FAIR VALUE OF ASSETS AND LIABILITIES

Fair Value Measurement - Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative fair value guidance establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. The Company’s Level 1 assets and liabilities primarily include certain cash equivalents, short-term investments and equity securities that trade on an active exchange market.

Level 2 - Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, and other market observable inputs. The Company’s Level 2 assets and liabilities include: fixed maturities (corporate public and private bonds, most government securities, certain asset-backed and mortgage-backed securities, etc.), certain equity securities (mutual funds, which do not actively trade and are priced based on a net asset value ("NAV")), certain short-term investments and certain cash equivalents, and certain over-the-counter ("OTC") derivatives.

Level 3 - Fair value is based on at least one or more significant unobservable inputs for the asset or liability. The assets and liabilities in this category may require significant judgment or estimation in determining the fair value. The Company’s Level 3 assets and liabilities primarily include: certain private fixed maturities and equity securities, certain manually priced public equity securities and fixed maturities, certain highly structured OTC derivative contracts, certain real estate funds for which the Company is the general partner and embedded derivatives resulting from reinsurance or certain products with guaranteed benefits.

Assets and Liabilities by Hierarchy Level - The tables below present the balances of assets and liabilities reported at fair value on a recurring basis, as of the dates indicated.



	September 30, 2015
	Level 1		Level 2		Level 3		Netting (1)			Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	—	$	96,015	$	—	$	—		$	96,015
Obligations of U.S. states and their political subdivisions	—		588,264		—		—			588,264
Foreign government bonds	—		66,845		—		—			66,845
Corporate securities	—		4,792,914		88,347		—			4,881,261
Asset-backed securities	—		295,383		155,281		—			450,664
Commercial mortgage-backed securities	—		403,024		—		—			403,024
Residential mortgage-backed securities	—		128,718		—		—			128,718
Sub-total	—		6,371,163		243,628		—			6,614,791
Trading account assets:
Corporate securities	—		45,574		—		—			45,574
Asset-backed securities	—		1,993		—		—			1,993
Equity securities	—		—		18,248		—			18,248
Sub-total	—		47,567		18,248		—			65,815
Equity securities, available-for-sale	49		55,823		174		—			56,046
Short-term investments	117,148		18,302		—		—			135,450
Cash equivalents	3,534		250,152		—		—			253,686
Other long-term investments	—		403,288		2,169		(377,506		)	27,951
Reinsurance recoverables	—		—		5,388,800		—			5,388,800
Receivables from parent and affiliates	—		172,302		3,030		—			175,332
Sub-total excluding separate account assets	120,731		7,318,597		5,656,049		(377,506		)	12,717,871
Separate account assets (2)	—		105,927,551		361,589		—			106,289,140
Total assets	$	120,731	$	113,246,148	$	6,017,638	$	(377,506	)	$	119,007,011
Future policy benefits (3)	$	—	$	—	$	5,661,265	$	—		$	5,661,265
Payables to parent and affiliates	—		41,949		—		(41,949		)	—
Total liabilities	$	—	$	41,949	$	5,661,265	$	(41,949	)	$	5,661,265



	December 31, 2014
	Level 1		Level 2		Level 3		Netting (1)			Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	—	$	92,082	$	—	$	—		$	92,082
Obligations of U.S. states and their political subdivisions	—		325,654		—		—			325,654
Foreign government bonds	—		38,498		—		—			38,498
Corporate securities	—		4,612,357		84,801		—			4,697,158
Asset-backed securities	—		302,034		100,217		—			402,251
Commercial mortgage-backed securities	—		498,879		—		—			498,879
Residential mortgage-backed securities	—		140,042		—		—			140,042
Sub-total	—		6,009,546		185,018		—			6,194,564
Trading account assets:
Corporate securities	—		42,131		—		—			42,131
Asset-backed securities	—		1,990		—		—			1,990
Equity securities	—		—		5,540		—			5,540
Sub-total	—		44,121		5,540		—			49,661
Equity securities, available-for-sale	107		28,643		750		—			29,500
Short-term investments	6,997		114,275		—		—			121,272
Cash equivalents	41,584		26,259		—		—			67,843
Other long-term investments	—		242,523		2,115		(215,066		)	29,572
Reinsurance recoverables	—		—		4,897,545		—			4,897,545
Receivables from parent and affiliates	—		158,469		19,203		—			177,672
Sub-total excluding separate account assets	48,688		6,623,836		5,110,171		(215,066		)	11,567,629
Separate account assets (2)	—		108,891,268		302,924		—			109,194,192
Total assets	$	48,688	$	115,515,104	$	5,413,095	$	(215,066	)	$	120,761,821
Future policy benefits (3)	$	—	$	—	$	4,993,611	$	—		$	4,993,611
Payables to parent and affiliates	—		58,687		—		(58,687		)	—
Total liabilities	$	—	$	58,687	$	4,993,611	$	(58,687	)	$	4,993,611


(1)	“Netting” amounts represent cash collateral of $336 million and $156 million as of September 30, 2015 and December 31, 2014, respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting arrangements.

(2)

Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account assets classified as Level 3 consist primarily of real estate and real estate investment funds. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Unaudited Interim Consolidated Statements of Financial Position.

(3)

As of September 30, 2015, the net embedded derivative liability position of $5,661 million includes $560 million of embedded derivatives in an asset position and $6,221 million of embedded derivatives in a liability position. As of December 31, 2014, the net embedded derivative liability position of $4,994 million includes $577 million of embedded derivatives in an asset position and $5,571 million of embedded derivatives in a liability position.

The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair value on a recurring basis are summarized below.

