Fair Value

9 Months Ended

Sep. 30, 2018

6. Fair Value

Considerable judgment is often required in interpreting market data to develop estimates of fair value, and the use of different assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

Recurring Fair Value Measurements

The assets and liabilities measured at estimated fair value on a recurring basis and their corresponding placement in the fair value hierarchy, including those items for which the Company has elected the FVO, are presented below at:



	September 30, 2018
	Fair Value Hierarchy
	Level 1		Level 2		Level 3		Total Estimated Fair Value
	(In millions)
Assets
Fixed maturity securities:
U.S. corporate	$	—	$	22,820	$	584	$	23,404
U.S. government and agency	3,699		6,806		—		10,505
RMBS	—		7,129		1,078		8,207
Foreign corporate	—		6,040		1,005		7,045
State and political subdivision	—		3,990		—		3,990
CMBS	—		4,015		130		4,145
ABS	—		1,917		61		1,978
Foreign government	—		1,353		—		1,353
Total fixed maturity securities	3,699		54,070		2,858		60,627
Equity securities	15		13		122		150
Short-term investments	56		60		—		116
Real estate joint ventures (1)	—		—		15		15
Other limited partnership interests (1)	—		—		25		25
Commercial mortgage loans held by CSEs — FVO	—		93		—		93
Derivative assets: (2)
Interest rate	—		629		—		629
Foreign currency exchange rate	—		176		—		176
Credit	—		24		10		34
Equity market	1		854		152		1,007
Total derivative assets	1		1,683		162		1,846
Embedded derivatives within asset host contracts (3)	—		—		166		166
Separate account assets	202		103,692		4		103,898
Total assets	$	3,973	$	159,611	$	3,352	$	166,936
Liabilities
Derivative liabilities: (2)
Interest rate	$	—	$	1,044	$	—	$	1,044
Foreign currency exchange rate	—		92		1		93
Credit	—		1		—		1
Equity market	1		1,716		449		2,166
Total derivative liabilities	1		2,853		450		3,304
Embedded derivatives within liability host contracts (3)	—		—		1,831		1,831
Long-term debt of CSEs — FVO	—		3		—		3
Total liabilities	$	1	$	2,856	$	2,281	$	5,138



	December 31, 2017
	Fair Value Hierarchy
	Level 1		Level 2		Level 3		Total Estimated Fair Value
	(In millions)
Assets
Fixed maturity securities:
U.S. corporate	$	—	$	21,491	$	889	$	22,380
U.S. government and agency	8,002		7,911		—		15,913
RMBS	—		6,836		981		7,817
Foreign corporate	—		5,723		1,048		6,771
State and political subdivision	—		4,098		—		4,098
CMBS	—		3,155		136		3,291
ABS	—		1,691		105		1,796
Foreign government	—		1,262		5		1,267
Total fixed maturity securities	8,002		52,167		3,164		63,333
Equity securities (4)	18		19		124		161
Short-term investments	135		120		14		269
Commercial mortgage loans held by CSEs — FVO	—		115		—		115
Derivative assets: (2)
Interest rate	1		1,111		—		1,112
Foreign currency exchange rate	—		155		—		155
Credit	—		30		10		40
Equity market	15		773		149		937
Total derivative assets	16		2,069		159		2,244
Embedded derivatives within asset host contracts (3)	—		—		227		227
Separate account assets	410		109,741		5		110,156
Total assets	$	8,581	$	164,231	$	3,693	$	176,505
Liabilities
Derivative liabilities: (2)
Interest rate	$	—	$	837	$	—	$	837
Foreign currency exchange rate	—		117		1		118
Credit	—		1		—		1
Equity market	—		1,736		437		2,173
Total derivative liabilities	—		2,691		438		3,129
Embedded derivatives within liability host contracts (3)	—		—		2,234		2,234
Long-term debt of CSEs — FVO	—		11		—		11
Total liabilities	$	—	$	2,702	$	2,672	$	5,374

__________________


(1)	In connection with the adoption of new guidance related to the recognition and measurement of financial instruments (see Note 1), effective January 1, 2018 on a modified retrospective basis, the Company carries real estate joint ventures and other limited partnership interests previously accounted under the cost method of accounting at estimated fair value.

(2)

Derivative assets are presented within other invested assets on the consolidated balance sheets and derivative liabilities are presented within other liabilities on the consolidated balance sheets. The amounts are presented gross in the tables above to reflect the presentation on the consolidated balance sheets, but are presented net for purposes of the rollforward in the Fair Value Measurements Using Significant Unobservable Inputs (Level 3) tables.

(3)

Embedded derivatives within asset host contracts are presented within premiums, reinsurance and other receivables and other invested assets on the consolidated balance sheets. Embedded derivatives within liability host contracts are presented within policyholder account balances on the consolidated balance sheets. At September 30, 2018 and December 31, 2017, debt and equity securities also included embedded derivatives of $0 and ($52) million, respectively.


