Fair Value Measurements

Recurring fair value measurements

The following tables present the Company’s financial assets and liabilities carried at fair value on a recurring basis by fair value hierarchy category:



	Assets and liabilities measured at fair value on a recurring basis
	September 30, 2014
	Quoted prices		Significant
	in active markets for identical assets (Level 1)		other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Assets
Fixed maturities available-for-sale:
U.S. government direct obligations and U.S. agencies	$	—	$	901,269	$	—	$	901,269
Obligations of U.S. states and their subdivisions	—		2,164,879		—		2,164,879
Foreign government securities	—		2,494		—		2,494
Corporate debt securities	—		11,654,190		6,105		11,660,295
Asset-backed securities	—		1,244,369		209,927		1,454,296
Residential mortgage-backed securities	—		191,568		—		191,568
Commercial mortgage-backed securities	—		907,608		—		907,608
Collateralized debt obligations	—		10,657		—		10,657
Total fixed maturities available-for-sale	—		17,077,034		216,032		17,293,066
Fixed maturities held for trading:
U.S. government direct obligations and U.S. agencies	—		160,390		—		160,390
Corporate debt securities	—		58,103		—		58,103
Commercial mortgage-backed securities	—		1,065		—		1,065
Total fixed maturities held for trading	—		219,558		—		219,558
Short-term investments	434,732		2,636,401		—		3,071,133
Collateral under securities lending agreements	62,887		—		—		62,887
Collateral under derivative counterparty collateral agreements	131,303		—		—		131,303
Derivative instruments designated as hedges:
Interest rate swaps	—		18,330		—		18,330
Cross-currency swaps	—		1,301		—		1,301
Derivative instruments not designated as hedges:
Interest rate swaps	—		1,840		—		1,840
Interest rate swaptions	—		424		—		424
Other forward contracts	—		2,347		—		2,347
Cross-currency swaps	—		2,055		—		2,055
Total derivative instruments	—		26,297		—		26,297
Separate account assets	15,583,106		11,898,760		—		27,481,866
Total assets	$	16,212,028	$	31,858,050	$	216,032	$	48,286,110

Liabilities
Payable under securities lending agreements	$	62,887	$	—	$	—	$	62,887
Derivative instruments designated as hedges:
Interest rate swaps	—		100		—		100
Cross-currency swaps	—		4,762		—		4,762
Derivative instruments not designated as hedges:
Interest rate swaps	—		1,411		—		1,411
Other forward contracts	—		4,434		—		4,434
Cross-currency swaps	—		143,588		—		143,588
Total derivative instruments	—		154,295		—		154,295
Separate account liabilities ⁽¹⁾	—		80,567		—		80,567
Total liabilities	$	62,887	$	234,862	$	—	$	297,749

⁽¹⁾Includes only separate account instruments which are carried at the fair value of the underlying liabilities owned by the separate accounts.



	Assets and liabilities measured at fair value on a recurring basis
	December 31, 2013
	Quoted prices		Significant
	in active markets for identical assets (Level 1)		other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Assets
Fixed maturities available-for-sale:
U.S. government direct obligations and U.S. agencies	$	—	$	3,064,639	$	—	$	3,064,639
Obligations of U.S. states and their subdivisions	—		1,943,587		—		1,943,587
Foreign government securities	—		2,603		—		2,603
Corporate debt securities	—		10,792,329		6,652		10,798,981
Asset-backed securities	—		1,402,679		252,958		1,655,637
Residential mortgage-backed securities	—		249,585		—		249,585
Commercial mortgage-backed securities	—		742,124		—		742,124
Collateralized debt obligations	—		12,356		32		12,388
Total fixed maturities available-for-sale	—		18,209,902		259,642		18,469,544
Fixed maturities held for trading:
U.S. government direct obligations and U.S. agencies	—		236,000		—		236,000
Corporate debt securities	—		58,171		—		58,171
Asset-backed securities	—		40,858		—		40,858
Commercial mortgage-backed securities	—		1,026		—		1,026
Total fixed maturities held for trading	—		336,055		—		336,055
Short-term investments	254,378		39,909		—		294,287
Collateral under securities lending agreements	18,534		—		—		18,534
Collateral under derivative counterparty collateral agreements	143,710		—		—		143,710
Derivative instruments designated as hedges:
Interest rate swaps	—		18,927		—		18,927
Derivative instruments not designated as hedges:
Interest rate swaps	—		1,454		—		1,454
Interest rate swaptions	—		1,176		—		1,176
Cross-currency swaps	—		1,921		—		1,921
Total derivative instruments	—		23,478		—		23,478
Separate account assets	14,861,680		11,769,224		—		26,630,904
Total assets	$	15,278,302	$	30,378,568	$	259,642	$	45,916,512

Liabilities
Payable under securities lending agreements	$	18,534	$	—	$	—	$	18,534
Derivative instruments designated as hedges:
Interest rate swaps	—		147		—		147
Cross-currency swaps	—		7,843		—		7,843
Derivative instruments not designated as hedges:
Interest rate swaps	—		3,492		—		3,492
Cross-currency swaps	—		156,261		—		156,261
Total derivative instruments	—		167,743		—		167,743
Separate account liabilities ⁽¹⁾	2		166,325		—		166,327
Total liabilities	$	18,536	$	334,068	$	—	$	352,604

⁽¹⁾ Includes only separate account instruments which are carried at the fair value of the underlying liabilities owned by the separate accounts.