Fixed Maturity Securities - The fair values of the Company’s public fixed maturity securities are generally based on prices obtained from independent pricing services. Prices for each security are generally sourced from multiple pricing vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. The Company ultimately uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type. The pricing hierarchy is updated for new financial products and recent pricing experience with various vendors. Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. Typical inputs used by these pricing services include but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, and/or estimated cash flow, prepayment speeds, and default rates. If the pricing information received from third party pricing services is deemed not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process with the pricing service or classify the securities as Level 3. If the pricing service updates the price to be more consistent with the presented market observations, the security remains within Level 2.

Internally-developed valuations or indicative broker quotes are also used to determine fair value in circumstances where vendor pricing is not available, or where the Company ultimately concludes that pricing information received from independent pricing services is not reflective of market activity. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may override the information with an internally-developed valuation. As of September 30, 2015 and December 31, 2014, overrides on a net basis were not material. Pricing service overrides, internally-developed valuations and indicative broker quotes are generally included in Level 3 in the fair value hierarchy.

The Company conducts several specific price monitoring activities. Daily analyses identify price changes over predetermined thresholds defined at the financial instrument level. Various pricing integrity reports are reviewed on a daily and monthly basis to determine if pricing is reflective of market activity or if it would warrant any adjustments. Other procedures performed include, but are not limited to, reviews of third-party pricing services methodologies, reviews of pricing trends, and back testing.

The fair value of private fixed maturities, which are comprised of investments in private placement securities, originated by internal private asset managers, are primarily determined using discounted cash flow models. These models primarily use observable inputs that include Treasury or similar base rates plus estimated credit spreads to value each security. The credit spreads are obtained through a survey of private market intermediaries who are active in both primary and secondary transactions, and consider, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Since most private placements are valued using standard market observable inputs and inputs derived from, or corroborated by, market observable data including observed prices and spreads for similar publicly traded or privately traded issues, they have been reflected within Level 2. For certain private fixed maturities, the discounted cash flow model may incorporate significant unobservable inputs, which reflect the Company’s own assumptions about the inputs that market participants would use in pricing the asset. To the extent management determines that such unobservable inputs are significant to the price of a security, a Level 3 classification is made.

Trading Account Assets - Trading account assets consist primarily of corporate and equity securities, asset-backed securities and perpetual preferred stock whose fair values are determined consistent with similar instruments described above under “Fixed Maturity Securities” and below under “Equity Securities”.

Equity Securities - Equity securities consist principally of investments in common and preferred stock of publicly traded companies, perpetual preferred stock, privately traded securities, as well as mutual fund shares. The fair values of most publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. Estimated fair values for most privately traded equity securities are determined using discounted cash flow, earnings multiple and other valuation models that require a substantial level of judgment around inputs and therefore are classified within Level 3. The fair values of mutual fund shares that transact regularly (but do not trade in active markets because they are not publicly available) are based on transaction prices of identical fund shares and are classified within Level 2 in the fair value hierarchy. The fair values of perpetual preferred stock are based on inputs obtained from independent pricing services that are primarily based on indicative broker quotes. As a result, the fair values of perpetual preferred stock are classified as Level 3.

Derivative Instruments - Derivatives are recorded at fair value either as assets, within “Other long-term investments”, or as liabilities, within “Payables to parent and affiliates”, except for embedded derivatives which are recorded with the associated host contract. The fair values of derivative contracts can be affected by changes in interest rates, foreign exchange rates, credit spreads, market volatility, expected returns, non-performance risk (“NPR”), liquidity and other factors. For derivative positions included within Level 3 of the fair value hierarchy, liquidity valuation adjustments are made to reflect the cost of exiting significant risk positions and consider the bid-ask spread, maturity, complexity, and other specific attributes of the underlying derivative position.

The majority of the Company’s derivative positions are traded in the OTC derivative market and are classified within Level 2 in the fair value hierarchy. OTC derivatives classified within Level 2 are valued using models that utilize actively quoted or observable market input values from external market data providers, third-party pricing vendors and/or recent trading activity. The Company’s policy is to use mid-market pricing in determining its best estimate of fair value. The fair values of most OTC derivatives, including interest rate, cross currency swaps, currency forward contracts and single name credit default swaps are determined using discounted cash flow models. The fair values of European style option contracts are determined using Black Scholes option pricing models. These models’ key inputs include the contractual terms of the respective contract, along with significant observable inputs, including interest rates, currency rates, credit spreads, equity prices, index dividend yields, NPR, volatility and other factors.

The Company’s cleared interest rate swaps and credit derivatives linked to an index are valued using models that utilize actively quoted or observable market inputs, including Overnight Indexed Swap discount rates, obtained from external market data providers, third-party pricing vendors and/or recent trading activity. These derivatives are classified as Level 2 in the fair value hierarchy.

To reflect the market’s perception of its own and the counterparty’s NPR, the Company incorporates additional spreads over London Interbank Offered Rate ("LIBOR") into the discount rate used in determining the fair value of OTC derivative assets and liabilities that are not otherwise collateralized.

Derivatives classified as Level 3 include structured products. These derivatives are valued based upon models such as Monte Carlo simulation models and other techniques that utilize significant unobservable inputs. Level 3 methodologies are validated through periodic comparison of the Company’s fair values to external broker-dealer values. As of September 30, 2015 and December 31, 2014, there were $0.7 million and $0.6 million, respectively, of internally valued derivatives with the fair value classified within Level 3, and all other derivatives were classified within Level 2. See Note 5 for more details on the fair value of derivative instruments by primary underlying.

