Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements

Fair Value Measurements

6.  Fair Value Measurements

The following tables summarize the carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2011 and December 31, 2010:

	September 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Assets
Fixed maturities and short-term investments	$	18,088,218	$	18,088,218	$	17,051,738	$	17,051,738
Mortgage loans on real estate	2,199,621		2,385,359		1,722,422		1,809,356
Equity investments	2,009		2,009		1,888		1,888
Policy loans	4,125,093		4,125,093		4,059,640		4,059,640
Other investments	22,205		54,347		22,762		46,608
Collateral under securities lending agreements	5,411		5,411		51,749		51,749
Collateral under derivative counterparty collateral agreements	4,165		4,165		7,790		7,790
Derivative instruments	26,561		26,561		24,826		24,826
Separate account assets	21,362,101		21,362,101		22,489,038		22,489,038

	September 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Liabilities
Annuity contract benefits without life contingencies	$	8,501,240	$	8,809,187	$	7,976,954	$	7,912,850
Policyholders’ funds	348,155		348,155		372,980		372,980
Repurchase agreements	1,054,462		1,054,462		936,762		936,762
Commercial paper	95,945		95,945		91,681		91,681
Payable under securities lending agreements	5,411		5,411		51,749		51,749
Payable under derivative counterparty collateral agreements	4,165		4,165		7,790		7,790
Derivative instruments	15,894		15,894		5,831		5,831
Notes payable	541,714		516,718		532,332		532,332

Fixed maturity and equity investments

The fair values for fixed maturity and equity securities are based upon quoted market prices or estimates from independent pricing services.  However, in cases where quoted market prices are not readily available, such as for private fixed maturity investments, fair values are estimated.  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.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts of the Company’s financial instruments.

Short-term investments, securities lending agreements, repurchase agreements and commercial paper

The carrying value of short-term investments, collateral and payable under securities lending agreements, repurchase agreements and commercial paper is a reasonable estimate of fair value due to their short-term nature.

Mortgage loans on real estate

Mortgage loan fair value estimates are generally based on discounted cash flows.  A discount rate matrix is incorporated whereby the discount rate used in valuing a specific mortgage generally corresponds to that mortgage’s remaining term and credit quality.  Management believes the discount rate used is commensurate with 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.

Policy loans

Policy loans accrue interest at variable rates with no fixed maturity dates; therefore, estimated fair values approximate carrying values.

Other investments

Other investments include the Company’s percentage ownership of foreclosed lease interests in aircraft.  The estimated fair value is based on the present value of anticipated lease payments plus the residual value of the aircraft.  Also included in other investments is real estate held for investment.  The estimated fair value is based on appraised value.

Derivative counterparty collateral agreements

Included in other assets and other liabilities is cash collateral received from derivative counterparties and the obligation to return the cash collateral to the counterparties.  The carrying value of the collateral approximates 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 interest rate swaps and interest rate swaptions which are held for other than trading purposes, 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, counterparty credit risk and other relevant factors.

Separate account assets

Separate account assets 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.

Annuity contract benefits without life contingencies

The estimated fair values of annuity contract benefits without life contingencies are 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.

Policyholders’ funds

The estimated fair values of policyholders’ funds are the same as the carrying amounts since the Company can change the interest crediting rates with thirty days notice.

Notes payable

The estimated fair values of the notes payable to GWL&A Financial are based upon quoted market prices from independent pricing services of securities with characteristics similar to those of the notes payable.

Fair value hierarchy

The Company’s assets and liabilities recorded at fair value have been categorized based upon the following fair value hierarchy:

·Level 1 inputs, which are utilized for general and separate account assets and liabilities, utilize observable, quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.  Financial assets and liabilities utilizing Level 1 inputs include actively exchange-traded equity securities.