The methods and assumptions used to estimate the fair value of the Company’s financial assets and liabilities carried at fair value on a recurring basis are as follows:

Fixed maturity investments

The fair values for fixed maturity investments are based upon market prices from independent pricing services. In cases where market prices are not readily available, such as for private fixed maturity investments, fair values are estimated by the Company. To determine estimated fair value for these instruments, the Company generally utilizes discounted cash flows calculated at current market rates on investments of similar quality and term. Fair value estimates are made at a specific point in time, based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty.

Short-term investments and securities lending agreements

The amortized cost of short-term investments, collateral under securities lending agreements and payable under securities lending agreements is a reasonable estimate of fair value due to their short-term nature and high credit quality of the issuers.

Derivative counterparty collateral agreements

Included in other assets is cash collateral received from or pledged to derivative counterparties and included in other liabilities is the obligation to return the cash collateral to the counterparties. The carrying value of the collateral is a reasonable estimate of fair value.

Derivative instruments

Included in other assets and other liabilities are derivative financial instruments. The estimated fair values of OTC derivatives, primarily consisting of cross-currency swaps, interest rate swaps, interest rate swaptions and other forward contracts, are the estimated amounts the Company would receive or pay to terminate the agreements at the end of each reporting period, taking into consideration current interest rates and other relevant factors.

Separate account assets and liabilities

Separate account assets and liabilities primarily include investments in mutual fund, fixed maturity and short-term securities. Mutual funds are recorded at net asset value, which approximates fair value, on a daily basis. The fixed maturity and short-term investments are valued in the same manner and using the same pricing sources and inputs as the fixed maturity and short-term investments of the Company.

The following tables present additional information about assets and liabilities measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:



	Recurring Level 3 financial assets and liabilities
	Three Months Ended September 30, 2014
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized
	debt securities			securities			debt obligations			Total
Balance, July 1, 2014	$	6,371		$	220,134		$	29		$	226,534
Realized and unrealized gains (losses) included in:
Net income (loss)	—			—			(17		)	(17		)
Other comprehensive income (loss)	(111		)	(3,957		)	(12		)	(4,080		)
Settlements	(155		)	(6,250		)	—			(6,405		)
Balances, September 30, 2014	$	6,105		$	209,927		$	—		$	216,032
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at September 30, 2014	$	—		$	—		$	—		$	—



	Recurring Level 3 financial assets and liabilities
	Three Months Ended September 30, 2013
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized
	debt securities			securities			debt obligations		Total
Balance, July 1, 2013	$	1,796		$	260,768		$	32	$	262,596
Realized and unrealized gains (losses) included in:
Other comprehensive income (loss)	(5		)	6,667			—		6,662
Settlements	1			(12,086		)	—		(12,085		)
Balances, September 30, 2013	$	1,792		$	255,349		$	32	$	257,173
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at September 30, 2013	$	—		$	—		$	—	$	—



	Recurring Level 3 financial assets and liabilities
	Nine Months Ended September 30, 2014
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized
	debt securities			securities			debt obligations			Total
Balance, January 1, 2014	$	6,652		$	252,958		$	32		$	259,642
Realized and unrealized gains (losses) included in:
Net income (loss)	—			—			(17		)	(17		)
Other comprehensive income (loss)	(36		)	(9,551		)	(15		)	(9,602		)
Settlements	(511		)	(33,480		)	—			(33,991		)
Balances, September 30, 2014	$	6,105		$	209,927		$	—		$	216,032
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at September 30, 2014	$	—		$	—		$	—		$	—



	Recurring Level 3 financial assets and liabilities
	Nine Months Ended September 30, 2013
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized
	debt securities			securities			debt obligations		Total
Balance, January 1, 2013	$	1,822		$	265,538		$	32	$	267,392
Realized and unrealized gains (losses) included in:
Other comprehensive income (loss)	(28		)	25,261			—		25,233
Settlements	(2		)	(35,450		)	—		(35,452		)
Balance at September 30, 2013	$	1,792		$	255,349		$	32	$	257,173
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at September 30, 2013	$	—		$	—		$	—	$	—

The following tables present significant unobservable inputs used during the valuation of certain assets categorized within Level 3 of the recurring fair value measurements table:



	September 30, 2014
	Fair Value		Valuation Technique	Unobservable Input	Weighted Average
Fixed maturities available-for-sale:
Asset-backed securities ⁽¹⁾	$	209,888	Internal model pricing	Prepayment speed assumption	8
				Constant default rate assumption	5
				Adjusted ABX Index spread assumption ⁽²⁾	505

⁽¹⁾ Includes home improvement loans only.

⁽²⁾ Includes an internally calculated liquidity premium adjustment of 217.

At September 30, 2014, after adjusting the Asset Backed Securities Index (“ABX Index”) spread assumption by the liquidity premium, the overall discount rate ranged from 293 to 613 basis points. The constant default rate assumption ranged from 2.0 to 12.7.



