Fair Values of Assets and Liabilities

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; that is, an exit price. The exit price assumes the asset or liability is not exchanged subject to a forced liquidation or distressed sale.

Valuation Hierarchy

The Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Company’s valuation techniques. A level is assigned to each fair value measurement based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:


Level 1	Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.


Level 2	Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities.


Level 3	Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis:



	June 30, 2014
	Level 1		Level 2		Level 3			Total
	(in millions)
Assets
Available-for-Sale securities: Fixed maturities:
Corporate debt securities	$	—	$	14,320	$	1,376		$	15,696
Residential mortgage backed securities	—		3,750		10			3,760
Commercial mortgage backed securities	—		2,343		15			2,358
State and municipal obligations	—		1,074		—			1,074
Asset backed securities	—		840		149			989
Foreign government bonds and obligations	—		258		—			258
U.S. government and agencies obligations	4		36		—			40
Total Available-for-Sale securities: Fixed maturities	4		22,621		1,550			24,175
Common stocks	3		4		1			8
Cash equivalents	2		28		—			30
Other assets:
Interest rate derivative contracts	—		1,585		—			1,585
Equity derivative contracts	298		1,377		—			1,675
Foreign exchange contracts	—		2		—			2
Other derivative contracts	—		—		1			1
Total other assets	298		2,964		1			3,263
Separate account assets	—		79,914		—			79,914
Total assets at fair value	$	307	$	105,531	$	1,552		$	107,390

Liabilities
Policyholder account balances, future policy benefits and claims:
EIA embedded derivatives	$	—	$	5	$	—		$	5
IUL embedded derivatives	—		—		184			184
GMWB and GMAB embedded derivatives	—		—		(347		)	(347		)	⁽²⁾
Total policyholder account balances, future policy benefits and claims	—		5		(163		)	(158		)	⁽¹⁾
Other liabilities:
Interest rate derivative contracts	—		1,306		—			1,306
Equity derivative contracts	464		2,314		—			2,778
Other derivative contracts	—		13		—			13
Total other liabilities	464		3,633		—			4,097
Total liabilities at fair value	$	464	$	3,638	$	(163	)	$	3,939


(1)	The Company’s adjustment for nonperformance risk resulted in a $162 million cumulative increase to the embedded derivatives.


(2)	The fair value of the GMWB and GMAB embedded derivatives was a net asset at June 30, 2014 and the amount is reported as a contra liability.



	December 31, 2013
	Level 1		Level 2		Level 3			Total
	(in millions)
Assets
Available-for-Sale securities: Fixed maturities:
Corporate debt securities	$	—	$	14,357	$	1,516		$	15,873
Residential mortgage backed securities	—		3,753		58			3,811
Commercial mortgage backed securities	—		2,404		30			2,434
State and municipal obligations	—		998		—			998
Asset backed securities	—		763		218			981
Foreign government bonds and obligations	—		245		—			245
U.S. government and agencies obligations	9		36		—			45
Total Available-for-Sale securities: Fixed maturities	9		22,556		1,822			24,387
Common stocks	3		3		—			6
Cash equivalents	1		320		—			321
Other assets:
Interest rate derivative contracts	—		1,484		—			1,484
Equity derivative contracts	265		1,503		—			1,768
Credit derivative contracts	—		3		—			3
Foreign exchange contracts	—		2		—			2
Other derivative contracts	—		4		—			4
Total other assets	265		2,996		—			3,261
Separate account assets	—		77,616		—			77,616
Total assets at fair value	$	278	$	103,491	$	1,822		$	105,591

Liabilities
Policyholder account balances, future policy benefits and claims:
EIA embedded derivatives	$	—	$	5	$	—		$	5
IUL embedded derivatives	—		—		125			125
GMWB and GMAB embedded derivatives	—		—		(575		)	(575		)	⁽²⁾
Total policyholder account balances, future policy benefits and claims	—		5		(450		)	(445		)	⁽¹⁾
Other liabilities:
Interest rate derivative contracts	—		1,672		—			1,672
Equity derivative contracts	549		2,382		—			2,931
Other derivative contracts	—		29		—			29
Total other liabilities	549		4,083		—			4,632
Total liabilities at fair value	$	549	$	4,088	$	(450	)	$	4,187


(1)	The Company’s adjustment for nonperformance risk resulted in a $150 million cumulative increase to the embedded derivatives.