Cash Equivalents and Short-Term Investments - Cash equivalents and short-term investments include money market instruments, and other highly liquid debt instruments. Certain money market instruments are valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. The remaining instruments in this category are generally fair valued based on market observable inputs and, these investments have primarily been classified within Level 2.

Separate Account Assets - Separate account assets include fixed maturity securities, treasuries, equity securities, mutual funds, and real estate investments for which values are determined consistent with similar instruments described above under “Fixed Maturity Securities” and “Equity Securities”.

Receivables from Parent and Affiliates - Receivables from parent and affiliates carried at fair value include affiliated bonds within the Company’s legal entity whose fair values are determined consistent with similar securities described above under “Fixed Maturity Securities” managed by affiliated asset managers.

Reinsurance Recoverables - Reinsurance recoverables carried at fair value include the reinsurance of the Company’s living benefit guarantees on certain variable annuity contracts. These guarantees are accounted for as embedded derivatives and are recorded in “Reinsurance Recoverables” or “Other Liabilities” when fair value is in an asset or liability position, respectively. The methods and assumptions used to estimate the fair value are consistent with those described below in “Future Policy Benefits”. The reinsurance agreements covering these guarantees are derivatives with fair value determined in the same manner as the living benefit guarantee.

The Company also has an agreement with Universal Prudential Arizona Reinsurance Company (“UPARC”), an affiliated captive reinsurance company, to reinsure risks associated with the no-lapse guarantee provision available on a portion of certain universal life products (see Note 7). Under this agreement, the Company pays a premium to UPARC to reinsure the risk of uncollectible policy charges and fees associated with the no-lapse guarantee provision. Reinsurance of this risk is accounted for as an embedded derivative which is included in “Reinsurance recoverables”. The fair value of this embedded derivative is the present value of expected reimbursement from UPARC for cost of insurance charges the Company is unable to collect from policyholders, less the present value of reinsurance premiums that is attributable to the embedded derivative feature. This methodology could result in either an asset or liability, given changes in capital market conditions and various policyholder behavior assumptions. Significant inputs to the valuation model for this embedded derivative include capital market assumptions, such as interest rates, estimated NPR of the counterparty, and various assumptions that are actuarially determined, including lapse rates, premium payment patterns and mortality rates.

Future Policy Benefits - The liability for future policy benefits is related to guarantees primarily associated with the living benefit features of certain variable annuity contracts, including guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum income and withdrawal benefits (“GMIWB”), accounted for as embedded derivatives. The fair values of these liabilities are calculated as the present value of future expected benefit payments to contractholders less the present value of assessed benefit fees attributable to the optional living benefit feature. This methodology could result in either a liability or contra-liability balance, given changing capital market conditions and various actuarial assumptions. Since there is no observable active market for the transfer of these obligations, the valuations are calculated using internally-developed models with option pricing techniques. The models are based on a risk neutral valuation framework and incorporate premiums for risks inherent in valuation techniques, inputs, and the general uncertainty around the timing and amount of future cash flows. The determination of these risk premiums requires the use of management’s judgment.

The significant inputs to the valuation models for these embedded derivatives include capital market assumptions, such as interest rate levels and volatility assumptions, the Company’s market-perceived NPR, as well as actuarially determined assumptions, including contractholder behavior such as lapse rates, benefit utilization rates, withdrawal rates and mortality rates. Since many of these assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 in the fair value hierarchy.

Capital market inputs and actual contractholders’ account values are updated each quarter based on capital market conditions as of the end of the quarter, including interest rates, equity markets and volatility. In the risk neutral valuation, the initial swap curve drives the total return used to grow the contractholders’ account values. The Company’s discount rate assumption is based on the LIBOR swap curve adjusted for an additional spread relative to LIBOR to reflect NPR.

Actuarial assumptions, including contractholder behavior and mortality, are reviewed at least annually and updated based upon emerging experience, future expectations and other data, including any observable market data. These assumptions are generally updated annually unless a material change that the Company feels is indicative of a long-term trend is observed in an interim period.

Transfers between Levels 1 and 2 - Overall, transfers between levels are made to reflect changes in observability of inputs and market activity. Transfers into or out of any level are generally reported as the value as of the beginning of the quarter in which the transfers occur for any such assets still held at the end of the quarter. Periodically there are transfers between Level 1 and Level 2 for assets held in the Company’s Separate Account. During the three and nine months ended September 30, 2015, there were no transfers between Levels 1 and 2. During the three months ended September 30, 2014, there were no transfers between Level 1 and Level 2. During the nine months ended September 30, 2014, $1.9 million was transferred from Level 1 to Level 2.

Level 3 Assets and Liabilities by Price Source - The tables below present the balances of Level 3 assets and liabilities measured at fair value with their corresponding pricing sources.



	September 30, 2015
	Internal (1)		External (2)		Total
	(in thousands)
Corporate securities	$	31,669	$	56,678	$	88,347
Asset-backed securities	193		155,088		155,281
Equity securities	174		18,248		18,422
Other long-term investments	731		1,438		2,169
Reinsurance recoverables	5,388,800		—		5,388,800
Receivables from parent and affiliates	—		3,030		3,030
Subtotal excluding separate account assets	5,421,567		234,482		5,656,049
Separate account assets	87,497		274,092		361,589
Total assets	$	5,509,064	$	508,574	$	6,017,638
Future policy benefits	$	5,661,265	$	—	$	5,661,265
Total liabilities	$	5,661,265	$	—	$	5,661,265



	December 31, 2014
	Internal (1)		External (2)		Total
	(in thousands)
Corporate securities	$	23,712	$	61,089	$	84,801
Asset-backed securities	264		99,953		100,217
Equity securities	750		5,540		6,290
Other long-term investments	565		1,550		2,115
Reinsurance recoverables	4,897,545		—		4,897,545
Receivables from parent and affiliates	—		19,203		19,203
Subtotal excluding separate account assets	4,922,836		187,335		5,110,171
Separate account assets	84,111		218,813		302,924
Total assets	$	5,006,947	$	406,148	$	5,413,095
Future policy benefits	$	4,993,611	$	—	$	4,993,611
Total liabilities	$	4,993,611	$	—	$	4,993,611


(1)	Represents valuations which could incorporate internally-derived and market inputs, as well as third-party pricing information or quotes. See below for additional information related to internally developed valuation for significant items in the above table.


