FAIR VALUE OF FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

FAIR VALUE OF FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company determined the fair value of its financial instruments based on the fair value hierarchy established in FASB guidance referenced in the Fair Value Measurements and Disclosures Topic which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company has adopted the provisions from the FASB guidance that is referenced in the Fair Value Measurements and Disclosures Topic for non-financial assets and liabilities (such as property and equipment, goodwill, and other intangible assets) that are required to be measured at fair value on a periodic basis. The effect on the Company’s periodic fair value measurements for non-financial assets and liabilities was not material.

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded at fair value on the consolidated balance sheets are categorized as follows:

•Level 1:  Unadjusted quoted prices for identical assets or liabilities in an active market.

•Level 2:  Quoted prices in markets that are not active or significant inputs that are observable either directly or indirectly. Level 2 inputs include the following:

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

b) Quoted prices for identical or similar assets or liabilities in non-active markets;

c) Inputs other than quoted market prices that are observable; and

d) Inputs that are derived principally from or corroborated by observable market data through correlation or other means.

•Level 3:  Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management’s own estimates about the assumptions a market participant would use in pricing the asset or liability.

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of September 30, 2019:

	Measurement Category	Level 1		Level 2		Level 3		Total
		(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	4	$	—	$	5,351,464	$	—	$	5,351,464
Commercial mortgage-backed securities	4	—		2,735,193		9,635		2,744,828
Other asset-backed securities	4	—		1,482,414		416,062		1,898,476
U.S. government-related securities	4	801,931		360,276		—		1,162,207
Other government-related securities	4	—		605,351		—		605,351
States, municipals, and political subdivisions	4	—		4,834,657		—		4,834,657
Corporate securities	4	—		46,134,425		1,325,112		47,459,537
Redeemable preferred stocks	4	70,627		16,935		—		87,562
Total fixed maturity securities - available-for-sale		872,558		61,520,715		1,750,809		64,144,082
Fixed maturity securities - trading
Residential mortgage-backed securities	3	—		202,963		—		202,963
Commercial mortgage-backed securities	3	—		208,935		—		208,935
Other asset-backed securities	3	—		76,205		61,527		137,732
U.S. government-related securities	3	25,756		22,356		—		48,112
Other government-related securities	3	—		26,792		—		26,792
States, municipals, and political subdivisions	3	—		300,331		—		300,331
Corporate securities	3	—		1,592,418		7,036		1,599,454
Redeemable preferred stocks	3	12,195		—		—		12,195
Total fixed maturity securities - trading		37,951		2,430,000		68,563		2,536,514
Total fixed maturity securities		910,509		63,950,715		1,819,372		66,680,596
Equity securities	3	549,487		36		69,818		619,341
Other long-term investments(1)	3 & 4	62,772		567,702		167,960		798,434
Short-term investments	3	1,517,313		80,606		—		1,597,919
Total investments		3,040,081		64,599,059		2,057,150		69,696,290
Cash	3	293,299		—		—		293,299
Other assets	3	34,621		—		—		34,621
Assets related to separate accounts
Variable annuity	3	12,542,212		—		—		12,542,212
Variable universal life	3	1,066,999		—		—		1,066,999
Total assets measured at fair value on a recurring basis		$	16,977,212	$	64,599,059	$	2,057,150	$	83,633,421
Liabilities:
Annuity account balances (2)	3	$	—	$	—	$	71,820	$	71,820
Other liabilities(1)	3 & 4	12,579		251,378		1,474,952		1,738,909
Total liabilities measured at fair value on a recurring basis		$	12,579	$	251,378	$	1,546,772	$	1,810,729
(1) Includes certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.
(3) Fair Value through Net Income
(4) Fair Value through Other Comprehensive Income (Loss)

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of December 31, 2018:

	Measurement Category	Level 1		Level 2		Level 3		Total
		(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	4	$	—	$	3,611,590	$	—	$	3,611,590
Commercial mortgage-backed securities	4	—		2,295,084		—		2,295,084
Other asset-backed securities	4	—		970,251		421,642		1,391,893
U.S. government-related securities	4	1,010,485		629,020		—		1,639,505
Other government-related securities	4	—		515,964		—		515,964
State, municipals, and political subdivisions	4	—		3,588,841		—		3,588,841
Corporate securities	4	—		35,724,552		638,276		36,362,828
Redeemable preferred stocks	4	65,536		17,266		—		82,802
Total fixed maturity securities - AFS		1,076,021		47,352,568		1,059,918		49,488,507
Fixed maturity securities - trading
Residential mortgage-backed securities	3	—		241,836		—		241,836
Commercial mortgage-backed securities	3	—		188,925		—		188,925
Other asset-backed securities	3	—		133,851		26,056		159,907
U.S. government-related securities	3	27,453		32,341		—		59,794
Other government-related securities	3	—		44,207		—		44,207
State, municipals, and political subdivisions	3	—		286,413		—		286,413
Corporate securities	3	—		1,417,591		6,242		1,423,833
Redeemable preferred stocks	3	11,277		—		—		11,277
Total fixed maturity securities - trading		38,730		2,345,164		32,298		2,416,192
Total fixed maturity securities		1,114,751		49,697,732		1,092,216		51,904,699
Equity securities	3	531,523		36		64,325		595,884
Other long-term investments(1)	3&4	83,047		180,438		112,344		375,829
Short-term investments	3	730,067		77,216		—		807,283
Total investments		2,459,388		49,955,422		1,268,885		53,683,695
Cash	3	173,714		—		—		173,714
Other assets	3	29,257		—		—		29,257
Assets related to separate accounts
Variable annuity	3	12,288,919		—		—		12,288,919
Variable universal life	3	937,732		—		—		937,732
Total assets measured at fair value on a recurring basis		$	15,889,010	$	49,955,422	$	1,268,885	$	67,113,317
Liabilities:
Annuity account balances(2)	3	$	—	$	—	$	76,119	$	76,119
Other liabilities(1)	3&4	56,018		69,501		629,942		755,461
Total liabilities measured at fair value on a recurring basis		$	56,018	$	69,501	$	706,061	$	831,580
(1) Includes certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.
(3) Fair Value through Net Income
(4) Fair Value through Other Comprehensive Income (Loss)

