Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2013

ASC 820-10 defines and establishes the framework for measuring fair value. The framework is based on inputs that are used in the valuation and a fair value hierarchy based on the quality of those inputs. Fair value is defined as 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.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The input levels, are defined as follows:


•	Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 1 securities include highly liquid government bonds and exchange-traded equities.

•

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Examples of such instruments include government-backed mortgage products, certain collateralized mortgage and debt obligations and certain high-yield debt securities.

•

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs reflect management’s own assumptions about inputs in which market participants would use in pricing these types of assets or liabilities. Level 3 financial instruments include values which are determined using pricing models and third-party evaluation. Additionally, the determination of some fair value estimates utilizes significant management judgments or best estimates.

Investments for which fair value is based upon unadjusted quoted market prices are reported as Level 1. The number of quotes the issuer obtains per instrument will vary depending on the security type and availability of pricing data from pricing vendors. The Company has defined a pricing hierarchy among independent, nationally recognized pricing vendors ("pricing vendors") to determine ultimate value used and also reviews significant discrepancies among pricing vendors to determine final value used. Prices from pricing services are not adjusted, but the Company may obtain a broker quote or use an internal model to price a security if it believes vendor prices do not reflect fair value. We receive quoted market prices from pricing vendors. When quoted prices are not available, we use these pricing vendors to give an estimated fair value. If quoted prices, or an estimated price from our pricing vendors are not available or we determine that the price is based on disorderly transactions or in inactive markets, fair value is based upon internally developed models or obtained from an independent third-party broker. We primarily use market-based or independently sourced market parameters, including interest rate yield curves, option volatilities and currency rates. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, our own creditworthiness, liquidity and unobservable parameters that are applied consistently over time.


9.	Fair Value of Financial Instruments (continued)

Management is responsible for the fair value of investments and the methodologies and assumptions used to estimate fair value. The fair value process is evaluated quarterly by the Pricing Committee, which is comprised of the Chief Investment Officer, Chief Accounting Officer and the Head of Investment Accounting. The purpose of the Committee is to ensure the Company follows objective and reliable valuation practices, as well as approving changes to valuation methodologies and pricing sources. Using professional judgment and experience, we evaluate and weigh the relevance and significance of all readily available market information to determine the best estimate of fair value.

The fair values of Level 2 investments are determined by management after considering prices from our pricing vendors. Fair values for debt securities are primarily based on yield curve analysis along with ratings and spread data. Other inputs may be considered for fair value calculations including published indexed data, sector specific performance, comparable price sources and similar traded securities. Management reviews all Level 2 and Level 3 market prices on a quarterly basis.

The following is a description of our valuation methodologies for assets and liabilities measured at fair value. Such valuation methodologies were applied to all of the assets and liabilities carried at fair value in each respective classification.

Debt securities

We use pricing vendors to estimate fair value for the majority of our public debt securities. The pricing vendors’ estimates are based on market data and use pricing models that vary by asset class and incorporate available trade, bid and other market information. The methodologies used by these vendors are reviewed and understood by management through discussion with and information provided by these vendors. The Company assesses the reasonableness of individual security values received from pricing vendors through various analytical techniques. Management also assesses whether the assumptions used appear reasonable and consistent with the objective of determining fair value. When our pricing vendors are unable to obtain evaluations based on market data, fair value is determined by obtaining a direct broker quote. Management reviews these broker quotes and valuation techniques to determine whether they are appropriate and consistently applied. Broker quotes are evaluated based on the Company’s assessment of the broker’s knowledge of, and history in trading, the security and the Company’s understanding of inputs used to derive the broker quote. Management also assesses reasonableness of individual security values similar to the pricing vendor review noted above.

For our private placement investments, we estimated fair value using internal models. Private placement securities are generally valued using a matrix pricing approach which categorizes these securities into groupings using remaining average life and credit rating as the two criteria to determine a grouping. The Company obtains current credit spread information from private placement dealers based on the criteria described and adds that spread information to U.S. Treasury rates corresponding to the life of each security to determine a discount rate for pricing. A small number of private placement securities are internally valued using models or analyst judgment. Fair values determined internally are also subject to management review to ensure that valuation models and inputs appear reasonable.