(2)	Represents unadjusted prices from independent pricing services and independent indicative broker quotes where pricing inputs are not readily available.

Quantitative Information Regarding Internally Priced Level 3 Assets and Liabilities - The tables below present quantitative information on significant internally-priced Level 3 assets and liabilities (see narrative below for quantitative information for separate account assets).



	September 30, 2015
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum			Maximum			Weighted Average			Impact of Increase in Input on Fair Value (1)
	(in thousands)
Assets:
Corporate securities	$	31,669	Discounted cash flow	Discount rate	7.04	%		14.99	%		9.33	%		Decrease
			Market comparables	EBITDA multiples (2)	4.9		X	5		X	4.9		X	Increase
Reinsurance recoverables - Living Benefits	$	5,067,922	Fair values are determined in the same manner as future policy benefits
Reinsurance recoverables - No Lapse Guarantee	$	320,878	Discounted cash flow	Lapse rate (3)	0	%		12	%					Decrease
				NPR spread (4)	0.03	%		1.85	%					Decrease
				Mortality rate (5)	0	%		20	%					Decrease
				Premium Payment (6)	1		X	3.75		X				Decrease
Liabilities:
Future policy benefits (7)	$	5,661,265	Discounted cash flow	Lapse rate (8)	0	%		14	%					Decrease
				NPR spread (4)	0.03	%		1.85	%					Decrease
				Utilization rate (9)	56	%		96	%					Increase
				Withdrawal rate (10)	74	%		100	%					Increase
				Mortality rate (11)	0	%		14	%					Decrease
				Equity Volatility curve	20	%		29	%					Increase



	December 31, 2014
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum			Maximum			Weighted Average			Impact of Increase in Input on Fair Value (1)
	(in thousands)
Assets:
Corporate securities	$	23,712	Discounted cash flow	Discount rate	10.00	%		11.75	%		10.52	%		Decrease
			Market comparables	EBITDA multiples (2)	6.1		X	6.1		X	6.1		X	Increase
Reinsurance recoverables - Living Benefits	$	4,521,928	Fair values are determined in the same manner as future policy benefits

Reinsurance recoverables - No Lapse Guarantee	$	375,617	Discounted cash flow	Lapse rate (3)	0	%		15	%					Decrease
				NPR spread (4)	0	%		1.30	%					Decrease
				Mortality rate (5)	0	%		18	%					Decrease
				Premium payment (6)	1		X	3.75		X				Decrease
Liabilities:
Future policy benefits (7)	$	4,993,611	Discounted cash flow	Lapse rate (8)	0	%		14	%					Decrease
				NPR spread (4)	0	%		1.30	%					Decrease
				Utilization rate (9)	63	%		96	%					Increase
				Withdrawal rate (10)	74	%		100	%					Increase
				Mortality rate (11)	0	%		14	%					Decrease
				Equity volatility curve	17	%		28	%					Increase


(1)	Conversely, the impact of a decrease in input would have the opposite impact for the fair value as that presented in the table.


(2)	EBITDA multiples represent multiples of earnings before interest, taxes, depreciation and amortization, and are amounts used when the reporting entity has determined that market participants would use such multiples when pricing the investments.


(3)	For universal life, lapse rates vary based on funding level and other factors. Rates are set to zero when the no lapse guarantee is fully funded and the cash value is zero.

(4)

To reflect NPR, the Company incorporates an additional spread over LIBOR into the discount rate used in the valuation of contracts in a liability position and generally not to those in a contra-liability position. The NPR spread reflects the financial strength ratings of the Company and its affiliates, as these are insurance liabilities and senior to debt. The additional spread over LIBOR is determined by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium.


(5)	Universal life mortality rates are adjusted based on underwriting information. A mortality improvement assumption is also incorporated into the projection.


(6)	For universal life, premium payment assumptions vary by funding level. Some policies are assumed to pay the minimum premium required to maintain the no lapse guarantee. Other policies are assumed to pay a multiple of commissionable target premium levels (shown above and indicated as “X”). Policyholders are assumed to stop premium payments once the no lapse guarantee is fully funded.

(7)

Future policy benefits primarily represent general account liabilities for the living benefit features of the Company’s variable annuity contracts which are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.


(8)	Lapse rates are adjusted at the contract level based on the in-the-moneyness of the living benefit and reflect other factors, such as the applicability of any surrender charges. Lapse rates are reduced when contracts are more in-the-money. Lapse rates are also generally assumed to be lower for the period where surrender charges apply.

(9)

The utilization rate assumption estimates the percentage of contracts that will utilize the benefit during the contract duration, and begin lifetime withdrawals at various time intervals from contract inception. The remaining contractholders are assumed to either begin lifetime withdrawals immediately or never utilize the benefit. Utilization assumptions may vary by product type, tax status and age. The impact of changes in these assumptions is highly dependent on the product type, the age of the contractholder at the time of the sale, and the timing of the first lifetime income withdrawal. Range reflects the utilization rate for the vast majority of business with living benefits.