(4)	The Company reclassified Federal Home Loan Bank (“FHLB”) stock in the prior period from equity securities to other invested assets.

Valuation Controls and Procedures

The Company monitors and provides oversight of valuation controls and policies for securities, mortgage loans and derivatives, which are primarily executed by MLIA. The valuation methodologies used to determine fair values prioritize the use of observable market prices and market-based parameters and determines that judgmental valuation adjustments, when applied, are based upon established policies and are applied consistently over time. The valuation methodologies for securities, mortgage loans and derivatives are reviewed on an ongoing basis and revised when necessary, based on changing market conditions. In addition, the Chief Accounting Officer periodically reports to the Audit Committee of Brighthouse’s Board of Directors regarding compliance with fair value accounting standards.

The fair value of financial assets and financial liabilities is based on quoted market prices, where available. The Company assesses whether prices received represent a reasonable estimate of fair value through controls designed to ensure valuations represent an exit price. MLIA performs several controls, including certain monthly controls, which include, but are not limited to, analysis of portfolio returns to corresponding benchmark returns, comparing a sample of executed prices of securities sold to the fair value estimates, reviewing the bid/ask spreads to assess activity, comparing prices from multiple independent pricing services and ongoing due diligence to confirm that independent pricing services use market-based parameters. The process includes a determination of the observability of inputs used in estimated fair values received from independent pricing services or brokers by assessing whether these inputs can be corroborated by observable market data. Independent non-binding broker quotes, also referred to herein as “consensus pricing,” are used for non-significant portion of the portfolio. Prices received from independent brokers are assessed to determine if they represent a reasonable estimate of fair value by considering such pricing relative to the current market dynamics and current pricing for similar financial instruments. Fixed maturity securities priced using independent non-binding broker quotations represent less than 1% of the total estimated fair value of fixed maturity securities and 5% of the total estimated fair value of Level 3 fixed maturity securities at September 30, 2018.

MLIA also applies a formal process to challenge any prices received from independent pricing services that are not considered representative of estimated fair value. If prices received from independent pricing services are not considered reflective of market activity or representative of estimated fair value, independent non-binding broker quotations are obtained. If obtaining an independent non-binding broker quotation is unsuccessful, MLIA will use the last available price.

The Company reviews outputs of MLIA’s controls and performs additional controls, including certain monthly controls, which include but are not limited to, performing balance sheet analytics to assess reasonableness of period to period pricing changes, including any price adjustments. Price adjustments are applied if prices or quotes received from independent pricing services or brokers are not considered reflective of market activity or representative of estimated fair value. The Company did not have significant price adjustments during the nine months ended September 30, 2018.

Determination of Fair Value

Fixed maturity securities

The fair values for actively traded marketable bonds, primarily U.S. government and agency securities, are determined using the quoted market prices and are classified as Level 1 assets. For fixed maturity securities classified as Level 2 assets, fair values are determined using either a market or income approach and are valued based on a variety of observable inputs as described below.

U.S. corporate and foreign corporate securities: Fair value is determined using third-party commercial pricing services, with the primary inputs being quoted prices in markets that are not active, benchmark yields, spreads off benchmark yields, new issuances, issuer rating, trades of identical or comparable securities, or duration. Privately-placed securities are valued using the additional key inputs: market yield curve, call provisions, observable prices and spreads for similar public or private securities that incorporate the credit quality and industry sector of the issuer, and delta spread adjustments to reflect specific credit-related issues.

U.S. government and agency, state and political subdivision and foreign government securities: Fair value is determined using third-party commercial pricing services, with the primary inputs being quoted prices in markets that are not active, benchmark U.S. Treasury yield or other yields, spread off the U.S. Treasury yield curve for the identical security, issuer ratings and issuer spreads, broker dealer quotes, and comparable securities that are actively traded.

Structured securities: Fair value is determined using third-party commercial pricing services, with the primary inputs being quoted prices in markets that are not active, spreads for actively traded securities, spreads off benchmark yields, expected prepayment speeds and volumes, current and forecasted loss severity, ratings, geographic region, weighted average coupon and weighted average maturity, average delinquency rates and debt-service coverage ratios. Other issuance-specific information is also used, including, but not limited to; collateral type, structure of the security, vintage of the loans, payment terms of the underlying asset, payment priority within tranche, and deal performance.

Equity securities, short-term investments, real estate joint ventures, other limited partnership interests, commercial mortgage loans held by CSEs — FVO and long-term debt of CSEs — FVO

The fair value for actively traded equity securities and short-term investments are determined using quoted market prices and are classified as Level 1 assets. For financial instruments classified as Level 2 assets or liabilities, fair values are determined using a market approach and are valued based on a variety of observable inputs as described below.