U.S. Government and Agency Securities

We value public U.S. government and agency debt by obtaining fair value estimates from our pricing vendors. For our private placement government and agency debt, our fair value is based on internal models using either a discounted cash flow or spread matrix which incorporates U.S. Treasury yields, market spreads and average life calculations. For short-term investments, we equate fair value to amortized cost due to their relatively short duration and limited exposure to credit risk.

State and Political Subdivisions

Public state and political subdivision debt is valued by obtaining fair value estimates from our pricing vendors. For our private placement debt securities, our fair value is based on internal models using either a discounted cash flow or spread matrix which incorporates U.S. Treasury yields, market spreads and average life calculations.

Foreign Government

We obtain fair value estimates from pricing vendors to value foreign government debt.


9.	Fair Value of Financial Instruments (continued)

Corporate Bonds

For the majority of our public corporate debt, we obtain fair value estimates from our pricing vendors. For public corporate debt in which we cannot obtain fair value estimates from our pricing vendors, we receive a direct quote from a broker. In most cases, we will obtain a direct broker quote from the broker that facilitated the deal. For our private placement debt securities, our fair value is based on internal models using either a discounted cash flow or spread matrix which incorporates U.S. Treasury yields, market spreads and average life calculations. For private fixed maturities, fair value is determined using a discounted cash flow model, which utilizes a discount rate based upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions and takes into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. In determining the fair value of certain debt securities, the discounted cash flow model may also use unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the security.

RMBS, CMBS, CDO/CLO and Other Asset-Backed Securities

For structured securities, the majority of the fair value estimates are provided by our pricing vendors. When a fair value estimate is not available from the pricing vendors, we estimate fair value using direct broker quotes or internal models which use a discounted cash flow technique. These models consider the best estimate of cash flows until maturity to determine our ability to collect principal and interest and compare this to the anticipated cash flows when the security was purchased. In addition, management judgment is used to assess the probability of collecting all amounts contractually due to us. After consideration is given to the available estimates relevant to assessing the collectibility, including historical events, current conditions and reasonable forecasts, an estimate of future cash flows is determined. This includes evaluating the remaining payment terms, prepayment speeds, the underlying collateral, expected defaults using current default data and the financial condition of the issuer. Other factors considered are composite credit ratings, industry forecast, analyst reports and other relevant market data, similar to those the Company believes market participants would use.

Limited partnerships and other investments

Our limited partnerships are accounted for using equity method accounting. We carry these investments on the balance sheets at the capital value we obtain from the financial statement we received from the general partner. Typically, our carrying value is based on a financial statement one quarter in arrears to accommodate the timing of receipt of financial statements. These financial statements are generally audited annually. Generally the information received is deemed an appropriate approximation of the fair value of these fund investments and no adjustments are made to the financial statements received. Management also has open communication with each fund manager and generally views the information reported from the underlying funds as the best information available to record its investments.

Separate account assets

Our separate account assets consist of mutual funds that are frequently traded. Since 2003, investments owned by The Phoenix Companies, Inc. Employee Pension Plan (the “Plan”) Trust were sold to PHL Variable and the investments converted to ownership by the Trust to the Employee Pension Separate Account (“EPP SA”). The Plan’s Trust purchased a group flexible premium variable accumulation deferred annuity contract. As of May 21, 2012, the Plan surrendered the EPP SA contract for full value and the Plan’s underlying investments are no longer held in the separate account. Certain investments related to fixed income, equities and foreign securities were transferred to Mercer Trust Company for investment management purposes in a group trust investment arrangement. The remaining investments continued with their respective investment managers. These securities are valued using the market approach in which unadjusted market quotes are used. We include these securities in Level 1 of our hierarchy.

