13. Fair Value of Financial Instruments

The carrying values and estimated fair values of our financial instruments (in millions) were as follows:



	As of March 31, 2019						As of December 31, 2018
	Carrying			Fair			Carrying			Fair
	Value			Value			Value			Value
Assets
Fixed maturity AFS securities	$	98,050		$	98,050		$	94,024		$	94,024
Trading securities		3,314			3,314			1,950			1,950
Equity securities		153			153			99			99
Mortgage loans on real estate		13,997			13,964			13,260			13,092
Derivative investments (1)		981			981			1,107			1,107
Other investments		2,740			2,740			2,255			2,255
Cash and invested cash		1,593			1,593			2,345			2,345
Other assets:
GLB direct embedded derivatives		439			439			123			123
GLB ceded embedded derivatives		50			50			72			72
Indexed annuity ceded embedded derivatives		872			872			902			902
Separate account assets		143,369			143,369			132,833			132,833

Liabilities
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives		(1,730	)		(1,730	)		(1,305	)		(1,305	)
Other contract holder funds:
Remaining guaranteed interest and similar contracts		(1,948	)		(1,948	)		(542	)		(542	)
Account values of certain investment contracts		(35,772	)		(38,790	)		(34,535	)		(36,358	)
Short-term debt		(300	)		(309	)		-			-
Long-term debt		(5,572	)		(5,534	)		(5,839	)		(5,604	)
Reinsurance related embedded derivatives		(177	)		(177	)		(3	)		(3	)
Other liabilities:
Derivative liabilities (1)		(242	)		(242	)		(160	)		(160	)
GLB ceded embedded derivatives		(8	)		(8	)		-			-

⁽¹⁾

We have master netting agreements with each of our derivative counterparties, which allow for the netting of our derivative asset and liability positions by counterparty.

Valuation Methodologies and Associated Inputs for Financial Instruments Not Carried at Fair Value

The following discussion outlines the methodologies and assumptions used to determine the fair value of our financial instruments not carried at fair value on our Consolidated Balance Sheets. Considerable judgment is required to develop these assumptions used to measure fair value. Accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of our financial instruments.

Mortgage Loans on Real Estate

The fair value of mortgage loans on real estate is established using a discounted cash flow method based on credit rating, maturity and future income. The ratings for mortgages in good standing are based on property type, location, market conditions, occupancy, debt-service coverage, loan-to-value, quality of tenancy, borrower and payment record. The fair value for impaired mortgage loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s market price or the fair value of the collateral if the loan is collateral dependent. The inputs used to measure the fair value of our mortgage loans on real estate are classified as Level 2 within the fair value hierarchy.

Other Investments

The carrying value of our assets classified as other investments approximates fair value. Other investments includes primarily LPs and other privately held investments that are accounted for using the equity method of accounting and the carrying value is based on our proportional share of the net assets of the LPs. Other investments also includes Federal Home Loan Bank (“FHLB”) stock carried at cost and periodically evaluated for impairment based on ultimate recovery of par value. The inputs used to measure the fair value of our LPs, other privately held investments and FHLB stock are classified as Level 3 within the fair value hierarchy. The remaining assets in other investments include cash collateral receivables and securities that are not LPs or other privately held investments. The inputs used to measure the fair value of these assets are classified as Level 1 within the fair value hierarchy.

Separate Account Assets

Separate account assets are primarily carried at fair value. A portion of our separate account assets includes LPs, which are accounted for using the equity method of accounting. The carrying value is based on our proportional share of the net assets of the LPs and approximates fair value. The inputs used to measure the fair value of the separate account asset LPs are classified as Level 3 within the fair value hierarchy.

Other Contract Holder Funds

Other contract holder funds include remaining guaranteed interest and similar contracts and account values of certain investment contracts. The fair value for the remaining guaranteed interest and similar contracts is estimated using discounted cash flow calculations as of the balance sheet date. These calculations are based on interest rates currently offered on similar contracts with maturities that are consistent with those remaining for the contracts being valued. As of March 31, 2019, and December 31, 2018, the remaining guaranteed interest and similar contracts carrying value approximated fair value. The fair value of the account values of certain investment contracts is based on their approximate surrender value as of the balance sheet date. The inputs used to measure the fair value of our other contract holder funds are classified as Level 3 within the fair value hierarchy.