Determination of fair values

The valuation methodologies used to determine the fair values of assets and liabilities reflect market participant assumptions and are based on the application of the fair value hierarchy that prioritizes observable market inputs over unobservable inputs. The Company determines the fair values of certain financial assets and financial liabilities based on quoted market prices, where available. The Company also determines certain fair values based on future cash flows discounted at the appropriate current market rate. Fair values reflect adjustments for counterparty credit quality, the Company’s credit standing, liquidity, and where appropriate, risk margins on unobservable parameters. The following is a discussion of the methodologies used to determine fair values for the financial instruments as listed in the above table.

The fair value of fixed maturity, short-term, and equity securities is determined by management after considering one of three primary sources of information: third party pricing services, non-binding independent broker quotations, or pricing matrices. Security pricing is applied using a “waterfall” approach whereby publicly available prices are first sought from third party pricing services, the remaining unpriced securities are submitted to independent brokers for non-binding prices, or lastly, securities are priced using a pricing matrix. Typical inputs used by these three pricing methods include, but are not limited to: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. Third party pricing services price 91.6% of the Company’s available-for-sale and trading fixed maturity securities. Based on the typical trading volumes and the lack of quoted market prices for available-for-sale and trading fixed maturities, third party pricing services derive the majority of security prices from observable market inputs such as recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information outlined above. If there are no recent reported trades, the third party pricing services and brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Certain securities are priced via independent non-binding broker quotations, which are considered to have no significant unobservable inputs. When using non-binding independent broker quotations, when available the Company obtains two quotes per security. Where multiple broker quotes are obtained, the Company reviews the quotes and selects the quote that provides the best estimate of the price a market participant would pay for these specific assets in an arm’s length transaction. A pricing matrix is used to price securities for which the Company is unable to obtain or effectively rely on either a price from a third party pricing service or an independent broker quotation.

The pricing matrix used by the Company begins with current spread levels to determine the market price for the security. The credit spreads, assigned by brokers, incorporate the issuer’s credit rating, liquidity discounts, weighted-average of contracted cash flows, risk premium, if warranted, due to the issuer’s industry, and the security’s time to maturity. The Company uses credit ratings provided by nationally recognized rating agencies.

For securities that are priced via non-binding independent broker quotations, the Company assesses whether prices received from independent brokers represent a reasonable estimate of fair value. The Company’s assessment incorporates various metrics (yield curves, credit spreads, prepayment rates, etc.) along with other information available to the Company from both internal and external sources to determine the valuation of such holdings. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon the analytics, the price received from the independent broker is adjusted accordingly. The Company did not adjust any quotes or prices received from brokers during the nine months ended September 30, 2019.

The Company has analyzed the third party pricing services’ valuation methodologies and related inputs and has also evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs that is in accordance with the Fair Value Measurements and Disclosures Topic of the ASC. Based on this evaluation and investment class analysis, each price was classified into Level 1, 2, or 3. Most prices provided by third party pricing services are classified into Level 2 because the significant inputs used in pricing the securities are market observable and the observable inputs are corroborated by the Company. Since the matrix pricing of certain debt securities includes significant non-observable inputs, they are classified as Level 3.

Asset-Backed Securities

This category mainly consists of residential mortgage-backed securities, commercial mortgage-backed securities, and other asset-backed securities (collectively referred to as asset-backed securities or “ABS”). As of September 30, 2019, the Company held $10.1 billion of ABS classified as Level 2. These securities are priced from information provided by a third party pricing service and independent broker quotes. The third party pricing services and brokers mainly value securities using both a market and income approach to valuation. As part of this valuation process they consider the following characteristics of the item being measured to be relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types

of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, and 7) credit ratings of the securities.

After reviewing these characteristics of the ABS, the third party pricing service and brokers use certain inputs to determine the value of the security. For ABS classified as Level 2, the valuation would consist of predominantly market observable inputs such as, but not limited to: 1) monthly principal and interest payments on the underlying assets, 2) average life of the security, 3) prepayment speeds, 4) credit spreads, 5) treasury and swap yield curves, and 6) discount margin. The Company reviews the methodologies and valuation techniques (including the ability to observe inputs) in assessing the information received from external pricing services and in consideration of the fair value presentation.

As of September 30, 2019, the Company held $487.2 million of Level 3 ABS, which included $425.7 million of other asset-backed securities classified as available-for-sale and $61.5 million of other asset-backed securities classified as trading. These securities are predominantly ARS whose underlying collateral is at least 97% guaranteed by the FFELP. As a result of the ARS market collapse during 2008, the Company prices its ARS using an income approach valuation model. As part of the valuation process the Company reviews the following characteristics of the ARS in determining the relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, 7) credit ratings of the securities, 8) liquidity premium, and 9) paydown rate. In periods where market activity increases and there are transactions at a price that is not the result of a distressed or forced sale we consider those prices as part of our valuation. If the market activity during a period is solely the result of the issuer redeeming positions we consider those transactions in our valuation, but still consider them to be Level 3 measurements due to the nature of the transaction.