Equity securities and short-term investments: Fair value is determined using third-party commercial pricing services, with the primary input being quoted prices in markets that are not active.

Real Estate Joint Ventures and Other Limited Partnership Interests: Fair value is generally based on the Company’s share of the net asset value (“NAV”) as provided on the financial statements of the investees.

Commercial mortgage loans held by CSEs — FVO and long-term debt of CSEs — FVO: Fair value is determined using third-party commercial pricing services, with the primary input being quoted securitization market price determined principally by independent pricing services using observable inputs or quoted prices or reported NAV provided by the fund managers.

Derivatives

The fair values for exchange-traded derivatives are determined using the quoted market prices and are classified as Level 1 assets. For OTC-bilateral derivatives and OTC-cleared derivatives classified as Level 2 assets or liabilities, fair values are determined using the income approach. Valuations of non-option-based derivatives utilize present value techniques, whereas valuations of option-based derivatives utilize option pricing models which are based on market standard valuation methodologies and a variety of observable inputs.

The significant inputs to the pricing models for most OTC-bilateral and OTC-cleared derivatives are inputs that are observable in the market or can be derived principally from, or corroborated by, observable market data. Certain OTC-bilateral and OTC-cleared derivatives may rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. These unobservable inputs may involve significant management judgment or estimation. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and management believes they are consistent with what other market participants would use when pricing such instruments.

Most inputs for OTC-bilateral and OTC-cleared derivatives are mid-market inputs but, in certain cases, liquidity adjustments are made when they are deemed more representative of exit value. Market liquidity, as well as the use of different methodologies, assumptions and inputs, may have a material effect on the estimated fair values of the Company’s derivatives and could materially affect net income.

The credit risk of both the counterparty and the Company are considered in determining the estimated fair value for all OTC-bilateral and OTC-cleared derivatives, and any potential credit adjustment is based on the net exposure by counterparty after taking into account the effects of netting agreements and collateral arrangements. The Company values its OTC-bilateral and OTC-cleared derivatives using standard swap curves which may include a spread to the risk-free rate, depending upon specific collateral arrangements. This credit spread is appropriate for those parties that execute trades at pricing levels consistent with similar collateral arrangements. As the Company and its significant derivative counterparties generally execute trades at such pricing levels and hold sufficient collateral, additional credit risk adjustments are not currently required in the valuation process. The Company’s ability to consistently execute at such pricing levels is in part due to the netting agreements and collateral arrangements that are in place with all of its significant derivative counterparties. An evaluation of the requirement to make additional credit risk adjustments is performed by the Company each reporting period.

Embedded Derivatives

Embedded derivatives principally include certain direct, assumed and ceded variable annuity guarantees, equity or bond indexed crediting rates within certain annuity contracts, and those related to funds withheld on ceded reinsurance agreements. Embedded derivatives are recorded at estimated fair value with changes in estimated fair value reported in net income.

The Company issues certain variable annuity products with guaranteed minimum benefits. GMWBs, GMABs and certain GMIBs contain embedded derivatives, which are measured at estimated fair value separately from the host variable annuity contract, with changes in estimated fair value reported in net derivative gains (losses). These embedded derivatives are classified within policyholder account balances on the consolidated balance sheets.

The Company’s actuarial department calculates the fair value of these embedded derivatives, which are estimated as the present value of projected future benefits minus the present value of projected future fees using actuarial and capital market assumptions including expectations concerning policyholder behavior. The calculation is based on in-force business, and is performed using standard actuarial valuation software which projects future cash flows from the embedded derivative over multiple risk neutral stochastic scenarios using observable risk-free rates.

Capital market assumptions, such as risk-free rates and implied volatilities, are based on market prices for publicly traded instruments to the extent that prices for such instruments are observable. Implied volatilities beyond the observable period are extrapolated based on observable implied volatilities and historical volatilities. Actuarial assumptions, including mortality, lapse, withdrawal and utilization, are unobservable and are reviewed at least annually based on actuarial studies of historical experience.

The valuation of these guarantee liabilities includes nonperformance risk adjustments and adjustments for a risk margin related to non-capital market inputs. The nonperformance adjustment is determined by taking into consideration publicly available information relating to spreads in the secondary market for Brighthouse Financial, Inc.’s debt. These observable spreads are then adjusted to reflect the priority of these liabilities and claims paying ability of the issuing insurance subsidiaries as compared to Brighthouse Financial, Inc.’s overall financial strength.

Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the uncertainties of such actuarial assumptions as annuitization, premium persistency, partial withdrawal and surrenders. The establishment of risk margins requires the use of significant management judgment, including assumptions of the amount and cost of capital needed to cover the guarantees. These guarantees may be more costly than expected in volatile or declining equity markets. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility and foreign currency exchange rates; changes in nonperformance risk; and variations in actuarial assumptions regarding policyholder behavior, mortality and risk margins related to non-capital market inputs, may result in significant fluctuations in the estimated fair value of the guarantees that could materially affect net income.

