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, 2015
	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	$	—	$	1,085,830	$	—	$	1,085,830
Obligations of U.S. states and their subdivisions	—		2,288,301		—		2,288,301
Foreign government securities	—		2,332		—		2,332
Corporate debt securities	—		12,621,693		4,783		12,626,476
Asset-backed securities	—		1,349,729		40		1,349,769
Residential mortgage-backed securities	—		136,910		—		136,910
Commercial mortgage-backed securities	—		995,371		—		995,371
Collateralized debt obligations	—		9,365		—		9,365
Total fixed maturities available-for-sale	—		18,489,531		4,823		18,494,354
Fixed maturities held-for-trading:
U.S. government direct obligations and U.S. agencies	—		68,853		—		68,853
Corporate debt securities	—		57,268		—		57,268
Commercial mortgage-backed securities	—		1,093		—		1,093
Total fixed maturities held-for-trading	—		127,214		—		127,214
Short-term investments	605,962		1,857,213		—		2,463,175
Collateral under securities lending agreements	45,726		—		—		45,726
Collateral under derivative counterparty collateral agreements	81,937		—		—		81,937
Derivative instruments designated as hedges:
Interest rate swaps	—		13,978		—		13,978
Cross-currency swaps	—		17,375		—		17,375
Derivative instruments not designated as hedges:
Interest rate swaps	—		10,057		—		10,057
Interest rate swaptions	—		193		—		193
Other forward contracts	—		23,519		—		23,519
Cross-currency swaps	—		13,900		—		13,900
Total derivative instruments	—		79,022		—		79,022
Separate account assets	14,747,770		11,619,799		—		26,367,569
Total assets	$	15,481,395	$	32,172,779	$	4,823	$	47,658,997

Liabilities
Payable under securities lending agreements	$	45,726	$	—	$	—	$	45,726
Collateral under derivative counterparty collateral agreements	15,168		—		—		15,168
Derivative instruments designated as hedges:
Cross-currency swaps	—		983		—		983
Derivative instruments not designated as hedges:
Interest rate swaps	—		5,152		—		5,152
Other forward contracts	—		8,741		—		8,741
Cross-currency swaps	—		92,360		—		92,360
Total derivative instruments	—		107,236		—		107,236
Embedded derivatives - GLWB	—		—		9,777		9,777
Separate account liabilities ⁽¹⁾	6		357,468		—		357,474
Total liabilities	$	60,900	$	464,704	$	9,777	$	535,381

⁽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, 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	$	—	$	3,547,256	$	—	$	3,547,256
Obligations of U.S. states and their subdivisions	—		2,172,484		—		2,172,484
Foreign government securities	—		2,451		—		2,451
Corporate debt securities	—		11,933,607		5,842		11,939,449
Asset-backed securities	—		1,398,503		36		1,398,539
Residential mortgage-backed securities	—		173,229		—		173,229
Commercial mortgage-backed securities	—		918,205		—		918,205
Collateralized debt obligations	—		10,465		—		10,465
Total fixed maturities available-for-sale	—		20,156,200		5,878		20,162,078
Fixed maturities held-for-trading:
U.S. government direct obligations and U.S. agencies	—		279,602		—		279,602
Corporate debt securities	—		57,850		—		57,850
Commercial mortgage-backed securities	—		1,091		—		1,091
Total fixed maturities held-for-trading	—		338,543		—		338,543
Short-term investments	156,935		106,566		—		263,501
Collateral under securities lending agreements	13,741		—		—		13,741
Collateral under derivative counterparty collateral agreements	106,901		—		—		106,901
Derivative instruments designated as hedges:
Interest rate swaps	—		19,383		—		19,383
Cross-currency swaps	—		5,143		—		5,143
Derivative instruments not designated as hedges:
Interest rate swaps	—		6,246		—		6,246
Interest rate swaptions	—		271		—		271
Cross-currency swaps	—		4,561		—		4,561
Total derivative instruments	—		35,604		—		35,604
Separate account assets	16,146,057		11,572,787		—		27,718,844
Total assets	$	16,423,634	$	32,209,700	$	5,878	$	48,639,212

Liabilities
Payable under securities lending agreements	$	13,741	$	—	$	—	$	13,741
Collateral under derivative counterparty collateral agreements	791		—		—		791
Derivative instruments designated as hedges:
Interest rate swaps	—		131		—		131
Cross-currency swaps	—		2,821		—		2,821
Derivative instruments not designated as hedges:
Interest rate swaps	—		1,844		—		1,844
Cross-currency swaps	—		131,791		—		131,791
Total derivative instruments	—		136,587		—		136,587
Embedded derivatives - GLWB	—		—		6,407		6,407
Separate account liabilities ⁽¹⁾	15		217,712		—		217,727
Total liabilities	$	14,547	$	354,299	$	6,407	$	375,253

⁽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, fair values are estimated by the Company. To determine estimated fair value for these instruments, the Company generally utilizes discounted cash flows models with market observable pricing inputs such as spreads, average life, and credit quality. 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.

