9. 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, 2013
	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	$	—	$	926,905	$	—	$	926,905
Obligations of U.S. states and their subdivisions	—		1,971,658		—		1,971,658
Foreign government securities	—		2,645		—		2,645
Corporate debt securities	—		10,664,962		1,792		10,666,754
Asset-backed securities	—		1,505,854		255,349		1,761,203
Residential mortgage-backed securities	—		319,246		—		319,246
Commercial mortgage-backed securities	—		588,390		—		588,390
Collateralized debt obligations	—		12,202		32		12,234
Total fixed maturities available-for-sale	—		15,991,862		257,173		16,249,035
Fixed maturities held for trading:
U.S. government direct obligations and U.S. agencies	—		172,577		—		172,577
Corporate debt securities	—		58,979		—		58,979
Asset-backed securities	—		41,299		—		41,299
Total fixed maturities held for trading	—		272,855		—		272,855
Short-term investments available-for-sale	257,328		2,003,382		—		2,260,710
Collateral under securities lending agreements	65,711		—		—		65,711
Collateral under derivative counterparty collateral agreements	132,344		—		—		132,344
Derivative instruments designated as hedges:
Interest rate swaps	—		20,777		—		20,777
Cross-currency swaps	—		3,145		—		3,145
Derivative instruments not designated as hedges:
Interest rate swaps	—		955		—		955
Interest rate swaptions	—		920		—		920
Other forward contracts	—		85,479		—		85,479
Total derivative instruments	—		111,276		—		111,276
Separate account assets	13,985,333		11,863,829		—		25,849,162
Total assets	$	14,440,716	$	30,243,204	$	257,173	$	44,941,093

Liabilities
Payable under securities lending agreements	$	65,711	$	—	$	—	$	65,711
Derivative instruments designated as hedges:
Interest rate swaps	—		182		—		182
Cross-currency swaps	—		154,216		—		154,216
Derivative instruments not designated as hedges:
Interest rate swaps	—		2,562		—		2,562
Other forward contracts	—		29,949		—		29,949
Total derivative instruments	—		186,909		—		186,909
Separate account liabilities (1)	8		261,191		—		261,199
Total liabilities	$	65,719	$	448,100	$	—	$	513,819

(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, 2012
	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	$	—	$	2,834,074	$	—	$	2,834,074
Obligations of U.S. states and their subdivisions	—		2,018,505		—		2,018,505
Corporate debt securities	—		10,372,269		1,822		10,374,091
Asset-backed securities	—		1,595,601		265,538		1,861,139
Residential mortgage-backed securities	—		425,585		—		425,585
Commercial mortgage-backed securities	—		662,955		—		662,955
Collateralized debt obligations	—		11,963		32		11,995
Total fixed maturities available-for-sale	—		17,920,952		267,392		18,188,344
Fixed maturities held for trading:
U.S. government direct obligations and U.S. agencies	—		263,634		—		263,634
Corporate debt securities	—		61,336		—		61,336
Asset-backed securities	—		42,630		—		42,630
Total fixed maturities held for trading	—		367,600		—		367,600
Short-term investments available-for-sale	19,459		246,873		—		266,332
Collateral under securities lending agreements	142,022		—		—		142,022
Collateral under derivative counterparty collateral agreements	54,400		—		—		54,400
Derivative instruments designated as hedges:
Interest rate swaps	—		26,371		—		26,371
Cross-currency swaps	—		4,643		—		4,643
Derivative instruments not designated as hedges:
Interest rate swaps	—		1,062		—		1,062
Interest rate swaptions	—		342		—		342
Total derivative instruments	—		32,418		—		32,418
Separate account assets	12,171,024		12,434,502		—		24,605,526
Total assets	$	12,386,905	$	31,002,345	$	267,392	$	43,656,642

Liabilities
Payable under securities lending agreements	$	142,022	$	—	$	—	$	142,022
Derivative instruments designated as hedges:
Interest rate swaps	—		1,649		—		1,649
Cross-currency swaps	—		85,752		—		85,752
Derivative instruments not designated as hedges:
Interest rate swaps	—		757		—		757
Total derivative instruments	—		88,158		—		88,158
Separate account liabilities (1)	14		352,653		—		352,667
Total liabilities	$	142,036	$	440,811	$	—	$	582,847

(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, such as for private fixed maturity investments, fair values are estimated by the Company. 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.

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 the 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.