The Company recaptured from a former affiliate the risk associated with certain GMIBs. These embedded derivatives are included in policyholder account balances on the consolidated balance sheets with changes in estimated fair value reported in net derivative gains (losses). The value of the embedded derivatives on these recaptured risks is determined using a methodology consistent with that described previously for the guarantees directly written by the Company.

The Company ceded to a former affiliate the risk associated with certain of the GMIBs, GMABs and GMWBs described above that are also accounted for as embedded derivatives. In addition to ceding risks associated with guarantees that are accounted for as embedded derivatives, the Company also ceded, to a former affiliate, certain directly written GMIBs that are accounted for as insurance (i.e., not as embedded derivatives), but where the reinsurance agreement contains an embedded derivative. These embedded derivatives are included within premiums, reinsurance and other receivables on the consolidated balance sheets with changes in estimated fair value reported in net derivative gains (losses). The value of the embedded derivatives on the ceded risk is determined using a methodology consistent with that described previously for the guarantees directly written by the Company with the exception of the input for nonperformance risk that reflects the credit of the reinsurer.

The estimated fair value of the embedded derivatives within funds withheld related to certain ceded reinsurance is determined based on the change in estimated fair value of the underlying assets held by the Company in a reference portfolio backing the funds withheld liability. The estimated fair value of the underlying assets is determined as previously described in “— Equity securities, short-term investments, real estate joint ventures, other limited partnership interests, commercial mortgage loans held by CSEs — FVO and long-term debt of CSEs — FVO.” The estimated fair value of these embedded derivatives is included, along with their funds withheld hosts, in other liabilities on the consolidated balance sheets with changes in estimated fair value recorded in net derivative gains (losses). Changes in the credit spreads on the underlying assets, interest rates and market volatility may result in significant fluctuations in the estimated fair value of these embedded derivatives that could materially affect net income.

The Company issues certain annuity contracts which allow the policyholder to participate in returns from equity indices. These equity indexed features are embedded derivatives which are measured at estimated fair value separately from the host fixed annuity contract, with changes in estimated fair value reported in net derivative gains (losses). These embedded derivatives are classified within policyholder account balances on the consolidated balance sheets.

The estimated fair value of the embedded equity indexed derivatives, based on the present value of future equity returns to the policyholder using actuarial and present value assumptions including expectations concerning policyholder behavior, is calculated by the Company’s actuarial department. The calculation is based on in-force business and uses standard capital market techniques, such as Black-Scholes, to calculate the value of the portion of the embedded derivative for which the terms are set. The portion of the embedded derivative covering the period beyond where terms are set is calculated as the present value of amounts expected to be spent to provide equity indexed returns in those periods. The valuation of these embedded derivatives also includes the establishment of a risk margin, as well as changes in nonperformance risk.

Transfers between Levels

Overall, transfers between levels occur when there are changes in the observability of inputs and market activity. Transfers into or out of any level are assumed to occur at the beginning of the period.

Transfers between Levels 1 and 2:

For assets and liabilities measured at estimated fair value and still held at September 30, 2018 and December 31, 2017, transfers between Levels 1 and 2 were not significant.

Transfers into or out of Level 3:

Assets and liabilities are transferred into Level 3 when a significant input cannot be corroborated with market observable data. This occurs when market activity decreases significantly and underlying inputs cannot be observed, current prices are not available, and/or when there are significant variances in quoted prices, thereby affecting transparency. Assets and liabilities are transferred out of Level 3 when circumstances change such that a significant input can be corroborated with market observable data. This may be due to a significant increase in market activity, a specific event, or one or more significant input(s) becoming observable.

Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)

The following table presents certain quantitative information about the significant unobservable inputs used in the fair value measurement, and the sensitivity of the estimated fair value to changes in those inputs, for the more significant asset and liability classes measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at:



