Fair Value of Assets and Liabilities

Fair Value Measurement

General accounting principles for Fair Value Measurements and Disclosures define fair value as the exchange price that would be received for 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. These principles also establish a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and describes three levels of inputs that may be used to measure fair value:

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets and liabilities are traded in active exchange markets.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or market standard valuation techniques and assumptions that use significant inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the related assets or liabilities. Prices are determined using valuation methodologies such as discounted cash flow models and other similar techniques that require management’s judgment or estimation in developing inputs that are consistent with what other market participants would use when pricing similar assets and liabilities. Additionally, the Company’s embedded derivatives, all of which are associated with reinsurance treaties and longevity and mortality swaps, are classified in Level 3 since their values include significant unobservable inputs.

For a discussion of the Company’s valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 6 in the Notes to Consolidated Financial Statements included in the Company’s 2018 Annual Report.

Assets and Liabilities by Hierarchy Level

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 are summarized below (dollars in thousands):



March 31, 2019:				Fair Value Measurements Using:
	Total			Level 1		Level 2			Level 3
Assets:
Fixed maturity securities – available-for-sale:
Corporate	$	25,077,338		$	—	$	23,546,583		$	1,530,755
Canadian government	4,277,864			—		3,670,073			607,791
RMBS	1,994,186			—		1,987,664			6,522
ABS	2,241,986			—		2,128,199			113,787
CMBS	1,431,746			—		1,431,725			21
U.S. government	1,567,563			1,464,139		86,215			17,209
State and political subdivisions	792,717			—		782,555			10,162
Other foreign government	4,355,043			—		4,349,977			5,066
Total fixed maturity securities – available-for-sale	41,738,443			1,464,139		37,982,991			2,291,313
Equity securities	89,865			49,443		—			40,422
Funds withheld at interest – embedded derivatives	107,506			—		—			107,506
Cash equivalents	855,265			853,927		1,319			19
Short-term investments	75,360			4,766		41,392			29,202
Other invested assets:
Derivatives:
Interest rate swaps	48,683			—		48,683			—
Foreign currency forwards	33,113			—		33,113			—
Credit default swaps	(6,201		)	—		(6,201		)	—
Equity options	18,676			—		18,676			—
Foreign currency swaps	38,141			—		38,141			—
FVO contractholder-directed unit-linked investments	202,848			201,833		1,015			—
Total other invested assets	335,260			201,833		133,427			—
Other assets - longevity swaps	48,869			—		—			48,869
Total	$	43,250,568		$	2,574,108	$	38,159,129		$	2,517,331
Liabilities:
Interest sensitive contract liabilities – embedded derivatives	$	903,935		$	—	$	—		$	903,935
Other liabilities:
Derivatives:
Interest rate swaps	17,620			—		17,620			—
Foreign currency swaps - non-hedged	4,629			—		4,629			—
CPI swaps	20,505			—		20,505			—
Credit default swaps	(12,757		)	—		(12,757		)	—
Equity options	(1,476		)	—		(1,476		)	—
Mortality swaps	(489		)	—		—			(489		)
Total	$	931,967		$	—	$	28,521		$	903,446



December 31, 2018:				Fair Value Measurements Using:
	Total			Level 1		Level 2			Level 3
Assets:
Fixed maturity securities – available-for-sale:
Corporate	$	23,982,119		$	—	$	22,651,194		$	1,330,925
Canadian government	3,892,385			—		3,364,261			528,124
RMBS	1,869,221			—		1,862,366			6,855
ABS	2,149,204			—		2,053,632			95,572
CMBS	1,419,034			—		1,419,012			22
U.S. government	2,185,874			2,067,529		100,320			18,025
State and political subdivisions	752,194			—		741,992			10,202
Other foreign government	3,742,315			—		3,737,309			5,006
Total fixed maturity securities – available-for-sale	39,992,346			2,067,529		35,930,086			1,994,731
Equity securities	82,197			48,737		—			33,460
Funds withheld at interest – embedded derivatives	109,597			—		—			109,597
Cash equivalents	485,167			473,509		11,658			—
Short-term investments	105,991			4,989		98,774			2,228
Other invested assets:
Derivatives:
Interest rate swaps	37,976			—		37,976			—
Foreign currency forwards	50,740			—		50,740			—
Credit default swaps	4,466			—		4,466			—
Equity options	36,206			—		36,206			—
Foreign currency swaps	51,311			—		51,311			—
FVO contractholder-directed unit-linked investments	197,770			196,781		989			—
Total other invested assets	378,469			196,781		181,688			—
Other assets - longevity swaps	47,789			—		—			47,789
Total	$	41,201,556		$	2,791,545	$	36,222,206		$	2,187,805
Liabilities:
Interest sensitive contract liabilities – embedded derivatives	$	944,865		$	—	$	—		$	944,865
Other liabilities:
Derivatives:
Interest rate swaps	18,542			—		18,542			—
Foreign currency swaps - non-hedged	4,155			—		4,155			—
CPI swaps	11,384			—		11,384			—
Credit default swaps	(371		)	—		(371		)	—
Equity options	(6,630		)	—		(6,630		)	—
Mortality swaps	369			—		—			369
Total	$	972,314		$	—	$	27,080		$	945,234