Derivatives

Exchange-traded derivatives are valued using quoted prices and are classified within Level 1 of the valuation hierarchy. However, few classes of derivative contracts are listed on an exchange. Therefore, the majority of our derivative positions are OTC derivative financial instruments, valued using third-party vendor derivative valuation systems that use as their basis readily observable market parameters, such as swap rates and volatility assumptions. These positions are classified within Level 2 of the valuation hierarchy. Such OTC derivatives include vanilla interest rate swaps, equity index options, swaptions, variance swaps and cross currency swaps. Nevertheless, we review and validate the resulting fair values against those provided to us monthly by the derivative counterparties for reasonableness.


9.	Fair Value of Financial Instruments (continued)

Fair values for OTC derivative financial instruments, mostly options and swaps, represent the present value of amounts estimated to be received from or paid to a marketplace participant in exchange of these instruments (i.e., the amount we would expect to receive in a derivative asset assignment or would expect to pay to have a derivative liability assumed). These derivatives are valued using third-party derivative valuation models which take into account the net present value of estimated future cash flows and capital market assumptions which are derived from directly observable prices from other OTC trades and exchange-traded derivatives. Such assumptions include swap rates and swaption volatility obtained from Bloomberg, as well as equity index volatility and dividend yields provided by OTC derivative dealers.

The fair value of OTC derivative financial instruments is also adjusted for the credit risk of the counterparty in cases in which there are no collateral offsets. To estimate the impact on fair value of a market participant’s view of counterparty non-performance risk we use a credit default swap (“CDS”)-based approach in measuring this counterparty non-performance risk by looking at the cost of obtaining credit protection in the CDS market for the aggregate fair value exposure amount over the remaining life of derivative contracts, given the counterparty’s rating. The resulting upfront CDS premium, calculated using Bloomberg analytics, serves as a reasonable estimate of the default provision for the non-performance risk or counterparty valuation adjustment to the fair valuation of non-collateralized OTC derivative financial instruments.

Certain new and/or complex instruments may have immature or limited markets or require more sophistication in derivative valuation methodology. As a result, the pricing models used for valuation of these instruments often incorporate significant estimates and assumptions that market participants would use in pricing the instrument, which may impact the results of operations reported in the financial statements. Hence, instead of valuing these instruments using third-party vendor valuation systems, we rely on the fair market valuations reported to us monthly by the derivative counterparties. Fair values for OTC derivatives are verified using observed estimates about the costs of hedging the risk and other trades in the market. As the markets for these products develop, we continually refine our pricing models to correlate more closely to the market risk of these instruments.

Valuation of embedded derivatives

We make guarantees on certain variable annuity contracts, including those with GMAB, GMWB and COMBO riders. We also provide credits based on the performance of certain indices (“index credits”) on our fixed indexed annuity contracts. Both contract types have features that meet the definition of an embedded derivative. The GMAB, GMWB and COMBO embedded derivative liabilities associated with our variable annuity contracts are accounted for at fair value using a risk neutral stochastic valuation methodology with changes in fair value recorded in realized investment gains. The inputs to our fair value methodology include estimates derived from the asset derivatives market, including equity volatilities and the swap curves. Several additional inputs are not obtained from independent sources, but instead reflect our internally developed assumptions related to mortality rates, lapse rates and other policyholder behavior.

The fair value of the embedded derivative liabilities associated with the index credits on our fixed indexed annuity contracts is calculated using the budget method with changes in fair value recorded in realized investment gains. Under the budget method, the value of the initial index option is based on the fair value of the option purchased to hedge the index. The value of the index credits paid in future years is estimated to be the annual budgeted amount. Budgeted amounts are estimated based on available investment income using assumed investment returns and projected liability values. As there are significant unobservable inputs included in our fair value methodology for these embedded derivative liabilities, we consider the methods as described above as a whole to be Level 3 within the fair value hierarchy.

