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Fair Value Measurements

12 Months Ended

Dec. 31, 2019

The following table presents the Company's hierarchy for its assets and liabilities measured at fair value on a recurring basis as of December 31, 2019:



	Level 1			Level 2			Level 3			Total
Assets:
Fixed maturities, including securities pledged:
U.S. Treasuries	$	536		$	155		$	—		$	691
U.S. Government agencies and authorities	—			19			—			19
State, municipalities and political subdivisions	—			815			—			815
U.S. corporate public securities	—			7,984			47			8,031
U.S. corporate private securities	—			3,064			1,002			4,066
Foreign corporate public securities and foreign governments⁽¹⁾	—			2,679			—			2,679
Foreign corporate private securities ⁽¹⁾	—			3,185			190			3,375
Residential mortgage-backed securities	—			3,794			16			3,810
Commercial mortgage-backed securities	—			2,500			—			2,500
Other asset-backed securities	—			1,426			48			1,474
Total fixed maturities, including securities pledged	536			25,621			1,303			27,460
Equity securities	17			—			63			80
Derivatives:
Interest rate contracts	1			209			—			210
Foreign exchange contracts	—			10			—			10
Equity contracts	—			4			—			4
Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements	1,429			—			—			1,429
Assets held in separate accounts	72,448			6,150			115			78,713
Total assets	$	74,431		$	31,994		$	1,481		$	107,906
Percentage of Level to total	69		%	30		%	1		%	100		%
Liabilities:
Derivatives:
Guaranteed benefit derivatives:
FIA	$	—		$	—		$	11		$	11
Stabilizer and MCGs	—			—			22			22
Other derivatives:
Interest rate contracts	—			261			—			261
Foreign exchange contracts	—			19			—			19
Equity contracts	—			3			—			3
Credit contracts	—			2			—			2
Embedded derivative on reinsurance	—			23			—			23
Total liabilities	$	—		$	308		$	33		$	341

⁽¹⁾Primarily U.S. dollar denominated.

The following table presents the Company's hierarchy for its assets and liabilities measured at fair value on a recurring basis as

of December 31, 2018:



	Level 1			Level 2			Level 3			Total
Assets:
Fixed maturities, including securities pledged:
U.S. Treasuries	$	679		$	59		$	—		$	738
U.S. Government agencies and authorities	—			—			—			—
State, municipalities and political subdivisions	—			764			—			764
U.S. corporate public securities	—			7,987			28			8,015
U.S. corporate private securities	—			2,882			771			3,653
Foreign corporate public securities and foreign governments⁽¹⁾	—			2,540			—			2,540
Foreign corporate private securities ⁽¹⁾	—			3,051			124			3,175
Residential mortgage-backed securities	—			3,026			10			3,036
Commercial mortgage-backed securities	—			1,893			12			1,905
Other asset-backed securities	—			1,114			94			1,208
Total fixed maturities, including securities pledged	679			23,316			1,039			25,034
Equity securities, available-for-sale	7			—			50			57
Derivatives:
Interest rate contracts	—			117			—			117
Foreign exchange contracts	—			10			—			10
Equity contracts	—			1			—			1
Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements	1,207			—			—			1,207
Assets held in separate accounts	61,457			5,805			61			67,323
Total assets	$	63,350		$	29,249		$	1,150		$	93,749
Percentage of Level to total	68		%	31		%	1		%	100		%
Liabilities:
Derivatives:
Guaranteed benefit derivatives:
FIA	$	—		$	—		$	11		$	11
Stabilizer and MCGs	—			—			4			4
Other derivatives:
Interest rate contracts	—			76			—			76
Foreign exchange contracts	—			20			—			20
Equity contracts	—			1			—			1
Credit contracts	—			2			—			2
Embedded derivative on reinsurance	—			(80		)	—			(80		)
Total liabilities	$	—		$	19		$	15		$	34

⁽¹⁾Primarily U.S. dollar denominated.

