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 trade in active markets because they are not publicly available), certain short-term investments, certain cash equivalents, and certain OTC derivatives.

Level 3 - Fair value is based on at least one significant unobservable input 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 fixed maturities, certain highly structured OTC derivative contracts, 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.



	As of December 31, 2017
	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	$	0	$	80,611	$	19,204	$	0		$	99,815
Obligations of U.S. states and their political subdivisions	0		635,458		0		0			635,458
Foreign government bonds	0		134,924		174		0			135,098
U.S. corporate public securities	0		1,779,935		1,154		0			1,781,089
U.S. corporate private securities	0		901,080		60,158		0			961,238
Foreign corporate public securities	0		182,243		209		0			182,452
Foreign corporate private securities	0		837,766		13,900		0			851,666
Asset-backed securities(4)	0		71,400		111,028		0			182,428
Commercial mortgage-backed securities	0		322,832		0		0			322,832
Residential mortgage-backed securities	0		71,226		0		0			71,226
Subtotal	0		5,017,475		205,827		0			5,223,302
Trading account assets:
Corporate securities	0		38,793		0		0			38,793
Asset-backed securities(4)	0		0		0		0			0
Equity securities	0		0		17,488		0			17,488
Subtotal	0		38,793		17,488		0			56,281
Equity securities, available-for-sale	94		22,991		37		0			23,122
Short-term investments	0		0		1,339		0			1,339
Cash equivalents	0		28,007		0		0			28,007
Other long-term investments(6)	0		115,094		0		(115,086		)	8
Reinsurance recoverables(5)	0		0		5,457,649		0			5,457,649
Receivables from parent and affiliates	0		132,571		0		0			132,571
Subtotal excluding separate account assets	94		5,354,931		5,682,340		(115,086		)	10,922,279
Separate account assets(2)(7)	0		125,543,035		0		0			125,543,035
Total assets	$	94	$	130,897,966	$	5,682,340	$	(115,086	)	$	136,465,314
Future policy benefits(3)	$	0	$	0	$	5,452,583	$	0		$	5,452,583
Policyholders' account balances	0		0		46,651		0			46,651
Payables to parent and affiliates	0		74,378		0		(69,718		)	4,660
Total liabilities	$	0	$	74,378	$	5,499,234	$	(69,718	)	$	5,503,894



	As of December 31, 2016
	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	$	0	$	160,740	$	0	$	0		$	160,740
Obligations of U.S. states and their political subdivisions	0		626,486		0		0			626,486
Foreign government bonds	0		108,782		0		0			108,782
U.S. corporate public securities	0		2,306,409		55,109		0			2,361,518
U.S. corporate private securities	0		851,585		32,699		0			884,284
Foreign corporate public securities	0		221,848		0		0			221,848
Foreign corporate private securities	0		584,268		14,748		0			599,016
Asset-backed securities(4)	0		169,160		19,856		0			189,016
Commercial mortgage-backed securities	0		382,671		0		0			382,671
Residential mortgage-backed securities	0		83,188		0		0			83,188
Subtotal	0		5,495,137		122,412		0			5,617,549
Trading account assets:
Corporate securities	0		19,256		0		0			19,256
Asset-backed securities(4)	0		302		0		0			302
Commercial mortgage-backed securities	0		0		0		0			—
Equity securities	0		0		15,770		0			15,770
Subtotal	0		19,558		15,770		0			35,328
Equity securities, available-for-sale	41		16,640		75		0			16,756
Short-term investments	31,007		5,650		0		0			36,657
Cash equivalents	5,644		1,998		0		0			7,642
Other long-term investments(6)	0		90,884		0		(13,019		)	77,865
Reinsurance recoverables	0		0		5,474,263		0			5,474,263
Receivables from parent and affiliates	0		131,144		6,493		0			137,637
Subtotal excluding separate account assets	36,692		5,761,011		5,619,013		(13,019		)	11,403,697
Separate account assets(2)(7)	0		116,040,888		0		0			116,040,888
Total assets	$	36,692	$	121,801,899	$	5,619,013	$	(13,019	)	$	127,444,585
Future policy benefits(3)	$	0	$	0	$	5,041,007	$	0		$	5,041,007
Policyholders' account balances	0		0		20,337		0			20,337
Payables to parent and affiliates	0		12,854		0		(12,854		)	0
Total liabilities	$	0	$	12,854	$	5,061,344	$	(12,854	)	$	5,061,344


(1)	“Netting” amounts represent cash collateral of $45.4 million and $0.2 million as of December 31, 2017 and 2016, 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 liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Consolidated Statements of Financial Position.