·Level 2 inputs utilize other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs, which are utilized for general and separate account assets and liabilities, include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.  The fair values for some Level 2 securities were obtained from pricing services.  The inputs used by the pricing services are reviewed at least quarterly or when the pricing vendor issues updates to its pricing methodology.  For fixed maturity securities and separate account assets and liabilities, inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, evaluated bids, offers and reference data including market research publications.  Additional inputs utilized for assets and liabilities classified as Level 2 are:

·Asset-backed, residential mortgage-backed, commercial mortgage-backed securities and collateralized debt obligations - new issue data, monthly payment information, collateral performance and third party real estate analysis.

·U.S. states and their subdivisions - material event notices.

·Equity investments - exchange rates, various index data and news sources.

·Short-term investments - valued at amortized cost, which approximates fair value.

·Derivative instruments - reported trades, swap curves, credit spreads, recovery rates, restructuring, currency volatility, net present value of cash flows and news sources.

·Separate account assets and liabilities - exchange rates, various index data and news sources, amortized cost (which approximates fair value), reported trades, swap curves, credit spreads, recovery rates, restructuring, currency volatility, net present value of cash flows and quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

·Level 3 inputs are unobservable and include situations where there is little, if any, market activity for the asset or liability.  In general, the prices of Level 3 securities, which include both general and separate account assets and liabilities, were obtained from single broker quotes and internal pricing models.  If the broker’s inputs are largely unobservable, the valuation is classified as a Level 3.  Broker quotes are validated through an internal analyst review process, which includes validation through known market conditions and other relevant data.  Internal models are usually cash flow based utilizing characteristics of the underlying collateral of the security such as default rate and other relevant data.  Inputs utilized for securities classified as Level 3 are as follows:

·Corporate debt securities - single broker quotes which may be in an illiquid market or otherwise deemed unobservable.

·Asset-backed securities - internal models utilizing asset-backed securities index spreads.

·Separate account assets - single broker quotes which may be in an illiquid market or otherwise deemed unobservable or net asset value per share of the underlying investments.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The following tables present information about the Company’s financial assets and liabilities carried at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

	Assets and liabilities measured at
	fair value on a recurring basis
	September 30, 2011
	Quoted prices		Significant
	in active		other		Significant
	markets for		observable		unobservable
	identical assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets
Fixed maturities available-for-sale:
U.S. government direct obligations and U.S. agencies	$	—	$	2,397,904	$	—	$	2,397,904
Obligations of U.S. states and their subdivisions	—		2,085,135		—		2,085,135
Corporate debt securities	—		8,615,086		44,773		8,659,859
Asset-backed securities	—		1,720,466		283,150		2,003,616
Residential mortgage-backed securities	—		635,729		—		635,729
Commercial mortgage-backed securities	—		756,996		—		756,996
Collateralized debt obligations	—		22,555		21		22,576
Total fixed maturities available- for-sale	—		16,233,871		327,944		16,561,815
Fixed maturities held for trading:
U.S. government direct obligations and U.S. agencies	—		47,259		—		47,259
Corporate debt securities	—		79,152		—		79,152
Asset-backed securities	—		44,381		—		44,381
Commercial mortgage-backed securities	—		7,978		—		7,978
Total fixed maturities held for trading	—		178,770		—		178,770
Equity investments available-for-sale:
Financial services	1,264		178		—		1,442
Asset allocation mutual funds	567		—		—		567
Total equity investments	1,831		178		—		2,009
Short-term investments available-for-sale	82,218		1,265,415		—		1,347,633
Collateral under securities lending agreements	5,411		—		—		5,411
Collateral under derivative counterparty collateral agreements	4,165		—		—		4,165
Derivative instruments designated as hedges:
Interest rate swaps	—		20,542		—		20,542
Derivative instruments not designated as hedges:
Interest rate swaps	—		4,604		—		4,604
Interest rate swaptions	—		1,415		—		1,415
Total derivative instruments	—		26,561		—		26,561
Separate account assets (1)	10,014,259		10,971,596		50,984		21,036,839
Total assets	$	10,107,884	$	28,676,391	$	378,928	$	39,163,203
Liabilities
Collateral under securities lending agreements	$	5,411	$	—	$	—	$	5,411
Collateral under derivative counterparty collateral agreements	4,165		—		—		4,165
Derivative instruments designated as hedges:
Foreign currency exchange contracts	—		638		—		638
Derivative instruments not designated as hedges:
Interest rate swaps	—		15,256		—		15,256
Total derivative instruments	—		15,894		—		15,894
Separate account liabilities (1)	258		401,039		—		401,297
Total liabilities	$	9,834	$	416,933	$	—	$	426,767

