
Equity securities	6			—			—			—			—
Free-standing derivatives, net	(7		)	(2		)	—			—			—
Other assets	1			—			—			—			—
Assets held for sale	—			(1		)	(8		)	3			(2		)
Total recurring Level 3 assets	$	1,676		$	5		$	11		$	24		$	(2	)

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	(533	)	$	8		$	—		$	—		$	—
Liabilities held for sale	—			16			—			—			—
Total recurring Level 3 liabilities	$	(533	)	$	24		$	—		$	—		$	—

	Transfer to held for sale			Purchases/Issues⁽²⁾			Sales			Settlements			Balance as of September 30, 2013
Assets
Fixed income securities:
Municipal	$	(51	)	$	—		$	(1	)	$	—		$	174
Corporate	(244		)	39			(28		)	(49		)	1,003
ABS	(85		)	—			—			(5		)	115
CMBS	(5		)	—			—			—			2
Redeemable preferred stock	—			—			—			—			1
Total fixed income securities	(385		)	39			(29		)	(54		)	1,295
Equity securities	—			—			—			—			6
Free-standing derivatives, net	—			1			—			(2		)	(10		)	⁽³⁾
Other assets	—			—			—			—			1
Assets held for sale	385			—			(10		)	(2		)	365
Total recurring Level 3 assets	$	—		$	40		$	(39	)	$	(58	)	$	1,657

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	265		$	(24	)	$	—		$	1		$	(283	)
Liabilities held for sale	(265		)	(2		)	—			2			(249		)
Total recurring Level 3 liabilities	$	—		$	(26	)	$	—		$	3		$	(532	)

__________


⁽¹⁾	The effect to net income totals $29 million and is reported in the Condensed Consolidated Statements of Operations and Comprehensive Income as follows: $1 million in realized capital gains and losses, $3 million in net investment income, $15 million in interest credited to contractholder funds and $10 million in contract benefits.


⁽²⁾	Represents purchases for assets and issues for liabilities.


⁽³⁾	Comprises $6 million of assets and $16 million of liabilities.

The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the nine months ended September 30, 2013.



($ in millions)				Total gains (losses) included in:
	Balance as of December 31, 2012			Net income ⁽¹⁾			OCI			Transfers into Level 3			Transfers out of Level 3
Assets
Fixed income securities:
Municipal	$	338		$	(12	)	$	21		$	—		$	—
Corporate	1,501			28			(37		)	84			(168		)
ABS	199			(1		)	30			17			(16		)
CMBS	21			(1		)	4			—			—
Redeemable preferred stock	1			—			—			—			—
Total fixed income securities	2,060			14			18			101			(184		)
Equity securities	7			—			—			—			—
Free-standing derivatives, net	(27		)	20			—			—			—
Other assets	1			—			—			—			—
Assets held for sale	—			(1		)	(8		)	3			(2		)
Total recurring Level 3 assets	$	2,041		$	33		$	10		$	104		$	(186	)

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	(553	)	$	77		$	—		$	—		$	—
Liabilities held for sale	—			16			—			—			—
Total recurring Level 3 liabilities	$	(553	)	$	93		$	—		$	—		$	—

	Transfer to held for sale			Purchases/Issues ⁽²⁾			Sales			Settlements			Balance as of September 30, 2013
Assets
Fixed income securities:
Municipal	$	(51	)	$	—		$	(122	)	$	—		$	174
Corporate	(244		)	132			(164		)	(129		)	1,003
ABS	(85		)	—			(8		)	(21		)	115
CMBS	(5		)	—			(17		)	—			2
Redeemable preferred stock	—			—			—			—			1
Total fixed income securities	(385		)	132			(311		)	(150		)	1,295
Equity securities	—			—			(1		)	—			6
Free-standing derivatives, net	—			2			—			(5		)	(10		)	⁽³⁾
Other assets	—			—			—			—			1
Assets held for sale	385			—			(10		)	(2		)	365
Total recurring Level 3 assets	$	—		$	134		$	(322	)	$	(157	)	$	1,657

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	265		$	(74	)	$	—		$	2		$	(283	)
Liabilities held for sale	(265		)	(2		)	—			2			(249		)
Total recurring Level 3 liabilities	$	—		$	(76	)	$	—		$	4		$	(532	)

____________


(1)	The effect to net income totals $126 million and is reported in the Condensed Consolidated Statements of Operations and Comprehensive Income as follows: $18 million in realized capital gains and losses, $12 million in net investment income, $40 million in interest credited to contractholder funds and $56 million in contract benefits.


⁽²⁾	Represents purchases for assets and issues for liabilities


(3)	Comprises $6 million of assets and $16 million of liabilities.

Transfers between level categorizations may occur due to changes in the availability of market observable inputs, which generally are caused by changes in market conditions such as liquidity, trading volume or bid-ask spreads. Transfers between level categorizations may also occur due to changes in the valuation source. For example, in situations where a fair value quote is not provided by the Company’s independent third-party valuation service provider and as a result the price is stale or has been replaced with a broker quote whose inputs have not been corroborated to be market observable, the security is transferred into Level 3. Transfers in and out of level categorizations are reported as having occurred at the beginning of the quarter in which the transfer occurred. Therefore, for all transfers into Level 3, all realized and changes in unrealized gains and losses in the quarter of transfer are reflected in the Level 3 rollforward table.