(3)

As of December 31, 2017, the net embedded derivative liability position of $5,453 million includes $823 million of embedded derivatives in an asset position and $6,276 million of embedded derivatives in a liability position. As of December 31, 2016, the net embedded derivative liability position of $5,041 million includes $1,157 million of embedded derivatives in an asset position and $6,198 million of embedded derivatives in a liability position.


(4)	Includes credit-tranched securities collateralized by syndicated bank loans, sub-prime mortgages, auto loans, credit cards, education loans and other asset types.


(5)	Effective July 1, 2017, the Company recaptured the risks related to the no-lapse guarantees that were previously reinsured to UPARC and discontinued the embedded derivative accounting.

(6)

Other long-term investments excluded from the fair value hierarchy include certain hedge funds, private equity funds and other funds for which fair value is measured at net asset value ("NAV") per share (or its equivalent) as a practical expedient. At December 31, 2017 and December 31, 2016, the fair values of these investments, which include certain hedge funds, private equity funds and other funds were $0.7 million and $0.9 million, respectively.

(7)

Separate account assets included in the fair value hierarchy exclude investments in entities that calculate NAV per share (or its equivalent) as a practical expedient. Such investments excluded from the fair value hierarchy include investments in real estate, hedge funds and a corporate owned life insurance fund, for which fair value is measured at net asset value per share (or its equivalent). At December 31, 2017 and December 31, 2016, the fair values of separate account assets excluded from the fair value hierarchy were $4,113 million and $566 million, respectively.

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 the 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 December 31, 2017 and 2016, 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 values of private fixed maturities, which are 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 the reduced liquidity associated with private placements. Internal adjustments are made to reflect variation in observed sector spreads. Since most private placements are valued using standard market observable inputs and inputs derived from, or corroborated by, market observable data including, but not limited to observed prices and spreads for similar publicly 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 fixed maturity securities and equity securities 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, 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.

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, NPR, liquidity and other factors.

The Company's exchange-traded futures and options include treasury and equity futures. Exchange-traded futures and options are valued using quoted prices in active markets and are classified within Level 1 in the fair value hierarchy.

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 and 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.

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, real estate, mutual funds, and commercial mortgage loans 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 where fair value is 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 had an agreement with 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 12). Under this agreement, the Company paid 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 was accounted for as an embedded derivative which was included in “Reinsurance recoverables” as of December 31, 2016. 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 are 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 included 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. Effective July 1, 2017, the Company recaptured the risks related to the no-lapse guarantees that were previously reinsured to UPARC and discontinued the embedded derivative accounting.

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 GMAB, GMWB and GMIWB, accounted for as embedded derivatives. The fair values of these liabilities are calculated as the present value of future expected benefit payments to customers less the present value of future expected rider fees attributable to the embedded derivative 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 policyholders’ 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 policyholders’ 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.

Policyholders' Account Balances - The liability for policyholders' account balances is related to certain embedded derivative instruments associated with certain policyholders' account balances. The fair values are determined consistent with similar derivative instruments described under "Derivative Instruments".

Transfers between Levels 1 and 2 - 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 at 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. The fair value of foreign common stock held in the Company's Separate Account may reflect differences in market levels between the close of foreign trading markets and the close of U.S. trading markets for the respective day. Dependent on the existence of such a timing difference, the assets may move between Level 1 and Level 2. During the years ended December 31, 2017 and 2016, there were no transfers between Level 1 and Level 2.

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.