(2)	The fair value of the GMWB and GMAB embedded derivatives was a net asset at December 31, 2013 and the amount is reported as a contra liability.

The following tables provide a summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis:




	Available-for-Sale Securities: Fixed Maturities
	Corporate Debt Securities			Residential Mortgage Backed Securities			Commercial Mortgage Backed Securities			Asset Backed Securities			Total			Common Stocks		Other Assets: Other Derivatives Contracts
	(in millions)
Balance, April 1, 2014	$	1,391		$	11		$	55		$	149		$	1,606		$	—	$	—
Total gains (losses) included in:
Other comprehensive income	10			—			—			1			11			—		—
Purchases	33			—			—			—			33			1		1
Settlements	(58		)	(1		)	—			(1		)	(60		)	—		—
Transfers out of Level 3	—			—			(40		)	—			(40		)	—		—
Balance, June 30, 2014	$	1,376		$	10		$	15		$	149		$	1,550		$	1	$	1
Changes in unrealized gains (losses) relating to assets held at June 30, 2014 included in:
Benefits, claims, losses and settlement expenses	$	—		$	—		$	—		$	—		$	—		$	—	$	—




	Policyholder Account Balances, Future Policy Benefits and Claims
	IUL Embedded Derivatives				GMWB and GMAB Embedded Derivatives				Total
	(in millions)
Balance, April 1, 2014	$	154			$	(471	)		$	(317	)
Total losses included in:
Net income	8			⁽¹⁾	68			⁽²⁾	76
Issues	24				60				84
Settlements	(2		)		(4		)		(6		)
Balance, June 30, 2014	$	184			$	(347	)		$	(163	)
Changes in unrealized losses relating to liabilities held at June 30, 2014 included in:
Benefits, claims, losses and settlement expenses	$	—			$	67			$	67
Interest credited to fixed accounts	8				—				8


(1)	Included in interest credited to fixed accounts in the Consolidated Statements of Income.


(2)	Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.



	Available-for-Sale Securities: Fixed Maturities
	Corporate Debt Securities			Residential Mortgage Backed Securities		Commercial Mortgage Backed Securities			Asset Backed Securities			Total
	(in millions)
Balance, April 1, 2013	$	1,653		$	8	$	168		$	160		$	1,989
Total gains (losses) included in:
Net income	(1		)	—		—			—			(1		)	⁽¹⁾
Other comprehensive loss	(35		)	—		(4		)	3			(36		)
Purchases	20			42		—			—			62
Settlements	(79		)	—		—			—			(79		)
Transfers out of Level 3	—			—		—			(9		)	(9		)
Balance, June 30, 2013	$	1,558		$	50	$	164		$	154		$	1,926
Changes in unrealized gains (losses) relating to assets held at June 30, 2013 included in:
Net investment income	$	—		$	—	$	—		$	—		$	—


(1)	Included in net investment income in the Consolidated Statements of Income.



	Policyholder Account Balances, Future Policy Benefits and Claims
	IUL Embedded Derivatives			GMWB and GMAB Embedded Derivatives				Total
	(in millions)
Balance, April 1, 2013	$	61		$	266			$	327
Total (gains) losses included in:
Net income	2		⁽¹⁾	(306		)	⁽²⁾	(304		)
Issues	13			53				66
Settlements	—			(2		)		(2		)
Balance, June 30, 2013	$	76		$	11			$	87
Changes in unrealized (gains) losses relating to liabilities held at June 30, 2013 included in:
Benefits, claims, losses and settlement expenses	$	—		$	(299	)		$	(299	)
Interest credited to fixed accounts	2			—				2


(1)	Included in interest credited to fixed accounts in the Consolidated Statements of Income.