Corporate Securities, Redeemable Preferred Stocks, U.S. Government-Related Securities, States, Municipals, and Political Subdivisions, and Other Government-Related Securities

As of September 30, 2019, the Company classified approximately $53.9 billion of corporate securities, redeemable preferred stocks, U.S. government-related securities, states, municipals, and political subdivisions, and other government-related securities as Level 2. The fair value of the Level 2 securities is predominantly priced by broker quotes and a third party pricing service. The Company has reviewed the valuation techniques of the brokers and third party pricing service and has determined that such techniques used Level 2 market observable inputs. The following characteristics of the securities are considered to be the primary relevant inputs to the valuation: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) seniority, and 4) credit ratings. The Company reviews the methodologies and valuation techniques (including the ability to observe inputs) in assessing the information received from external pricing services and in consideration of the fair value presentation.

The brokers and third party pricing service utilize valuation models that consist of a hybrid income and market approach to valuation. The pricing models utilize the following inputs: 1) principal and interest payments, 2) treasury yield curve, 3) credit spreads from new issue and secondary trading markets, 4) dealer quotes with adjustments for issues with early redemption features, 5) liquidity premiums present on private placements, and 6) discount margins from dealers in the new issue market.

As of September 30, 2019, the Company classified approximately $1.3 billion of securities as Level 3 valuations. Level 3 securities primarily represent investments in illiquid bonds for which no price is readily available. To determine a price, the Company uses a discounted cash flow model with both observable and unobservable inputs. These inputs are entered into an industry standard pricing model to determine the final price of the security. These inputs include: 1) principal and interest payments, 2) coupon rate, 3) sector and issuer level spread over treasury, 4) underlying collateral, 5) credit ratings, 6) maturity, 7) embedded options, 8) recent new issuance, 9) comparative bond analysis, and 10) an illiquidity premium.

Equities

As of September 30, 2019, the Company held approximately $69.9 million of equity securities classified as Level 2 and Level 3. Of this total, $68.5 million represents Federal Home Loan Bank (“FHLB”) stock. The Company believes that the cost of the FHLB stock approximates fair value.

Other Long-term Investments and Other Liabilities

Other long-term investments and other liabilities consist entirely of free-standing and embedded derivative financial instruments. Refer to Note 7, Derivative Financial Instruments for additional information related to derivatives. Derivative financial instruments are valued using exchange prices, independent broker quotations, or pricing valuation models, which utilize market data inputs. Excluding embedded derivatives, as of September 30, 2019, 100% of derivatives based upon notional values were priced using exchange prices or independent broker quotations. Inputs used to value derivatives include, but are not

limited to, interest swap rates, credit spreads, interest rate and equity market volatility indices, equity index levels, and treasury rates. The Company performs monthly analysis on derivative valuations that includes both quantitative and qualitative analyses.

Derivative instruments classified as Level 1 generally include futures and options, which are traded on active exchange markets.

Derivative instruments classified as Level 2 primarily include swaps, options, and swaptions, which are traded over-the-counter. Level 2 also includes certain centrally cleared derivatives. These derivative valuations are determined using independent broker quotations, which are corroborated with observable market inputs.

Derivative instruments classified as Level 3 are embedded derivatives and include at least one significant non-observable input. A derivative instrument containing Level 1 and Level 2 inputs will be classified as a Level 3 financial instrument in its entirety if it has at least one significant Level 3 input.

The Company utilizes derivative instruments to manage the risk associated with certain assets and liabilities. However, the derivative instruments may not be classified within the same fair value hierarchy level as the associated assets and liabilities. Therefore, the changes in fair value on derivatives reported in Level 3 may not reflect the offsetting impact of the changes in fair value of the associated assets and liabilities.

The embedded derivatives are carried at fair value in other long-term investments and other liabilities on the Company’s consolidated condensed balance sheet. The changes in fair value are recorded in earnings as Realized investment gains (losses). Refer to Note 7, Derivative Financial Instruments for more information related to each embedded derivatives gains and losses.

The fair value of the guaranteed living withdrawal benefits (“GLWB”) embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using multiple risk neutral stochastic equity scenarios and policyholder behavior assumptions. The risk neutral scenarios are generated using the current swap curve and projected equity volatilities and correlations. The projected equity volatilities are based on a blend of historical volatility and near-term equity market implied volatilities. The equity correlations are based on historical price observations. For policyholder behavior assumptions, expected lapse and utilization assumptions are used and updated for actual experience, as necessary. The Company assumes age-based mortality from the Ruark 2015 ALB table, with attained age factors varying from 87.0% - 100.0% based on company experience. The present value of the cash flows is determined using the discount rate curve, which is based upon LIBOR plus a credit spread (to represent the Company’s non-performance risk). For expected lapse and utilization, assumptions are used and updated for actual experience, as necessary, using an internal predictive model developed by the Company. As a result of using significant unobservable inputs, the GLWB embedded derivative is categorized as Level 3. Policyholder assumptions are reviewed on an annual basis.

The balance of the fixed indexed annuity (“FIA”) embedded derivative is impacted by policyholder cash flows associated with the FIA product that are allocated to the embedded derivative in addition to changes in the fair value of the embedded derivative during the reporting period. The fair value of the FIA embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using current index values and volatility, the hedge budget used to price the product, and policyholder assumptions (both elective and non-elective). For policyholder behavior, assumptions are used and updated for actual experience, as necessary. The Company assumes age-based mortality from the 2015 Ruark ALB mortality table, with attained age factors varying from 87.0% - 100.0% based on company experience. The present value of the cash flows is determined using the discount rate curve, which is based upon LIBOR up to one year and constant maturity treasury rates plus a credit spread (to represent the Company’s non-performance risk) thereafter. Policyholder assumptions are reviewed on an annual basis. As a result of using significant unobservable inputs, the FIA embedded derivative is categorized as Level 3.