Our fair value calculation of embedded derivative liabilities includes a credit standing adjustment (the “CSA”). The CSA represents the adjustment that market participants would make to reflect the risk that guaranteed benefit obligations may not be fulfilled (“non-performance risk”). We estimate our CSA using the credit spread (based on publicly available credit spread indices) for financial services companies similar to the Company’s life insurance subsidiaries. The CSA is updated every quarter and, therefore, the fair value will change with the passage of time even in the absence of any other changes that would affect the valuation.

The following tables present the financial instruments carried at fair value on a recurring basis by ASC 820-10 valuation hierarchy (as described above). There were no financial instruments carried at fair value on a non-recurring basis as of December 31, 2013 and 2012, respectively.


9.	Fair Value of Financial Instruments (continued)



Fair Values of Financial Instruments by Level:	As of
($ in millions)	December 31, 2013
	Level 1		Level 2		Level 3			Total
Assets
Available-for-sale debt securities
U.S. government and agency	$	—	$	9.8	$	58.8	[1]	$	68.6
State and political subdivision	—		20.8		133.8			154.6
Foreign government	—		62.2		3.3			65.5
Corporate	—		1,105.0		1,102.3			2,207.3
CMBS	—		221.8		31.9			253.7
RMBS	—		333.9		175.9			509.8
CDO/CLO	—		—		70.9			70.9
Other asset-backed	—		13.6		82.3			95.9
Total available-for-sale debt securities	—		1,767.1		1,659.2			3,426.3
Short-term investments	80.0		1.0		—			81.0
Derivative assets	12.5		225.3		—			237.8
Related party reinsurance derivative asset	—		—		—			—
Fair value investments	—		13.0		35.6			48.6
Separate account assets	2,052.7		—		—			2,052.7
Total assets	$	2,145.2	$	2,006.4	$	1,694.8		$	5,846.4
Liabilities
Derivative liabilities	$	—	$	110.8	$	—		$	110.8
Embedded derivatives	—		—		74.8			74.8
Total liabilities	$	—	$	110.8	$	74.8		$	185.6

———————


[1]	Includes securities whose underlying collateral is an obligation of a U.S. government entity.

There were no transfers of assets between Level 1 and Level 2 during the year ended December 31, 2013.


9.	Fair Value of Financial Instruments (continued)



Fair Values of Financial Instruments by Level:	As of
($ in millions)	December 31, 2012
	Level 1		Level 2		Level 3			Total
Assets
Available-for-sale debt securities
U.S. government and agency	$	—	$	14.3	$	25.9	[1]	$	40.2
State and political subdivision	—		14.8		116.1			130.9
Foreign government	—		43.8		8.0			51.8
Corporate	—		1,096.0		801.5			1,897.5
CMBS	—		234.7		19.3			254.0
RMBS	—		199.9		222.6			422.5
CDO/CLO	—		—		56.8			56.8
Other asset-backed	—		38.5		80.1			118.6
Total available-for-sale debt securities	—		1,642.0		1,330.3			2,972.3
Short-term investments	244.9		—		—			244.9
Derivative assets	13.8		135.6		—			149.4
Related party reinsurance derivative asset	—		—		—			—
Fair value investments	—		15.8		22.7			38.5
Separate account assets	2,061.8		—		—			2,061.8
Total assets	$	2,320.5	$	1,793.4	$	1,353.0		$	5,466.9
Liabilities
Derivative liabilities	$	—	$	45.7	$	—		$	45.7
Embedded derivatives	—		—		79.5			79.5
Total liabilities	$	—	$	45.7	$	79.5		$	125.2

———————


[1]	Includes securities whose underlying collateral is an obligation of a U.S. government entity.

There were no transfers of assets between Level 1 and Level 2 during the year ended December 31, 2012.

The following tables present corporates carried at fair value on a recurring basis by sector.