Embedded derivative - GLWB

Significant unobservable inputs used in the fair value measurements of GLWB include long-term equity and interest rate implied volatility, mortality, and policyholder behavior assumptions, such as benefit utilization, lapses, and partial withdrawals.

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, 2015
	Assets										Liabilities
	Fixed maturities available-for-sale										Embedded
	Corporate			Asset-backed		Collateralized					derivatives
	debt securities			securities		debt obligations		Total			- GLWB
Balances, July 1, 2015	$	5,065		$	31	$	—	$	5,096		$	2,919
Realized and unrealized gains (losses) included in:
Net income (loss)	—			—		—		—			6,858
Other comprehensive income (loss)	(66		)	—		—		(66		)	—
Settlements	(216		)	9		—		(207		)	—
Balances, September 30, 2015	$	4,783		$	40	$	—	$	4,823		$	9,777
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at September 30, 2015	$	—		$	—	$	—	$	—		$	6,858



	Recurring Level 3 financial assets and liabilities
	Three Months Ended September 30, 2014
	Assets												Liabilities
	Fixed maturities available-for-sale												Embedded
	Corporate			Asset-backed			Collateralized						derivatives
	debt securities			securities			debt obligations			Total			- GLWB
Balances, July 1, 2014	$	6,371		$	220,134		$	29		$	226,534		$	609
Realized and unrealized gains (losses) included in:
Net income (loss)	—			—			(17		)	(17		)	1,494
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		$	2,103
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at September 30, 2014	$	—		$	—		$	—		$	—		$	1,494



	Recurring Level 3 financial assets and liabilities
	Nine Months Ended September 30, 2015
	Assets										Liabilities
	Fixed maturities available-for-sale										Embedded
	Corporate			Asset-backed		Collateralized					derivatives
	debt securities			securities		debt obligations		Total			- GLWB
Balances, January 1, 2015	$	5,842		$	36	$	—	$	5,878		$	6,407
Realized and unrealized gains (losses) included in:
Net income (loss)	—			—		—		—			3,370
Other comprehensive income (loss)	(143		)	—		—		(143		)	—
Settlements	(916		)	4		—		(912		)	—
Balances, September 30, 2015	$	4,783		$	40	$	—	$	4,823		$	9,777
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at September 30, 2015	$	—		$	—	$	—	$	—		$	3,370



	Recurring Level 3 financial assets and liabilities
	Nine Months Ended September 30, 2014
	Assets												Liabilities
	Fixed maturities available-for-sale												Embedded
	Corporate			Asset-backed			Collateralized						derivatives
	debt securities			securities			debt obligations			Total			- GLWB
Balances, January 1, 2014	$	6,652		$	252,958		$	32		$	259,642		$	—
Realized and unrealized gains (losses) included in:
Net income (loss)	—			—			(17		)	(17		)	2,103
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		2,103
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at September 30, 2014	$	—		$	—		$	—		$	—		$	2,103

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



	September 30, 2015
	Fair Value		Valuation Technique	Unobservable Input	Range
Embedded derivatives - GLWB	$	9,777	Risk neutral stochastic valuation methodology	Equity volatility	15% - 28%
				Swap curve	0.75% - 3.00%
				Mortality rate	Based on the Annuity 2000 Mortality Table
				Lapse rate	1% - 12%



	December 31, 2014
	Fair Value		Valuation Technique	Unobservable Input	Range
Embedded derivatives - GLWB	$	6,407	Risk neutral stochastic valuation methodology	Equity volatility	15% - 28%
				Swap curve	0.44% - 2.70%
				Mortality rate	Based on the Annuity 2000 Mortality Table
				Lapse rate	1% - 12%

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 zero and $9,242 of adjusted cost basis limited partnership interests which were impaired at September 30, 2015, and December 31, 2014, 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, 2015				December 31, 2014
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Assets
Mortgage loans on real estate	$	3,324,597	$	3,502,107	$	3,363,570	$	3,558,111
Policy loans	4,150,476		4,150,476		4,130,062		4,130,062
Limited partnership interests	36,474		37,339		38,796		41,853
Other investments	14,760		44,591		15,614		43,263

Liabilities
Annuity contract benefits without life contingencies	$	10,897,078	$	10,746,275	$	10,569,147	$	10,563,477
Policyholders’ funds	266,438		266,438		335,484		335,484
Commercial paper	96,284		96,284		98,589		98,589
Notes payable	541,826		569,320		532,547		564,904

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 minority 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.