	As of December 31, 2017
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value(1)
	(in thousands)
Assets:
Corporate securities(12)	$	36,966	Discounted cash flow	Discount rate	5.06	%	22.23	%	7.33	%	Decrease
			Liquidation	Liquidation value	25	%	25	%	25	%	Increase
Reinsurance recoverables(13)	$	5,457,649	Fair values are determined in the same manner as future policy benefits
Liabilities:
Future policy benefits(7)	$	5,452,583	Discounted cash flow	Lapse rate(8)	1	%	12	%			Decrease
				Spread over LIBOR(4)	0.12	%	1.10	%			Decrease
				Utilization rate(9)	52	%	97	%			Increase
				Withdrawal rate	See table footnote (10) below
				Mortality rate(11)	0	%	14	%			Decrease
				Equity volatility curve	13	%	24	%			Increase



	As of December 31, 2016
	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum			Maximum			Weighted Average			Impact of Increase in Input on Fair Value(1)
	(in thousands)
Assets:
Corporate securities(12)	$	45,715	Discounted cash flow	Discount rate	4.54	%		15.00	%		8.06	%		Decrease
			Market comparables	EBITDA multiples(2)	4.0		X	4.0		X	4.0		X	Increase
			Liquidation	Liquidation value	98.21	%		98.21	%		98.21	%		Increase
Reinsurance recoverables - Living Benefits	$	5,041,262	Fair values are determined in the same manner as future policy benefits
Reinsurance recoverables - No Lapse Guarantee	$	433,001	Discounted cash flow	Lapse rate(3)	0	%		12	%					Decrease
				Spread over LIBOR(4)	0.25	%		1.50	%					Decrease
				Mortality rate(5)	0	%		31	%					Decrease
				Premium payment(6)	0.65		X	0.95		X				Decrease
Liabilities:
Future policy benefits(7)	$	5,041,007	Discounted cash flow	Lapse rate(8)	0	%		13	%					Decrease
				Spread over LIBOR(4)	0.25	%		1.50	%					Decrease
				Utilization rate(9)	52	%		96	%					Increase
				Withdrawal rate	See table footnote (10) below
				Mortality rate(11)	0	%		14	%					Decrease
				Equity volatility curve	16	%		25	%					Increase


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


(2)	Represents multiples of earnings before interest, taxes, depreciation and amortization, ("EBITDA"), and are amounts used when the Company has determined that market participants would use such multiples when valuing 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)

The spread over LIBOR swap curve represents the premium added to the risk-free discount rate (i.e., LIBOR) to reflect our estimates of rates that a market participant would use to value the living benefit contracts in both the accumulation and payout phases. This spread includes an estimate of NPR, which is the risk that the obligation will not be fulfilled by the Company. NPR is primarily estimated by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium. In order to reflect the financial strength ratings of the Company, credit spreads associated with funding agreements, as opposed to credit spread associated with debt, are utilized in developing this estimate because both funding agreements and living benefit contracts are insurance liabilities and are therefore senior to debt.


(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, policyholders are assumed to pay a multiple of commissionable target premium levels (shown above and indicated as "X"). The multiples vary by funding level and policy duration. If the resulting premium in any duration is smaller than the minimum annual premium required to maintain the no-lapse guarantee, policyholders are assumed to pay the minimum annual premium. Policyholders are assumed to stop premium payments once the no-lapse guarantee is fully funded. The range shown as of December 31, 2016 excludes multiples for the first duration since all contracts are beyond the first duration. Assumption ranges for prior periods include first duration multiples.

(7)

Future policy benefits primarily represent general account liabilities for the living benefit guarantees 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 age of the contractholder, the tax status of the contract and the duration since the contractholder began lifetime withdrawals. As of December 31, 2017 and 2016, the minimum withdrawal assumption rate is 78% and the maximum withdrawal assumption rate may be greater than 100%. The fair value of the liability will generally increase the closer the withdrawal rate is to 100% and decrease as the withdrawal rate moves further away from 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.


(12)	Includes assets classified as fixed maturities available-for-sale.


(13)	Effective July 1, 2017, the Company recaptured the risks related to the no-lapse guarantees that were previously reinsured to UPARC and discontinued the embedded derivative accounting.

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.

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 describe 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.