Short-Term and Long-Term Debt

The fair value of short-term and long-term debt is based on quoted market prices. The inputs used to measure the fair value of our short-term and long-term debt are classified as Level 2 within the fair value hierarchy.

Financial Instruments Carried at Fair Value

We did not have any assets or liabilities measured at fair value on a nonrecurring basis as of March 31, 2019, or December 31, 2018, and we noted no changes in our valuation methodologies between these periods.

The following summarizes our financial instruments carried at fair value (in millions) on a recurring basis by the fair value hierarchy levels:



		As of March 31, 2019
		Quoted
		Prices
		in Active
	Markets for			Significant				Significant
		Identical		Observable				Unobservable				Total
		Assets			Inputs				Inputs			Fair
		(Level 1)			(Level 2)				(Level 3)			Value
Assets
Investments:
Fixed maturity AFS securities:
Corporate bonds		$	-		$	79,687			$	3,521		$	83,208
ABS			-			966				81			1,047
U.S. government bonds			405			18				-			423
Foreign government bonds			-			343				110			453
RMBS			-			3,414				-			3,414
CMBS			-			883				2			885
CLOs			-			2,340				97			2,437
State and municipal bonds			-			5,569				-			5,569
Hybrid and redeemable preferred securities			71			465				78			614
Trading securities			45			3,033				236			3,314
Equity securities			67			61				25			153
Derivative investments (1)			-			826				672			1,498
Other investments			151			-				-			151
Cash and invested cash			-			1,593				-			1,593
Other assets:
GLB direct embedded derivatives			-			-				439			439
GLB ceded embedded derivatives			-			-				50			50
Indexed annuity ceded embedded derivatives			-			-				872			872
Separate account assets			696			142,657				-			143,353
Total assets		$	1,435		$	241,855			$	6,183		$	249,473

Liabilities
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives		$	-		$	-			$	(1,730	)	$	(1,730	)
Reinsurance related embedded derivatives			-			(177	)			-			(177	)
Other liabilities:
Derivative liabilities (1)			-			(354	)			(405	)		(759	)
GLB ceded embedded derivatives			-			-				(8	)		(8	)
Total liabilities		$	-		$	(531	)		$	(2,143	)	$	(2,674	)


		As of December 31, 2018
		Quoted
		Prices
		in Active
	Markets for			Significant				Significant
		Identical		Observable				Unobservable				Total
		Assets			Inputs				Inputs			Fair
		(Level 1)			(Level 2)				(Level 3)			Value
Assets
Investments:
Fixed maturity AFS securities:
Corporate bonds		$	-		$	77,079			$	3,269		$	80,348
ABS			-			937				29			966
U.S. government bonds			399			18				-			417
Foreign government bonds			-			339				109			448
RMBS			-			3,366				7			3,373
CMBS			-			802				2			804
CLOs			-			1,625				105			1,730
State and municipal bonds			-			5,345				-			5,345
Hybrid and redeemable preferred securities			67			451				75			593
Trading securities			43			1,840				67			1,950
Equity securities			16			58				25			99
Derivative investments (1)			-			727				705			1,432
Other investments			150			-				-			150
Cash and invested cash			-			2,345				-			2,345
Other assets:
GLB direct embedded derivatives			-			-				123			123
GLB ceded embedded derivatives			-			-				72			72
Indexed annuity ceded embedded derivatives			-			-				902			902
Separate account assets			665			132,135				-			132,800
Total assets		$	1,340		$	227,067			$	5,490		$	233,897

Liabilities
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives		$	-		$	-			$	(1,305	)	$	(1,305	)
Reinsurance related embedded derivatives			-			(3	)			-			(3	)
Other liabilities:
Derivative liabilities (1)			-			(314	)			(171	)		(485	)
Total liabilities		$	-		$	(317	)		$	(1,476	)	$	(1,793	)

⁽¹⁾

Derivative investment assets and liabilities are presented within the fair value hierarchy on a gross basis by derivative type and not on a master netting basis by counterparty.

The following summarizes changes to our financial instruments carried at fair value (in millions) and classified within Level 3 of the fair value hierarchy. This summary excludes any effect of amortization of DAC, value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”). The gains and losses below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.