					September 30, 2018				December 31, 2017				Impact of Increase in Input on Estimated Fair Value (2)
	Valuation Techniques		Significant Unobservable Inputs		Range			Weighted Average (1)	Range			Weighted Average (1)	Impact of Increase in Input on Estimated Fair Value (2)
Fixed maturity securities (3)
U.S. corporate and foreign corporate	•	Matrix pricing	•	Offered quotes (4)	86	-	126	104	93	-	142	110	Increase
	•	Market pricing	•	Quoted prices (4)	53	-	316	101	—	-	443	76	Increase
RMBS	•	Market pricing	•	Quoted prices (4)	59	-	107	95	3	-	107	94	Increase (5)
ABS	•	Market pricing	•	Quoted prices (4)	99	-	101	100	100	-	104	101	Increase (5)
	•	Consensus pricing	•	Offered quotes (4)	100	-	100	100	100	-	100	100	Increase (5)
Derivatives
Foreign currency exchange rate	•	Present value techniques	•	Swap yield (17)	(23)	-	2		—	-	—		Increase (6)
Credit	•	Present value techniques	•	Credit spreads (7)	97	-	99		—	-	—		Decrease (6)
	•	Consensus pricing	•	Offered quotes (8)
Equity market	•	Present value techniques or option pricing models	•	Volatility (9)	12%	-	26%		11%	-	31%		Increase (6)
			•	Correlation (10)	30%	-	30%		10%	-	30%
Embedded derivatives
Direct, assumed and ceded guaranteed minimum benefits	•	Option pricing techniques	•	Mortality rates:
				Ages 0 - 40	0%	-	0.08%		0%	-	0.09%		Decrease (11)
				Ages 41 - 60	0.04%	-	0.60%		0.04%	-	0.65%		Decrease (11)
				Ages 61 - 115	0.26%	-	100%		0.26%	-	100%		Decrease (11)
			•	Lapse rates:
				Durations 1 - 10	0.25%	-	100%		0.25%	-	100%		Decrease (12)
				Durations 11 - 20	2%	-	100%		2%	-	100%		Decrease (12)
				Durations 21 - 116	2%	-	100%		2%	-	100%		Decrease (12)
			•	Utilization rates	0%	-	25%		0%	-	25%		Increase (13)
			•	Withdrawal rates	0.25%	-	10%		0.25%	-	10%		(14)
			•	Long-term equity volatilities	17.40%	-	25%		17.40%	-	25%		Increase (15)
			•	Nonperformance risk spread	1.05%	-	1.91%		0.64%	-	1.43%		Decrease (16)

___________________


(1)	The weighted average for fixed maturity securities is determined based on the estimated fair value of the securities.


(2)	The impact of a decrease in input would have the opposite impact on estimated fair value. For embedded derivatives, changes to direct and assumed guaranteed minimum benefits are based on liability positions; changes to ceded guaranteed minimum benefits are based on asset positions.


(3)	Significant increases (decreases) in expected default rates in isolation would result in substantially lower (higher) valuations.


(4)	Range and weighted average are presented in accordance with the market convention for fixed maturity securities of dollars per hundred dollars of par.


(5)	Changes in the assumptions used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumptions used for prepayment rates.


(6)	Changes in estimated fair value are based on long U.S. dollar net asset positions and will be inversely impacted for short U.S. dollar net asset positions.


(7)	Represents the risk quoted in basis points of a credit default event on the underlying instrument. Credit derivatives with significant unobservable inputs are primarily comprised of written credit default swaps.


(8)	At September 30, 2018 and December 31, 2017, independent non-binding broker quotations were used in the determination of less than 1% and 1% of the total net derivative estimated fair value, respectively.


(9)	Ranges represent the underlying equity volatility quoted in percentage points. Since this valuation methodology uses a range of inputs across multiple volatility surfaces to value the derivative, presenting a range is more representative of the unobservable input used in the valuation.


(10)	Ranges represent the different correlation factors utilized as components within the valuation methodology. Presenting a range of correlation factors is more representative of the unobservable input used in the valuation. Increases (decreases) in correlation in isolation will increase (decrease) the significance of the change in valuations.


(11)	Mortality rates vary by age and by demographic characteristics such as gender. Mortality rate assumptions are based on company experience. A mortality improvement assumption is also applied. For any given contract, mortality rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.

(12)

Base lapse rates are adjusted at the contract level based on a comparison of the actuarially calculated guaranteed values and the current policyholder account value, as well as other factors, such as the applicability of any surrender charges. A dynamic lapse function reduces the base lapse rate when the guaranteed amount is greater than the account value as in the money contracts are less likely to lapse. Lapse rates are also generally assumed to be lower in periods when a surrender charge applies. For any given contract, lapse rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.

(13)

The utilization rate assumption estimates the percentage of contract holders with a GMIB or lifetime withdrawal benefit who will elect to utilize the benefit upon becoming eligible. The rates may vary by the type of guarantee, the amount by which the guaranteed amount is greater than the account value, the contract’s withdrawal history and by the age of the policyholder. For any given contract, utilization rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.

(14)

The withdrawal rate represents the percentage of account balance that any given policyholder will elect to withdraw from the contract each year. The withdrawal rate assumption varies by age and duration of the contract, and also by other factors such as benefit type. For any given contract, withdrawal rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. For GMWBs, any increase (decrease) in withdrawal rates results in an increase (decrease) in the estimated fair value of the guarantees. For GMABs and GMIBs, any increase (decrease) in withdrawal rates results in a decrease (increase) in the estimated fair value.


(15)	Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are available. For any given contract, long-term equity volatility rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.