	Year Ended December 31, 2017
	Fixed Maturities Available-For-Sale
	U.S. Government		Corporate Securities (5)			Asset-Backed Securities (6)			Commercial Mortgage-Backed Securities
	(in thousands)
Fair value, beginning of period	$	0	$	102,556		$	19,856		$	0
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		(2,198		)	4,199			0
Asset management fees and other income	0		0			0			0
Included in other comprehensive income (loss)	0		1,590			(3,178		)	0
Net investment income	0		158			112			0
Purchases	15,634		18,022			108,731			1,493
Sales	0		(52,287		)	(7,471		)	0
Issuances	0		0			0			0
Settlements	0		(24,770		)	(55,372		)	0
Transfers into Level 3(1)	0		42,125			78,159			0
Transfers out of Level 3(1)	0		(6,193		)	(34,008		)	(1,493		)
Other(3)	3,570		(3,582		)	0			0
Fair value, end of period	$	19,204	$	75,421		$	111,028		$	0
Unrealized gains (losses) for assets still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	(2,736	)	$	0		$	0
Asset management fees and other income	$	0	$	0		$	0		$	0



	Year Ended December 31, 2017
	Trading Account Assets
	Asset-Backed Securities (6)		Equity Securities		Equity Securities, Available-for-Sale			Short term Investments			Other Long- term Investments
	(in thousands)
Fair value, beginning of period	$	0	$	15,770	$	75		$	0		$	0
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		0		0			0			0
Asset management fees and other income	0		1,707		0			0			0
Included in other comprehensive income (loss)	0		0		(38		)	0			0
Net investment income	0		0		0			0			0
Purchases	0		0		0			8,425			0
Sales	0		0		0			(1		)	0
Issuances	0		0		0			0			0
Settlements	0		0		0			(7,085		)	0
Transfers into Level 3(1)	0		0		0			0			16
Transfers out of Level 3(1)	0		0		0			0			(16		)
Other(3)	0		11		0			0			0
Fair value, end of period	$	0	$	17,488	$	37		$	1,339		$	0
Unrealized gains (losses) for assets still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	0		$	0		$	0
Asset management fees and other income	$	0	$	2,345	$	0		$	0		$	0



	Year Ended December 31, 2017
	Reinsurance Recoverables			Receivables from Parent and Affiliates			Future Policy Benefits			Policyholders' Account Balances
	(in thousands)
Fair value, beginning of period	$	5,474,263		$	6,493		$	(5,041,007	)	$	(20,337	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net(4)	(158,623		)	0			463,432			(30,991		)
Asset management fees and other income	0			0			0			0
Included in other comprehensive income (loss)	0			0			0			0
Net investment income	0			0			0			0
Purchases	902,110			0			0			0
Sales	0			0			0			0
Issuances	0			0			(875,008		)	0
Settlements	0			0			0			4,677
Transfers into Level 3(1)	0			0			0			0
Transfers out of Level 3(1)	0			(6,493		)	0			0
Other(3)	(760,101		)	0			0			0
Fair value, end of period	$	5,457,649		$	0		$	(5,452,583	)	$	(46,651	)
Unrealized gains (losses) for assets/liabilities still held(2):
Included in earnings:
Realized investment gains (losses), net	$	(315,998	)	$	0		$	313,532		$	(30,991	)
Asset management fees and other income	$	0		$	0		$	0		$	0



	Year Ended December 31, 2016
	Fixed Maturities, Available-for-Sale
		Corporate Securities (5)			Asset-Backed Securities (6)			Commercial Mortgage-Backed Securities
	(in thousands)
Fair value, beginning of period		$	95,492		$	173,347		$	0
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net		(277		)	(891		)	0
Asset management fees and other income		0			0			0
Included in other comprehensive income (loss)		(1,018		)	158			0
Net investment income		54			149			0
Purchases		5,459			21,473			0
Sales		(9,928		)	(44,486		)	0
Issuances		0			0			0
Settlements		(10,728		)	(1,071		)	0
Transfers into Level 3(1)		29,881			48,957			0
Transfers out of Level 3(1)		(6,379		)	(177,780		)	0
Other(3)		0			0			0
Fair value, end of period		$	102,556		$	19,856		$	0
Unrealized gains (losses) for assets still held(2):
Included in earnings:
Realized investment gains (losses), net		$	(560	)	$	(1,378	)	$	0
Asset management fees and other income		$	0		$	0		$	0



