Fair Value Measurements

6 Months Ended

Jun. 30, 2012

Fair Value Measurements

Fair Value Measurements

9.  Fair Value Measurements

We use fair value measurements to record fair value of certain assets and liabilities and to estimate fair value of financial instruments not recorded at fair value but required to be disclosed at fair value. Certain financial instruments, particularly policyholder liabilities other than investment-type insurance contracts, are excluded from these fair value disclosure requirements.

Valuation Hierarchy

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 (an exit price). The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels.

·Level 1 — Fair values are based on unadjusted quoted prices in active markets for identical assets or liabilities. Our Level 1 assets and liabilities primarily include exchange traded equity securities, mutual funds and U.S. Treasury bonds.

·Level 2 — Fair values are based on inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. Our Level 2 assets and liabilities primarily include fixed maturities (including public and private bonds), equity securities, over-the-counter derivatives and other investments for which public quotations are not available but that are priced by third-party pricing services or internal models using substantially all observable inputs.

·Level 3 — Fair values are based on significant unobservable inputs for the asset or liability. Our Level 3 assets and liabilities include certain fixed maturities, private equity securities, real estate and commercial mortgage loan investments of our separate accounts, commercial mortgage loan investments and obligations of consolidated VIEs for which the fair value option was elected, complex derivatives and embedded derivatives that must be priced using broker quotes or other valuation methods that utilize at least one significant unobservable input.

Determination of Fair Value

The following discussion describes the valuation methodologies and inputs used for assets and liabilities measured at fair value on a recurring basis or disclosed at fair value. The techniques utilized in estimating the fair values of financial instruments are reliant on the assumptions used. Care should be exercised in deriving conclusions about our business, its value or financial position based on the fair value information of financial instruments presented below.

Fair value estimates are made based on available market information and judgments about the financial instrument at a specific point in time. Such estimates do not consider the tax impact of the realization of unrealized gains or losses. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial instrument. We validate prices through an investment analyst review process, which includes validation through direct interaction with external sources, review of recent trade activity or use of internal models. In circumstances where broker quotes are used to value an instrument, we generally receive one non-binding quote. Broker quotes are validated through an investment analyst review process, which includes validation through direct interaction with external sources and use of internal models or other relevant information. We did not make any significant changes to our valuation processes during 2012.

Fixed Maturities

Fixed maturities include bonds, redeemable preferred stock, asset-backed securities and certain nonredeemable preferred stock. When available, the fair value of fixed maturities is based on quoted prices of identical assets in active markets. These are reflected in Level 1 and primarily include U.S. Treasury bonds and actively traded redeemable corporate preferred securities.

When quoted prices of identical assets in active markets are not available, our first priority is to obtain prices from third party pricing vendors. We have regular interaction with these vendors to ensure we understand their pricing methodologies and to confirm they are utilizing observable market information. Their methodologies vary by asset class and include inputs such as estimated cash flows, benchmark yields, reported trades, broker quotes, credit quality, industry events and economic events. Fixed maturities with validated prices from pricing services, which includes the majority of our public fixed maturities in all asset classes, are generally reflected in Level 2. Also included in Level 2 are corporate bonds where quoted market prices are not available, for which an internal model using substantially all observable inputs or a matrix pricing valuation approach is used. In the matrix approach, securities are grouped into pricing categories that vary by sector, rating and average life. Each pricing category is assigned a risk spread based on studies of observable public market data from the investment professionals assigned to specific security classes. The expected cash flows of the security are then discounted back at the current Treasury curve plus the appropriate risk spread. Although the matrix valuation approach provides a fair valuation of each pricing category, the valuation of an individual security within each pricing category may actually be impacted by company specific factors.

If we are unable to price a fixed maturity security using prices from third party pricing vendors or other sources specific to the asset class, we may obtain a broker quote or utilize an internal pricing model specific to the asset utilizing relevant market information, to the extent available and where at least one significant unobservable input is utilized, which are reflected in Level 3 and can include fixed maturities across all asset classes. As of June 30, 2012, less than 1% of our fixed maturities were valued using internal pricing models, which were classified as Level 3 assets accordingly.