(16)	Nonperformance risk spread varies by duration and by currency. For any given contract, multiple nonperformance risk spreads will apply, depending on the duration of the cash flow being discounted for purposes of valuing the embedded derivative.

(17)

Ranges represent the rates across different yield curves and are presented in basis points. The swap yield curves are utilized among different types of derivatives to project cash flows, as well as to discount future cash flows to present value. Since this valuation methodology uses a range of inputs across a yield curve to value the derivative, presenting a range is more representative of the unobservable input used in the valuation.

The following is a summary of the valuation techniques and significant unobservable inputs used in the fair value measurement of assets and liabilities classified within Level 3 that are not included in the preceding table. Generally, all other classes of securities classified within Level 3, including those within separate account assets and embedded derivatives within funds withheld related to certain assumed reinsurance, use the same valuation techniques and significant unobservable inputs as previously described for Level 3 securities. This includes matrix pricing and discounted cash flow methodologies, inputs such as quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2, as well as independent non-binding broker quotations. The sensitivity of the estimated fair value to changes in the significant unobservable inputs for these other assets and liabilities is similar in nature to that described in the preceding table.

The following tables summarize the change of all assets and (liabilities) measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3):



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Fixed Maturity Securities
	Corporate (1)			Structured Securities			State and Political Subdivision			Foreign Government		Equity Securities
	(In millions)
Three Months Ended September 30, 2018
Balance, beginning of period	$	1,815		$	1,261		$	8		$	—	$	120
Total realized/unrealized gains (losses) included in net income (loss) (6) (7)	—			10			2			—		(2		)
Total realized/unrealized gains (losses) included in AOCI	(44		)	(8		)	(2		)	—		—
Purchases (8)	56			287			—			—		—
Sales (8)	(50		)	(114		)	(6		)	—		—
Issuances (8)	—			—			—			—		—
Settlements (8)	—			—			—			—		—
Transfers into Level 3 (9)	20			3			—			—		9
Transfers out of Level 3 (9)	(208		)	(170		)	(2		)	—		(5		)
Balance, end of period	$	1,589		$	1,269		$	—		$	—	$	122
Three Months Ended September 30, 2017
Balance, beginning of period	$	2,295		$	1,481		$	—		$	—	$	134
Total realized/unrealized gains (losses) included in net income (loss) (6) (7)	1			13			—			—		—
Total realized/unrealized gains (losses) included in AOCI	34			6			—			—		(1		)
Purchases (8)	92			147			—			—		—
Sales (8)	(56		)	(230		)	(1		)	—		(3		)
Issuances (8)	—			—			—			—		—
Settlements (8)	—			—			—			—		—
Transfers into Level 3 (9)	191			—			10			—		—
Transfers out of Level 3 (9)	(19		)	(14		)	—			—		—
Balance, end of period	$	2,538		$	1,403		$	9		$	—	$	130
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at September 30, 2018 (10)	$	—		$	4		$	—		$	—	$	—
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at September 30, 2017 (10)	$	1		$	10		$	—		$	—	$	—



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Real Estate Joint Ventures (2)			Other Limited Partnership Interests (2)			Short-term Investments			Net Derivatives (3)			Net Embedded Derivatives (4)			Separate Account Assets (5)
	(In millions)
Three Months Ended September 30, 2018
Balance, beginning of period	$	17		$	24		$	—		$	(284	)	$	(1,498	)	$	4
Total realized/unrealized gains (losses) included in net income (loss) (6) (7)	—			3			—			(4		)	(15		)	—
Total realized/unrealized gains (losses) included in AOCI	—			(1		)	—			—			—			—
Purchases (8)	—			—			—			—			—			1
Sales (8)	(2		)	(1		)	—			—			—			—
Issuances (8)	—			—			—			—			—			—
Settlements (8)	—			—			—			—			(152		)	—
Transfers into Level 3 (9)	—			—			—			—			—			—
Transfers out of Level 3 (9)	—			—			—			—			—			(1		)
Balance, end of period	$	15		$	25		$	—		$	(288	)	$	(1,665	)	$	4
Three Months Ended September 30, 2017
Balance, beginning of period	$	—		$	—		$	91		$	(780	)	$	(2,477	)	$	6
Total realized/unrealized gains (losses) included in net income (loss) (6) (7)	—			—			—			4			561			—
Total realized/unrealized gains (losses) included in AOCI	—			—			—			—			—			—
Purchases (8)	—			—			—			—			—			2
Sales (8)	—			—			—			—			—			—
Issuances (8)	—			—			—			—			—			—
Settlements (8)	—			—			—			370			(153		)	—
Transfers into Level 3 (9)	—			—			—			—			—			—
Transfers out of Level 3 (9)	—			—			(90		)	—			—			(2		)
Balance, end of period	$	—		$	—		$	1		$	(406	)	$	(2,069	)	$	6
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at September 30, 2018 (10)	$	—		$	3		$	—		$	(4	)	$	(13	)	$	—
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at September 30, 2017 (10)	$	—		$	—		$	—		$	4		$	341		$	—