Fair Values of Corporates by Level and Sector:	As of
($ in millions)	December 31, 2013
	Level 1		Level 2		Level 3		Total
Corporates
Consumer	$	—	$	288.9	$	377.0	$	665.9
Energy	—		137.7		95.4		233.1
Financial services	—		440.3		262.2		702.5
Technical/communications	—		32.8		25.4		58.2
Transportation	—		25.0		85.1		110.1
Utilities	—		83.6		154.3		237.9
Other	—		96.7		102.9		199.6
Total corporates	$	—	$	1,105.0	$	1,102.3	$	2,207.3


9.	Fair Value of Financial Instruments (continued)



Fair Values of Corporates by Level and Sector:	As of
($ in millions)	December 31, 2012
	Level 1		Level 2		Level 3		Total
Corporates
Consumer	$	—	$	352.9	$	389.5	$	742.4
Energy	—		79.6		18.8		98.4
Financial services	—		361.9		165.8		527.7
Technical/communications	—		45.4		7.6		53.0
Transportation	—		9.3		29.8		39.1
Utilities	—		116.9		134.2		251.1
Other	—		130.0		55.8		185.8
Total corporates	$	—	$	1,096.0	$	801.5	$	1,897.5

Level 3 financial assets and liabilities

The following tables set forth a summary of changes in the fair value of our Level 3 financial assets and liabilities. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The securities which were transferred as of the end of each reporting period into Level 3 were due to decreased

market observability of similar assets and/or changes to significant inputs, such as downgrades or price declines. Transfers out of Level 3 were due to increased market activity on comparable assets or observability of inputs.



Level 3 Financial Assets:	As of
($ in millions)	December 31, 2013
	Balance, beginning of period		Purchases		Sales			Transfers into Level 3		Transfers out of Level 3			Realized and unrealized gains (losses) included in income [1]			Unrealized gains (losses) included in OCI			Total




Assets
Available-for-sale debt securities
U.S. government and agency [2]	$	25.9	$	44.3	$	(4.3	)	$	—	$	—		$	—		$	(7.1	)	$	58.8
State and political subdivision	116.1		47.8		(1.5		)	—		—			—			(28.6		)	133.8
Foreign government	8.0		—		—			1.6		(6.1		)	—			(0.2		)	3.3
Corporate	801.5		364.8		(12.8		)	41.6		(10.9		)	—			(81.9		)	1,102.3
CMBS	19.3		19.3		(0.7		)	—		(1.5		)	(0.2		)	(4.3		)	31.9
RMBS	222.6		1.3		(28.9		)	5.1		—			(0.4		)	(23.8		)	175.9
CDO/CLO	56.8		36.6		(6.6		)	—		—			(0.3		)	(15.6		)	70.9
Other asset-backed	80.1		13.4		(6.0		)	—		—			—			(5.2		)	82.3
Total available-for-sale debt securities	1,330.3		527.5		(60.8		)	48.3		(18.5		)	(0.9		)	(166.7		)	1,659.2
Related party reinsurance derivative asset	—		—		—			—		—			—			—			—
Fair value investments	22.7		21.1		(3.8		)	—		—			(4.4		)	—			35.6
Total assets	$	1,353.0	$	548.6	$	(64.6	)	$	48.3	$	(18.5	)	$	(5.3	)	$	(166.7	)	$	1,694.8

———————


[1]	Reflected in realized investment gains and losses for all assets except fair value investments which are included in net investment income.


[2]	Includes securities whose underlying collateral is an obligation of a U.S. government entity.