The primary inputs, by asset class, for valuations of the majority of our Level 2 investments from third party pricing vendors or our internal pricing valuation approach are described below.

U.S. Government and Agencies/Non-U.S. Governments. Inputs include recently executed market transactions, interest rate yield curves, maturity dates, market price quotations and credit spreads relating to similar instruments.

State and Political Subdivisions. Inputs include Municipal Securities Rulemaking Board reported trades, U.S. Treasury and other benchmark curves, material event notices, new issue data and obligor credit ratings.

Corporate. Inputs include recently executed transactions, market price quotations, benchmark yields, issuer spreads and observations of equity and credit default swap curves related to the issuer. For private placement corporate securities valued through the matrix valuation approach inputs include the current U.S. Treasury curve and risk spreads based on sector, rating and average life of the issuance.

RMBS, CMBS, Collateralized Debt Obligations and Other Debt Obligations. Inputs include cash flows, priority of the tranche in the capital structure, expected time to maturity for the specific tranche, reinvestment period remaining and performance of the underlying collateral including prepayments, defaults, deferrals, loss severity of defaulted collateral and, for RMBS, prepayment speed assumptions. Other inputs include market indices and recently executed market transactions.

Equity Securities

Equity securities include mutual funds, common stock and nonredeemable preferred stock. Fair values of equity securities are determined using quoted prices in active markets for identical assets when available, which are reflected in Level 1. When quoted prices are not available, we may utilize internal valuation methodologies appropriate for the specific asset that use observable inputs such as underlying share prices, which are reflected in Level 2. Fair values might also be determined using broker quotes or through the use of internal models or analysis that incorporate significant assumptions deemed appropriate given the circumstances and consistent with what other market participants would use when pricing such securities, which are reflected in Level 3.

Derivatives

The fair values of exchange-traded derivatives are determined through quoted market prices, which are reflected in Level 1. Exchange-traded derivatives include interest rate and equity futures that are settled daily such that their fair value is not reflected in the consolidated statements of financial position. The fair values of over-the-counter derivative instruments are determined using either pricing valuation models that utilize market observable inputs or broker quotes. The majority of our over-the-counter derivatives are valued with models that use market observable inputs, which are reflected in Level 2. Significant inputs include contractual terms, interest rates, currency exchange rates, credit spread curves, equity prices, and volatilities. These valuation models consider projected discounted cash flows, relevant swap curves, and appropriate implied volatilities. Certain over-the-counter derivatives utilize unobservable market data, primarily independent broker quotes that are nonbinding quotes based on models that do not reflect the result of market transactions, which are reflected in Level 3.

Our derivative contracts are generally documented under ISDA Master Agreements, which provide for legally enforceable set-off and close-out netting of exposures to specific counterparties. Collateral arrangements are bilateral and based on current ratings of each entity. We utilize the LIBOR interest rate curve to value our positions, which includes a credit spread. This credit spread incorporates an appropriate level of nonperformance risk into our valuations given the current ratings of our counterparties, as well as the collateral agreements in place. Counterparty credit risk is routinely monitored to ensure our adjustment for non-performance risk is appropriate.

Interest Rate Contracts. We use discounted cash flow valuation techniques to determine the fair value of interest rate swaps using observable swap curves as the inputs. These are reflected in Level 2. In addition, we have a limited number of complex inflation-linked interest rate swaps, interest rate collars and swaptions that are valued using broker quotes. These are reflected in Level 3.

Foreign Exchange Contracts. We use discounted cash flow valuation techniques that utilize observable swap curves and exchange rates as the inputs to determine the fair value of foreign currency swaps. These are reflected in Level 2. In addition, we have a limited number of non-standard currency swaps that are valued using broker quotes. These are reflected within Level 3. Currency forwards are valued using observable market inputs, including forward currency exchange rates. These are reflected in Level 2.