(10)	The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These assumptions may vary based on the product type, contractholder age, tax status and withdrawal timing. The fair value of the liability will generally increase the closer the withdrawal rate is to 100%.

(11)

Range reflects the mortality rate for the vast majority of business with living benefits, with policyholders ranging from 35 to 90 years old. While the majority of living benefits have a minimum age requirement, certain benefits do not have an age restriction. This results in contractholders for certain benefits with mortality rates approaching 0%. Based on historical experience, the Company applies a set of age and duration specific mortality rate adjustments compared to standard industry tables. A mortality improvement assumption is also incorporated into the overall mortality table.

Interrelationships Between Unobservable Inputs - In addition to the sensitivities of fair value measurements to changes in each unobservable input in isolation, as reflected in the table above, interrelationships between these inputs may also exist, such that a change in one unobservable input may give rise to a change in another, or multiple, inputs. Examples of such interrelationships for significant internally-priced Level 3 assets and liabilities are as follows:

Corporate Securities - The rate used to discount future cash flows reflects current risk free rates plus credit and liquidity spread requirements that market participants would use to value an asset. The discount rate may be influenced by many factors, including market cycles, expectations of default, collateral, term, and asset complexity. Each of these factors can influence discount rates, either in isolation, or in response to other factors.

Future Policy Benefits - The Company expects efficient benefit utilization and withdrawal rates to generally be correlated with lapse rates. However, behavior is generally highly dependent on the facts and circumstances surrounding the individual contractholder, such as their liquidity needs or tax situation, which could drive lapse behavior independent of other contractholder behavior assumptions. To the extent more efficient contractholder behavior results in greater in-the-moneyness at the contract level, lapse rates may decline for those contracts. Similarly, to the extent that increases in equity volatility are correlated with overall declines in the capital markets, lapse rates may decline as contracts become more in-the-money.

Separate Account Assets - In addition to the significant internally-priced Level 3 assets and liabilities presented and described above, the Company also has internally-priced separate account assets reported within Level 3. Changes in the fair value of separate account assets are borne by customers and thus are offset by changes in separate account liabilities on the Company’s Unaudited Interim Consolidated Statements of Financial Position. As a result, changes in value associated with these investments do not impact the Company’s Unaudited Interim Consolidated Statements of Operations. Quantitative information about significant internally-priced Level 3 separate account assets is as follows:

Real Estate and Other Invested Assets - Separate account assets include $87.5 million and $84.1 million of investments in real estate as of September 30, 2015 and December 31, 2014, respectively, that are classified as Level 3 and reported at fair value which is determined by the Company’s equity in net assets of the entities. In general, these fair value estimates of real estate are based on property appraisal reports prepared by independent real estate appraisers. Key inputs and assumptions to the appraisal process include rental income and expense amounts, related growth rates, discount rates and capitalization rates. Because of the subjective nature of inputs and the judgment involved in the appraisal process, real estate investments are typically included in the Level 3 classification. Key unobservable inputs to real estate valuation include capitalization rates, which ranged from 4.75% to 10.00% (6.16% weighted average) as of September 30, 2015 and 5.00% to 10.00% (6.68% weighted average) as of December 31, 2014, and discount rates which ranged from 6.00% to 11.00% (6.98% weighted average) as of September 30, 2015 and 6.75% to 11.00% (7.66% weighted average) as of December 31, 2014.

Valuation Process for Fair Value Measurements Categorized within Level 3 - The Company has established an internal control infrastructure over the valuation of financial instruments that requires ongoing oversight by its various business groups. These management control functions are segregated from the trading and investing functions. For invested assets, the Company has established oversight teams, often in the form of pricing committees within each asset management group. The teams, which typically include representation from investment, accounting, operations, legal and other disciplines are responsible for overseeing and monitoring the pricing of the Company’s investments and performing periodic due diligence reviews of independent pricing services. An actuarial valuation team oversees the valuation of living benefit features of the Company’s variable annuity contracts.

The Company has also established policies and guidelines that require the establishment of valuation methodologies and consistent application of such methodologies. These policies and guidelines govern the use of inputs and price source hierarchies and provide controls around the valuation processes. These controls include appropriate review and analysis of investment prices against market activity or indicators of reasonableness, analysis of portfolio returns to corresponding benchmark returns, back-testing, review of bid/ask spreads to assess activity, approval of price source changes, price overrides, methodology changes and classification of fair value hierarchy levels. For living benefit features of the Company’s variable annuity products, the actuarial valuation unit periodically tests contract input data and actuarial assumptions are reviewed at least annually and updated based upon emerging experience, future expectations and other data, including any observable market data. The valuation policies and guidelines are reviewed and updated as appropriate.

Within the trading and investing functions, the Company has established policies and procedures that relate to the approval of all new transaction types, transaction pricing sources and fair value hierarchy coding within the financial reporting system. For variable annuity product changes or new launches of living benefit features, the actuarial valuation unit validates input logic and new product features and agrees new input data directly to source documents.

