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, 2018
	Quoted prices in active markets for identical assets (Level 1)		Significant 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	$	—	$	1,426,095	$	—	$	1,426,095
Obligations of U.S. states and their subdivisions	—		1,959,125		—		1,959,125
Corporate debt securities	—		15,331,285		8,623		15,339,908
Asset-backed securities	—		1,568,739		—		1,568,739
Residential mortgage-backed securities	—		75,247		—		75,247
Commercial mortgage-backed securities	—		1,245,498		—		1,245,498
Collateralized debt obligations	—		935,690		—		935,690
Total fixed maturities available-for-sale	—		22,541,679		8,623		22,550,302
Fixed maturities held-for-trading:
U.S. government direct obligations and U.S. agencies	—		137,866		—		137,866
Corporate debt securities	—		3,044		—		3,044
Commercial mortgage-backed securities	—		1,033		—		1,033
Total fixed maturities held-for-trading	—		141,943		—		141,943
Short-term investments	369,539		45,650		—		415,189
Limited partnership interests ⁽¹⁾	—		—		—		71,895
Equity investments	38,374		5,400		—		43,774
Collateral under securities lending agreements	—		66,784		—		66,784
Collateral under derivative counterparty collateral agreements	51,090		—		—		51,090
Derivative instruments designated as hedges:
Interest rate swaps	—		5,037		—		5,037
Cross-currency swaps	—		31,025		—		31,025
Derivative instruments not designated as hedges:
Interest rate swaps	—		681		—		681
Interest rate swaptions	—		164		—		164
Other forward contracts	—		976		—		976
Cross-currency swaps	—		22,435		—		22,435
Total derivative instruments	—		60,318		—		60,318
Embedded derivatives - GLWB	—		—		6,849		6,849
Separate account assets ⁽¹⁾	15,781,604		9,915,781		—		26,142,156
Total assets	$	16,240,607	$	32,777,555	$	15,472	$	49,550,300
Liabilities
Payable under securities lending agreements	$	—	$	66,784	$	—	$	66,784
Collateral under derivative counterparty collateral agreements	11,960		—		—		11,960
Derivative instruments designated as hedges:
Cross-currency swaps	—		37,542		—		37,542
Derivative instruments not designated as hedges:
Interest rate swaps	—		943		—		943
Other forward contracts	—		6,060		—		6,060
Cross-currency swaps	—		28,839		—		28,839
Total derivative instruments	—		73,384		—		73,384
Separate account liabilities ⁽²⁾	—		217,062		—		217,062
Total liabilities	$	11,960	$	357,230	$	—	$	369,190

⁽¹⁾Included in the total fair value amount are $445 million of separate account assets and $72 million of limited partnership interests as of September 30, 2018 for which the fair value is estimated using net asset value per unit as a practical expedient.

⁽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, 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	$	—	$	1,871,642	$	—	$	1,871,642
Obligations of U.S. states and their subdivisions	—		2,090,972		—		2,090,972
Corporate debt securities	—		15,696,349		9,738		15,706,087
Asset-backed securities	—		1,717,976		—		1,717,976
Residential mortgage-backed securities	—		64,984		—		64,984
Commercial mortgage-backed securities	—		1,357,609		—		1,357,609
Collateralized debt obligations	—		783,869		—		783,869
Total fixed maturities available-for-sale	—		23,583,401		9,738		23,593,139
Fixed maturities held-for-trading:
U.S. government direct obligations and U.S. agencies	—		16,836		—		16,836
Corporate debt securities	—		3,156		—		3,156
Commercial mortgage-backed securities	—		1,067		—		1,067
Total fixed maturities held-for-trading	—		21,059		—		21,059
Short-term investments	288,302		61,964		—		350,266
Collateral under derivative counterparty collateral agreements	57,820		—		—		57,820
Derivative instruments designated as hedges:
Interest rate swaps	—		7,476		—		7,476
Cross-currency swaps	—		19,958		—		19,958
Derivative instruments not designated as hedges:
Interest rate swaps	—		3,530		—		3,530
Interest rate swaptions	—		75		—		75
Cross-currency swaps	—		20,320		—		20,320
Total derivative instruments	—		51,359		—		51,359
Separate account assets ⁽¹⁾	16,523,630		10,736,532		—		27,660,571
Total assets	$	16,869,752	$	34,454,315	$	9,738	$	51,734,214
Liabilities
Collateral under derivative counterparty collateral agreements	$	5,490	$	—	$	—	$	5,490
Derivative instruments designated as hedges:
Cross-currency swaps	—		51,316		—		51,316
Derivative instruments not designated as hedges:
Interest rate swaps	—		1,628		—		1,628
Cross-currency swaps	—		41,599		—		41,599
Total derivative instruments	—		94,543		—		94,543
Embedded derivatives - GLWB	—		—		11,095		11,095
Separate account liabilities ⁽²⁾	8		409,266		—		409,274
Total liabilities	$	5,498	$	503,809	$	11,095	$	520,402

⁽¹⁾Included in the total fair value amounts are $400 million of investments as of December 31, 2017 for which the fair value is estimated using net asset value per unit as a practical expedient.