	For the Three Months Ended March 31, 2019
							Gains		Issuances,				Transfers
				Items			(Losses)			Sales,			Into or
				Included			in		Maturities,				Out
	Beginning			in			OCI		Settlements,				of			Ending
	Fair			Net			and			Calls,			Level 3,			Fair
	Value			Income			Other (1)			Net			Net (2)			Value
Investments: (4)
Fixed maturity AFS securities:
Corporate bonds	$	3,269		$	(1	)	$	70		$	200		$	(17	)	$	3,521
ABS		29			-			-			52			-			81
Foreign government bonds		109			-			1			-			-			110
RMBS		7			-			-			-			(7	)		-
CMBS		2			-			-			-			-			2
CLOs		105			-			-			97			(105	)		97
Hybrid and redeemable
preferred securities		75			-			3			-			-			78
Trading securities		67			-			-			206			(37	)		236
Equity securities		25			-			-			-			-			25
Derivative investments		534			(383	)		46			70			-			267
Other assets: (5)
GLB direct embedded derivatives		123			316			-			-			-			439
GLB ceded embedded derivatives		72			(22	)		-			-			-			50
Indexed annuity ceded embedded derivatives		902			77			-			(107	)		-			872
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives (5)		(1,305	)		(316	)		-			(109	)		-			(1,730	)
Other liabilities – GLB ceded embedded
derivatives (5)		-			(8	)		-			-			-			(8	)
Total, net	$	4,014		$	(337	)	$	120		$	409		$	(166	)	$	4,040



	For the Three Months Ended March 31, 2018
							Gains		Issuances,				Transfers
				Items			(Losses)			Sales			Into or
				Included			in		Maturities,				Out
	Beginning			in			OCI		Settlements,				of			Ending
	Fair			Net			and			Calls,			Level 3,			Fair
	Value			Income			Other (1)			Net			Net (2)(3)			Value
Investments: (4)
Fixed maturity AFS securities:
Corporate bonds	$	3,091		$	3		$	17		$	74		$	7		$	3,192
ABS		27			-			(1	)		-			-			26
U.S. government bonds		5			-			-			-			-			5
Foreign government bonds		110			-			(2	)		-			-			108
RMBS		12			-			-			-			(12	)		-
CMBS		6			1			-			20			-			27
CLOs		91			-			-			2			(91	)		2
Hybrid and redeemable
preferred securities		76			-			1			-			-			77
Equity AFS securities		162			-			-			-			(162	)		-
Trading securities		49			(2	)		-			-			-			47
Equity securities		-			-			-			1			26			27
Derivative investments		30			329			(19	)		(61	)		-			279
Other assets: (5)
GLB direct embedded derivatives		903			207			-			-			-			1,110
GLB ceded embedded derivatives		51			(6	)		-			-			-			45
Indexed annuity ceded embedded derivatives		11			-			-			6			-			17
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives (5)		(1,418	)		52			-			20			-			(1,346	)
Other liabilities – GLB ceded embedded
derivatives (5)		(67	)		(44	)		-			-			-			(111	)
Total, net	$	3,139		$	540		$	(4	)	$	62		$	(232	)	$	3,505

⁽¹⁾

The changes in fair value of the interest rate swaps are offset by an adjustment to derivative investments (see Note 6).

⁽²⁾

Transfers into or out of Level 3 for AFS and trading securities are reported at amortized cost as of the beginning-of-year. For AFS and trading securities, the difference between beginning-of-year amortized cost and beginning-of-year fair value was included in OCI and earnings, respectively, in the prior period.

⁽³⁾

Transfers into or out of Level 3 for FHLB stock between equity securities and other investments are reported at cost on our Consolidated Balance Sheets.

⁽⁴⁾

Amortization and accretion of premiums and discounts are included in net investment income on our Consolidated Statements of Comprehensive Income (Loss). Gains (losses) from sales, maturities, settlements and calls and OTTI are included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).

⁽⁵⁾

Gains (losses) from sales, maturities, settlements and calls are included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).