Changes in Level 3 assets and liabilities - The following tables provide summaries of the changes in fair values of Level 3 assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods:



	Three Months Ended September 30, 2015
	Fixed Maturities Available-For-Sale
	Corporate Securities			Asset-Backed Securities			Trading Account Assets- Equity Securities			Equity Securities, Available-for- Sale			Other Long-term Investments
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	80,482		$	172,200		$	18,369		$	853		$	2,327
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	(1,245		)	24			—			337			(630		)
Asset management fees and other income	—			—			(121		)	—			(21		)
Included in other comprehensive income (loss)	(1		)	(529		)	—			(339		)	—
Net investment income	(13		)	141			—			—			(16		)
Purchases	72,343			1			—			—			611
Sales	(54,841		)	(2,500		)	—			—			—
Issuances	—			—			—			—			—
Settlements	(8,379		)	(1,949		)	—			(677		)	(102		)
Transfers into Level 3 (2)	—			11,502			—			—			—
Transfers out of Level 3 (2)	1			(23,609		)	—			—			—
Fair Value, end of period assets/(liabilities)	$	88,347		$	155,281		$	18,248		$	174		$	2,169
Unrealized gains (losses) for assets still held (3):
Included in earnings:
Realized investment gains (losses), net	$	(1,035	)	$	—		$	—		$	—		$	(631	)
Asset management fees and other income	$	—		$	—		$	(122	)	$	—		$	(2	)



	Three Months Ended September 30, 2015
	Reinsurance Recoverables		Receivables from Parent and Affiliates			Separate Account Assets (1)			Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	3,023,119	$	2,550		$	337,406		$	(3,117,171	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	2,194,352		—			1,243			(2,365,205		)
Asset management fees and other income	—		—			—			—
Interest credited to policyholders’ account balances	—		—			(6,285		)	—
Included in other comprehensive income (loss)	—		4			—			—
Net investment income	—		—			—			—
Purchases	171,329		—			123,150			—
Sales	—		—			(93,925		)	—
Issuances	—		—			—			(178,889		)
Settlements	—		—			—			—
Transfers into Level 3 (2)	—		2,468			—			—
Transfers out of Level 3 (2)	—		(1,992		)	—			—
Fair Value, end of period assets/(liabilities)	$	5,388,800	$	3,030		$	361,589		$	(5,661,265	)
Unrealized gains (losses) for assets/liabilities still held (3):
Included in earnings:
Realized investment gains (losses), net	$	2,215,567	$	—		$	—		$	(2,388,177	)
Asset management fees and other income	$	—	$	—		$	—		$	—
Interest credited to policyholders’ account balances	$	—	$	—		$	(6,284	)	$	—



	Nine Months Ended September 30, 2015
	Fixed Maturities Available-For-Sale
	Corporate Securities			Asset-Backed Securities			Trading Account Assets- Equity Securities			Equity Securities, Available-for-Sale
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	84,801		$	100,217		$	5,540		$	750
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	(1,541		)	23			—			337
Asset management fees and other income	—			—			2,207			—
Included in other comprehensive income (loss)	281			180			—			(236		)
Net investment income	(7		)	125			—			—
Purchases	186,352			111,760			—			—
Sales	(164,876		)	(39,631		)	—			—
Issuances	—			—			—			—
Settlements	(9,982		)	(2,075		)	(1,500		)	(677		)
Transfers into Level 3 (2)	1,530			59,010			—			—
Transfers out of Level 3 (2)	(8,211		)	(74,328		)	—			—
Other (4)	—			—			12,001			—
Fair Value, end of period assets/(liabilities)	$	88,347		$	155,281		$	18,248		$	174
Unrealized gains (losses) for assets still held (3):
Included in earnings:
Realized investment gains (losses), net	$	(1,392	)	$	—		$	—		$	—
Asset management fees and other income	$	—		$	—		$	2,162		$	—



	Nine Months Ended September 30, 2015
	Other Long- term Investments			Reinsurance Recoverables			Receivables from Parent and Affiliates			Separate Account Assets (1)			Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	2,115		$	4,897,545		$	19,203		$	302,924		$	(4,993,611	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	(785		)	(12,541		)	—			5,863			(135,978		)
Asset management fees and other income	(10		)	—			—			—			—
Interest credited to policyholders’ account balances	—			—			—			(2,990		)	—
Included in other comprehensive income (loss)	—			—			6			—			—
Net investment income	—			—			—			—			—
Purchases	997			503,796			—			246,975			—
Sales	—			—			—			(191,183		)	—
Issuances	—			—						—			(531,676		)
Settlements	(118		)	—						—			—
Transfers into Level 3 (2)	—			—			4,454			—			—
Transfers out of Level 3 (2)	(30		)	—			(20,633		)	—			—
Fair Value, end of period assets/(liabilities)	$	2,169		$	5,388,800		$	3,030		$	361,589		$	(5,661,265	)
Unrealized gains (losses) for assets/liabilities still held (3):
Included in earnings:
Realized investment gains (losses), net	$	(785	)	$	105,211		$	—		$	—		$	(235,170	)
Asset management fees and other income	$	10		$	—		$	—		$	—		$	—
Interest credited to policyholders’ account balances	$	—		$	—		$	—		$	(2,990	)	$	—



	Three Months Ended September 30, 2014
	Fixed Maturities Available-For-Sale
	Corporate Securities			Asset-Backed Securities			Trading Account Assets- Equity Securities		Equity Securities, Available-for-Sale
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	22,097		$	66,179		$	1,463	$	546
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	531			—			—		—
Asset management fees and other income	—			—			—		—
Included in other comprehensive income (loss)	406			89			—		65
Net investment income	18			(34		)	—		—
Purchases	12,840			83,866			—		—
Sales	(1,844		)	—			—		(1		)
Settlements	(5,101		)	(15,202		)	—		—
Transfers into Level 3 (2)	538			709			—		—
Transfers out of Level 3 (2)	—			(3,319		)	—		—
Fair Value, end of period assets/(liabilities)	$	29,485		$	132,288		$	1,463	$	610
Unrealized gains (losses) for assets still held (3):
Included in earnings:
Realized investment gains (losses), net	$	—		$	—		$	—	$	—
Asset management fees and other income	$	—		$	—		$	—	$	—