Transfers between Levels 1 and 2

Transfers between Levels 1 and 2 are made to reflect changes in observability of inputs and market activity. The Company recognizes transfers of assets and liabilities into and out of levels within the fair value hierarchy at the beginning of the quarter in which the actual event or change in circumstances that caused the transfer occurs. There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2019 or 2018.

Quantitative Information Regarding Internally - Priced Assets and Liabilities

The following table presents quantitative information about significant unobservable inputs used in Level 3 fair value measurements that are developed internally by the Company as of March 31, 2019 and December 31, 2018 (dollars in thousands):



	Estimated Fair Value			Valuation Technique	Unobservable Inputs	Range (Weighted Average)
	March 31, 2019		December 31, 2018	Valuation Technique	Unobservable Inputs	March 31, 2019		December 31, 2018
Assets:
Corporate	$740,698		$642,647	Market comparable securities	Liquidity premium	0-5% (1%)		0-5% (1%)
					EBITDA Multiple	5.9x		5.9x-7.5x (6.5x)
ABS	81,417		77,842	Market comparable securities	Liquidity premium	0-1% (1%)		0-1% (1%)
U.S. government	17,209		18,025	Market comparable securities	Liquidity premium	0-1% (1%)		0-1% (1%)
Other foreign government	5,066		5,006	Market comparable securities	Liquidity premium	1	%	1	%
Equity securities	30,294		25,007	Market comparable securities	Liquidity premium	4	%	4	%
					EBITDA Multiple	6.9x-12.3x (8.2x)		6.9x-12.3x (7.9x)
Funds withheld at interest- embedded derivatives	107,506		109,597	Total return swap	Mortality	0-100% (2%)		0-100% (2%)
					Lapse	0-35% (11%)		0-35% (10%)
					Withdrawal	0-5% (3%)		0-5% (3%)
					CVA	0-5% (1%)		0-5% (1%)
					Crediting rate	2-4% (2%)		2-4% (2%)
Longevity swaps	48,869		47,789	Discounted cash flow	Mortality	0-100% (2%)		0-100% (2%)
					Mortality improvement	(10%)-10% (3%)		(10%)-10% (3%)
Liabilities:
Interest sensitive contract liabilities- embedded derivatives- indexed annuities	754,171		776,940	Discounted cash flow	Mortality	0-100% (2%)		0-100% (2%)
					Lapse	0-35% (11%)		0-35% (10%)
					Withdrawal	0-5% (3%)		0-5% (3%)
					Option budget projection	2-4% (2%)		2-4% (2%)
Interest sensitive contract liabilities- embedded derivatives- variable annuities	149,764		167,925	Discounted cash flow	Mortality	0-100% (1%)		0-100% (1%)
					Lapse	0-25% (5%)		0-25% (5%)
					Withdrawal	0-7% (4%)		0-7% (5%)
					CVA	0-5% (1%)		0-5% (1%)
					Long-term volatility	0-27% (13%)		0-27% (13%)
Mortality swaps	(489	)	369	Discounted cash flow	Mortality	0-100% (1%)		0-100% (1%)

Changes in Level 3 Assets and Liabilities

Assets and liabilities transferred into Level 3 are due to a lack of observable market transactions and price information. Transfers out of Level 3 are primarily the result of the Company obtaining observable pricing information or a third party pricing quotation that appropriately reflects the fair value of those assets and liabilities. In 2018, the Company transferred equity securities with a fair value of approximately $38.9 million into Level 3 as a result of the adoption of the new accounting guidance for the recognition and measurement of equity securities (see “New Accounting Pronouncements – Financial Instruments – Recognition and Measurement” in Note 2 – “Significant Accounting Policies and Pronouncements” in the Notes to Consolidated Financial Statements included in the Company’s 2018 Annual Report).

For further information on the Company’s valuation processes, see Note 6 in the Notes to Consolidated Financial Statements included in the Company’s 2018 Annual Report.

The reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows (dollars in thousands):



For the three months ended March 31, 2019:	Fixed maturity securities - available-for-sale
	Corporate			Canadian government		RMBS			ABS
Fair value, beginning of period	$	1,330,925		$	528,124	$	6,855		$	95,572
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related expenses	133			3,493		2			17
Included in other comprehensive income	19,404			76,174		1			975
Purchases⁽¹⁾	214,441			—		—			31,322
Sales⁽¹⁾	(10,712		)	—		—			—
Settlements⁽¹⁾	(23,436		)	—		(336		)	(14,099		)
Fair value, end of period	$	1,530,755		$	607,791	$	6,522		$	113,787
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
Included in earnings, net:
Investment income, net of related expenses	$	166		$	3,493	$	2		$	17



For the three months ended March 31, 2019 (continued):	Fixed maturity securities - available-for-sale
	CMBS			U.S. government			State and political subdivisions			Other foreign government		Equity securities
Fair value, beginning of period	$	22		$	18,025		$	10,202		$	5,006	33,460
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related expenses	—			(89		)	5			—		—
Investment related gains (losses), net	—			—			—			—		3,762
Included in other comprehensive income	—			267			(7		)	60		—
Purchases⁽¹⁾	—			84			—			—		3,200
Settlements⁽¹⁾	(1		)	(1,078		)	(38		)	—		—
Fair value, end of period	$	21		$	17,209		$	10,162		$	5,066	$	40,422
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
Included in earnings, net:
Investment income, net of related expenses	$	—		$	(89	)	$	5		$	—	$	—
Investment related gains (losses), net	—			—			—			—		3,762



For the three months ended March 31, 2019 (continued):	Funds withheld at interest- embedded derivatives			Cash equivalents		Short-term investments		Other assets - longevity swaps			Interest sensitive contract liabilities embedded derivatives			Other liabilities - mortality swaps
Fair value, beginning of period	$	109,597		$	—	$	2,228	$	47,789		$	(944,865	)	$	(369	)
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related expenses	—			—		32		—			—			—
Investment related gains (losses), net	(2,091		)	—		—		—			18,161			—
Interest credited	—			—		—		—			3,070			—
Included in other comprehensive income	—			—		199		(1,063		)	—			—
Other revenues	—			—		—		2,143			—			858
Purchases⁽¹⁾	—			19		26,743		—			1,398			—
Settlements⁽¹⁾	—			—		—		—			18,301			—
Fair value, end of period	$	107,506		$	19	$	29,202	$	48,869		$	(903,935	)	$	489
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
Included in earnings, net:
Investment income, net of related expenses	$	—		$	—	$	32	$	—		$	—		$	—
Investment related gains (losses), net	(2,091		)	—		—		—			16,766			—
Other revenues	—			—		—		2,143			—			858
Interest credited	—			—		—		—			(15,231		)	—



For the three months ended March 31, 2018:	Fixed maturity securities - available-for-sale
	Corporate			Canadian government			RMBS			ABS
Fair value, beginning of period	$	1,337,272		$	593,942		$	107,882		$	123,474
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related expenses	(361		)	3,444			(92		)	106
Investment related gains (losses), net	—			—			—			2
Included in other comprehensive income	(32,852		)	(24,639		)	(1,110		)	853
Purchases⁽¹⁾	100,170			—			20,916			11,000
Sales⁽¹⁾	(6,180		)	—			—			—
Settlements⁽¹⁾	(75,146		)	—			(2,963		)	(2,739		)
Transfers into Level 3	7,166			—			—			—
Transfers out of Level 3	(30,805		)	—			(4,019		)	(1,990		)
Fair value, end of period	$	1,299,264		$	572,747		$	120,614		$	130,706
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
Included in earnings, net:
Investment income, net of related expenses	$	(361	)	$	3,444		$	(92	)	$	106



For the three months ended March 31, 2018 (continued):	Fixed maturity securities - available-for-sale
	CMBS			U.S. government			State and political subdivisions			Other foreign government
Fair value, beginning of period	$	3,234		$	22,511		$	41,203		$	5,092
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related expenses	—			(110		)	8			—
Included in other comprehensive income	(47		)	(340		)	700			(88		)
Purchases⁽¹⁾	—			96			—			—
Settlements⁽¹⁾	(1		)	(1,104		)	(35		)	—
Transfers out of Level 3	(1,302		)	—			—			—
Fair value, end of period	$	1,884		$	21,053		$	41,876		$	5,004
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
Included in earnings, net:
Investment income, net of related expenses	$	—		$	(110	)	$	8		$	—