The following provides the components of the items included in issuances, sales, maturities, settlements and calls, net, excluding any effect of amortization of DAC, VOBA, DSI and DFEL and changes in future contract benefits, (in millions) as reported above:



	For the Three Months Ended March 31, 2019
	Issuances			Sales			Maturities		Settlements				Calls			Total
Investments:
Fixed maturity AFS securities:
Corporate bonds	$	267		$	(2	)	$	(7	)	$	(51	)	$	(7	)	$	200
ABS		52			-			-			-			-			52
CLOs		97			-			-			-			-			97
Trading securities		207			-			-			(1	)		-			206
Derivative investments		131			(15	)		(46	)		-			-			70
Other assets – indexed annuity ceded
embedded derivatives		19			-			-			(126	)		-			(107	)
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives		(148	)		-			-			39			-			(109	)
Total, net	$	625		$	(17	)	$	(53	)	$	(139	)	$	(7	)	$	409



	For the Three Months Ended March 31, 2018
	Issuances			Sales			Maturities		Settlements				Calls		Total
Investments:
Fixed maturity AFS securities:
Corporate bonds	$	223		$	(53	)	$	(2	)	$	(94	)	$	-	$	74
CMBS		21			-			-			(1	)		-		20
CLOs		2			-			-			-			-		2
Equity securities		1			-			-			-			-		1
Derivative investments		68			(6	)		(123	)		-			-		(61	)
Other assets – indexed annuity ceded
embedded derivatives		6			-			-			-			-		6
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives		(27	)		-			-			47			-		20
Total, net	$	294		$	(59	)	$	(125	)	$	(48	)	$	-	$	62

The following summarizes changes in unrealized gains (losses) included in net income, excluding any effect of amortization of DAC, VOBA, DSI and DFEL and changes in future contract benefits, related to financial instruments carried at fair value classified within Level 3 that we still held (in millions):



	For the Three
	Months Ended
	March 31,
	2019			2018
Derivative investments	$	(287	)	$	281
Embedded derivatives:
Indexed annuity and IUL contracts		(32	)		(4	)
GLB		481			376
Total, net (1)	$	162		$	653

⁽¹⁾

Included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).

The following provides the components of the transfers into and out of Level 3 (in millions) as reported above:



	For the Three								For the Three
	Months Ended								Months Ended
	March 31, 2019								March 31, 2018
	Transfers		Transfers						Transfers		Transfers
	Into		Out of						Into		Out of
	Level 3		Level 3			Total			Level 3		Level 3			Total
Investments:
Fixed maturity AFS securities:
Corporate bonds	$	83	$	(100	)	$	(17	)	$	40	$	(33	)	$	7
RMBS		-		(7	)		(7	)		-		(12	)		(12	)
CLOs		-		(105	)		(105	)		-		(91	)		(91	)
Equity AFS securities		-		-			-			-		(162	)		(162	)
Trading securities		-		(37	)		(37	)		-		-			-
Equity securities		-		-			-			26		-			26
Total, net	$	83	$	(249	)	$	(166	)	$	66	$	(298	)	$	(232	)

Transfers into and out of Level 3 are generally the result of observable market information on a security no longer being available or becoming available to our pricing vendors. For the three months ended March 31, 2019 and 2018, transfers in and out of Level 3 were attributable primarily to the securities’ observable market information no longer being available or becoming available. In 2018, transfers into or out of Level 3 also included FHLB stock between equity securities and other investments at cost on our Consolidated Balance Sheets. Transfers into and out of Levels 1 and 2 are generally the result of a change in the type of input used to measure the fair value of an asset or liability at the end of the reporting period. When quoted prices in active markets become available, transfers from Level 2 to Level 1 will result. When quoted prices in active markets become unavailable, but we are able to employ a valuation methodology using significant observable inputs, transfers from Level 1 to Level 2 will result. For the three months ended March 31, 2019 and 2018, the transfers between Levels 1 and 2 of the fair value hierarchy were less than $1 million for our financial instruments carried at fair value.

The following summarizes the fair value (in millions), valuation techniques and significant unobservable inputs of the Level 3 fair value measurements as of March 31, 2019:



	Fair			Valuation	Significant	Assumption or
	Value			Technique	Unobservable Inputs	Input Ranges
Assets
Investments:
Fixed maturity AFS and trading
securities:
Corporate bonds	$	2,604		Discounted cash flow	Liquidity/duration adjustment (1)	0.6	%	-	30.0	%
ABS		23		Discounted cash flow	Liquidity/duration adjustment (1)	3.0	%	-	3.0	%
Foreign government bonds		77		Discounted cash flow	Liquidity/duration adjustment (1)	1.4	%	-	3.1	%
Hybrid and redeemable
preferred securities		4		Discounted cash flow	Liquidity/duration adjustment (1)	1.6	%	-	1.6	%
Equity securities		21		Discounted cash flow	Liquidity/duration adjustment (1)	4.5	%	-	5.2	%
Other assets:
GLB direct and ceded
embedded derivatives		489		Discounted cash flow	Long-term lapse rate (2)	1	%	-	30	%
					Utilization of guaranteed withdrawals (3)	85	%	-	100	%
					Claims utilization factor (4)	60	%	-	100	%
					Premiums utilization factor (4)	80	%	-	115	%
					NPR (5)	0.02	%	-	0.32	%
					Mortality rate (6)				(8)
					Volatility (7)	1	%	-	29	%