Equity Contracts. We use an option pricing model using observable implied volatilities, dividend yields, index prices and swap curves as the inputs to determine the fair value of equity options. These are reflected in Level 2.

Credit Contracts. We use either the ISDA Credit Default Swap Standard discounted cash flow model that utilizes observable default probabilities and recovery rates as inputs or broker prices to determine the fair value of credit default swaps. These are reflected in Level 3. In addition, we have a limited number of total return swaps that are valued based on the observable quoted price of underlying equity indices. These are reflected in Level 2.

Other Investments

Other investments reported at fair value primarily include seed money investments, for which the fair value is determined using the net asset value of the fund. The net asset value of the fund represents the price at which we feel we would be able to initiate a transaction. Seed money investments in mutual funds for which the net asset value is published are reflected in Level 1. Seed money investments in mutual funds or other investment funds in markets that do not have a published net asset value are reflected in Level 2.

Other investments reported at fair value also include commercial mortgage loans of consolidated VIEs for which the fair value option was elected, which are reflected in Level 3. Fair value of these commercial mortgage loans is computed utilizing a discount rate based on the current market. The market discount rate is then adjusted based on various factors that differentiate it from our pool of loans.

Cash and Cash Equivalents

Certain cash equivalents are reported at fair value on a recurring basis and include money market instruments and other short-term investments with maturities of less than three months. Fair values of these cash equivalents may be determined using public quotations, when available, which are reflected in Level 1. When public quotations are not available, because of the highly liquid nature of these assets, carrying amounts may be used to approximate fair values, which are reflected in Level 2.

Separate Account Assets

Separate account assets include equity securities, debt securities and derivative instruments, for which fair values are determined as previously described, and are reflected in Level 1, Level 2 and Level 3. Separate account assets also include commercial mortgage loans, for which the fair value is estimated by discounting the expected total cash flows using market rates that are applicable to the yield, credit quality and maturity of the loans. The market clearing spreads vary based on mortgage type, weighted average life, rating and liquidity. These are reflected in Level 3. Finally, separate account assets include real estate, for which the fair value is estimated using discounted cash flow valuation models that utilize public real estate market data inputs such as transaction prices, market rents, vacancy levels, leasing absorption, market cap rates and discount rates. In addition, each property is appraised annually by an independent appraiser. The real estate within the separate accounts is reflected in Level 3.

Investment-Type Insurance Contracts

Certain annuity contracts and other investment-type insurance contracts include embedded derivatives that have been bifurcated from the host contract and that are measured at fair value on a recurring basis, which are reflected in Level 3. The key assumptions for calculating the fair value of the embedded derivative liabilities are market assumptions (such as equity market returns, interest rate levels, market volatility and correlations) and policyholder behavior assumptions (such as lapse, mortality, utilization and withdrawal patterns). They are valued using a combination of historical data and actuarial judgment. Stochastic models are used to value the embedded derivatives that incorporate a spread reflecting our own creditworthiness and risk margins.

The assumption for our own non-performance risk for investment-type insurance contracts and any embedded derivatives bifurcated from certain annuity and investment-type insurance contracts is based on the current market credit spreads for debt-like instruments that we have issued and are available in the market.

Other Liabilities

Certain obligations reported in other liabilities include embedded derivatives to deliver underlying securities of structured investments to third parties. The fair value of the embedded derivatives is calculated based on the value of the underlying securities that are valued based on prices obtained from third party pricing vendors as utilized and described in our discussion of how fair value is determined for fixed maturities, which are reflected in Level 2.

Additionally, obligations of consolidated VIEs for which the fair value option was elected are included in other liabilities. These obligations are valued either based on prices obtained from third party pricing vendors as utilized and described in our discussion of how fair value is determined for fixed maturities, which are reflected in Level 2, or broker quotes, which are reflected in Level 3.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below.