⁽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 flow 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.

Equity investments

The fair value for equity securities is generally based upon quoted market prices in active markets for identical assets

that the Company has the ability to access.

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. Short-term investments also include money market funds that are valued using unadjusted quoted prices in active markets.

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.

Limited partnership interests

Limited partnership interests 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 net asset value, determined using the partnership financial statement reported capital account adjusted for other relevant information which may impact the exit value of the investments, is used as a practical expedient to estimate fair value. 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. In the absence of permitted sales of its ownership interest, the Company will be redeemed out of the partnership interests through distributions.

Separate account assets and liabilities

Separate account assets and liabilities primarily include investments in mutual funds, unregistered funds, most of which are not subject to redemption restrictions, fixed maturity, and short-term securities. Mutual funds and unregistered 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, 2018
	Assets			Assets/(Liabilities)
	Fixed maturities available-for-sale			Embedded derivatives - GLWB
	Corporate debt securities
Balances, July 1, 2018	$	8,970		$	(513	)
Realized and unrealized gains (losses) included in:
Net income (loss)	—			7,362
Other comprehensive income (loss)	105			—
Settlements	(452		)	—
Balances, September 30, 2018	$	8,623		$	6,849
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, 2018	$	—		$	7,362



	Recurring Level 3 financial assets and liabilities
	Three Months Ended September 30, 2017
	Assets			Assets/(Liabilities)
	Fixed maturities available-for-sale			Embedded derivatives - GLWB
	Corporate debt securities
Balances, July 1, 2017	$	10,703		$	(9,595	)
Realized and unrealized gains (losses) included in:
Net income (loss)	—			(626		)
Other comprehensive income (loss)	166			—
Settlements	(432		)	—
Transfers out of Level 3 ⁽¹⁾	(357		)	—
Balances, September 30, 2017	$	10,080		$	(10,221	)
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, 2017	$	—		$	(626	)

(1) Transfers out of Level 3 are due primarily to increased observability of inputs in valuation methodologies as evidenced by corroboration of market prices with multiple pricing vendors.



	Recurring Level 3 financial assets and liabilities
	Nine Months Ended September 30, 2018
	Assets			Assets/(Liabilities)
	Fixed maturities available-for-sale			Embedded derivatives - GLWB
	Corporate debt securities
Balances, January 1, 2018	$	9,738		$	(11,095	)
Realized and unrealized gains (losses) included in:
Net income (loss)	—			17,944
Other comprehensive income (loss)	221			—
Settlements	(1,336		)	—
Balances, September 30, 2018	$	8,623		$	6,849
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, 2018	$	—		$	17,944



	Recurring Level 3 financial assets and liabilities
	Nine Months Ended September 30, 2017
	Assets			Assets/(Liabilities)
	Fixed maturities available-for-sale			Embedded derivatives - GLWB
	Corporate debt securities
Balances, January 1, 2017	$	11,639		$	(5,712	)
Realized and unrealized gains (losses) included in:
Net income (loss)	—			(4,509		)
Other comprehensive income (loss)	83			—
Settlements	(1,275		)	—
Transfers out of Level 3 ⁽¹⁾	(367		)	—
Balances, September 30, 2017	$	10,080		$	(10,221	)
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, 2017	$	—		$	(4,509	)

(1) Transfers out of Level 3 are due primarily to increased observability of inputs in valuation methodologies as evidenced by corroboration of market prices with multiple pricing vendors.

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	September 30, 2018	December 31, 2017
Embedded derivatives - GLWB	Risk neutral stochastic valuation methodology	Equity volatility	15% - 30%	15% - 30%
		Swap curve	2.40% - 3.16%	1.69% - 2.54%
		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:



	September 30, 2018					December 31, 2017
					Fair value					Fair value
	Carrying		Estimated		hierarchy	Carrying		Estimated		hierarchy
	amount		fair value		level	amount		fair value		level
Assets
Mortgage loans on real estate	$	4,365,189	$	4,254,101	2	$	4,005,187	$	4,066,800	2
Policy loans	4,103,408		4,103,408		2	4,104,094		4,104,094		2
Limited partnership interests ⁽¹⁾	—		—			43,281		45,009
Other investments	10,840		40,387		3	11,507		41,588		3

Liabilities
Annuity contract benefits without life contingencies	$	12,882,915	$	12,503,021	2	$	12,704,401	$	12,647,309	2
Policyholders’ funds	239,576		239,576		2	280,578		280,578		2
Commercial paper	99,692		99,692		2	99,886		99,886		2
Notes payable	564,119		612,828		2	543,338		581,097		2

⁽¹⁾ The fair value of limited partnership interests as of December 31, 2017 is estimated using net asset value per unit as a practical expedient.