10. 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:

	March 31, 2013
	Level 1		Level 2		Level 3		Total
	(in millions)
Assets
Available-for-Sale securities:
Fixed maturities:
Corporate debt securities	$	—	$	15,067	$	1,653	$	16,720
Residential mortgage backed securities	—		3,569		8		3,577
Commercial mortgage backed securities	—		2,657		168		2,825
State and municipal obligations	—		1,117		—		1,117
Asset backed securities	—		707		160		867
Foreign government bonds and obligations	—		214		—		214
U.S. government and agencies obligations	10		38		—		48
Total Available-for-Sale securities: Fixed maturities	10		23,369		1,989		25,368
Common stocks	2		2		—		4
Cash equivalents	—		137		—		137
Other assets:
Interest rate derivative contracts	—		1,937		—		1,937
Equity derivative contracts	339		867		—		1,206
Foreign currency derivative contracts	—		7		—		7
Total other assets	339		2,811		—		3,150
Separate account assets	—		72,532		—		72,532
Total assets at fair value	$	351	$	98,851	$	1,989	$	101,191

Liabilities
Future policy benefits:
EIA embedded derivatives	$	—	$	3	$	—	$	3
IUL embedded derivatives	—		61		—		61
GMWB and GMAB embedded derivatives	—		—		266		266
Total future policy benefits	—		64		266		330		(1)
Other liabilities:
Interest rate derivative contracts	—		1,421		—		1,421
Equity derivative contracts	141		1,768		—		1,909
Foreign currency derivative contracts	—		1		—		1
Total other liabilities	141		3,190		—		3,331
Total liabilities at fair value	$	141	$	3,254	$	266	$	3,661

(1) The Company’s adjustment for nonperformance risk resulted in a $295 million cumulative decrease to the embedded derivative liability.

	December 31, 2012
	Level 1		Level 2		Level 3		Total
	(in millions)
Assets
Available-for-Sale securities:
Fixed maturities:
Corporate debt securities	$	—	$	15,387	$	1,654	$	17,041
Residential mortgage backed securities	—		3,598		23		3,621
Commercial mortgage backed securities	—		2,834		170		3,004
State and municipal obligations	—		1,122		—		1,122
Asset backed securities	—		715		156		871
Foreign government bonds and obligations	—		224		—		224
U.S. government and agencies obligations	10		39		—		49
Total Available-for-Sale securities: Fixed maturities	10		23,919		2,003		25,932
Common stocks	2		2		—		4
Cash equivalents	—		264		—		264
Other assets:
Interest rate derivative contracts	—		2,191		—		2,191
Equity derivative contracts	285		936		—		1,221
Foreign currency derivative contracts	—		6		—		6
Total other assets	285		3,133		—		3,418
Separate account assets	—		69,395		—		69,395
Total assets at fair value	$	297	$	96,713	$	2,003	$	99,013

Liabilities
Future policy benefits:
EIA embedded derivatives	$	—	$	2	$	—	$	2
IUL embedded derivatives	—		45		—		45
GMWB and GMAB embedded derivatives	—		—		833		833
Total future policy benefits	—		47		833		880		(1)
Other liabilities:
Interest rate derivative contracts	—		1,486		—		1,486
Equity derivative contracts	258		1,535		—		1,793
Total other liabilities	258		3,021		—		3,279
Total liabilities at fair value	$	258	$	3,068	$	833	$	4,159

(1) The Company’s adjustment for nonperformance risk resulted in a $389 million cumulative decrease to the embedded derivative 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															Future Policy
	Corporate Debt Securities			Residential Mortgage Backed Securities			Commercial Mortgage Backed Securities			Asset Backed Securities			Total			Benefits: GMWB and GMAB Embedded Derivatives
	(in millions)
Balance, January 1, 2013	$	1,654		$	23		$	170		$	156		$	2,003		$	(833	)
Total gains (losses) included in:
Net income	—			—			—			1			1		(1)	618		(2)
Other comprehensive income	—			—			(2		)	4			2			—
Purchases	54			—			—			—			54			—
Sales	—			—			—			—			—			—
Issues	—			—			—			—			—			(50		)
Settlements	(55		)	—			—			(1		)	(56		)	(1		)
Transfers into Level 3	—			—			—			—			—			—
Transfers out of Level 3	—			(15		)	—			—			(15		)	—
Balance, March 31, 2013	$	1,653		$	8		$	168		$	160		$	1,989		$	(266	)

Changes in unrealized gains (losses) relating to assets and liabilities held at March 31, 2013 included in:
Net investment income	$	—		$	—		$	—		$	1		$	1		$	—
Benefits, claims, losses and settlement expenses	—			—			—			—			—			609

(1) Represents a $1 million gain included in net investment income 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																	Future Policy Benefits:
	Corporate Debt Securities			Residential Mortgage Backed Securities			Commercial Mortgage Backed Securities		Asset Backed Securities		Other Structured Investments		Total			Common Stock		GMWB and GMAB Embedded Derivatives
	(in millions)
Balance, January 1, 2012	$	1,342		$	58		$	16	$	133	$	14	$	1,563		$	—	$	(1,585	)
Total gains (losses) included in:
Net income	—			(2		)	—		—		—		(2		)(1)	—		784		(2)
Other comprehensive income	4			5			—		—		1		10			—		—
Purchases	98			24			—		—		—		122			1		—
Sales	—			—			—		—		—		—			—		—
Issues	—			—			—		—		—		—			—		(39		)
Settlements	(51		)	(3		)	—		—		—		(54		)	—		—
Transfers into Level 3	—			—			—		7		—		7			—		—
Transfers out of Level 3	—			—			—		—		—		—			—		—
Balance, March 31, 2012	$	1,393		$	82		$	16	$	140	$	15	$	1,646		$	1	$	(840	)