The balance of the indexed universal life (“IUL”) embedded derivative is impacted by policyholder cash flows associated with the IUL product that are allocated to the embedded derivative in addition to changes in the fair value of the embedded derivative during the reporting period. The fair value of the IUL embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using current index values and volatility, the hedge budget used to price the product, and policyholder assumptions (both elective and non-elective). For policyholder behavior assumptions, expected lapse and withdrawal assumptions are used and updated for actual experience, as necessary. The Company assumes age-based mortality from the SOA 2015 VBT Primary Tables, with attained age factors varying from 37.0% - 577.0% based on company experience. The present value of the cash flows is determined using the discount rate curve, which is based upon LIBOR up to one year and constant maturity treasury rates plus a credit spread (to represent the Company’s non-performance risk) thereafter. Policyholder assumptions are reviewed on an annual basis. As a result of using significant unobservable inputs, the IUL embedded derivative is categorized as Level 3.

The Company has assumed and ceded certain blocks of policies under modified coinsurance agreements in which the investment results of the underlying portfolios inure directly to the reinsurers. As a result, these agreements contain embedded derivatives that are reported at fair value. Changes in their fair value are reported in earnings. The investments supporting these agreements where the Company has ceded certain blocks of policies are designated as “trading securities”; therefore changes in their fair value are also reported in earnings. As of September 30, 2019, the fair value of the embedded derivative is based upon the relationship between the statutory policy liabilities (net of policy loans) of $3.5 billion and the statutory unrealized gain (loss) of the securities of $285.9 million. As a result, changes in the fair value of the embedded derivatives where the Company has ceded certain blocks of policies are largely offset by the changes in fair value of the related investments and each are reported in earnings. The fair value of the embedded derivative is considered a Level 3 valuation due to the unobservable nature of the policy liabilities.

Annuity Account Balances

The Company records a certain legacy block of FIA reserves at fair value. Based on the characteristics of these reserves, the Company believes that the fund value approximates fair value. The fair value measurement of these reserves is considered a Level 3 valuation due to the unobservable nature of the fund values. The Level 3 fair value as of September 30, 2019 is $71.8 million.

Separate Accounts

Separate account assets are invested in open-ended mutual funds and are included in Level 1.

Valuation of Level 3 Financial Instruments

The following table presents the valuation method for material financial instruments included in Level 3, as well as the unobservable inputs used in the valuation of those financial instruments:

	Fair Value as of September 30, 2019		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(Dollars In Thousands)
Assets:
Other asset-backed securities	$	415,950	Liquidation	Liquidation value	$95.39 - $97.00 ($96.48)
			Discounted cash flow	Liquidity premium	0.01% - 1.32% (0.44%)
				Paydown rate	9.96% - 12.61% (11.62%)
Corporate securities	1,325,112		Discounted cash flow	Spread over treasury	0.89% - 3.93% (1.73%)
Liabilities:(1)
Embedded derivatives - GLWB(2)	$	547,306	Actuarial cash flow model	Mortality	87% to 100% of
					Ruark 2015 ALB table
				Lapse	Internal Predictive Model
				Utilization	Internal Predictive Model
				Nonperformance risk	0.12% - 0.97%
Embedded derivative - FIA	308,861		Actuarial cash flow model	Expenses	$195 per policy
				Withdrawal rate	0.4% - 1.2% prior to age 70, 100% of the
					RMD for ages 70+
				Mortality	87% to 100% of Ruark 2015 ALB
					table
				Lapse	.5% - 50%, depending
					on duration/surrender
					charge period
					Dynamically adjusted for WB moneyness and projected market rates vs credited rates
				Nonperformance risk	0.12% - 0.97%
Embedded derivative - IUL	141,793		Actuarial cash flow model	Mortality	37% - 156% of 2015
					VBT Primary Tables
				Lapse	0.5% - 10.0%, depending
					on duration/distribution
					channel and smoking class
				Nonperformance risk	0.12% - 0.97%
(1) Excludes modified coinsurance arrangements.
(2) The fair value for the GLWB embedded derivative is presented as a net liability.

The chart above excludes Level 3 financial instruments that are valued using broker quotes and for which book value approximates fair value.

The Company has considered all reasonably available quantitative inputs as of September 30, 2019, but the valuation techniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company. This resulted in $79.4 million of financial instruments being classified as Level 3 as of September 30, 2019. Of the $79.4 million, $71.3 million are other asset-backed securities, $7.0 million are corporate securities, and $1.1 million are equity securities.

In certain cases, the Company has determined that book value materially approximates fair value. As of September 30, 2019, the Company held $68.7 million of financial instruments where book value approximates fair value which was predominantly FHLB stock.

The following table presents the valuation method for material financial instruments included in Level 3, as well as the unobservable inputs used in the valuation of those financial instruments:

	Fair Value as of December 31, 2018		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(Dollars In Thousands)
Assets:
Other asset-backed securities	$	421,458	Liquidation	Liquidation value	$85.75 - $99.99 ($95.36)
			Discounted Cash Flow	Liquidity premium	0.02% - 1.25% (0.64%)
				Paydown rate	10.96% - 13.11% (12.03%)
Corporate securities	631,068		Discounted cash flow	Spread over treasury	0.84% - 3.0% (1.84%)
Liabilities:(1)
Embedded derivatives - GLWB(2)	$	184,071	Actuarial cash flow model	Mortality	87% to 100% of
					Ruark 2015 ALB table
				Lapse	Ruark Predictive Model
				Utilization	99%. 10% of policies have a one-
					time over-utilization of 400%
				Nonperformance risk	0.21% - 1.16%
Embedded derivative - FIA	217,288		Actuarial cash flow model	Expenses	$145 per policy
				Withdrawal rate	1.5% prior to age 70, 100% of the
					RMD for ages 70+
				Mortality	87% to 100% of Ruark 2015 ALB
					table
				Lapse	1.0% - 30.0%, depending
					on duration/surrender
					charge period
				Nonperformance risk	0.21% - 1.16%
Embedded derivative - IUL	90,231		Actuarial cash flow model	Mortality	37% - 577% of 2015
					VBT Primary Tables
				Lapse	0.5% - 10.0%, depending
					on duration/distribution
					channel and smoking class
				Nonperformance risk	0.21% - 1.16%
(1) Excludes modified coinsurance arrangements.
(2) The fair value for the GLWB embedded derivative is presented as a net liability.