Valuation of Financial Assets and Liabilities at Fair Value

Certain assets and liabilities are measured at estimated fair value on the Company's Consolidated Balance Sheets. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The exit price and the transaction (or entry) price will be the same at initial recognition in many circumstances. However, in certain cases, the transaction price may not represent fair value. The fair value of a liability is based on the amount that would be paid to transfer a liability to a third-party with an equal credit standing. Fair value is required to be a market-based measurement that is determined based on a hypothetical transaction at the measurement date, from a market participant's perspective. The Company considers three broad valuation approaches when a quoted price is unavailable: (i) the market approach, (ii) the income approach and (iii) the cost approach. The Company determines the most appropriate valuation technique to use, given the instrument being measured and the availability of sufficient inputs. The Company prioritizes the inputs to fair valuation approaches and allows for the use of unobservable inputs to the extent that observable inputs are not available.

The Company utilizes a number of valuation methodologies to determine the fair values of its financial assets and liabilities in conformity with the concepts of exit price and the fair value hierarchy as prescribed in ASC Topic 820. Valuations are obtained from third-party commercial pricing services, brokers and industry-standard, vendor-provided software that models the value based on market observable inputs. The valuations obtained from third-party commercial pricing services are non-binding. The Company reviews the assumptions and inputs used by third-party commercial pricing services for each reporting period in order to determine an appropriate fair value hierarchy level. The documentation and analysis obtained from third-party commercial pricing services are reviewed by the Company, including in-depth validation procedures confirming the observability of inputs. The valuations are reviewed and validated monthly through the internal valuation committee price variance review, comparisons to internal pricing models, back testing to recent trades or monitoring of trading volumes.

The valuation approaches and key inputs for each category of assets or liabilities that are classified within Level 2 and Level 3 of the fair value hierarchy are presented below.

For fixed maturities classified as Level 2 assets, fair values are determined using a matrix-based market approach, based on prices obtained from third-party commercial pricing services and the Company’s matrix and analytics-based pricing models, which in each case incorporate a variety of market observable information as valuation inputs. The market observable inputs used for these fair value measurements, by fixed maturity asset class, are as follows:

U.S. Treasuries: Fair value is determined using third-party commercial pricing services, with the primary inputs being stripped interest and principal U.S. Treasury yield curves that represent a U.S. Treasury zero-coupon curve.

U.S. government agencies and authorities, State, municipalities and political subdivisions: Fair value is determined using third-party commercial pricing services, with the primary inputs being U.S. Treasury yield curves, trades of comparable securities, credit spreads off benchmark yields and issuer ratings.

U.S. corporate public securities, Foreign corporate public securities and foreign governments: Fair value is determined using third-party commercial pricing services, with the primary inputs being benchmark yields, trades of comparable securities, issuer ratings, bids and credit spreads off benchmark yields.

U.S. corporate private securities and Foreign corporate private securities: Fair values are determined using a matrix and analytics-based pricing model. The model incorporates the current level of risk-free interest rates, current corporate credit spreads, credit quality of the issuer and cash flow characteristics of the security. The model also considers a liquidity spread, the value of any collateral, the capital structure of the issuer, the presence of guarantees, and prices and quotes for comparably rated publicly traded securities.

RMBS, CMBS and ABS: Fair value is determined using third-party commercial pricing services, with the primary inputs being credit spreads off benchmark yields, prepayment speed assumptions, current and forecasted loss severity, debt service coverage ratios, collateral type, payment priority within tranche and the vintage of the loans underlying the security.

Generally, the Company does not obtain more than one vendor price from pricing services per instrument. The Company uses a hierarchy process in which prices are obtained from a primary vendor and, if that vendor is unable to provide the price, the next vendor in the hierarchy is contacted until a price is obtained or it is determined that a price cannot be obtained from a commercial pricing service. When a price cannot be obtained from a commercial pricing service, independent broker quotes are solicited. Securities priced using independent broker quotes are classified as Level 3.

Broker quotes and prices obtained from pricing services are reviewed and validated through an internal valuation committee price variance review, comparisons to internal pricing models, back testing to recent trades or monitoring of trading volumes.

Fair values of privately placed bonds are determined primarily using a matrix-based pricing model and are generally classified as Level 2 assets. The model considers the current level of risk-free interest rates, current corporate spreads, the credit quality of the issuer and cash flow characteristics of the security. Also considered are factors such as the net worth of the borrower, the value of collateral, the capital structure of the borrower, the presence of guarantees and the Company's evaluation of the borrower's ability to compete in its relevant market. Using this data, the model generates estimated market values which the Company considers reflective of the fair value of each privately placed bond.

