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
	June 30, 2016
	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	$	—	$	1,181,290	$	—	$	1,181,290
Obligations of U.S. states and their subdivisions	—		2,273,641		—		2,273,641
Foreign government securities	—		2,205		—		2,205
Corporate debt securities	—		13,792,661		15,056		13,807,717
Asset-backed securities	—		1,680,061		—		1,680,061
Residential mortgage-backed securities	—		96,158		—		96,158
Commercial mortgage-backed securities	—		1,090,803		—		1,090,803
Collateralized debt obligations	—		38,713		—		38,713
Total fixed maturities available-for-sale	—		20,155,532		15,056		20,170,588
Fixed maturities held-for-trading:
U.S. government direct obligations and U.S. agencies	—		268,691		—		268,691
Corporate debt securities	—		56,932		—		56,932
Commercial mortgage-backed securities	—		1,129		—		1,129
Total fixed maturities held-for-trading	—		326,752		—		326,752
Short-term investments	345,406		2,067,786		—		2,413,192
Collateral under securities lending agreements	79,780		—		—		79,780
Collateral under derivative counterparty collateral agreements	108,216		—		—		108,216
Derivative instruments designated as hedges:
Interest rate swaps	—		14,649		—		14,649
Cross-currency swaps	—		52,287		—		52,287
Derivative instruments not designated as hedges:
Interest rate swaps	—		33,083		—		33,083
Interest rate swaptions	—		138		—		138
Other forward contracts	—		20,582		—		20,582
Cross-currency swaps	—		40,175		—		40,175
Total derivative instruments	—		160,914		—		160,914
Separate account assets	15,193,369		12,058,035		—		27,251,404
Total assets	$	15,726,771	$	34,769,019	$	15,056	$	50,510,846

Liabilities
Payable under securities lending agreements	$	79,780	$	—	$	—	$	79,780
Collateral under derivative counterparty collateral agreements	82,626		—		—		82,626
Derivative instruments designated as hedges:
Interest rate swaps	—		24,150		—		24,150
Cross-currency swaps	—		1,432		—		1,432
Derivative instruments not designated as hedges:
Interest rate swaps	—		10,563		—		10,563
Other forward contracts	—		5,027		—		5,027
Cross-currency swaps	—		28,839		—		28,839
Total derivative instruments	—		70,011		—		70,011
Embedded derivatives - GLWB	—		—		30,687		30,687
Separate account liabilities ⁽¹⁾	6		368,282		—		368,288
Total liabilities	$	162,412	$	438,293	$	30,687	$	631,392

⁽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, 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	$	—	$	3,341,752	$	—	$	3,341,752
Obligations of U.S. states and their subdivisions	—		2,219,173		—		2,219,173
Foreign government securities	—		2,286		—		2,286
Corporate debt securities	—		12,501,174		4,538		12,505,712
Asset-backed securities	—		1,311,370		—		1,311,370
Residential mortgage-backed securities	—		125,372		—		125,372
Commercial mortgage-backed securities	—		1,016,908		—		1,016,908
Collateralized debt obligations	—		9,054		—		9,054
Total fixed maturities available-for-sale	—		20,527,089		4,538		20,531,627
Fixed maturities held-for-trading:
U.S. government direct obligations and U.S. agencies	—		558,208		—		558,208
Corporate debt securities	—		56,566		—		56,566
Commercial mortgage-backed securities	—		1,065		—		1,065
Total fixed maturities held-for-trading	—		615,839		—		615,839
Short-term investments	132,288		134,738		—		267,026
Collateral under derivative counterparty collateral agreements	69,984		—		—		69,984
Derivative instruments designated as hedges:
Interest rate swaps	—		11,843		—		11,843
Cross-currency swaps	—		28,736		—		28,736
Derivative instruments not designated as hedges:
Interest rate swaps	—		8,295		—		8,295
Interest rate swaptions	—		189		—		189
Cross-currency swaps	—		19,537		—		19,537
Total derivative instruments	—		68,600		—		68,600
Separate account assets	15,249,966		11,381,227		—		26,631,193
Total assets	$	15,452,238	$	32,727,493	$	4,538	$	48,184,269

Liabilities
Collateral under derivative counterparty collateral agreements	$	19,060	$	—	$	—	$	19,060
Derivative instruments designated as hedges:
Cross-currency swaps	—		22		—		22
Derivative instruments not designated as hedges:
Interest rate swaps	—		5,055		—		5,055
Cross-currency swaps	—		71,296		—		71,296
Total derivative instruments	—		76,373		—		76,373
Embedded derivatives - GLWB	—		—		11,257		11,257
Separate account liabilities ⁽¹⁾	24		290,293		—		290,317
Total liabilities	$	19,084	$	366,666	$	11,257	$	397,007

⁽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 generally 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.