The chart above excludes Level 3 financial instruments that are valued using broker quotes and for which book value approximates fair value.

The Company had considered all reasonably available quantitative inputs as of December 31, 2018, but the valuation techniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company. This resulted in $40.4 million of financial instruments being classified as Level 3 as of December 31, 2018. Of the $40.4 million, $26.2 million are other asset-backed securities, $13.5 million are corporate securities, and $0.7 million are equity securities.

In certain cases the Company has determined that book value materially approximates fair value. As of December 31, 2018, the Company held $63.6 million of financial instruments where book value approximates fair value which was predominantly FHLB stock.

The asset-backed securities classified as Level 3 are predominantly ARS. A change in the paydown rate (the projected annual rate of principal reduction) of the ARS can significantly impact the fair value of these securities. A decrease in the paydown rate would increase the projected weighted average life of the ARS and increase the sensitivity of the ARS’ fair value to changes in interest rates. An increase in the liquidity premium would result in a decrease in the fair value of the securities, while a decrease in the liquidity premium would increase the fair value of these securities. The liquidation values for these securities are sensitive to the issuer’s available cash flows and ability to redeem the securities, as well as the current holders’ willingness to liquidate at the specified price.

The fair value of corporate bonds classified as Level 3 is sensitive to changes in the interest rate spread over the corresponding U.S. Treasury rate. This spread represents a risk premium that is impacted by company-specific and market factors. An increase in the spread can be caused by a perceived increase in credit risk of a specific issuer and/or an increase in the overall market risk premium associated with similar securities. The fair values of corporate bonds are sensitive to changes in spread. When holding the treasury rate constant, the fair value of corporate bonds increases when spreads decrease, and decreases when spreads increase.

The fair value of the GLWB embedded derivative is sensitive to changes in the discount rate which includes the Company’s nonperformance risk, volatility, lapse, and mortality assumptions. The volatility assumption is an observable input as it is based on market inputs. The Company’s nonperformance risk, lapse, and mortality are unobservable. An increase in the three unobservable assumptions would result in a decrease in the fair value of the liability and conversely, if there is a decrease in the assumptions the fair value would increase. The fair value is also dependent on the assumed policyholder utilization of the GLWB where an increase in assumed utilization would result in an increase in the fair value of the liability and conversely, if there is a decrease in the assumption, the fair value would decrease.

The fair value of the FIA embedded derivative is predominantly impacted by observable inputs such as discount rates and equity returns. However, the fair value of the FIA embedded derivative is sensitive to non-performance risk, which is unobservable. The value of the liability increases with decreases in the discount rate and non-performance risk and decreases with increases in the discount rate and nonperformance risk. The value of the liability increases with increases in equity returns and the liability decreases with a decrease in equity returns.

The fair value of the IUL embedded derivative is predominantly impacted by observable inputs such as discount rates and equity returns. However, the fair value of the IUL embedded derivative is sensitive to non-performance risk, which is unobservable. The value of the liability increases with decreases in the discount rate and non-performance risk and decreases with increases in the discount rate and non-performance risk. The value of the liability increases with increases in equity returns and the liability decreases with a decrease in equity returns.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended September 30, 2019, for which the Company has used significant unobservable inputs (Level 3):

			Total Realized and Unrealized Gains				Total Realized and Unrealized Losses																		Total Gains (losses) included in Earnings related to Instruments still held at the  Reporting Date
	Beginning Balance		Included  in Earnings		Included  in Other Comprehensive Income		Included  in Earnings		Included  in Other Comprehensive Income		Purchases		Sales		Issuances		Settlements		Transfers in/out of Level 3		Other		Ending Balance
	(Dollars In Thousands)
Assets:
Fixed maturity securities AFS
Residential mortgage-backed securities	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial mortgage-backed securities	9,366		—		294		—		—		—		(19)		—		—		—		(6)		9,635		—
Other asset-backed securities	418,310		—		865		(14)		(3,276)		—		(8)		—		—		—		185		416,062		—
Corporate securities	1,328,491		—		22,910		—		(3,408)		9,150		(72,215)		—		—		41,319		(1,135)		1,325,112		—
Total fixed maturity securities - AFS	1,756,167		—		24,069		(14)		(6,684)		9,150		(72,242)		—		—		41,319		(956)		1,750,809		—
Fixed maturity securities - trading
Other asset-backed securities	62,180		294		—		(34)		—		—		(879)		—		—		—		(34)		61,527		274
Corporate securities	5,294		67		—		—		—		1,700		—		—		—		—		(25)		7,036		6,906
Total fixed maturity securities - trading	67,474		361		—		(34)		—		1,700		(879)		—		—		—		(59)		68,563		7,180
Total fixed maturity securities	1,823,641		361		24,069		(48)		(6,684)		10,850		(73,121)		—		—		41,319		(1,015)		1,819,372		7,180
Equity securities	69,627		192		—		(1)		—		—		—		—		—		—		—		69,818		191
Other long-term investments(1)	110,923		57,037		—		—		—		—		—		—		—		—		—		167,960		57,037
Total investments	2,004,191		57,590		24,069		(49)		(6,684)		10,850		(73,121)		—		—		41,319		(1,015)		2,057,150		64,408
Total assets measured at fair value on a recurring basis	$	2,004,191	$	57,590	$	24,069	$	(49)	$	(6,684)	$	10,850	$	(73,121)	$	—	$	—	$	41,319	$	(1,015)	$	2,057,150	$	64,408
Liabilities:
Annuity account balances(2)	$	72,585	$	—	$	—	$	(523)	$	—	$	—	$	—	$	91	$	1,379	$	—	$	—	$	71,820	$	—
Other liabilities(1)	1,097,077		—		—		(344,191)		—		33,684		—		—		—		—		—		1,474,952		(344,191)
Total liabilities measured at fair value on a recurring basis	$	1,169,662	$	—	$	—	$	(344,714)	$	—	$	33,684	$	—	$	91	$	1,379	$	—	$	—	$	1,546,772	$	(344,191)
(1) Represents certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.