Changes in unrealized gains (losses) relating to assets and liabilities held at March 31, 2012 included in:
Net realized investment gains (losses)	$	—		$	2		$	—	$	—	$	—	$	2		$	—	$	—
Benefits, claims, losses and settlement expenses	—			—			—		—		—		—			—		769

(1) Represents a $2 million loss included in net realized investment gains 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 GMWB and GMAB embedded derivatives was $(65) million and $(115) million, net of DAC and DSIC amortization, for the three months ended March 31, 2013 and 2012, 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:

	March 31, 2013
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(in millions)
Corporate debt securities (private placements)	$	1,625	Discounted cash flow	Yield/spread to U.S. Treasuries	1.1% – 6.0% (2.0%)

GMWB and GMAB embedded derivatives	$	266	Discounted cash flow	Utilization of guaranteed withdrawals(1)	0.0% – 56.4%
				Surrender rate	0.0% – 56.3%
				Market volatility(2)	5.2% – 20.2%
				Nonperformance risk(3)	93 bps

	December 31, 2012
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(in millions)
Corporate debt securities (private placements)	$	1,624	Discounted cash flow	Yield/spread to U.S. Treasuries	1.1% – 8.5% (2.2%)

GMWB and GMAB embedded derivatives	$	833	Discounted cash flow	Utilization of guaranteed withdrawals(1)	0.0% – 56.4%
				Surrender rate	0.0% – 56.3%
				Market volatility(2)	5.6% – 21.2%
				Nonperformance risk(3)	97 bps

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

(2) Market volatility is implied volatility of fund of funds.

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

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 increases (decreases) in utilization and volatility used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would result in a significantly higher (lower) fair value measurement. Significant increases (decreases) in surrender rate and nonperformance risk used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would result in a significantly lower (higher) fair value measurement. 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. 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, municipal bonds, 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.

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 net asset value (“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 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. The counterparties’ nonperformance risk associated with uncollateralized derivative assets was immaterial at March 31, 2013 and December 31, 2012. See Note 11 and Note 12 for further information on the credit risk of derivative instruments and related collateral.

Liabilities

Future Policy Benefits

The Company values the embedded derivative liability 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 of these embedded derivatives also reflects a current estimate of the Company’s nonperformance risk specific to these liabilities. Given the significant unobservable inputs to this valuation, these measurements are classified as Level 3. The embedded derivative liability attributable to these provisions is recorded in future policy benefits.

The Company’s Corporate Actuarial Department calculates the fair value of the GMWB and GMAB 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.

The Company uses various Black-Scholes calculations to determine the fair value of the embedded derivative liability associated with the provisions of its EIA and IUL products. The inputs to these calculations are primarily market observable and include interest rates, volatilities and equity index levels. As a result, these measurements are classified as Level 2.

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. The Company’s nonperformance risk associated with uncollateralized derivative liabilities was immaterial at March 31, 2013 and December 31, 2012. See Note 11 and Note 12 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.

	March 31, 2013
	Carrying		Fair Value
	Value		Level 1		Level 2		Level 3		Total
	(in millions)
Financial Assets
Mortgage loans, net	$	3,365	$	—	$	—	$	3,553	$	3,553
Policy loans	752		—		—		686		686
Other investments	314		—		284		37		321
Restricted cash	75		75		—		—		75
Financial Liabilities
Future policy benefits	$	14,548	$	—	$	—	$	15,578	$	15,578
Separate account liabilities	375		—		375		—		375
Line of credit with Ameriprise Financial	150		—		—		150		150
Short-term borrowings	500		—		500		—		500
Other liabilities	123		—		—		121		121

	December 31, 2012
	Carrying		Fair Value
	Value		Level 1		Level 2		Level 3		Total
	(in millions)
Financial Assets
Mortgage loans, net	$	3,389	$	—	$	—	$	3,568	$	3,568
Policy loans	752		—		—		725		725
Other investments	309		—		292		24		316
Restricted cash	86		86		—		—		86
Financial Liabilities
Future policy benefits	$	14,701	$	—	$	—	$	15,982	$	15,982
Separate account liabilities	360		—		360		—		360
Line of credit with Ameriprise Financial	150		—		—		150		150
Short-term borrowings	501		—		500		—		500
Other liabilities	144		—		—		142		142

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 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

The fair value of policy loans is determined using discounted cash flows and 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 service or non-binding broker quotes. Syndicated loans that are priced by multiple non-binding broker quotes 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 or lack of liquidity.

Restricted Cash

Restricted cash is generally set aside for specific business transactions and restrictions are specific to the Company and do not transfer to third party market participants; therefore, the carrying amount is a reasonable estimate of fair value. The fair value of restricted cash is classified as Level 1.

Future Policy Benefits

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 provision for adverse deviation from estimated early policy surrender behavior and the Company’s nonperformance risk specific to these liabilities. The fair value of other liabilities including 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.

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.

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.

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.

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 and is classified as Level 3 as the discount rate is adjusted.