	Year Ended December 31, 2016
	Trading Account Assets
	Asset-Backed Securities (6)			Equity Securities			Equity Securities Available-For-Sale			Other Long-term Investments
	(in thousands)
Fair value, beginning of period	$	0		$	18,248		$	165		$	5,704
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net(4)	0			0			0			0
Asset management fees and other income	(32		)	192			0			0
Included in other comprehensive income (loss)	0			0			(90		)	0
Net investment income	0			0			0			(67		)
Purchases	0			0			0			102
Sales	0			(5,930		)	0			0
Issuances	0			0			0			0
Settlements	(527		)	0			0			0
Transfers into Level 3(1)	0			0			0			0
Transfers out of Level 3(1)	0			0			0			(2,479		)
Other	559			3,260			0			(3,260		)
Fair value, end of period	$	0		$	15,770		$	75		$	0
Unrealized gains (losses) for assets still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	0		$	0
Asset management fees and other income	$	0		$	(769	)	$	0		$	0



	Year Ended December 31, 2016
	Reinsurance Recoverables			Receivables from Parent and Affiliates			Future Policy Benefits			Policyholders' Account Balances
	(in thousands)
Fair value, beginning of period	$	4,940,011		$	5,000		$	(5,205,434	)	$	0
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net(4)	(281,009		)	(13		)	975,823			(8,463		)
Asset management fees and other income	0			0			0			0
Included in other comprehensive income (loss)	0			16			0			0
Net investment income	0			0			0			0
Purchases	815,261			6,500			0			0
Sales	0			(1,987		)	0			0
Issuances	0			0			(811,396		)	0
Settlements	0			0			0			(5,972		)
Transfers into Level 3(1)	0			0			0			0
Transfers out of Level 3(1)	0			(2,464		)	0			0
Other	0			(559		)	0			(5,902		)
Fair value, end of period	$	5,474,263		$	6,493		$	(5,041,007	)	$	(20,337	)
Unrealized gains (losses) for assets/liabilities still held(2):
Included in earnings:
Realized investment gains (losses), net	$	4,326,977		$	0		$	866,386		$	(8,463	)
Asset management fees and other income	$	0		$	0		$	0		$	0

The following tables summarize the portion of changes in fair values of Level 3 assets and liabilities included in earnings and other comprehensive income for the year ended December 31, 2015, 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 as of December 31, 2015.



	Year Ended December 31, 2015
	Fixed Maturities, Available-for-Sale
	Corporate Securities (5)			Asset-Backed Securities (6)			Commercial Mortgage-Backed Securities
	(in thousands)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	$	(1,533	)	$	42		$	0
Asset management fees and other income	$	0		$	0		$	0
Included in other comprehensive income (loss)	$	262		$	(939	)	$	0
Net investment income	$	30		$	52		$	0
Unrealized gains (losses) for assets still held(2):
Included in earnings:
Realized investment gains (losses), net	$	(1,392	)	$	0		$	0
Asset management fees and other income	$	0		$	0		$	0



	Year Ended December 31, 2015
	Trading Account Assets
	Asset-Backed Securities (6)		Equity Securities		Equity Securities, Available-for-Sale			Other Long- term Investments
	(in thousands)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	337		$	1,912
Asset management fees and other income	$	0	$	2,207	$	0		$	0
Included in other comprehensive income (loss)	$	0	$	0	$	(245	)	$	0
Net investment income	$	0	$	0	$	0		$	0
Unrealized gains (losses) for assets/liabilities still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	0		$	1,744
Asset management fees and other income	$	0	$	2,162	$	0		$	0



	Year Ended December 31, 2015
	Reinsurance Recoverables			Receivables from Parent and Affiliates			Future Policy Benefits		Policyholders' Account Balances
	(in thousands)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net (4)	$	(635,006	)	$	0		$	505,416	$	0
Asset management fees and other income	$	0		$	0		$	0	$	0
Included in other comprehensive income (loss)	$	0		$	(17	)	$	0	$	0
Net investment income	$	0		$	0		$	0	$	0
Unrealized gains (losses) for assets/liabilities still held(2):
Included in earnings:
Realized investment gains (losses), net	$	(482,828	)	$	0		$	381,057	$	0
Asset management fees and other income	$	0		$	0		$	0	$	0


(1)	Transfers into or out of any level are generally reported at 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.


(2)	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.