(2)	Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.




	Available-for-Sale Securities: Fixed Maturities
	Corporate Debt Securities			Residential Mortgage Backed Securities			Commercial Mortgage Backed Securities			Asset Backed Securities			Total			Common Stocks		Other Assets: Other Derivatives Contracts
	(in millions)
Balance, January 1, 2014	$	1,516		$	58		$	30		$	218		$	1,822		$	—	$	—
Total gains (losses) included in:
Other comprehensive income	15			—			—			1			16			—		—
Purchases	57			11			39			—			107			1		1
Sales	(11		)	—			—			—			(11		)	—		—
Settlements	(201		)	(1		)	—			(1		)	(203		)	—		—
Transfers out of Level 3	—			(58		)	(54		)	(69		)	(181		)	—		—
Balance, June 30, 2014	$	1,376		$	10		$	15		$	149		$	1,550		$	1	$	1
Changes in unrealized gains (losses) relating to assets held at June 30, 2014 included in:
Benefits, claims, losses and settlement expenses	$	—		$	—		$	—		$	—		$	—		$	—	$	—




	Policyholder Account Balances, Future Policy Benefits and Claims
	IUL Embedded Derivatives				GMWB and GMAB Embedded Derivatives				Total
	(in millions)
Balance, January 1, 2014	$	125			$	(575	)		$	(450	)
Total losses included in:
Net income	14			⁽¹⁾	120			⁽²⁾	134
Issues	48				119				167
Settlements	(3		)		(11		)		(14		)
Balance, June 30, 2014	$	184			$	(347	)		$	(163	)
Changes in unrealized losses relating to liabilities held at June 30, 2014 included in:
Benefits, claims, losses and settlement expenses	$	—			$	119			$	119
Interest credited to fixed accounts	14				—				14


(1)	Included in interest credited to fixed accounts in the Consolidated Statements of Income.


(2)	Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.



	Available-for-Sale Securities: Fixed Maturities
	Corporate Debt Securities			Residential Mortgage Backed Securities			Commercial Mortgage Backed Securities			Asset Backed Securities			Total
	(in millions)
Balance, January 1, 2013	$	1,654		$	23		$	170		$	156		$	2,003
Total gains (losses) included in:
Net income	(1		)	—			—			1			—			⁽¹⁾
Other comprehensive loss	(35		)	—			(6		)	7			(34		)
Purchases	74			42			—			—			116
Settlements	(134		)	—			—			(1		)	(135		)
Transfers out of Level 3	—			(15		)	—			(9		)	(24		)
Balance, June 30, 2013	$	1,558		$	50		$	164		$	154		$	1,926
Changes in unrealized gains (losses) relating to assets held at June 30, 2013 included in:
Net investment income	$	(1	)	$	—		$	—		$	1		$	—


(1)	Included in net investment income in the Consolidated Statements of Income.



	Policyholder Account Balances, Future Policy Benefits and Claims
	IUL Embedded Derivatives			GMWB and GMAB Embedded Derivatives				Total
	(in millions)
Balance, January 1, 2013	$	45		$	833			$	878
Total (gains) losses included in:
Net income	6		⁽¹⁾	(924		)	⁽²⁾	(918		)
Issues	25			103				128
Settlements	—			(1		)		(1		)
Balance, June 30, 2013	$	76		$	11			$	87
Changes in unrealized (gains) losses relating to liabilities held at June 30, 2013 included in:
Benefits, claims, losses and settlement expenses	$	—		$	(908	)		$	(908	)
Interest credited to fixed accounts	6			—				6


(1)	Included in interest credited to fixed accounts in the Consolidated Statements of Income.