Equity securities: Level 2 and Level 3 equity securities, typically private equities or equity securities not traded on an exchange, are valued by other sources such as analytics or brokers.

Derivatives: Derivatives are carried at fair value, which is determined using the Company's derivative accounting system in conjunction with observable key financial data from third party sources, such as yield curves, exchange rates, S&P 500 Index prices, London Interbank Offered Rates ("LIBOR") and Overnight Index Swap ("OIS") rates. The Company uses OIS for valuations of collateralized interest rate derivatives, which are obtained from third-party sources. For those derivatives that are unable to be valued by the accounting system, the Company typically utilizes values established by third-party brokers. Counterparty credit risk is considered and incorporated in the Company's valuation process through counterparty credit rating requirements and monitoring of overall exposure. It is the Company's policy to transact only with investment grade counterparties with a credit rating of A- or better. The Company's nonperformance risk is also considered and incorporated in the Company's valuation process. The Company also has certain credit default swaps and options that are priced by third party vendors or by using models that primarily use market observable inputs, but contain inputs that are not observable to market participants, which have been classified as Level 3. The remaining derivative instruments are valued based on market observable inputs and are classified as Level 2.

Guaranteed benefit derivatives: The index-crediting feature in the Company's FIA contract is an embedded derivative that is required to be accounted for separately from the host contract. The fair value of the obligation is calculated based on actuarial and capital market assumptions related to the projected cash flows, including benefits and related contract charges, over the anticipated life of the related contracts. The cash flow estimates are produced by market implied assumptions. These derivatives are classified as Level 3 liabilities in the fair value hierarchy.

The Company records reserves for Stabilizer and MCG contracts containing guaranteed credited rates. The guarantee is treated as an embedded derivative or a stand-alone derivative (depending on the underlying product) and is required to be reported at fair value. The estimated fair value is determined based on the present value of projected future claims, minus the present value of future guaranteed premiums. At inception of the contract, the Company projects a guaranteed premium to be equal to the present value of the projected future claims. The income associated with the contracts is projected using relevant actuarial and capital market assumptions, including benefits and related contract charges, over the anticipated life of the related contracts. The cash flow estimates are produced by using stochastic techniques under a variety of risk neutral scenarios and other market implied assumptions. These derivatives are classified as Level 3 liabilities.

The discount rate used to determine the fair value of the embedded derivatives and stand-alone derivative includes an adjustment for nonperformance risk. The nonperformance risk adjustment incorporates a blend of observable, similarly rated peer holding company credit spreads, adjusted to reflect the credit quality of the Company, as well as an adjustment to reflect the non-default spreads and the priority and recovery rates of policyholder claims.

The Company's valuation actuaries are responsible for the policies and procedures for valuing the embedded derivatives, reflecting the capital markets and actuarial valuation inputs and nonperformance risk in the estimate of the fair value of the embedded derivatives. The actuarial and capital market assumptions for each liability are approved by each product's Chief Risk Officer

("CRO"), including an independent annual review by the CRO. Models used to value the embedded derivatives must comply with the Company's governance policies.

Quarterly, an attribution analysis is performed to quantify changes in fair value measurements and a sensitivity analysis is used to analyze the changes. The changes in fair value measurements are also compared to corresponding movements in the hedge target to assess the validity of the attributions. The results of the attribution analysis are reviewed by the valuation actuaries, responsible CFOs, Controllers, CROs and/or others as nominated by management.

Embedded derivatives on reinsurance: The carrying value of embedded derivatives is estimated based upon the change in the fair value of the assets supporting the funds withheld payable under reinsurance agreements. The fair value of the embedded derivatives is based on market observable inputs and is classified as Level 2.

Transfers in and out of Level 1 and 2

There were no securities transferred between Level 1 and Level 2 for the years ended December 31, 2019 and 2018. The Company's policy is to recognize transfers in and transfers out as of the beginning of the reporting period.

Level 3 Financial Instruments

The fair values of certain assets and liabilities are determined using prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement (i.e., Level 3 as defined by ASC Topic 820), including but not limited to liquidity spreads for investments within markets deemed not currently active. These valuations, whether derived internally or obtained from a third-party, use critical assumptions that are not widely available to estimate market participant expectations in valuing the asset or liability. In addition, the Company has determined, for certain financial instruments, an active market is such a significant input to determine fair value that the presence of an inactive market may lead to classification in Level 3. In light of the methodologies employed to obtain the fair values of financial assets and liabilities classified as Level 3, additional information is presented below.

