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, 2017
	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	$	—	$	1,431,635	$	—	$	1,431,635
Obligations of U.S. states and their subdivisions	—		2,108,567		—		2,108,567
Corporate debt securities	—		15,015,692		10,703		15,026,395
Asset-backed securities	—		1,722,178		—		1,722,178
Residential mortgage-backed securities	—		75,090		—		75,090
Commercial mortgage-backed securities	—		1,297,687		—		1,297,687
Collateralized debt obligations	—		580,966		—		580,966
Total fixed maturities available-for-sale	—		22,231,815		10,703		22,242,518
Fixed maturities held-for-trading:
U.S. government direct obligations and U.S. agencies	—		126,590		—		126,590
Corporate debt securities	—		54,889		—		54,889
Commercial mortgage-backed securities	—		1,075		—		1,075
Total fixed maturities held-for-trading	—		182,554		—		182,554
Short-term investments	406,459		511,257		—		917,716
Collateral under securities lending agreements	—		77,614		—		77,614
Collateral under derivative counterparty collateral agreements	61,829		—		—		61,829
Derivative instruments designated as hedges:
Interest rate swaps	—		29,929		—		29,929
Cross-currency swaps	—		40,324		—		40,324
Derivative instruments not designated as hedges:
Interest rate swaps	—		10,296		—		10,296
Interest rate swaptions	—		204		—		204
Other forward contracts	—		2,843		—		2,843
Cross-currency swaps	—		35,587		—		35,587
Total derivative instruments	—		119,183		—		119,183
Separate account assets ⁽¹⁾	16,057,719		11,366,695		—		27,856,199
Total assets	$	16,526,007	$	34,489,118	$	10,703	$	51,457,613

Liabilities
Derivative instruments designated as hedges:
Cross-currency swaps	$	—	$	20,052	$	—	$	20,052
Derivative instruments not designated as hedges:
Interest rate swaps	—		12,492		—		12,492
Other forward contracts	—		5,423		—		5,423
Cross-currency swaps	—		24,004		—		24,004
Total derivative instruments	—		61,971		—		61,971
Embedded derivatives - GLWB	—		—		9,595		9,595
Separate account liabilities ⁽²⁾	4		444,831		—		444,835
Total liabilities	$	4	$	506,802	$	9,595	$	516,401

⁽¹⁾Included in the total fair value amount are $432 million of investments as of June 30, 2017 for which the fair value is estimated using net asset value per unit as a practical expedient which are excluded from the disclosure requirement to classify amounts in the fair value hierarchy in connection with the adoption of ASU 2015-07.

⁽²⁾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, 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	$	—	$	3,035,112	$	—	$	3,035,112
Obligations of U.S. states and their subdivisions	—		2,098,662		—		2,098,662
Corporate debt securities	—		13,968,110		11,639		13,979,749
Asset-backed securities	—		1,312,379		—		1,312,379
Residential mortgage-backed securities	—		140,992		—		140,992
Commercial mortgage-backed securities	—		1,225,282		—		1,225,282
Collateralized debt obligations	—		361,527		—		361,527
Total fixed maturities available-for-sale	—		22,142,064		11,639		22,153,703
Fixed maturities held-for-trading:
U.S. government direct obligations and U.S. agencies	—		458,067		—		458,067
Corporate debt securities	—		55,591		—		55,591
Commercial mortgage-backed securities	—		1,080		—		1,080
Total fixed maturities held-for-trading	—		514,738		—		514,738
Short-term investments	267,851		36,137		—		303,988
Collateral under derivative counterparty collateral agreements	103,214		—		—		103,214
Derivative instruments designated as hedges:
Interest rate swaps	—		33,390		—		33,390
Cross-currency swaps	—		53,641		—		53,641
Derivative instruments not designated as hedges:
Interest rate swaps	—		8,982		—		8,982
Interest rate swaptions	—		354		—		354
Cross-currency swaps	—		50,018		—		50,018
Total derivative instruments	—		146,385		—		146,385
Separate account assets ⁽¹⁾	15,407,992		11,199,924		—		27,037,765
Total assets	$	15,779,057	$	34,039,248	$	11,639	$	50,259,793

Liabilities
Collateral under derivative counterparty collateral agreements	$	103,214	$	—	$	—	$	103,214
Derivative instruments designated as hedges:
Cross-currency swaps	—		8,294		—		8,294
Derivative instruments not designated as hedges:
Interest rate swaps	—		13,340		—		13,340
Cross-currency swaps	—		16,647		—		16,647
Total derivative instruments	—		38,281		—		38,281
Embedded derivatives - GLWB	—		—		5,712		5,712
Separate account liabilities ⁽²⁾	55		336,468		—		336,523
Total liabilities	$	103,269	$	374,749	$	5,712	$	483,730

⁽¹⁾Included in the total fair value amount are $430 million of investments as of December 31, 2016 for which the fair value is estimated using net asset value per unit as a practical expedient which are excluded from the disclosure requirement to classify amounts in the fair value hierarchy in connection with the adoption of ASU 2015-07.

⁽²⁾ 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 evaluated prices from independent pricing services. In cases where these 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 June 30, 2017
	Assets			Liabilities
	Fixed maturities available-for-sale			Embedded
	Corporate			derivatives
	debt securities			- GLWB
Balances, April 1, 2017	$	10,931		$	4,042
Realized and unrealized gains (losses) included in:
Net income (loss)	—			(5,553		)
Other comprehensive income (loss)	84			—
Settlements	(312		)	—
Balances, June 30, 2017	$	10,703		$	9,595
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, 2017	$	—		$	(5,553	)



	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
	Six Months Ended June 30, 2017
	Assets			Liabilities
	Fixed maturities available-for-sale			Embedded
	Corporate			derivatives
	debt securities			- GLWB
Balances, January 1, 2017	$	11,639		$	5,712
Realized and unrealized gains (losses) included in:
Net income (loss)	—			(3,883		)
Other comprehensive income (loss)	(280		)	—
Settlements	(656		)	—
Balances, June 30, 2017	$	10,703		$	9,595
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, 2017	$	—		$	(3,883	)



	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.

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



			Range
	Valuation Technique	Unobservable Input	June 30, 2017	December 31, 2016
Embedded derivatives - GLWB	Risk neutral stochastic valuation methodology	Equity volatility	15% - 28%	15% - 30%
		Swap curve	1.30% - 2.52%	0.75% - 3.00%
		Mortality rate	Based on the Annuity 2000 Mortality Table	Based on the Annuity 2000 Mortality Table
		Base Lapse rate	1% - 15%	1% - 15%

Fair value of financial instruments

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



	June 30, 2017				December 31, 2016
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Assets
Mortgage loans on real estate	$	3,924,598	$	4,020,537	$	3,558,826	$	3,574,240
Policy loans	4,066,620		4,066,620		4,019,648		4,019,648
Limited partnership interests	32,991		31,944		29,345		29,822
Other investments	13,603		43,799		14,382		44,687

Liabilities
Annuity contract benefits without life contingencies	$	12,419,039	$	12,314,755	$	12,291,378	$	12,129,631
Policyholders’ funds	287,265		287,265		285,554		285,554
Commercial paper	71,253		71,253		99,049		99,049
Notes payable	531,220		563,615		531,092		495,004

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 appraised value which includes factors such as comparable property sales, property income analysis, and capitalization rates. The estimated fair value is classified as Level 3.

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.