(2)	Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.

The impact to pretax income of the Company’s adjustment for nonperformance risk on the fair value of its embedded derivatives was $(6) million and $(28) million, net of DAC, DSIC, unearned revenue amortization and the reinsurance accrual, for the three months ended June 30, 2014 and 2013, respectively. The impact to pretax income of the Company’s adjustment for nonperformance risk on the fair value of its embedded derivatives was $9 million and $(90) million, net of DAC, DSIC, unearned revenue amortization and the reinsurance accrual, for the six months ended June 30, 2014 and 2013, respectively.

Securities transferred from Level 3 primarily represent securities with fair values that are now obtained from a third party pricing service with observable inputs. Securities transferred to Level 3 represent securities with fair values that are now based on a single non-binding broker quote. The Company recognizes transfers between levels of the fair value hierarchy as of the beginning of the quarter in which each transfer occurred. For assets and liabilities held at the end of the reporting periods that are measured at fair value on a recurring basis, there were no transfers between Level 1 and Level 2.

The following tables provide a summary of the significant unobservable inputs used in the fair value measurements developed by the Company or reasonably available to the Company of Level 3 assets and liabilities:



	June 30, 2014
	Fair Value			Valuation Technique	Unobservable Input	Range				Weighted Average
	(in millions)
Corporate debt securities (private placements)	$	1,351		Discounted cash flow	Yield/spread to U.S. Treasuries	0.8	%	-	4.7%	1.3	%
Other derivative contracts	$	1		Option pricing model	Correlation⁽¹⁾	(40.0)%
IUL embedded derivatives	$	184		Discounted cash flow	Nonperformance risk⁽²⁾	56			bps
GMWB and GMAB embedded derivatives	$	(347	)	Discounted cash flow	Utilization of guaranteed withdrawals⁽³⁾	0.0	%	-	51.1%
					Surrender rate	0.1	%	-	57.9%
					Market volatility⁽⁴⁾	4.6	%	-	17.2%
					Nonperformance risk⁽²⁾	56			bps
					Elective contractholder strategy allocations⁽⁵⁾	0.0	%	-	50.0%



	December 31, 2013
	Fair Value			Valuation Technique	Unobservable Input	Range				Weighted Average
	(in millions)
Corporate debt securities (private placements)	$	1,487		Discounted cash flow	Yield/spread to U.S. Treasuries	0.9	%	-	5.3%	1.6%
IUL embedded derivatives	$	125		Discounted cash flow	Nonperformance risk⁽²⁾	74			bps
GMWB and GMAB embedded derivatives	$	(575	)	Discounted cash flow	Utilization of guaranteed withdrawals⁽³⁾	0.0	%	-	51.1%
					Surrender rate	0.1	%	-	57.9%
					Market volatility⁽⁴⁾	4.9	%	-	18.8%
					Nonperformance risk⁽²⁾	74			bps
					Elective contractholder strategy allocations⁽⁵⁾	0.0	%		50.0%


(1)	Represents the correlation between equity returns and interest rates used in the valuation of the derivative contract.


(2)	The nonperformance risk is the spread added to the observable interest rates used in the valuation of the embedded derivatives.


(3)	The utilization of guaranteed withdrawals represents the percentage of contractholders that will begin withdrawing in any given year.


(4)	Market volatility is implied volatility of fund of funds and managed volatility funds.


(5)	The elective allocation represents the percentage of contractholders that are assumed to electively switch their investment allocation to a different allocation model.

Level 3 measurements not included in the table above are obtained from non-binding broker quotes where unobservable inputs are not reasonably available to the Company.

Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs

Significant increases (decreases) in the yield/spread to U.S. Treasuries used in the fair value measurement of Level 3 corporate debt securities in isolation would result in a significantly lower (higher) fair value measurement.

Significant (decreases) increases in the correlation used in the fair value measurement of Level 3 derivatives in isolation would result in a significantly higher (lower) fair value measurement.