There were no transfers between Level 1 and Level 2 during the three months and nine months ended September 30, 2014 or 2013.

Transfers into Level 3 during the three months and nine months ended September 30, 2014 and 2013 included situations where a fair value quote was not provided by the Company’s independent third-party valuation service provider and as a result the price was stale or had been replaced with a broker quote where the inputs had not been corroborated to be market observable resulting in the security being classified as Level 3. Transfers out of Level 3 during the three months and nine months ended September 30, 2014 and 2013 included situations where a broker quote was used in the prior period and a fair value quote became available from the Company’s independent third-party valuation service provider in the current period. A quote utilizing the new pricing source was not available as of the prior period, and any gains or losses related to the change in valuation source for individual securities were not significant.

The following table provides the change in unrealized gains and losses included in net income for Level 3 assets and liabilities held as of September 30.



($ in millions)	Three months ended September 30,					Nine months ended September 30,
	2014		2013			2014			2013
Assets
Fixed income securities:
Municipal	$	—	$	—		$	(1	)	$	(5	)
Corporate	3		3			8			9
ABS	—		—			—			(1		)
CMBS	—		—			(1		)	(1		)
Total fixed income securities	3		3			6			2
Free-standing derivatives, net	—		(2		)	6			14
Other assets	—		—			1			—
Assets held for sale	—		(1		)	(1		)	(1		)
Total recurring Level 3 assets	$	3	$	—		$	12		$	15

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	9	$	8		$	(5	)	$	77
Liabilities held for sale	—		16			17			16
Total recurring Level 3 liabilities	$	9	$	24		$	12		$	93

The amounts in the table above represent the change in unrealized gains and losses included in net income for the period of time that the asset or liability was determined to be in Level 3. These gains and losses total $12 million for the three months ended September 30, 2014 and are reported as follows: $3 million in net investment income, $5 million in interest credited to contractholder funds and $4 million in contract benefits. These gains and losses total $24 million for the three months ended September 30, 2013 and are reported as follows: $(2) million in realized capital gains and losses, $2 million in net investment income, $14 million in interest credited to contractholder funds and $10 million in contract benefits. These gains and losses total $24 million for the nine months ended September 30, 2014 and are reported as follows: $5 million in realized capital gains and losses, $6 million in net investment income, $5 million in interest credited to contractholder funds and $8 million in contract benefits. These gains and losses total $108 million for the nine months ended September 30, 2013 and are reported as follows: $7 million in realized capital gains and losses, $8 million in net investment income, $37 million in interest credited to contractholder funds and $56 million in contract benefits.

Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value.

Financial assets



($ in millions)	September 30, 2014				December 31, 2013
	Carrying value		Fair value		Carrying value		Fair value
Mortgage loans	$	3,644	$	3,856	$	4,173	$	4,300
Cost method limited partnerships	526		729		605		799
Agent loans	364		357		341		325
Bank loans	339		337		160		161
Notes due from related party	275		275		275		275
Assets held for sale	—		—		1,458		1,532

The fair value of mortgage loans, including those classified as assets held for sale, is based on discounted contractual cash flows or, if the loans are impaired due to credit reasons, the fair value of collateral less costs to sell. Risk adjusted discount rates are selected using current rates at which similar loans would be made to borrowers with similar characteristics, using similar types of properties as collateral. The fair value of cost method limited partnerships is determined using reported net asset values of the underlying funds. The fair value of agent loans, which are reported in other investments, is based on discounted cash flow calculations that use discount rates with a spread over U.S. Treasury rates. Assumptions used in developing estimated cash flows and discount rates consider the loan’s credit and liquidity risks. The fair value of bank loans, which are reported in other investments or assets held for sale, is based on broker quotes from brokers familiar with the loans and current market conditions. The fair value of notes due from related party, which are reported in other investments, is based on discounted cash flow calculations using current interest rates for instruments with comparable terms. The fair value measurements for mortgage loans, cost method limited partnerships, agent loans, bank loans, notes due from related party and assets held for sale are categorized as Level 3.

Financial liabilities



($ in millions)	September 30, 2014				December 31, 2013
	Carrying value		Fair value		Carrying value		Fair value
Contractholder funds on investment contracts	$	14,059	$	14,741	$	15,542	$	16,198
Notes due to related parties	275		275		282		282
Liability for collateral	479		479		328		328
Liabilities held for sale	—		—		7,417		7,298

The fair value of contractholder funds on investment contracts, including those classified as liabilities held for sale, is based on the terms of the underlying contracts utilizing prevailing market rates for similar contracts adjusted for the Company’s own credit risk. Deferred annuities included in contractholder funds are valued using discounted cash flow models that incorporate market value margins, which are based on the cost of holding economic capital, and the Company’s own credit risk. Immediate annuities without life contingencies and fixed rate funding agreements are valued at the present value of future benefits using market implied interest rates which include the Company’s own credit risk. The fair value measurements for contractholder funds on investment contracts and liabilities held for sale are categorized as Level 3.

The fair value of notes due to related parties is based on discounted cash flow calculations using current interest rates for instruments with comparable terms and considers the Company’s own credit risk. The liability for collateral is valued at carrying value due to its short-term nature. The fair value measurements for liability for collateral are categorized as Level 2. The fair value measurements for notes due to related parties are categorized as Level 3.