For the three months ended September 30, 2019, there were $52.1 million of securities transferred into Level 3 from Level 2.

For the three months ended September 30, 2019, there were $10.8 million of securities transferred into Level 2 from Level 3. These transfers resulted from securities that were priced internally using significant unobservable inputs where market observable inputs were not available in previous periods but were priced by independent pricing services or brokers as of September 30, 2019.

For the three months ended September 30, 2019, there were no transfers from Level 2 into Level 1.

For the three months ended September 30, 2019, there were no transfers from Level 1 into Level 2.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the nine months ended September 30, 2019, for which the Company has used significant unobservable inputs (Level 3):

			Total Realized and Unrealized Gains				Total Realized and Unrealized Losses																		Total Gains (losses) included in Earnings related to Instruments still held at the  Reporting Date
	Beginning Balance		Included  in Earnings		Included  in Other Comprehensive Income		Included  in Earnings		Included  in Other Comprehensive Income		Purchases		Sales		Issuances		Settlements		Transfers in/out of Level 3		Other		Ending Balance
	(Dollars In Thousands)
Assets:
Fixed maturity securities AFS
Residential mortgage-backed securities	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial mortgage-backed securities	—		—		310		—		—		9,359		(26)		—		—		—		(8)		9,635		—
Other asset-backed securities	421,642		446		11,525		(71)		(8,075)		—		(10,023)		—		—		—		618		416,062		—
Corporate securities	638,276		82		66,866		—		(6,917)		704,777		(157,171)		—		—		80,574		(1,375)		1,325,112		—
Total fixed maturity securities - AFS	1,059,918		528		78,701		(71)		(14,992)		714,136		(167,220)		—		—		80,574		(765)		1,750,809		—
Fixed maturity securities - trading
Other asset-backed securities	26,056		4,300		—		(3,618)		—		15,463		(6,771)		—		—		26,267		(170)		61,527		(2,442)
Corporate securities	6,242		236		—		(31)		—		1,700		(1,035)		—		—		—		(76)		7,036		5,274
Total fixed maturity securities - trading	32,298		4,536		—		(3,649)		—		17,163		(7,806)		—		—		26,267		(246)		68,563		2,832
Total fixed maturity securities	1,092,216		5,064		78,701		(3,720)		(14,992)		731,299		(175,026)		—		—		106,841		(1,011)		1,819,372		2,832
Equity securities	64,325		431		—		(17)		—		5,079		—		—		—		—		—		69,818		345
Other long-term investments(1)	112,344		83,959		—		(29,922)		—		1,579		—		—		—		—		—		167,960		54,037
Total investments	1,268,885		89,454		78,701		(33,659)		(14,992)		737,957		(175,026)		—		—		106,841		(1,011)		2,057,150		57,214
Total assets measured at fair value on a recurring basis	$	1,268,885	$	89,454	$	78,701	$	(33,659)	$	(14,992)	$	737,957	$	(175,026)	$	—	$	—	$	106,841	$	(1,011)	$	2,057,150	$	57,214
Liabilities:
Annuity account balances(2)	$	76,119	$	—	$	—	$	(1,675)	$	—	$	—	$	—	$	158	$	6,132	$	—	$	—	$	71,820	$	—
Other liabilities(1)	629,942		12,034		—		(786,156)		—		70,888		—		—		—		—		—		1,474,952		(774,122)
Total liabilities measured at fair value on a recurring basis	$	706,061	$	12,034	$	—	$	(787,831)	$	—	$	70,888	$	—	$	158	$	6,132	$	—	$	—	$	1,546,772	$	(774,122)
(1) Represents certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.

For the nine months ended September 30, 2019, there were $138.2 million securities transferred into Level 3 from Level 2.

For the nine months ended September 30, 2019, there were $31.4 million securities transferred into Level 2 from Level 3. These transfers resulted from securities that were priced internally using significant unobservable inputs where market observable inputs were not available in previous periods but were priced by independent pricing services or brokers as of September 30, 2019.

For the nine months ended September 30, 2019, there were no transfers from Level 2 into Level 1.

For the nine months ended September 30, 2019, there were no transfers from Level 1 into Level 2.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended September 30, 2018, for which the Company has used significant unobservable inputs (Level 3):