The following table summarizes the change in fair value of the Company's Level 3 assets and liabilities and transfers in and out of Level 3 for the period indicated:



	Year Ended December 31, 2019
	Fair Value as of January 1			Total Realized/Unrealized Gains (Losses) Included in:					Purchases		Issuances			Sales			Settlements			Transfers into Level 3⁽³⁾		Transfers out of Level 3⁽³⁾			Fair Value as of December 31			Change in Unrealized Gains (Losses) Included in Earnings⁽⁴⁾
				Net Income			OCI
Fixed maturities, including securities pledged:
U.S. Corporate public securities	$	28		$	—		$	3	$	—	$	—		$	—		$	(7	)	$	23	$	—		$	47		$	—
U.S. Corporate private securities	771			(1		)	62		246		—			(14		)	(61		)	8		(9		)	1,002			(1		)
Foreign corporate private securities⁽¹⁾	124			(17		)	31		108		—			(56		)	—			—		—			190			1
Residential mortgage-backed securities	10			(3		)	—		9		—			—			—			—		—			16			(4		)
Commercial mortgage-backed securities	12			—			—		—		—			—			—			—		(12		)	—			—
Other asset-backed securities	94			—			—		—		—			—			(2		)	—		(44		)	48			—
Total fixed maturities, including securities pledged	1,039			(21		)	96		363		—			(70		)	(70		)	31		(65		)	1,303			(4		)
Equity securities	50			(16		)	—		29		—			—			—			—		—			63			(16		)
Derivatives:
Guaranteed benefit derivatives:
Stabilizer and MCGs⁽²⁾	(4		)	(16		)	—		—		(2		)	—			—			—		—			(22		)	—
FIA⁽²⁾	(11		)	5			—		—		(5		)	—			—			—		—			(11		)	—
Assets held in separate accounts⁽⁵⁾	61			4			—		79		—			(2		)	—			3		(30		)	115			—
⁽¹⁾Primarily U.S. dollar denominated.
⁽²⁾All gains and losses on Level 3 liabilities are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses) separately on a contract-by-contract basis. These amounts are included in Other net realized capital gains (losses) in the Consolidated Statements of Operations.
⁽³⁾ The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
⁽⁴⁾ For financial instruments still held as of December 31, amounts are included in Net investment income and Total net realized capital gains (losses) in the Consolidated Statements of Operations.
⁽⁵⁾ The investment income and realized gains (losses) and change in unrealized gains (losses) included in net income (loss) for separate account assets are offset by an equal amount for separate account liabilities, which results in a net zero impact on Net income (loss) for the Company.

The following table summarizes the change in fair value of the Company's Level 3 assets and liabilities and transfers in and out of Level 3 for the period indicated:



	Year Ended December 31, 2018
	Fair Value as of January 1			Total Realized/Unrealized Gains (Losses) Included in:						Purchases		Issuances			Sales			Settlements			Transfers into Level 3⁽³⁾		Transfers out of Level 3⁽³⁾			Fair Value as of December 31			Change in Unrealized Gains (Losses) Included in Earnings⁽⁴⁾
				Net Income			OCI
Fixed maturities, including securities pledged:
U.S. Corporate public securities	$	26		$	—		$	—		$	22	$	—		$	(5	)	$	—		$	—	$	(15	)	$	28		$	—
U.S. Corporate private securities	642			—			(31		)	184		—			(4		)	(32		)	20		(8		)	771			—
Foreign corporate private securities⁽¹⁾	92			(9		)	14			93		—			(56		)	(10		)	—		—			124			(9		)
Residential mortgage-backed securities	21			(5		)	—			41		—			(40		)	—			—		(7		)	10			(5		)
Commercial mortgage-backed securities	7			—			—			13		—			—			(1		)	—		(7		)	12			—
Other asset-backed securities	43			—			(2		)	56		—			—			(4		)	22		(21		)	94			—
Total fixed maturities, including securities pledged	831			(14		)	(19		)	409		—			(105		)	(47		)	42		(58		)	1,039			(14		)
Equity securities, available-for-sale	50			(4		)	—			4		—			—			—			—		—			50			(4		)
Derivatives:
Guaranteed benefit derivatives:
Stabilizer and MCGs⁽²⁾	(97		)	96			—			—		(3		)	—			—			—		—			(4		)	—
FIA⁽²⁾	(20		)	(2		)	—			—		2			—			9			—		—			(11		)	—
Assets held in separate accounts⁽⁵⁾	11			—			—			67		—			(6		)	—			—		(11		)	61			—
⁽¹⁾Primarily U.S. dollar denominated.
⁽²⁾All gains and losses on Level 3 liabilities are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses) separately on a contract-by-contract basis. These amounts are included in Other net realized capital gains (losses) in the Consolidated Statements of Operations.
⁽³⁾ The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
⁽⁴⁾ For financial instruments still held as of December 31, amounts are included in Net investment income and Total net realized capital gains (losses) in the Consolidated Statements of Operations.
⁽⁵⁾ The investment income and realized gains (losses) and change in unrealized gains (losses) included in net income (loss) for separate account assets are offset by an equal amount for separate account liabilities, which results in a net zero impact on Net income (loss) for the Company.