9.	Fair Value of Financial Instruments (continued)



Level 3 Financial Assets:	As of
($ in millions)	December 31, 2012
	Balance, beginning of period		Purchases		Sales			Transfers into Level 3		Transfers out of Level 3			Realized and unrealized gains (losses) included in income [1]			Unrealized gains (losses) included in OCI			Total




Assets
Available-for-sale debt securities
U.S. government and agency [2]	$	31.7	$	3.2	$	(6.7	)	$	—	$	—		$	—		$	(2.3	)	$	25.9
State and political subdivision	48.7		41.9		(0.8		)	12.9		—			—			13.4			116.1
Foreign government	3.1		3.5		—			—		—			—			1.4			8.0
Corporate	513.8		297.1		(16.2		)	21.0		(14.2		)	—			—			801.5
CMBS	35.4		—		(0.6		)	1.1		(17.1		)	—			0.5			19.3
RMBS	268.0		1.6		(38.9		)	—		—			2.0			(10.1		)	222.6
CDO/CLO	62.5		2.8		(5.3		)	—		—			(0.3		)	(2.9		)	56.8
Other asset-backed	81.2		9.5		(7.6		)	—		(1.8		)	—			(1.2		)	80.1
Total available-for-sale debt securities	1,044.4		359.6		(76.1		)	35.0		(33.1		)	1.7			(1.2		)	1,330.3
Related party reinsurance derivative asset	3.5		—		—			—		—			(3.5		)	—			—
Fair value investments	27.5		5.7		(11.5		)	—		—			1.0			—			22.7
Total assets	$	1,075.4	$	365.3	$	(87.6	)	$	35.0	$	(33.1	)	$	(0.8	)	$	(1.2	)	$	1,353.0

———————


[1]	Reflected in realized investment gains and losses for all assets except fair value investments which are included in net investment income.


[2]	Includes securities whose underlying collateral is an obligation of a U.S. government entity.



Level 3 Financial Liabilities:	Embedded Derivatives
($ in millions)	Years Ended December 31,
	2013			2012

Balance, beginning of period	$	79.5		$	82.3
Net purchases/(sales)	12.9			8.4
Transfers into Level 3	—			—
Transfers out of Level 3	—			—
Realized (gains) losses [1]	(17.6		)	(11.2		)
Balance, end of period	$	74.8		$	79.5

———————


[1]	Realized gains and losses are included in net realized investment gains on the statements of income and comprehensive income.

Significant unobservable inputs used in the fair value measurement of Level 3 assets are yield, prepayment rate, default rate, recovery rate and reinvestment spread. Keeping other inputs unchanged, an increase in yield, default rate or prepayment rate would decrease the fair value of the asset while an increase in recovery rate, or reinvestment spread would result in an increase to the fair value of the asset. Yields are a function of the underlying U.S. Treasury rates and asset spreads, and changes in default and recovery rates are dependent on overall market conditions.


9.	Fair Value of Financial Instruments (continued)

The following tables present quantitative estimates about unobservable inputs used in the fair value measurement of significant categories of internally priced assets.



Level 3 Assets: [1]	As of
($ in millions)	December 31, 2013
	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)

U.S. government and agency	$	58.8	Discounted cash flow	Yield	1.07%-5.00% (3.18%)
State and political subdivision	$	45.4	Discounted cash flow	Yield	2.44%-5.79% (3.88%)
Corporate	$	874.1	Discounted cash flow	Yield	1.06%-6.75% (3.81%)
Other asset-backed	$	11.3	Discounted cash flow	Yield	2.10%-3.41% (2.30%)
			Discounted cash flow	Prepayment rate	2%
				Default rate	2.53% for 48 mos then .37% thereafter
				Recovery rate	10% (TRUPS)
Fair value investments	$	0.8	Discounted cash flow	Default rate	0.25%
				Recovery rate	45%

———————


[1]	Excludes Level 3 assets which are valued based upon non-binding independent third-party valuations or third-party price information for which unobservable inputs are not reasonably available to us.