			Total Realized and Unrealized Gains				Total Realized and Unrealized Losses																		Total Gains (losses) included in Earnings related to Instruments still held at the  Reporting Date
	Beginning Balance		Included  in Earnings		Included  in Other Comprehensive Income		Included  in Earnings		Included  in Other Comprehensive Income		Purchases		Sales		Issuances		Settlements		Transfers in/out of Level 3		Other		Ending Balance
	(Dollars In Thousands)
Assets:
Fixed maturity securities AFS
Residential mortgage-backed securities	$	21,780	$	—	$	—	$	—	$	(538)	$	—	$	—	$	—	$	—	$	(21,281)	$	39	$	—	$	—
Commercial mortgage-backed securities	47,227		—		—		—		(1,212)		—		(151)		—		—		(26,372)		(25)		19,467		—
Other asset-backed securities	515,701		—		17		(62)		(14,802)		—		(24)		—		—		—		1,431		502,261		—
Corporate securities	644,811		—		1,422		—		(4,044)		15,000		(47,935)		—		—		19,903		(873)		628,284		—
Total fixed maturity securities - AFS	1,229,519		—		1,439		(62)		(20,596)		15,000		(48,110)		—		—		(27,750)		572		1,150,012		—
Fixed maturity securities - trading
Other asset-backed securities	24,852		84		—		(76)		—		4,128		(926)		—		—		—		(50)		28,012		68
Corporate securities	5,254		—		—		(6)		—		—		—		—		—		—		(25)		5,223		(6)
Total fixed maturity securities - trading	30,106		84		—		(82)		—		4,128		(926)		—		—		—		(75)		33,235		62
Total fixed maturity securities	1,259,625		84		1,439		(144)		(20,596)		19,128		(49,036)		—		—		(27,750)		497		1,183,247		62
Equity securities	66,083		287		—		—		—		—		(2,102)		—		—		—		—		64,268		287
Other long-term investments(1)	156,674		24,872		—		—		—		—		—		—		—		—		—		181,546		24,872
Total investments	1,482,382		25,243		1,439		(144)		(20,596)		19,128		(51,138)		—		—		(27,750)		497		1,429,061		25,221
Total assets measured at fair value on a recurring basis	$	1,482,382	$	25,243	$	1,439	$	(144)	$	(20,596)	$	19,128	$	(51,138)	$	—	$	—	$	(27,750)	$	497	$	1,429,061	$	25,221
Liabilities:
Annuity account balances(2)	$	80,098	$	—	$	—	$	(896)	$	—	$	—	$	—	$	40	$	2,571	$	—	$	—	$	78,463	$	—
Other liabilities(1)	572,916		70,887		—		(52,451)		—		—		—		—		—		—		—		554,480		18,436
Total liabilities measured at fair value on a recurring basis	$	653,014	$	70,887	$	—	$	(53,347)	$	—	$	—	$	—	$	40	$	2,571	$	—	$	—	$	632,943	$	18,436
(1) Represents certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.

For the three months ended September 30, 2018, there were $19.9 million securities transferred into Level 3.

For the three months ended September 30, 2018, there were $47.7 million of securities transferred into Level 2 from Level 3. These transfers resulted from securities that were priced internally using significant unobservable inputs where market observable inputs were not available in previous periods but were priced by independent pricing services or brokers as of September 30, 2018.

For the three months ended September 30, 2018, there were no transfers from Level 2 into Level 1.

For the three months ended September 30, 2018, there were no transfers from Level 1 into Level 2.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the nine months ended September 30, 2018, for which the Company has used significant unobservable inputs (Level 3):

			Total Realized and Unrealized Gains				Total Realized and Unrealized Losses																		Total Gains (losses) included in Earnings related to Instruments still held at the  Reporting Date
	Beginning Balance		Included  in Earnings		Included  in Other Comprehensive Income		Included  in Earnings		Included  in Other Comprehensive Income		Purchases		Sales		Issuances		Settlements		Transfers in/out of Level 3		Other		Ending Balance
	(Dollars In Thousands)
Assets:
Fixed maturity securities AFS
Residential mortgage-backed securities	$	—	$	—	$	—	$	—	$	(995)	$	22,225	$	—	$	—	$	—	$	(21,281)	$	51	$	—	$	—
Commercial mortgage-backed securities	—		—		—		—		(2,496)		48,621		(245)		—		—		(26,372)		(41)		19,467		—
Other asset-backed securities	504,365		—		11,884		(62)		(16,449)		—		(47)		—		—		222		2,348		502,261		—
Corporate securities	626,901		—		8,483		—		(22,973)		93,491		(86,388)		—		—		12,009		(3,239)		628,284		—
Total fixed maturity securities - AFS	1,131,266		—		20,367		(62)		(42,913)		164,337		(86,680)		—		—		(35,422)		(881)		1,150,012		—
Fixed maturity securities - trading
Other asset-backed securities	35,222		278		—		(3,674)		—		8,728		(12,595)		—		—		164		(111)		28,012		(3,337)
Corporate securities	5,442		—		—		(145)		—		—		—		—		—		—		(74)		5,223		(145)
Total fixed maturity securities - trading	40,664		278		—		(3,819)		—		8,728		(12,595)		—		—		164		(185)		33,235		(3,482)
Total fixed maturity securities	1,171,930		278		20,367		(3,881)		(42,913)		173,065		(99,275)		—		—		(35,258)		(1,066)		1,183,247		(3,482)
Equity securities	66,110		288		—		(64)		—		36		(2,102)		—		—		—		—		64,268		224
Other long-term investments(1)	136,004		46,557		—		(1,015)		—		—		—		—		—		—		—		181,546		45,542
Short-term investments	—		—		—		—		—		—		—		—		—		—		—		—		—
Total investments	1,374,044		47,123		20,367		(4,960)		(42,913)		173,101		(101,377)		—		—		(35,258)		(1,066)		1,429,061		42,284
Total assets measured at fair value on a recurring basis	$	1,374,044	$	47,123	$	20,367	$	(4,960)	$	(42,913)	$	173,101	$	(101,377)	$	—	$	—	$	(35,258)	$	(1,066)	$	1,429,061	$	42,284
Liabilities:
Annuity account balances(2)	$	83,472	$	—	$	—	$	(2,749)	$	—	$	—	$	—	$	570	$	8,328	$	—	$	—	$	78,463	$	—
Other liabilities(1)	760,890		328,343		—		(121,933)		—		—		—		—		—		—		—		554,480		206,410
Total liabilities measured at fair value on a recurring basis	$	844,362	$	328,343	$	—	$	(124,682)	$	—	$	—	$	—	$	570	$	8,328	$	—	$	—	$	632,943	$	206,410
(1) Represents certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.