	Three Months Ended September 30, 2014
	Other Long- term Investments			Reinsurance Recoverables		Receivables from Parent and Affiliates			Separate Account Assets (1)			Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	1,805		$	1,713,132	$	23,817		$	285,811		$	(1,700,747	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	100			1,061,086		—			721			(1,080,155		)
Asset management fees and other income	(42		)	—		—			—			—
Interest credited to policyholders’ account balances	—			—		—			3,450			—
Included in other comprehensive income (loss)	—			—		(41		)	—			—
Net investment income	—			—		(25		)	—			—
Purchases	262			149,405		(1		)	13,763			—
Sales	—			—		—			(17,316		)	—
Issuances	—			—		—			—			(165,606		)
Settlements	—			—		—			—			—
Transfers into Level 3 (2)	—			—		—			—			—
Transfers out of Level 3 (2)	—			—		(4,451		)	—			—
Fair Value, end of period assets/(liabilities)	$	2,125		$	2,923,623	$	19,299		$	286,429		$	(2,946,508	)
Unrealized gains (losses) for assets/liabilities still held (3):
Included in earnings:
Realized investment gains (losses), net	$	100		$	1,071,165	$	—		$	—		$	(1,087,120	)
Asset management fees and other income	$	(42	)	$	—	$	—		$	—		$	—
Interest credited to policyholders’ account balances	$	—		$	—	$	—		$	3,449		$	—



	Nine Months Ended September 30, 2014
	Fixed Maturities Available-for-Sale
	Corporate Securities			Asset-Backed Securities			Commercial Mortgage- Backed Securities			Trading Account Assets- Equity Securities			Equity Securities, Available-for-Sale			Short-Term Investments
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	18,293		$	80,934		$	—		$	2,731		$	569		$	18
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	787			113			—			—			—			—
Asset management fees and other income	—			—			—			107			—			—
Included in other comprehensive income (loss)	791			196			(2		)	—			106			—
Net investment income	49			88			—			—			—			—
Purchases	25,426			83,866			28,077			—			—			—
Sales	(7,035		)	—			—			—			(65		)	—
Settlements	(6,937		)	(48,644		)	—			(1,375		)	—			—
Transfers into Level 3 (2)	2,769			31,862			—			—			—			—
Transfers out of Level 3 (2)	(4,658		)	(16,127		)	(28,075		)	—			—			—
Fair Value, end of period assets/(liabilities)	$	29,485		$	132,288		$	—		$	1,463		$	610		$	18
Unrealized gains (losses) for assets still held (3):
Included in earnings:
Realized investment gains (losses), net	$	(101	)	$	—		$	—		$	—		$	—		$	—
Asset management fees and other income	$	—		$	—		$	—		$	109		$	—		$	—



	Nine Months Ended September 30, 2014
	Other Long- term Investments			Reinsurance Recoverables			Receivables from Parent and Affiliates			Separate Account Assets (1)			Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	1,168		$	(376,868	)	$	4,121		$	279,842		$	348,399
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	191			2,862,059			—			2,706			(2,812,836		)
Asset management fees and other income	(47		)	—			—			—			—
Interest credited to policyholders’ account balances	—			—			—			10,172			—
Included in other comprehensive income (loss)	—			—			(25		)	—			—
Net investment income	—			—			—			—			—
Purchases	398			438,432			18,648			53,532			—
Sales	—			—			—			(59,823		)	—
Issuances	—			—			—			—			(482,071		)
Settlements	(12		)	—			—			—			—
Transfers into Level 3 (2)	427			—			1,985			—			—
Transfers out of Level 3 (2)	—			—			(5,430		)	—			—
Fair Value, end of period assets/(liabilities)	$	2,125		$	2,923,623		$	19,299		$	286,429		$	(2,946,508	)
Unrealized gains (losses) for assets/liabilities still held (3):
Included in earnings:
Realized investment gains (losses), net	$	191		$	2,858,981		$	—		$	—		$	(2,806,201	)
Asset management fees and other income	$	(47	)	$	—		$	—		$	—		$	—
Interest credited to policyholders’ account balances	$	—		$	—		$	—		$	10,172		$	—

(1)

Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain contracts. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Unaudited Interim Consolidated Statements of Financial Position.


(2)	Transfers into or out of any level are generally reported as the value as of the beginning of the quarter in which the transfer occurs for any such assets still held at the end of the quarter.


(3)	Unrealized gains or losses related to assets still held at the end of the period do not include amortization or accretion of premiums and discounts.


(4)	Other primarily represents reclassifications of certain assets between reporting categories.

Transfers - Transfers into Level 3 are generally the result of unobservable inputs utilized within valuation methodologies and the use of indicative broker quotes for assets that were previously valued using observable inputs. Transfers out of Level 3 are generally due to the use of observable inputs in valuation methodologies as well as the availability of pricing service information for certain assets that the Company is able to validate.

Fair Value of Financial Instruments

The table below presents the carrying amount and fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. The financial instruments presented below are reported at carrying value on the Company’s Unaudited Interim Consolidated Statements of Financial Position; however, in some cases, as described below, the carrying amount equals or approximates fair value.