Significant increases (decreases) in nonperformance risk used in the fair value measurement of the IUL embedded derivatives in isolation would result in a significantly lower (higher) fair value measurement.

Significant increases (decreases) in utilization, surrender rate and volatility used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would result in a significantly lower (higher) asset value, possibly creating a liability. Significant increases (decreases) in nonperformance risk and elective investment allocation model used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would result in a significantly higher (lower) asset value. Utilization of guaranteed withdrawals and surrender rates vary with the type of rider, the duration of the policy, the age of the contractholder, the distribution system and whether the value of the guaranteed benefit exceeds the contract accumulation value.

Determination of Fair Value

The Company uses valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. The Company’s market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company’s income approach uses valuation techniques to convert future projected cash flows to a single discounted present value amount. When applying either approach, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs.

The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.

Assets

Cash Equivalents

Cash equivalents include highly liquid investments with original maturities of 90 days or less. Actively traded money market funds are measured at their net asset value (“NAV”) and classified as Level 1. The Company’s remaining cash equivalents are classified as Level 2 and measured at amortized cost, which is a reasonable estimate of fair value because of the short time between the purchase of the instrument and its expected realization.

Available-for-Sale Securities

When available, the fair value of securities is based on quoted prices in active markets. If quoted prices are not available, fair values are obtained from third party pricing services, non-binding broker quotes, or other model-based valuation techniques. Level 1 securities include U.S. Treasuries. Level 2 securities include corporate bonds, residential mortgage backed securities, commercial mortgage backed securities, state and municipal obligations, asset backed securities and U.S. agency and foreign government securities. The fair value of these Level 2 securities is based on a market approach with prices obtained from third party pricing services. Observable inputs used to value these securities can include, but are not limited to, reported trades, benchmark yields, issuer spreads and non-binding broker quotes. Level 3 securities primarily include certain corporate bonds, non-agency residential mortgage backed securities, commercial mortgage backed securities and asset backed securities. The fair value of corporate bonds, non-agency residential mortgage backed securities, commercial mortgage backed securities and certain asset backed securities classified as Level 3 is typically based on a single non-binding broker quote. The underlying inputs used for some of the non-binding broker quotes are not readily available to the Company. The Company’s privately placed corporate bonds are typically based on a single non-binding broker quote. In addition to the general pricing controls, the Company reviews the broker prices to ensure that the broker quotes are reasonable and, when available, compares prices of privately issued securities to public issues from the same issuer to ensure that the implicit illiquidity premium applied to the privately placed investment is reasonable considering investment characteristics, maturity, and average life of the investment.

In consideration of the above, management is responsible for the fair values recorded on the financial statements. Prices received from third party pricing services are subjected to exception reporting that identifies investments with significant daily price movements as well as no movements. The Company reviews the exception reporting and resolves the exceptions through reaffirmation of the price or recording an appropriate fair value estimate. The Company also performs subsequent transaction testing. The Company performs annual due diligence of third party pricing services. The Company’s due diligence procedures include assessing the vendor’s valuation qualifications, control environment, analysis of asset-class specific valuation methodologies, and understanding of sources of market observable assumptions and unobservable assumptions, if any, employed in the valuation methodology. The Company also considers the results of its exception reporting controls and any resulting price challenges that arise.

Separate Account Assets

The fair value of assets held by separate accounts is determined by the NAV of the funds in which those separate accounts are invested. The NAV represents the exit price for the separate account. Separate account assets are classified as Level 2 as they are traded in principal-to-principal markets with little publicly released pricing information.