For the years ended December 31, 2019 and 2018, the transfers in and out of Level 3 for fixed maturities and separate accounts were due to the variation in inputs relied upon for valuation each quarter. Securities that are primarily valued using independent broker quotes when prices are not available from one of the commercial pricing services are reflected as transfers into Level 3. When securities are valued using more widely available information, the securities are transferred out of Level 3 and into Level 1 or 2, as appropriate.

Significant Unobservable Inputs

The Company's Level 3 fair value measurements of its fixed maturities, equity securities and equity and credit derivative contracts are primarily based on broker quotes for which the quantitative detail of the unobservable inputs is neither provided nor reasonably corroborated, thus negating the ability to perform a sensitivity analysis. The Company performs a review of broker quotes by performing a monthly price variance comparison and back tests broker quotes to recent trade prices.

Other Financial Instruments

The following disclosures are made in accordance with the requirements of ASC Topic 825 which requires disclosure of fair value information about financial instruments, whether or not recognized at fair value on the Consolidated Balance Sheets.

ASC Topic 825 excludes certain financial instruments, including insurance contracts and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The carrying values and estimated fair values of the Company's financial instruments as of the dates indicated:



	December 31, 2019				December 31, 2018
	Carrying Value		Fair Value		Carrying Value			Fair Value
Assets:
Fixed maturities, including securities pledged	$	27,460	$	27,460	$	25,034		$	25,034
Equity securities	80		80		57			57
Mortgage loans on real estate	4,664		4,912		4,918			4,983
Policy loans	205		205		210			210
Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements	1,429		1,429		1,207			1,207
Derivatives	224		224		128			128
Short-term loan to affiliate	69		69		—			—
Other investments	43		43		40			40
Assets held in separate accounts	78,713		78,713		67,323			67,323
Liabilities:
Investment contract liabilities:
Funding agreements without fixed maturities and deferred annuities⁽¹⁾	26,337		32,697		26,068			29,108
Funding agreements with fixed maturities	877		876		658			652
Supplementary contracts, immediate annuities and other	312		384		333			354
Deposit liabilities	76		152		77			122
Derivatives:
Guaranteed benefit derivatives:
FIA	11		11		11			11
Stabilizer and MCGs	22		22		4			4
Other derivatives	285		285		99			99
Short-term debt⁽²⁾	1		1		1			1
Long-term debt⁽²⁾	4		4		4			4
Embedded derivatives on reinsurance	23		23		(80		)	(80		)

⁽¹⁾ Certain amounts included in Funding agreements without fixed maturities and deferred annuities are also reflected within the Guaranteed benefit derivatives section of the table above.

⁽²⁾ Included in Other Liabilities on the Consolidated Balance Sheets.

The following table presents the classification of financial instruments which are not carried at fair value on the Consolidated Balance Sheets:



Financial Instrument	Classification
Mortgage loans on real estate	Level 3
Policy loans	Level 2
Short-term loan to affiliate	Level 2
Other investments	Level 2
Funding agreements without fixed maturities and deferred annuities	Level 3
Funding agreements with fixed maturities	Level 2
Supplementary contracts, immediate annuities and other	Level 3
Deposit liabilities	Level 3
Short-term debt and Long-term debt	Level 2

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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