Level 3 Assets: [1]	As of
($ in millions)	December 31, 2012
	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)

U.S. government and agency	$	25.9	Discounted cash flow	Yield	1.46%-3.29% (2.57%)
State and political subdivision	$	58.0	Discounted cash flow	Yield	1.94%-3.53% (2.94%)
Corporate	$	649.6	Discounted cash flow	Yield	1.47%-6.33% (3.01%)
CDO/CLO	$	3.4	Discounted cash flow	Prepayment rate	20% (CLOs)
				Default rate	2.5% (CLOs)
				Recovery rate	65% (Loans), 35% (High yield bonds), 45% (Investment grade bonds)
				Reinvestment spread	3 mo LIBOR + 400bps (CLOs)
Other asset-backed	$	2.8	Discounted cash flow	Yield	2.61%-9.50% (4.97%)
			Discounted cash flow	Prepayment rate	2%
				Default rate	2.53% for 48 mos then .33% thereafter
				Recovery rate	10% (TRUPS)
Fair value investments	$	0.8	Discounted cash flow	Default rate	0.24%
				Recovery rate	45%

———————


[1]	Excludes Level 3 assets which are valued based upon non-binding independent third-party valuations or third-party price information for which unobservable inputs are not reasonably available to us.

Significant unobservable inputs used in the fair value measurement of variable annuity GMAB and GMWB type liabilities are equity volatility, swap curve, mortality and lapse rates and an adjustment for non-performance risk. Keeping other inputs unchanged, an increase in the equity volatility would increase the fair value of the liability while an increase in the swap curve or CSA would result in a decrease to the fair value of the liability. The impact of changes in mortality and lapse rates are dependent on overall market conditions. The fair value of fixed indexed annuity and indexed universal life embedded derivative related to index credits is calculated using the swap curve, future option budget, mortality and lapse rates, as well as an adjustment for non-performance risk. Keeping other inputs unchanged, an increase in any of these significant unobservable inputs would result in a decrease of the fixed indexed annuity embedded derivative liability.


9.	Fair Value of Financial Instruments (continued)

The following tables present quantitative estimates about unobservable inputs used in the fair value measurement of internally priced liabilities.



Level 3 Liabilities:	As of
($ in millions)	December 31, 2013
	Fair Value			Valuation Technique(s)	Unobservable Input	Range

Embedded derivatives (FIA)	$	78.9		Budget method	Swap curve	0.19% - 3.79%
					Mortality rate	103% or 97% 2012 IAM basic table with scale G2
					Lapse rate	0.02% - 47.15%
					CSA	3.23%
Embedded derivatives (GMAB / GMWB)	$	(4.1	)	Risk neutral stochastic valuation methodology	Volatility surface	10.85% - 46.33%
					Swap curve	0.15% - 4.15%
					Mortality rate	105% 2012 IAM basic table with scale G2
					Lapse rate	0.00% - 40.00%
					CSA	3.23%



Level 3 Liabilities:	As of
($ in millions)	December 31, 2012
	Fair Value		Valuation Technique(s)	Unobservable Input	Range

Embedded derivatives (FIA)	$	51.2	Budget method	Swap curve	0.21% - 2.50%
				Mortality rate	75% of A2000 basic table
				Lapse rate	1.00% - 35.00%
				CSA	4.47%
Embedded derivatives (GMAB / GMWB)	$	28.3	Risk neutral stochastic valuation methodology	Volatility surface	11.67% - 50.83%
				Swap curve	0.36% - 3.17%
				Mortality rate	75% of A2000 basic table
				Lapse rate	0.00% - 60.00%
				CSA	4.47%



Level 3 Assets and Liabilities by Pricing Source:	As of
($ in millions)	December 31, 2013
	Internal [1]		External [2]		Total
Assets
Available-for-sale debt securities
U.S. government and agency [3]	$	58.8	$	—	$	58.8
State and political subdivision	45.4		88.4		133.8
Foreign government	—		3.3		3.3
Corporate	874.1		228.2		1,102.3
CMBS	—		31.9		31.9
RMBS	—		175.9		175.9
CDO/CLO	—		70.9		70.9
Other asset-backed	11.3		71.0		82.3
Total available-for-sale debt securities	989.6		669.6		1,659.2
Related party reinsurance derivative asset	—		—		—
Fair value investments	0.8		34.8		35.6
Total assets	$	990.4	$	704.4	$	1,694.8
Liabilities
Embedded derivatives	$	74.8	$	—	$	74.8
Total liabilities	$	74.8	$	—	$	74.8

———————


[1]	Represents valuations reflecting both internally-derived and market inputs, as well as third-party information or quotes.