Other Assets

Derivatives that are measured using quoted prices in active markets, such as derivatives that are exchange-traded, are classified as Level 1 measurements. The fair value of derivatives that are traded in less active over-the-counter (“OTC”) markets is generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps and the majority of the Company's options. The fair value of certain derivatives measured using pricing models which include significant unobservable inputs are classified as Level 3 within the fair value hierarchy. Other derivative contracts consist of the Company's macro hedge program. See Note 13 for further information on the macro hedge program. The counterparties’ nonperformance risk associated with uncollateralized derivative assets was immaterial at June 30, 2014 and December 31, 2013. See Note 12 and Note 13 for further information on the credit risk of derivative instruments and related collateral.

Liabilities

Policyholder Account Balances, Future Policy Benefits and Claims

The Company values the embedded derivatives attributable to the provisions of certain variable annuity riders using internal valuation models. These models calculate fair value by discounting expected cash flows from benefits plus margins for profit, risk and expenses less embedded derivative fees. The projected cash flows used by these models include observable capital market assumptions and incorporate significant unobservable inputs related to contractholder behavior assumptions, implied volatility, and margins for risk, profit and expenses that the Company believes an exit market participant would expect. The fair value also reflects a current estimate of the Company’s nonperformance risk specific to these embedded derivatives. Given the significant unobservable inputs to this valuation, these measurements are classified as Level 3. The embedded derivatives attributable to these provisions are recorded in policyholder account balances, future policy benefits and claims.

The Company uses various Black-Scholes calculations to determine the fair value of the embedded derivatives associated with the provisions of its EIA and IUL products. Significant inputs to the EIA calculation include observable interest rates, volatilities and equity index levels and, therefore, are classified as Level 2. The fair value of the IUL embedded derivatives includes significant observable interest rates, volatilities and equity index levels and the significant unobservable estimate of the Company’s nonperformance risk. Given the significance of the nonperformance risk assumption to the fair value, the IUL embedded derivatives are classified as Level 3. The embedded derivatives attributable to these provisions are recorded in policyholder account balances, future policy benefits and claims.

The Company’s Corporate Actuarial Department calculates the fair value of the embedded derivatives on a monthly basis. During this process, control checks are performed to validate the completeness of the data. Actuarial management approves various components of the valuation along with the final results. The change in the fair value of the embedded derivatives is reviewed monthly with senior management. The Level 3 inputs into the valuation are consistent with the pricing assumptions and updated as experience develops. Significant unobservable inputs that reflect policyholder behavior are reviewed quarterly along with other valuation assumptions.

Other Liabilities

Derivatives that are measured using quoted prices in active markets, such as derivatives that are exchange-traded, are classified as Level 1 measurements. The fair value of derivatives that are traded in less active OTC markets are generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps and the majority of options. Other derivative contracts consist of the Company's macro hedge program. See Note 13 for further information on the macro hedge program. The Company’s nonperformance risk associated with uncollateralized derivative liabilities was immaterial at June 30, 2014 and December 31, 2013. See Note 12 and Note 13 for further information on the credit risk of derivative instruments and related collateral.

During the reporting periods, there were no material assets or liabilities measured at fair value on a nonrecurring basis.

The following tables provide the carrying value and the estimated fair value of financial instruments that are not reported at fair value. All other financial instruments that are reported at fair value have been included above in the table with balances of assets and liabilities measured at fair value on a recurring basis.



	June 30, 2014
	Carrying		Fair Value
	Value		Level 1		Level 2		Level 3		Total
	(in millions)
Financial Assets
Mortgage loans, net	$	3,307	$	—	$	—	$	3,399	$	3,399
Policy loans	791		—		—		779		779
Other investments	410		—		386		27		413

Financial Liabilities
Policyholder account balances, future policy benefits and claims	$	13,424	$	—	$	—	$	14,195	$	14,195
Short-term borrowings	200		—		200		—		200
Other liabilities	108		—		—		107		107
Separate account liabilities	397		—		397		—		397



	December 31, 2013
	Carrying		Fair Value
	Value		Level 1		Level 2		Level 3		Total
	(in millions)
Financial Assets
Mortgage loans, net	$	3,326	$	—	$	—	$	3,372	$	3,372
Policy loans	773		—		—		765		765
Other investments	385		—		346		42		388