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

	Assets and liabilities measured at
	fair value on a recurring basis
	December 31, 2010
	Quoted prices		Significant
	in active		other		Significant
	markets for		observable		unobservable
	identical assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets
Fixed maturities available-for-sale:
U.S. government direct obligations and U.S. agencies	$	—	$	2,371,150	$	—	$	2,371,150
Obligations of U.S. states and their subdivisions	—		1,942,263		—		1,942,263
Corporate debt securities	—		7,979,736		58,692		8,038,428
Asset-backed securities	—		1,711,438		290,488		2,001,926
Residential mortgage-backed securities	—		739,062		—		739,062
Commercial mortgage-backed securities	—		820,349		—		820,349
Collateralized debt obligations	—		29,865		14		29,879
Total fixed maturities available- for-sale	—		15,593,863		349,194		15,943,057
Fixed maturities held for trading:
U.S. government direct obligations and U.S. agencies	—		41,834		—		41,834
Corporate debt securities	—		49,961		—		49,961
Asset-backed securities	—		44,060		—		44,060
Commercial mortgage-backed securities	—		8,319		—		8,319
Total fixed maturities held for trading	—		144,174		—		144,174
Equity investments available-for-sale:
Financial services	—		725		—		725
Equity mutual funds	551		—		—		551
Airline industry	612		—		—		612
Total equity investments	1,163		725		—		1,888
Short-term investments available-for-sale	140,922		823,585		—		964,507
Collateral under securities lending agreements	51,749		—		—		51,749
Collateral under derivative counterparty collateral agreements	7,790		—		—		7,790
Derivative instruments designated as hedges:
Interest rate swaps	—		10,386		—		10,386
Derivative instruments not designated as hedges:
Interest rate swaps	—		9,484		—		9,484
Interest rate swaptions	—		4,956		—		4,956
Total derivative instruments	—		24,826		—		24,826
Separate account assets (1)	11,222,384		10,838,983		4,278		22,065,645
Total assets	$	11,424,008	$	27,426,156	$	353,472	$	39,203,636
Liabilities
Derivative instruments designated as hedges:
Interest rate swaps	$	—	$	131	$	—	$	131
Foreign currency exchange contracts	—		252		—		252
Derivative instruments not designated as hedges:
Interest rate swaps	—		5,448		—		5,448
Total derivative instruments	—		5,831		—		5,831
Separate account liabilities (1)	93		301,108		—		301,201
Total liabilities	$	93	$	306,939	$	—	$	307,032

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

All transfers between levels are recognized at the beginning of the reporting period in which the transfer occurred.  There were no significant transfers between Level 1 and Level 2 during the nine months ended September 30, 2011 or during the year ended December 31, 2010.

The following tables present additional information about assets and liabilities carried 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, 2011
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized		Separate
	debt securities			securities			debt obligations		accounts			Total
Balance, July 1, 2011	$	49,376		$	285,399		$	21	$	10,124		$	344,920
Realized and unrealized gains (losses) included in:
Net income	416			(192		)	—		(133		)	261
Other comprehensive income (loss)	(1,274		)	5,585			—		(14,302		)	(10,160		)
Purchases	—			—			—		—			3,871
Sales	(2,924		)	—			—		(1,845		)	(4,803		)
Settlements	(821		)	(7,642		)	—		(3,114		)	(11,543		)
Transfers into Level 3 (1)	—			—			—		67,328			63,456
Transfers out of Level 3 (1)	—			—			—		(7,074		)	(7,074		)
Balance, September 30, 2011	$	44,773		$	283,150		$	21	$	50,984		$	378,928
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, 2011	$	—		$	—		$	—	$	—		$	—