	September 30, 2015
	Fair Value								Carrying Amount (1)
	Level 1		Level 2		Level 3		Total		Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	—	$	8,647	$	1,767,340	$	1,775,987	$	1,709,477
Policy loans	—		—		1,140,736		1,140,736		1,140,736
Other long-term investments	—		—		20,802		20,802		20,016
Cash and cash equivalents	19,543		307,872		—		327,415		327,415
Accrued investment income	—		96,356		—		96,356		96,356
Receivables from parent and affiliates	—		110,833		—		110,833		110,833
Other assets	—		27,651		—		27,651		27,651
Total assets	$	19,543	$	551,359	$	2,928,878	$	3,499,780	$	3,432,484
Liabilities:
Policyholders’ account balances - investment contracts	$	—	$	916,013	$	239,597	$	1,155,610	$	1,161,766
Cash collateral for loaned securities	—		69,296		—		69,296		69,296
Short-term debt	—		296,278		—		296,278		294,000
Long-term debt	—		1,512,547		—		1,512,547		1,281,000
Payables to parent and affiliates	—		62,937		—		62,937		62,937
Other liabilities	—		326,316		—		326,316		326,316
Total liabilities	$	—	$	3,183,387	$	239,597	$	3,422,984	$	3,195,315



	December 31, 2014
	Fair Value								Carrying Amount (1)
	Level 1		Level 2		Level 3		Total		Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	—	$	8,486	$	1,775,949	$	1,784,435	$	1,681,553
Policy loans	—		—		1,123,912		1,123,912		1,123,912
Other long-term investments	—		—		11,085		11,085		10,168
Cash and cash equivalents	53,476		93,633		—		147,109		147,109
Accrued investment income	—		90,506		—		90,506		90,506
Receivables from parent and affiliates	—		70,668		—		70,668		70,689
Other assets	—		24,126		—		24,126		24,126
Total assets	$	53,476	$	287,419	$	2,910,946	$	3,251,841	$	3,148,063
Liabilities:
Policyholders’ account balances - investment contracts	$	—	$	929,694	$	40,063	$	969,757	$	976,190
Cash collateral for loaned securities	—		65,418		—		65,418		65,418
Short-term debt	—		429,903		—		429,903		423,000
Long-term debt	—		1,321,501		—		1,321,501		1,288,000
Payables to parent and affiliates	—		53,027		—		53,027		53,027
Other liabilities	—		315,736		—		315,736		315,736
Total liabilities	$	—	$	3,115,279	$	40,063	$	3,155,342	$	3,121,371

(1)

Carrying values presented herein differ from those in the Company’s Unaudited Interim Consolidated Statements of Financial Position because certain items within the respective financial statement captions are not considered financial instruments or out of scope under authoritative guidance relating to disclosures of the fair value of financial instruments. Financial statement captions excluded from the above table are not considered financial instruments.

The fair values presented above have been determined by using available market information and by applying market valuation methodologies, as described in more detail below.

Commercial Mortgage and Other Loans

The fair value of most commercial mortgage loans is based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate plus an appropriate credit spread for similar quality loans. The quality ratings for these loans, a primary determinant of the credit spreads and a significant component of the pricing process, are based on an internally-developed methodology.

Policy Loans

The Company’s valuation technique for policy loans is to discount cash flows at the current policy loan coupon rate. Policy loans are fully collateralized by the cash surrender value of underlying insurance policies. Repayment risk is minimal and valuation is not affected by changes in interest rates. As a result, the carrying value of the policy loans approximates the fair value.

Other Long-Term Investments

Other long-term investments include investments in joint ventures and limited partnerships. The estimated fair values of these cost method investments are generally based on the Company’s NAV as provided in the financial statements of the investees. In certain circumstances, management may adjust the NAV by a premium or discount when it has sufficient evidence to support applying such adjustments. No such adjustments were made as of September 30, 2015 and December 31, 2014.

Cash and Cash Equivalents, Accrued Investment Income, Receivables from Parent and Affiliates and Other Assets

The Company believes that due to the short-term nature of certain assets, the carrying value approximates fair value. These assets include: cash and cash equivalents instruments, accrued investment income, and other assets that meet the definition of financial instruments, including receivables, such as unsettled trades and accounts receivable. Also included in receivables from parent and affiliates are affiliated notes whose fair value is determined in the same manner as the underlying debt described below under “Short-Term and Long-Term Debt”.

Policyholders’ Account Balances - Investment Contracts

Only the portion of policyholders’ account balances related to products that are investment contracts (those without significant mortality or morbidity risk) are reflected in the table above. For fixed deferred annuities, fair values are generally derived using discounted projected cash flows based on interest rates that are representative of the Company’s financial strength ratings, and hence reflect the Company’s own NPR. For those balances that can be withdrawn by the customer at any time without prior notice or penalty, the fair value is the amount estimated to be payable to the customer as of the reporting date, which is generally the carrying value.

Securities Sold Under Agreements to Repurchase

The Company receives collateral for selling securities under agreements to repurchase, or pledges collateral under agreements to resell. Repurchase and resale agreements are also generally short-term in nature, and therefore, the carrying amounts of these instruments approximate fair value.

Cash Collateral for Loaned Securities

Cash collateral for loaned securities represents the collateral received or paid in connection with loaning or borrowing securities, similar to the securities sold under agreement to repurchase above. For these transactions, the carrying value of the related asset/liability approximates fair value as they equal the amount of cash collateral received or paid.

Short-Term and Long-Term Debt

The fair value of short-term and long-term debt is generally determined by either prices obtained from independent pricing services, which are validated by the Company, or discounted cash flow models. These fair values consider the Company’s own NPR. Discounted cash flow models predominately use market observable inputs such as the borrowing rates currently available to the Company for debt and financial instruments with similar terms and remaining maturities. For debt with a maturity of less than 90 days, the carrying value approximates fair value.

Other Liabilities and Payables to Parent and Affiliates

Other liabilities and payables to parent and affiliates are primarily payables, such as unsettled trades, drafts, escrow deposits and accrued expense payables. Due to the short-term until settlement of most of these liabilities, the Company believes that carrying value approximates fair value.