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Fixed Maturity Securities
	Corporate (1)			Structured Securities			State and Political Subdivision			Foreign Government			Equity Securities
	(In millions)
Nine Months Ended September 30, 2018
Balance, beginning of period	$	1,937		$	1,222		$	—		$	5		$	124
Total realized/unrealized gains (losses) included in net income (loss) (6) (7)	2			21			—			—			(4		)
Total realized/unrealized gains (losses) included in AOCI	(118		)	(10		)	—			—			—
Purchases (8)	164			339			—			—			—
Sales (8)	(183		)	(227		)	—			—			(3		)
Issuances (8)	—			—			—			—			—
Settlements (8)	—			—			—			—			—
Transfers into Level 3 (9)	20			—			—			—			10
Transfers out of Level 3 (9)	(233		)	(76		)	—			(5		)	(5		)
Balance, end of period	$	1,589		$	1,269		$	—		$	—		$	122
Nine Months Ended September 30, 2017
Balance, beginning of period	$	2,310		$	1,695		$	17		$	—		$	137
Total realized/unrealized gains (losses) included in net income (loss) (6) (7)	(2		)	22			—			—			—
Total realized/unrealized gains (losses) included in AOCI	176			43			—			—			2
Purchases (8)	235			186			—			—			4
Sales (8)	(230		)	(460		)	(1		)	—			(13		)
Issuances (8)	—			—			—			—			—
Settlements (8)	—			—			—			—			—
Transfers into Level 3 (9)	180			—			3			—			—
Transfers out of Level 3 (9)	(131		)	(83		)	(10		)	—			—
Balance, end of period	$	2,538		$	1,403		$	9		$	—		$	130
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at September 30, 2018 (10)	$	(1	)	$	14		$	—		$	—		$	(4	)
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at September 30, 2017 (10)	$	1		$	19		$	—		$	—		$	—



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Real Estate Joint Ventures (2)			Other Limited Partnership Interests (2)			Short-term Investments			Net Derivatives (3)			Net Embedded Derivatives (4)			Separate Account Assets (5)
	(In millions)
Nine Months Ended September 30, 2018
Balance, beginning of period	$	22		$	28		$	14		$	(279	)	$	(2,007	)	$	5
Total realized/unrealized gains (losses) included in net income (loss) (6) (7)	(1		)	2			—			(12		)	767			—
Total realized/unrealized gains (losses) included in AOCI	—			(1		)	—			—			—			—
Purchases (8)	—			—			—			3			—			1
Sales (8)	(6		)	(4		)	(14		)	—			—			(1		)
Issuances (8)	—			—			—			—			—			—
Settlements (8)	—			—			—			—			(425		)	(1		)
Transfers into Level 3 (9)	—			—			—			—			—			—
Transfers out of Level 3 (9)	—			—			—			—			—			—
Balance, end of period	$	15		$	25		$	—		$	(288	)	$	(1,665	)	$	4
Nine Months Ended September 30, 2017
Balance, beginning of period	$	—		$	—		$	2		$	(954	)	$	(2,761	)	$	10
Total realized/unrealized gains (losses) included in net income (loss) (6) (7)	—			—			—			100			1,029			—
Total realized/unrealized gains (losses) included in AOCI	—			—			—			—			—			—
Purchases (8)	—			—			1			4			—			2
Sales (8)	—			—			(1		)	—			—			(3		)
Issuances (8)	—			—			—			—			—			—
Settlements (8)	—			—			—			444			(337		)	—
Transfers into Level 3 (9)	—			—			—			—			—			1
Transfers out of Level 3 (9)	—			—			(1		)	—			—			(4		)
Balance, end of period	$	—		$	—		$	1		$	(406	)	$	(2,069	)	$	6
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at September 30, 2018 (10)	$	(1	)	$	2		$	—		$	(12	)	$	739		$	—
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at September 30, 2017 (10)	$	—		$	—		$	—		$	98		$	862		$	—

________________


(1)	Comprised of U.S. and foreign corporate securities.


(2)	In connection with the adoption of new guidance related to the recognition and measurement of financial instruments (see Note 1), effective January 1, 2018 on a modified retrospective basis, the Company carries real estate joint ventures and other limited partnership interests previously accounted under the cost method of accounting at estimated fair value.


(3)	Freestanding derivative assets and liabilities are presented net for purposes of the rollforward.


(4)	Embedded derivative assets and liabilities are presented net for purposes of the rollforward.


(5)	Investment performance related to separate account assets is fully offset by corresponding amounts credited to contract holders within separate account liabilities. Therefore, such changes in estimated fair value are not recorded in net income (loss). For the purpose of this disclosure, these changes are presented within net investment gains (losses).