Financial Liabilities
Policyholder account balances, future policy benefits and claims	$	14,106	$	—	$	—	$	14,724	$	14,724
Short-term borrowings	500		—		500		—		500
Line of credit with Ameriprise Financial	150		—		—		150		150
Other liabilities	137		—		—		134		134
Separate account liabilities	400		—		400		—		400

Mortgage Loans, Net

The fair value of commercial mortgage loans, except those with significant credit deterioration, is determined by discounting contractual cash flows using discount rates that reflect current pricing for loans with similar remaining maturities, liquidity and characteristics including LTV ratio, occupancy rate, refinance risk, debt-service coverage, location, and property condition. For commercial mortgage loans with significant credit deterioration, fair value is determined using the same adjustments as above with an additional adjustment for the Company’s estimate of the amount recoverable on the loan.

The fair value of residential mortgage loans is determined by discounting estimated cash flows and incorporating adjustments for prepayment, administration expenses, loss severity and credit loss estimates, with discount rates based on the Company’s estimate of current market conditions.

Given the significant unobservable inputs to the valuation of mortgage loans, these measurements are classified as Level 3.

Policy Loans

Policy loans represent loans made against the cash surrender value of the underlying life insurance or annuity product. These loans and the related interest are usually realized at death of the policyholder or contractholder or at surrender of the contract and are not transferable without the underlying insurance or annuity contract. The fair value of policy loans is determined by estimating expected cash flows discounted at rates based on the U.S. Treasury curve. Policy loans are classified as Level 3 as the discount rate used may be adjusted for the underlying performance of individual policies.

Other Investments

Other investments primarily consist of syndicated loans and an investment in FHLB. The fair value of syndicated loans is obtained from a third party pricing service or non-binding broker quotes. Syndicated loans that are priced using a market approach with observable inputs are classified as Level 2 and syndicated loans priced using a single non-binding broker quote are classified as Level 3. The fair value of the investment in FHLB is approximated by the carrying value and classified as Level 3 due to restrictions on transfer and lack of liquidity in the primary market for this asset.

Policyholder Account Balances, Future Policy Benefits and Claims

The fair value of fixed annuities, in deferral status, is determined by discounting cash flows using a risk neutral discount rate with adjustments for profit margin, expense margin, early policy surrender behavior, a margin for adverse deviation from estimated early policy surrender behavior and the Company’s nonperformance risk specific to these liabilities. The fair value of non-life contingent fixed annuities in payout status, EIA host contracts and the fixed portion of a small number of variable annuity contracts classified as investment contracts is determined in a similar manner. Given the use of significant unobservable inputs to these valuations, the measurements are classified as Level 3.

Short-term Borrowings

The fair value of short-term borrowings is obtained from a third party pricing service. A nonperformance adjustment is not included as collateral requirements for these borrowings minimize the nonperformance risk. The fair value of short-term borrowings is classified as Level 2.

Line of Credit with Ameriprise Financial

The fair value of the line of credit is determined by discounting cash flows with an adjustment for the Company’s nonperformance risk specific to this liability. The fair value of the line of credit is classified as Level 3.

Other Liabilities

Other liabilities consist of future funding commitments to affordable housing partnerships. The fair value of these future funding commitments is determined by discounting cash flows. The fair value of these commitments includes an adjustment for the Company’s nonperformance risk and is classified as Level 3 due to the use of the significant unobservable input.

Separate Account Liabilities

Certain separate account liabilities are classified as investment contracts and are carried at an amount equal to the related separate account assets. The NAV of the related separate account assets represents the exit price for the separate account liabilities. Separate account liabilities are classified as Level 2 as they are traded in principal-to-principal markets with little publicly released pricing information. A nonperformance adjustment is not included as the related separate account assets act as collateral for these liabilities and minimize nonperformance risk.