	December 31, 2013
	Fair Value		Valuation Technique	Unobservable Input	Weighted Average
Fixed maturities available-for-sale:
Asset-backed securities ⁽¹⁾	$	252,902	Internal model pricing	Prepayment speed assumption	9
				Constant default rate assumption	5
				Adjusted ABX Index spread assumption ⁽²⁾	455

⁽¹⁾ Includes home improvement loans only.

⁽²⁾ Includes an internally calculated liquidity premium adjustment of 217.

At December 31, 2013, after adjusting the ABX Index spread assumption by the liquidity premium, the overall discount rate ranged from 327 to 647 basis points. The constant default rate assumption ranged from 2.0 to 12.9.

The significant unobservable inputs used in the fair value measurement of asset-backed securities are prepayment speed assumptions, constant default rate assumptions and the ABX Index spread adjusted by an internally calculated liquidity premium with the primary inputs being the constant default rate assumption and the adjusted ABX Index spread assumption. As the constant default rate assumption or the adjusted ABX Index spread assumption increases, the price and therefore, the fair value, of the securities decreases.

Non-recurring fair value measurements - Certain assets are measured at estimated fair value on a non-recurring basis and are not included in the tables above. The Company held $9,242 and zero of adjusted cost basis limited partnership interests which were impaired at September 30, 2014 and December 31, 2013, respectively, based on the fair value disclosed in the limited partnership financial statements. These limited partnership interests were recorded at estimated fair value and represent a non-recurring fair value measurement. The estimated fair value was categorized as Level 3.

Fair value of financial instruments

The following tables summarize the carrying amounts and estimated fair values of the Company’s financial instruments not carried at fair value on a recurring basis:



	September 30, 2014				December 31, 2013
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Assets
Mortgage loans on real estate	$	3,175,683	$	3,338,668	$	3,134,255	$	3,197,292
Policy loans	4,179,059		4,179,059		4,185,472		4,185,472
Limited partnership interests	38,772		43,754		44,551		42,433
Other investments	15,790		42,809		16,643		42,814

Liabilities
Annuity contract benefits without life contingencies	$	10,499,021	$	10,390,024	$	10,263,043	$	9,986,464
Policyholders’ funds	306,293		306,293		345,689		345,689
Commercial paper	99,989		99,989		98,990		98,990
Notes payable	541,798		574,260		532,519		541,918

The methods and assumptions used to estimate the fair value of financial instruments not carried at fair value on a recurring basis are summarized as follows:

Mortgage loans on real estate

Mortgage loan fair value estimates are generally based on discounted cash flows. A discount rate matrix is used where the discount rate valuing a specific mortgage generally corresponds to that mortgage’s remaining term and credit quality. Management believes the discount rate used is comparable to the credit, interest rate, term, servicing costs and risks of loans similar to the portfolio loans that the Company would make today given its internal pricing strategy. The estimated fair value is classified as Level 2.

Policy loans

Policy loans are funds provided to policy holders in return for a claim on the policy. The funds provided are limited to the cash surrender value of the underlying policy. The nature of policy loans is to have a negligible default risk as the loans are fully collateralized by the value of the policy. Policy loans do not have a stated maturity and the balances and accrued interest are repaid either by the policyholder or with proceeds from the policy. Due to the collateralized nature of policy loans and unpredictable timing of repayments, the Company believes the fair value of policy loans approximates carrying value. The estimated fair value is classified as Level 2.

Limited partnership interests

Limited partnership interests, accounted for using the cost method, represent the Company’s minor ownership interests in pooled investment funds. These funds employ varying investment strategies that principally make private equity investments across diverse industries and geographical focuses. The estimated fair value was determined using the partnership financial statement reported capital account or net asset value adjusted for other relevant information which may impact the exit value of the investments. Distributions by these investments are generated from investment gains, from operating income generated by the underlying investments of the funds and from liquidation of the underlying assets of the funds which are estimated to be liquidated over the next one to 10 years. The estimated fair value is classified as Level 3.

Other investments

Other investments primarily include real estate held for investment. The estimated fair value for real estate is based on the unadjusted annual appraised value which includes factors such as comparable property sales, property income analysis, and capitalization rates. The estimated fair value is classified as Level 2.

Annuity contract benefits without life contingencies

The estimated fair value of annuity contract benefits without life contingencies is estimated by discounting the projected expected cash flows to the maturity of the contracts utilizing risk-free spot interest rates plus a provision for the Company’s credit risk. The estimated fair value is classified as Level 2.

Policyholders’ funds

The carrying amount of policyholders’ funds approximates the fair value since the Company can change the interest credited rates with 30 days notice. The estimated fair value is classified as Level 2.

Commercial paper

The amortized cost of commercial paper is a reasonable estimate of fair value due to its short-term nature and the high credit quality of the obligor. The estimated fair value is classified as Level 2.

Notes payable

The estimated fair value of the notes payable to GWL&A Financial is based upon quoted market prices from independent pricing services of securities with characteristics similar to those of the notes payable. The estimated fair value is classified as Level 2.