For the nine months ended September 30, 2018, there were $30.9 million securities transferred into Level 3.

For the nine months ended September 30, 2018, there were $66.2 million securities transferred into Level 2 from Level 3. These transfers resulted from securities that were priced internally using significant unobservable inputs where market observable inputs were not available in previous periods but were priced by independent pricing services or brokers as of September 30, 2018.

For the nine months ended September 30, 2018, there were no transfers from Level 2 into Level 1.

For the nine months ended September 30, 2018, there were no transfers from Level 1 into Level 2.

Total realized and unrealized gains (losses) on Level 3 assets and liabilities are primarily reported in either realized investment gains (losses) within the consolidated condensed statements of income (loss) or other comprehensive income (loss) within shareowner’s equity based on the appropriate accounting treatment for the item.

Purchases, sales, issuances, and settlements, net, represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily relates to purchases and sales of fixed maturity securities and issuances and settlements of fixed indexed annuities.

The Company reviews the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. The asset transfers in the table(s) above primarily related to positions moved from Level 3 to Level 2 as the Company determined that certain inputs were observable.

The amount of total gains (losses) for assets and liabilities still held as of the reporting date primarily represents changes in fair value of trading securities and certain derivatives that exist as of the reporting date and the change in fair value of fixed indexed annuities.

Estimated Fair Value of Financial Instruments

The carrying amounts and estimated fair values of the Company’s financial instruments as of the periods shown below are as follows:

		As of
		September 30, 2019				December 31, 2018
	Fair Value Level	Carrying Amounts		Fair Values		Carrying Amounts		Fair Values
		(Dollars In Thousands)
Assets:
Mortgage loans on real estate	3	$	9,327,911	$	9,529,865	$	7,724,733	$	7,447,702
Policy loans	3	1,686,832		1,686,832		1,695,886		1,695,886
Fixed maturities, held-to-maturity(1)	3	2,544,054		2,685,076		2,633,474		2,547,210
Liabilities:
Stable value product account balances	3	$	5,450,981	$	5,547,509	$	5,234,731	$	5,200,723
Future policy benefits and claims(2)	3	1,707,238		1,709,444		1,671,414		1,671,434
Other policyholders’ funds(3)	3	104,395		106,285		131,150		131,782
Debt:(4)
Bank borrowings(5)	3	$	599,653	$	600,000	$	—	$	—
Senior Notes	2	1,467,245		1,531,330		1,100,508		1,065,338
Subordinated debentures	2	495,528		511,690		495,426		494,265
Subordinated funding obligations	3	110,000		113,369		110,000		95,476
Non-recourse funding obligations(6)	3	2,545,049		2,723,594		2,632,497		2,550,237
Except as noted below, fair values were estimated using quoted market prices.
(1) Securities purchased from unconsolidated affiliates, Red Mountain, LLC and Steel City, LLC.
(2) Single premium immediate annuity without life contingencies.
(3) Supplementary contracts without life contingencies.
(4) Excludes capital lease obligations of $2.3 million and $1.3 million as of September 30, 2019 and December 31, 2018, respectively.
(5) As September 30, 2019, includes the Term Loan Credit Agreement.
(6) As of September 30, 2019, carrying amount of $2.7 billion and a fair value of $2.5 billion related to non-recourse funding obligations issued by Golden Gate and Golden Gate V. As of December 31, 2018, carrying amount of $2.6 billion and a fair value of $2.5 billion related to non-recourse funding obligations issued by Golden Gate and Golden Gate V.

Fair Value Measurements

Mortgage loans on real estate

The Company estimates the fair value of mortgage loans using an internally developed model. This model includes inputs derived by the Company based on assumed discount rates relative to the Company’s current mortgage loan lending rate and an expected cash flow analysis based on a review of the mortgage loan terms. The model also contains the Company’s determined representative risk adjustment assumptions related to credit and liquidity risks.

Policy loans

The Company believes the fair value of policy loans approximates book value. Policy loans are funds provided to policyholders in return for a claim on the policy. The funds provided are limited to the cash surrender value of the underlying policy. The nature of policy loans is to have a negligible default risk as the loans are fully collateralized by the value of the policy. Policy loans do not have a stated maturity and the balances and accrued interest are repaid either by the policyholder or with proceeds from the policy. Due to the collateralized nature of policy loans and unpredictable timing of repayments, the Company believes the carrying value of policy loans approximates fair value.

Fixed maturities, held-to-maturity

The Company estimates the fair value of its fixed maturity, held-to-maturity securities using internal discounted cash flow models. The discount rates used in the model are based on a current market yield for similar financial instruments.

Stable value product and other investment contract balances

The Company estimates the fair value of stable value product account balances and other investment contract balances (included in Future policy benefits and claims as well as Other policyholders’ funds line items on our consolidated condensed balance sheet) using models based on discounted expected cash flows. The discount rates used in the models are based on a current market rate for similar financial instruments.

Debt

Bank borrowings

The Company believes the carrying value of its bank borrowings approximates fair value as the borrowings pay a floating interest rate plus a spread based on the rating of the Company’s senior debt which the Company believes approximates a market interest rate.

Senior notes and subordinated debentures

The Company estimates the fair value of its Senior Notes and Subordinated debentures using quoted market prices from third party pricing services, where available. The Company also determines certain fair values based on future cash flows discounted at the appropriate current market rate.

Funding obligations

The Company estimates the fair value of its subordinated and non-recourse funding obligations using internal discounted cash flow models. The discount rates used in the model are based on a current market yield for similar financial instruments.