(6)

Amortization of premium/accretion of discount is included within net investment income. Impairments charged to net income (loss) on securities are included in net investment gains (losses). Lapses associated with net embedded derivatives are included in net derivative gains (losses). Substantially all realized/unrealized gains (losses) included in net income (loss) for net derivatives and net embedded derivatives are reported in net derivative gains (losses).


(7)	Interest and dividend accruals, as well as cash interest coupons and dividends received, are excluded from the rollforward.


(8)	Items purchased/issued and then sold/settled in the same period are excluded from the rollforward. Fees attributed to embedded derivatives are included in settlements.


(9)	Gains and losses, in net income (loss) and OCI, are calculated assuming transfers into and/or out of Level 3 occurred at the beginning of the period. Items transferred into and then out of Level 3 in the same period are excluded from the rollforward.


(10)	Changes in unrealized gains (losses) included in net income (loss) relate to assets and liabilities still held at the end of the respective periods. Substantially all changes in unrealized gains (losses) included in net income (loss) for net derivatives and net embedded derivatives are reported in net derivative gains (losses).

Fair Value Option

The following table presents information for certain assets and liabilities of CSEs, which are accounted for under the FVO. These assets and liabilities were initially measured at fair value.



	September 30, 2018		December 31, 2017
	(In millions)
Assets (1)
Unpaid principal balance	$	59	$	70
Difference between estimated fair value and unpaid principal balance	34		45
Carrying value at estimated fair value	$	93	$	115
Liabilities (1)
Contractual principal balance	$	3	$	10
Difference between estimated fair value and contractual principal balance	—		1
Carrying value at estimated fair value	$	3	$	11

__________________

(1)

These assets and liabilities are comprised of commercial mortgage loans and long-term debt. Changes in estimated fair value on these assets and liabilities and gains or losses on sales of these assets are recognized in net investment gains (losses). Interest income on commercial mortgage loans held by CSEs — FVO is recognized in net investment income. Interest expense from long-term debt of CSEs — FVO is recognized in other expenses.

Fair Value of Financial Instruments Carried at Other Than Fair Value

The following tables provide fair value information for financial instruments that are carried on the balance sheet at amounts other than fair value. These tables exclude the following financial instruments: cash and cash equivalents, accrued investment income, payables for collateral under securities loaned and other transactions and those short-term investments that are not securities, such as time deposits, and therefore are not included in the three level hierarchy table disclosed in the “— Recurring Fair Value Measurements” section. The estimated fair value of the excluded financial instruments, which are primarily classified in Level 2, approximates carrying value as they are short-term in nature such that the Company believes there is minimal risk of material changes in interest rates or credit quality. All remaining balance sheet amounts excluded from the tables below are not considered financial instruments subject to this disclosure.

The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows at:



	September 30, 2018
			Fair Value Hierarchy
	Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value
	(In millions)
Assets
Mortgage loans	$	12,841	$	—	$	—	$	12,816	$	12,816
Policy loans	$	1,026	$	—	$	648	$	435	$	1,083
Other invested assets	$	77	$	—	$	64	$	13	$	77
Premiums, reinsurance and other receivables	$	1,434	$	—	$	59	$	1,549	$	1,608
Liabilities
Policyholder account balances	$	15,876	$	—	$	—	$	14,736	$	14,736
Long-term debt	$	234	$	—	$	239	$	—	$	239
Other liabilities	$	545	$	—	$	196	$	343	$	539
Separate account liabilities	$	1,223	$	—	$	1,223	$	—	$	1,223



	December 31, 2017
			Fair Value Hierarchy
	Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value
	(In millions)
Assets
Mortgage loans	$	10,525	$	—	$	—	$	10,768	$	10,768
Policy loans	$	1,106	$	—	$	746	$	439	$	1,185
Real estate joint ventures (1)	$	5	$	—	$	—	$	22	$	22
Other limited partnership interests (1)	$	36	$	—	$	—	$	28	$	28
Other invested assets (2)	$	71	$	—	$	71	$	—	$	71
Premiums, reinsurance and other receivables	$	1,556	$	—	$	126	$	1,783	$	1,909
Liabilities
Policyholder account balances	$	15,626	$	—	$	—	$	15,760	$	15,760
Long-term debt	$	35	$	—	$	42	$	—	$	42
Other liabilities	$	459	$	—	$	93	$	368	$	461
Separate account liabilities	$	1,206	$	—	$	1,206	$	—	$	1,206

__________________


(1)	In connection with the adoption of new guidance related to the recognition and measurement of financial instruments (see Note 1), effective January 1, 2018 on a modified retrospective basis, the Company carries real estate joint ventures and other limited partnership interests previously accounted under the cost method of accounting at estimated fair value.


(2)	The Company reclassified FHLB stock in the prior period from equity securities to other invested assets.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details