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 utilized Level 3 inputs to determine fair value:

	Recurring Level 3 financial assets and liabilities
	Three months ended September 30, 2013
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized
	debt securities			securities			debt obligations		Total
Balance, July 1, 2013	$	1,796		$	260,768		$	32	$	262,596
Realized and unrealized gains (losses) included in:
Other comprehensive income (loss)	(5		)	6,667			—		6,662
Settlements	1			(12,086		)	—		(12,085		)
Balance, September 30, 2013	$	1,792		$	255,349		$	32	$	257,173
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, 2013	$	—		$	—		$	—	$	—

	Recurring Level 3 financial assets and liabilities
	Three months ended September 30, 2012
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized
	debt securities			securities			debt obligations		Total
Balance, July 1, 2012	$	5,460		$	269,035		$	19	$	274,514
Realized and unrealized gains (losses) included in:
Other comprehensive income (loss)	33			12,547			12		12,592
Settlements	16			(9,786		)	1		(9,769		)
Transfers out of Level 3 (1)	(3,734		)	—			—		(3,734		)
Balance, September 30, 2012	$	1,775		$	271,796		$	32	$	273,603
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, 2012	$	—		$	—		$	—	$	—

(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 and internal models.

	Recurring Level 3 financial assets and liabilities
	Nine months ended September 30, 2013
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized
	debt securities			securities			debt obligations		Total
Balance, January 1, 2013	$	1,822		$	265,538		$	32	$	267,392
Realized and unrealized gains (losses) included in:
Other comprehensive income (loss)	(28		)	25,261			—		25,233
Settlements	(2		)	(35,450		)	—		(35,452		)
Balance, September 30, 2013	$	1,792		$	255,349		$	32	$	257,173
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, 2013	$	—		$	—		$	—	$	—

	Recurring Level 3 financial assets and liabilities
	Nine months ended September 30, 2012
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized			Separate
	debt securities			securities			debt obligations			accounts			Total
Balance, January 1, 2012	$	36,496		$	279,021		$	22		$	2,118		$	317,657
Realized and unrealized gains (losses) included in:
Net income	(66		)	—			—			(1,715		)	(1,781		)
Other comprehensive income (loss)	70			22,298			11			1,627			24,006
Sales	(1,598		)	—			—			(1,997		)	(3,595		)
Settlements	(795		)	(24,503		)	(1		)	(33		)	(25,332		)
Transfers out of Level 3 (1)	(32,332		)	(5,020		)	—			—			(37,352		)
Balance, September 30, 2012	$	1,775		$	271,796		$	32		$	—		$	273,603
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, 2012	$	—		$	—		$	—		$	—		$	—

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

	September 30, 2013
	Fair Value		Valuation Technique	Unobservable Input	Weighted Average
Fixed maturities available-for-sale:

Asset-backed securities(1)	$	255,293	Internal model pricing	Prepayment speed assumption	5

				Constant default rate assumption	3

				Adjusted ABX Index spread assumption (2)	495

(1) Includes home improvement loans only.

(2) Includes an internally calculated liquidity premium adjustment of 217.

At September 30, 2013, after adjusting the Asset Backed Securities Index (“ABX Index”) spread assumption by the liquidity premium, the overall discount rate ranged from 303 to 623 basis points. The constant default rate assumption ranged from 1.0 to 5.7.

	December 31, 2012
	Fair Value		Valuation Technique	Unobservable Input	Weighted Average
Fixed maturities available-for-sale:

Asset-backed securities(1)	$	265,470	Internal model pricing	Prepayment speed assumption	5

				Constant default rate assumption	5

				Adjusted ABX Index spread assumption (2)	655

(1) Includes home improvement loans only.

(2) Includes an internally calculated liquidity premium adjustment of 217.

At December 31, 2012, after adjusting the ABX Index spread assumption by the liquidity premium, the overall discount rate ranged from 384 to 918 basis points. The constant default rate assumption ranged from 1.2 to 7.9.

The significant unobservable inputs used in the fair value measurement of asset-backed securities are prepayment speed assumptions, constant default rate assumptions and the ABX Index spread adjusted by an internally calculated liquidity premium with the primary inputs being the constant default rate assumption and the adjusted ABX Index spread assumption. As the constant default rate assumption or the adjusted ABX Index spread assumption decreases, the price and therefore, the fair value, of the securities increases.

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, 2013				December 31, 2012
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Assets
Mortgage loans on real estate	$	3,039,245	$	3,132,774	$	2,881,758	$	3,114,796
Policy loans	4,145,260		4,145,260		4,260,200		4,260,200
Limited partnership interests	46,885		46,239		46,707		43,954
Other investments	16,360		42,895		18,890		45,050

Liabilities
Annuity contract benefits without life contingencies	$	10,106,819	$	9,784,830	$	9,622,357	$	9,731,734
Policyholders’ funds	326,639		326,639		374,821		374,821
Commercial paper	99,988		99,988		97,987		97,987
Notes payable due to parent	541,770		548,902		532,491		563,860

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 was 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 was classified as Level 2.

Limited partnership interests

Limited partnership interests, accounted for using the cost method, represent the Company’s minor 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 ten years. The estimated fair value was 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 was classified as Level 2.

Annuity contract benefits without life contingencies

The 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 was classified as Level 2.

Policyholders’ funds

The carrying amount of policyholders’ funds approximates the fair value since the Company can change the interest crediting rates with 30 days notice. The estimated fair value was 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 was classified as Level 2.

Notes payable due to parent

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 was classified as Level 2.