[2]	Represents unadjusted prices from independent pricing services, third-party financial statements and independent indicative broker quotes where pricing inputs are not readily available.


[3]	Includes securities whose underlying collateral is an obligation of a U.S. government entity.



Level 3 Assets and Liabilities by Pricing Source:	As of
($ in millions)	December 31, 2012
	Internal [1]		External [2]		Total
Assets
Available-for-sale debt securities
U.S. government and agency [3]	$	25.9	$	—	$	25.9
State and political subdivision	58.0		58.1		116.1
Foreign government	—		8.0		8.0
Corporate	649.6		151.9		801.5
CMBS	—		19.3		19.3
RMBS	—		222.6		222.6
CDO/CLO	3.4		53.4		56.8
Other asset-backed	2.8		77.3		80.1
Total available-for-sale debt securities	739.7		590.6		1,330.3
Related party reinsurance derivative asset	—		—		—
Fair value investments	0.8		21.9		22.7
Total assets	$	740.5	$	612.5	$	1,353.0
Liabilities
Embedded derivatives	$	79.5	$	—	$	79.5
Total liabilities	$	79.5	$	—	$	79.5

———————


[1]	Represents valuations reflecting both internally-derived and market inputs, as well as third-party information or quotes.


[2]	Represents unadjusted prices from independent pricing services, third-party financial statements and independent indicative broker quotes where pricing inputs are not readily available.


[3]	Includes securities whose underlying collateral is an obligation of a U.S. government entity.

Financial instruments not carried at fair value

The Company is required by U.S. GAAP to disclose the fair value of certain financial instruments including those that are not carried at fair value. The following table discloses the Company’s financial instruments where the carrying amounts and fair values differ:



Carrying Amounts and Fair Values		As of December 31,
of Financial Instruments:	Fair Value	2013				2012
($ in millions)	Hierarchy	Carrying		Fair		Carrying		Fair
	Level	Value		Value		Value		Value
Financial assets:
Policy loans	Level 3	$	66.1	$	65.6	$	61.0	$	60.6
Cash and cash equivalents	Level 1	$	181.0	$	181.0	$	83.1	$	83.1
Financial liabilities:
Investment contracts	Level 3	$	2,762.8	$	2,763.8	$	2,349.8	$	2,355.4
Surplus notes	Level 3	$	30.0	$	30.0	$	—	$	—

Fair value of policy loans

The fair value of fixed rate policy loans is calculated using a discounted cash flow model based upon current U.S. Treasury rates and historical loan repayment patterns. For floating rate policy loans the fair value is the amount due, excluding interest, as of the reporting date.

Fair value of investment contracts

We determine the fair value of guaranteed interest contracts by using a discount rate based upon the appropriate U.S. Treasury rate to calculate the present value of projected contractual liability payments through final maturity. We determine the fair value of deferred annuities and supplementary contracts without life contingencies with an interest guarantee of one year or less at the amount of the policy reserve. In determining the fair value of deferred annuities and supplementary contracts without life contingencies with interest guarantees greater than one year, we use a discount rate based upon the appropriate U.S. Treasury rate to calculate the present value of the projected account value of the policy at the end of the current guarantee period.

Deposit type funds, including pension deposit administration contracts, dividend accumulations and other funds left on deposit not involving life contingencies, have interest guarantees of less than one year for which interest credited is closely tied to rates earned on owned assets. For these liabilities, we assume fair value to be equal to the stated liability balances.

The fair value of these investment contracts are categorized as Level 3.

Indebtedness

The fair value of surplus notes is determined with reference to the fair value of Phoenix’s senior unsecured bonds including consideration of the different features in the two securities. See Note 11 to these financial statements for additional information.

- 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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