(1)   Transfers into Level 3 are due primarily to decreased observability of inputs in valuation methodologies.  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
	Three months ended September 30, 2010
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized		Other assets			Separate
	debt securities			securities			debt obligations		and liabilities (1)			accounts		Total
Balance, July 1, 2010	$	59,649		$	319,157		$	699	$	1,658		$	4,359	$	385,522
Realized and unrealized gains (losses) included in:
Net income	—			—			—		—			—		—
Other comprehensive income (loss)	1,257			6,149			—		(3,026		)	132		4,512
Purchases, issuances and settlements	(1,657		)	(9,246		)	—		—			162		(10,741		)
Transfers in (out) of Level 3 (2)	1,987			—			—		—			—		1,987
Balance, September 30, 2010	$	61,236		$	316,060		$	699	$	(1,368	)	$	4,653	$	381,280
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, 2010	$	—		$	—		$	—	$	—		$	—	$	—

(1)   Includes derivative financial instruments.

(2)   Transfers in and out of Level 3 are from and to Level 2 and are due primarily to the ability or inability to corroborate market prices with multiple pricing vendors.

	Recurring Level 3 financial assets and liabilities
	Nine months ended September 30, 2011
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized		Separate
	debt securities			securities			debt obligations		accounts			Total
Balance, January 1, 2011	$	58,692		$	290,488		$	14	$	4,278		$	353,472
Realized and unrealized gains (losses) included in:
Net income	3,666			(192		)	—		(133		)	3,511
Other comprehensive income (loss)	(740		)	17,612			7		(13,868		)	2,994
Purchases	—			—			—		—			7,843
Sales	(4,816		)	—			—		(1,847		)	(6,959		)
Settlements	(16,983		)	(24,758		)	—		(4,674		)	(44,835		)
Transfers into Level 3 (1)	7,333			—			—		67,328			74,356
Transfers out of Level 3 (1)	(2,379		)	—			—		(100		)	(11,454		)
Balance, September 30, 2011	$	44,773		$	283,150		$	21	$	50,984		$	378,928
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, 2011	$	—		$	—		$	—	$	—		$	—

(1)   Transfers into Level 3 are due primarily to decreased observability of inputs in valuation methodologies.  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, 2010
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Commercial			Collateralized			Other assets			Separate
	debt securities			securities			mortgage-backed securities			debt obligations			and liabilities (1)			accounts			Total
Balance, January 1, 2010	$	188,936		$	392,365		$	58,270		$	1,729		$	(3,317	)	$	9,960		$	647,943
Realized and unrealized gains (losses) included in:
Net income	475			(41,225		)	—			—			—			—			(40,750		)
Other comprehensive income (loss)	5,842			73,680			—			142			1,949			536			82,149
Purchases, issuances and settlements	(30,602		)	(89,202		)	—			(1,172		)	—			(1,605		)	(122,581		)
Transfers in (out) of Level 3 (2)	(103,415		)	(19,558		)	(58,270		)	—			—			(4,238		)	(185,481		)
Balance, September 30, 2010	$	61,236		$	316,060		$	—		$	699		$	(1,368	)	$	4,653		$	381,280
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, 2010	$	—		$	—		$	—		$	—		$	—		$	—		$	—

(1)   Includes derivative financial instruments.

(2)   Transfers in and out of Level 3 are from and to Level 2 and are due primarily to the ability or inability to corroborate market prices with multiple pricing vendors.

Non-recurring fair value measurements - The Company held $19,745 and $980 of adjusted cost basis limited partnership interests which were impaired at September 30, 2011 and at December 31, 2010, 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.  The Company had no liabilities measured at fair value on a non-recurring basis at September 30, 2011 or December 31, 2010.