(3)

Other, except for Reinsurance recoverables, primarily represents reclassifications of certain assets and liabilities between reporting categories. Other for Reinsurance Recoverables for the year ended December 31, 2017, represents the Company's recapture of the risks related to the no-lapse guarantees that were previously reinsured to UPARC and the discontinuation of embedded derivative accounting, effective July 1, 2017.


(4)	Realized investment gains (losses) on Future Policy Benefits and Reinsurance Recoverables primarily represents the change in the fair value of the Company's living benefit guarantees on certain of its variable annuity contracts. Refer to Note 1 for impacts to Realized investment gains (losses) related to the Variable Annuities Recapture.


(5)	Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities. Prior period amounts were aggregated to conform to current period presentation.


(6)	Includes credit-tranched securities collateralized by syndicated bank loans, sub-prime mortgages, auto loans, credit cards, education loans and other asset types.

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 Consolidated Statements of Financial Position. In some cases, as described below, the carrying amount equals or approximates fair value.



	December 31, 2017(1)
	Fair Value								Carrying Amount(2)
	Level 1		Level 2		Level 3		Total		Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	0	$	0	$	1,111,625	$	1,111,625	$	1,083,419
Policy loans	0		0		1,161,101		1,161,101		1,161,101
Cash and cash equivalents	36,562		148,000		0		184,562		184,562
Accrued investment income	0		82,341		0		82,341		82,341
Receivables from parent and affiliates	0		167,545		0		167,545		167,545
Other assets	0		50,407		0		50,407		50,407
Total assets	$	36,562	$	448,293	$	2,272,726	$	2,757,581	$	2,729,375
Liabilities:
Policyholders’ account balances - investment contracts	$	0	$	1,178,583	$	276,435	$	1,455,018	$	1,458,599
Securities sold under agreements to repurchase	0		0		0		0		0
Cash collateral for loaned securities	0		33,169		0		33,169		33,169
Payables to parent and affiliates	0		223,550		0		223,550		223,550
Other liabilities	0		362,592		0		362,592		362,592
Total liabilities	$	0	$	1,797,894	$	276,435	$	2,074,329	$	2,077,910



	December 31, 2016(1)
	Fair Value								Carrying Amount (2)
	Level 1		Level 2		Level 3		Total		Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	0	$	0	$	1,181,582	$	1,181,582	$	1,150,381
Policy loans	0		0		1,166,456		1,166,456		1,166,456
Cash and cash equivalents	30,149		58,366		0		88,515		88,515
Accrued investment income	0		87,322		0		87,322		87,322
Receivables from parent and affiliates	0		76,315		0		76,315		76,315
Other assets	0		37,969		0		37,969		37,969
Total assets	$	30,149	$	259,972	$	2,348,038	$	2,638,159	$	2,606,958
Liabilities:
Policyholders’ account balances - investment contracts	$	0	$	1,129,378	$	253,007	$	1,382,385	$	1,386,099
Securities sold under agreements to repurchase	0		68,904		0		68,904		68,904
Cash collateral for loaned securities	0		74,976		0		74,976		74,976
Payables to parent and affiliates	0		73,628		0		73,628		73,628
Other liabilities	0		305,969		0		305,969		305,969
Total liabilities	$	0	$	1,652,855	$	253,007	$	1,905,862	$	1,909,576

(1)

Other long-term investments excluded from the fair value hierarchy include certain hedge funds, private equity funds and other funds for which fair value is measured at NAV per share (or its equivalent) as a practical expedient. At December 31, 2017 and 2016, the fair values of these cost method investments were $49 million and $35 million, respectively. The carrying values of these investments were $41 million and $32 million as of December 31, 2017 and 2016, respectively.

(2)

Carrying values presented herein differ from those in the Company’s 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 or foreign government bond rate (for non-U.S. dollar-denominated loans) plus an appropriate credit spread for loans of similar quality, average life and currency. 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. Certain commercial mortgage loans are valued incorporating other factors, including the terms of the loans, the principal exit strategies for the loans, prevailing interest rates and credit risk.

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. As a result, the carrying value of the policy loans approximates the fair value.

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 equivalent instruments, accrued investment income, and other assets that meet the definition of financial instruments, including receivables, such as unsettled trades and accounts receivable.

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, payout annuities and other similar contracts without life contingencies, 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. Due to the short-term nature of these transactions, 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.