Indexed annuity ceded
embedded derivatives		872		Discounted cash flow	Lapse rate (2)	1	%	-	9	%
					Mortality rate (6)				(8)
Liabilities
Future contract benefits – indexed
annuity and IUL contracts
embedded derivatives	$	(1,730	)	Discounted cash flow	Lapse rate (2)	1	%	-	9	%
					Mortality rate (6)				(8)
Other liabilities – GLB ceded
embedded derivatives		(8	)	Discounted cash flow	Long-term lapse rate (2)	1	%	-	30	%
					Utilization of guaranteed withdrawals (3)	85	%	-	100	%
					Claims utilization factor (4)	60	%	-	100	%
					Premiums utilization factor (4)	80	%	-	115	%
					NPR (5)	0.02	%	-	0.32	%
					Mortality rate (6)				(8)
					Volatility (7)	1	%	-	29	%

⁽¹⁾

The liquidity/duration adjustment input represents an estimated market participant composite of adjustments attributable to liquidity premiums, expected durations, structures and credit quality that would be applied to the market observable information of an investment.

⁽²⁾

The lapse rate input represents the estimated probability of a contract surrendering during a year, and thereby forgoing any future benefits. The range for indexed annuity and IUL contracts represents the lapse rates during the surrender charge period.

⁽³⁾

The utilization of guaranteed withdrawals input represents the estimated percentage of contract holders that utilize the guaranteed withdrawal feature.

⁽⁴⁾

The utilization factors are applied to the present value of claims or premiums, as appropriate, in the GLB reserve calculation to estimate the impact of inefficient withdrawal behavior, including taking less than or more than the maximum guaranteed withdrawal.

⁽⁵⁾

The NPR input represents the estimated additional credit spread that market participants would apply to the market observable discount rate when pricing a contract.

⁽⁶⁾

The mortality rate input represents the estimated probability of when an individual belonging to a particular group, categorized according to age or some other factor such as gender, will die.

⁽⁷⁾

The volatility input represents overall volatilities assumed for the underlying variable annuity funds, which include a mixture of equity and fixed-income assets. Fair value of the variable annuity GLB embedded derivatives would increase if higher volatilities were used for valuation.

⁽⁸⁾

The mortality rate is based on a combination of company and industry experience, adjusted for improvement factors.

From the table above, we have excluded Level 3 fair value measurements obtained from independent, third-party pricing sources. We do not develop the significant inputs used to measure the fair value of these assets and liabilities, and the information regarding the significant inputs is not readily available to us. Independent broker-quoted fair values are non-binding quotes developed by market makers or broker-dealers obtained from third-party sources recognized as market participants. The fair value of a broker-quoted asset or liability is based solely on the receipt of an updated quote from a single market maker or a broker-dealer recognized as a market participant as we do not adjust broker quotes when used as the fair value measurement for an asset or liability. Significant increases or decreases in any of the quotes received from a third-party broker-dealer may result in a significantly higher or lower fair value measurement.

Changes in any of the significant inputs presented in the table above may result in a significant change in the fair value measurement of the asset or liability as follows:

Investments – An increase in the liquidity/duration adjustment input would result in a decrease in the fair value measurement.

Indexed annuity and IUL contracts embedded derivatives – For direct embedded derivatives, an increase in the lapse rate or mortality rate inputs would result in a decrease in the fair value measurement.

GLB embedded derivatives – Assuming our GLB direct embedded derivatives are in a liability position: an increase in our lapse rate, NPR or mortality rate inputs would result in a decrease in the fair value measurement; and an increase in the utilization of guaranteed withdrawal or volatility inputs would result in an increase in the fair value measurement.

For each category discussed above, the unobservable inputs are not inter-related; therefore, a directional change in one input will not affect the other inputs.

As part of our ongoing valuation process, we assess the reasonableness of our valuation techniques or models and make adjustments as necessary.