	As of June 30, 2012
	Assets/
	(liabilities)
	measured at			Fair value hierarchy level
	fair value			Level 1		Level 2			Level 3
	(in millions)
Assets
Fixed maturities, available-for-sale:
U.S. government and agencies	$	824.1		$	103.1	$	721.0		$	—
Non-U.S. governments	1,159.2			—		1,119.6			39.6
States and political subdivisions	2,869.4			—		2,869.4			—
Corporate	34,051.5			92.3		33,759.6			199.6
Residential mortgage-backed securities	3,298.2			—		3,298.2			—
Commercial mortgage-backed securities	3,744.9			—		3,744.9			—
Collateralized debt obligations	366.1			—		288.5			77.6
Other debt obligations	3,480.2			—		3,475.1			5.1
Total fixed maturities, available-for-sale	49,793.6			195.4		49,276.3			321.9
Fixed maturities, trading	776.5			127.5		463.3			185.7
Equity securities, available-for-sale	139.0			61.2		60.7			17.1
Equity securities, trading	224.3			97.3		127.0			—
Derivative assets (1)	1,136.3			—		1,077.5			58.8
Other investments (2)	218.8			21.1		114.1			83.6
Cash equivalents (3)	854.7			7.3		847.4			—
Sub-total excluding separate account assets	53,143.2			509.8		51,966.3			667.1
Separate account assets	75,950.5			49,922.3		21,587.7			4,440.5
Total assets	$	129,093.7		$	50,432.1	$	73,554.0		$	5,107.6
Liabilities
Investments-type insurance contracts (4)	$	(179.4	)	$	—	$	—		$	(179.4	)
Derivative liabilities (1)	(1,433.6		)	—		(1,286.5		)	(147.1		)
Other liabilities (4)	(218.0		)	—		(184.4		)	(33.6		)
Total liabilities	$	(1,831.0	)	$	—	$	(1,470.9	)	$	(360.1	)
Net assets (liabilities)	$	127,262.7		$	50,432.1	$	72,083.1		$	4,747.5

	As of December 31, 2011
	Assets/
	(liabilities)
	measured at			Fair value hierarchy level
	fair value			Level 1		Level 2			Level 3
	(in millions)
Assets
Fixed maturities, available-for-sale:
U.S. government and agencies	$	805.1		$	57.5	$	747.6		$	—
Non-U.S. governments	1,096.7			—		1,073.8			22.9
States and political subdivisions	2,882.7			—		2,882.7			—
Corporate	33,556.5			87.5		33,172.0			297.0
Residential mortgage-backed securities	3,343.0			—		3,343.0			—
Commercial mortgage-backed securities	3,413.7			—		3,413.7			—
Collateralized debt obligations	338.8			—		236.3			102.5
Other debt obligations	3,570.2			—		3,542.9			27.3
Total fixed maturities, available-for-sale	49,006.7			145.0		48,412.0			449.7
Fixed maturities, trading	971.7			199.6		551.3			220.8
Equity securities, available-for-sale	77.1			56.5		2.6			18.0
Equity securities, trading	404.8			291.6		113.2			—
Derivative assets (1)	1,171.1			—		1,110.9			60.2
Other investments (2)	213.3			17.6		98.2			97.5
Cash equivalents (3)	1,659.8			677.3		982.5			—
Sub-total excluding separate account assets	53,504.5			1,387.6		51,270.7			846.2
Separate account assets	71,364.4			49,477.1		17,689.1			4,198.2
Total assets	$	124,868.9		$	50,864.7	$	68,959.8		$	5,044.4
Liabilities
Investments-type insurance contracts (4)	$	(195.8	)	$	—	$	—		$	(195.8	)
Derivative liabilities (1)	(1,527.3		)	—		(1,350.2		)	(177.1		)
Other liabilities (4)	(225.3		)	—		(201.1		)	(24.2		)
Total liabilities	$	(1,948.4	)	$	—	$	(1,551.3	)	$	(397.1	)
Net assets (liabilities)	$	122,920.5		$	50,864.7	$	67,408.5		$	4,647.3

(1)Within the consolidated statements of financial position, derivative assets are reported with other investments and derivative liabilities are reported with other liabilities. Refer to Note 4, Derivative Financial Instruments, for further information on fair value by class of derivative instruments. Our derivatives are primarily Level 2, with the exception of certain credit default swaps and other swaps that are Level 3.