For the three months ended March 31, 2018 (continued):	Equity securities			Funds withheld at interest- embedded derivatives		Short-term investments			Other assets - longevity swaps		Interest sensitive contract liabilities embedded derivatives			Other liabilities - mortality swaps
Fair value, beginning of period	$	—		$	122,194	$	3,096		$	40,659	$	(1,014,229	)	$	(1,683	)
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment related gains (losses), net	(2,677		)	13,611		—			—		14,785			—
Interest credited	—			—		—			—		25,351			—
Included in other comprehensive income	—			—		(25		)	1,085		—			—
Other revenues	—			—		—			2,267		—			—
Purchases⁽¹⁾	—			—		146			—		(8,508		)	—
Sales⁽¹⁾	(28		)	—		—			—		—			—
Settlements⁽¹⁾	(48		)	—		—			—		17,807			—
Transfers into Level 3	38,905			—		—			—		—			—
Fair value, end of period	$	36,152		$	135,805	$	3,217		$	44,011	$	(964,794	)	$	(1,683	)
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
Included in earnings, net:
Investment related gains (losses), net	$	(2,705	)	$	13,611	$	—		$	—	$	12,901		$	—
Other revenues	—			—		—			2,267		—			—
Interest credited	—			—		—			—		7,544			—


(1)	The amount reported within purchases, sales and settlements is the purchase price (for purchases) and the sales/settlement proceeds (for sales and settlements) based upon the actual date purchased or sold/settled. Items purchased and sold/settled in the same period are excluded from the rollforward. The Company had no issuances during the period.

Nonrecurring Fair Value Measurements

During the three months ended March 31, 2019 and March 31, 2018, the Company did not have any adjustments to its financial instruments measured at fair value on a nonrecurring basis that are still held at the reporting date.

Fair Value of Financial Instruments

The Company is required by general accounting principles for Fair Value Measurements and Disclosures to disclose the fair value of certain financial instruments including those that are not carried at fair value. The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments, which were not measured at fair value on a recurring basis, as of March 31, 2019 and December 31, 2018 (dollars in thousands). For additional information regarding the methods and significant assumptions used by the Company to estimate these fair values, see Note 6 in the Notes to Consolidated Financial Statements included in the Company’s 2018 Annual Report. This table excludes any payables or receivables for collateral under repurchase agreements and other transactions. The estimated fair value of the excluded amount approximates carrying value as they equal the amount of cash collateral received/paid.



March 31, 2019:	Carrying Value ⁽¹⁾		Estimated Fair Value		Fair Value Measurement Using:
March 31, 2019:	Carrying Value ⁽¹⁾		Estimated Fair Value		Level 1		Level 2		Level 3		NAV
Assets:
Mortgage loans on real estate	$	5,117,545	$	5,210,513	$	—	$	—	$	5,210,513	$	—
Policy loans	1,312,349		1,312,349		—		1,312,349		—		—
Funds withheld at interest	5,619,039		5,823,245		—		—		5,823,245		—
Cash and cash equivalents	1,165,131		1,165,131		1,165,131		—		—		—
Short-term investments	43,855		43,855		43,855		—		—		—
Other invested assets	1,061,220		1,060,931		5,176		83,529		603,835		368,391
Accrued investment income	442,956		442,956		—		442,956		—		—
Liabilities:
Interest-sensitive contract liabilities	$	14,543,332	$	14,790,369	$	—	$	—	$	14,790,369	$	—
Long-term debt	2,787,717		2,915,623		—		—		2,915,623		—
Collateral finance and securitization notes	656,174		601,680		—		—		601,680		—

December 31, 2018:
Assets:
Mortgage loans on real estate	$	4,966,298	$	4,917,416	$	—	$	—	$	4,917,416	$	—
Policy loans	1,344,980		1,344,980		—		1,344,980		—		—
Funds withheld at interest	5,655,055		5,802,518		—		—		5,802,518		—
Cash and cash equivalents	1,404,566		1,404,566		1,404,566		—		—		—
Short-term investments	36,607		36,607		36,607		—		—		—
Other invested assets	945,731		941,449		4,640		83,203		477,214		376,392
Accrued investment income	427,893		427,893		—		427,893		—		—
Liabilities:
Interest-sensitive contract liabilities	$	14,547,436	$	14,611,011	$	—	$	—	$	14,611,011	$	—
Long-term debt	2,787,873		2,752,047		—		—		2,752,047		—
Collateral finance and securitization notes	681,961		626,731		—		—		626,731		—


(1)	Carrying values presented herein may differ from those in the Company’s condensed consolidated balance sheets because certain items within the respective financial statement captions may be measured at fair value on a recurring basis.