Collateral under 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 June 30, 2016
	Assets			Liabilities
	Fixed maturities available-for-sale			Embedded
	Corporate			derivatives
	debt securities			- GLWB
Balances, April 1, 2016	$	15,542		$	21,707
Realized and unrealized gains (losses) included in:
Net income (loss)	—			8,980
Other comprehensive income (loss)	109			—
Settlements	(595		)	—
Balances, June 30, 2016	$	15,056		$	30,687
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 June 30, 2016	$	—		$	8,980



	Recurring Level 3 financial assets and liabilities
	Three Months Ended June 30, 2015
	Assets									Liabilities
	Fixed maturities available-for-sale									Embedded
	Corporate			Asset-backed						derivatives
	debt securities			securities			Total			- GLWB
Balances, April 1, 2015	$	5,329		$	33		$	5,362		$	9,177
Realized and unrealized gains (losses) included in:
Net income (loss)	—			—			—			(6,258		)
Other comprehensive income (loss)	(49		)	—			(49		)	—
Settlements	(215		)	(2		)	(217		)	—
Balances, June 30, 2015	$	5,065		$	31		$	5,096		$	2,919
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 June 30, 2015	$	—		$	—		$	—		$	(6,258	)



	Recurring Level 3 financial assets and liabilities
	Six Months Ended June 30, 2016
	Assets			Liabilities
	Fixed maturities available-for-sale			Embedded
	Corporate			derivatives
	debt securities			- GLWB
Balances, January 1, 2016	$	4,538		$	11,257
Realized and unrealized gains (losses) included in:
Net income (loss)	—			19,430
Other comprehensive income (loss)	475			—
Settlements	(1,193		)	—
Transfers into Level 3 ⁽¹⁾	11,236			—
Balances, June 30, 2016	$	15,056		$	30,687
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 June 30, 2016	$	—		$	19,430

⁽¹⁾ Transfers into Level 3 are due primarily to decreased observability of inputs in valuation methodologies.



	Recurring Level 3 financial assets and liabilities
	Six Months Ended June 30, 2015
	Assets									Liabilities
	Fixed maturities available-for-sale									Embedded
	Corporate			Asset-backed						derivatives
	debt securities			securities			Total			- GLWB
Balances, January 1, 2015	$	5,842		$	36		$	5,878		$	6,407
Realized and unrealized gains (losses) included in:
Net income (loss)	—			—			—			(3,488		)
Other comprehensive income (loss)	(77		)	—			(77		)	—
Settlements	(700		)	(5		)	(705		)	—
Balances, June 30, 2015	$	5,065		$	31		$	5,096		$	2,919
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 June 30, 2015	$	—		$	—		$	—		$	(3,488	)

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:



	June 30, 2016
	Fair Value		Valuation Technique	Unobservable Input	Range
Embedded derivatives - GLWB	$	30,687	Risk neutral stochastic valuation methodology	Equity volatility	15% - 28%
				Swap curve	0.5% - 2.50%
				Mortality rate	Based on the Annuity 2000 Mortality Table
				Lapse rate	1% - 15%



	December 31, 2015
	Fair Value		Valuation Technique	Unobservable Input	Range
Embedded derivatives - GLWB	$	11,257	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% - 15%

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:



	June 30, 2016				December 31, 2015
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Assets
Mortgage loans on real estate	$	3,495,837	$	3,699,863	$	3,247,704	$	3,362,496
Policy loans	4,113,952		4,113,952		4,092,661		4,092,661
Limited partnership interests	29,905		29,140		35,039		34,882
Other investments	14,295		44,723		14,596		44,723

Liabilities
Annuity contract benefits without life contingencies	$	11,838,861	$	11,967,170	$	11,104,721	$	10,839,205
Policyholders’ funds	289,666		289,666		299,577		299,577
Commercial paper	99,669		99,669		93,371		93,371
Notes payable	530,956		527,132		532,575		563,633

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 primarily 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.