(2)Primarily includes seed money investments and commercial mortgage loans of consolidated VIEs reported at fair value.

(3)Includes money market instruments and short-term investments with a maturity date of three months or less when purchased.

(4)Includes bifurcated embedded derivatives that are reported at fair value within the same line item in the consolidated statements of financial position in which the host contract is reported. Other liabilities also include obligations of consolidated VIEs reported at fair value.

Changes in Level 3 Fair Value Measurements

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

	For the three months ended June 30, 2012																				Changes in
	Beginning									Net								Ending			unrealized
	asset/			Total realized/unrealized						purchases,								asset/			gains (losses)
	(liability)			gains (losses)						sales,								(liability)			included in net
	balance						Included in			issuances								balance			income
	as of			Included in			other			and			Transfers		Transfers			as of			relating to
	March 31,			net income			comprehensive			settlements			into		out of			June 30,			positions still
	2012			(1)			income			(4)			Level 3		Level 3			2012			held (1)
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	36.8		$	—		$	0.3		$	2.5		$	—	$	—		$	39.6		$	—
Corporate	202.7			(2.8		)	7.0			(14.9		)	22.6		(15.0		)	199.6			(0.1		)
Collateralized debt obligations	79.0			(0.1		)	(6.1		)	4.8			—		—			77.6			(0.1		)
Other debt obligations	6.1			(1.5		)	0.6			(0.1		)	—		—			5.1			(1.6		)
Total fixed maturities, available-for-sale	324.6			(4.4		)	1.8			(7.7		)	22.6		(15.0		)	321.9			(1.8		)
Fixed maturities, trading	206.2			(1.1		)	(4.0		)	(24.9		)	9.5		—			185.7			(1.1		)
Equity securities, available-for-sale	17.5			—			(0.4		)	—			—		—			17.1			—
Derivative assets	47.3			10.8			—			0.7			—		—			58.8			11.8
Other investments	89.8			0.2			—			(6.4		)	—		—			83.6			0.2
Separate account assets (2)	4,280.3			126.3			0.2			32.5			1.3		(0.1		)	4,440.5			126.9
Liabilities
Investments-type insurance contracts	(129.0		)	(46.4		)	—			(4.0		)	—		—			(179.4		)	(47.6		)
Derivative liabilities	(142.3		)	(12.6		)	(1.1		)	8.9			—		—			(147.1		)	(13.4		)
Other liabilities (3)	(40.7		)	7.1			—			—			—		—			(33.6		)	7.2

	For the three months ended June 30, 2011																				Changes in
	Beginning									Net								Ending			unrealized
	asset/			Total realized/unrealized						purchases,								asset/			gains (losses)
	(liability)			gains (losses)						sales,								(liability)			included in net
	balance			Included in			Included in			issuances								balance			income
	as of			net			other			and			Transfers		Transfers			as of			relating to
	March 31,			income			comprehensive			settlements			into		out of			June 30,			positions still
	2011			(1)			income			(4)			Level 3		Level 3			2011			held (1)
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	24.5		$	—		$	0.2		$	(1.4	)	$	—	$	—		$	23.3		$	—
Corporate	545.2			(1.0		)	(4.6		)	(23.4		)	18.4		—			534.6			(1.1		)
Commercial mortgage-backed securities	19.0			—			(0.3		)	(0.3		)	—		(7.1		)	11.3			—
Collateralized debt obligations	111.1			(0.8		)	0.6			—			—		—			110.9			(0.7		)
Other debt obligations	88.5			—			0.4			(28.9		)	8.2		(31.1		)	37.1			—
Total fixed maturities, available-for-sale	788.3			(1.8		)	(3.7		)	(54.0		)	26.6		(38.2		)	717.2			(1.8		)
Fixed maturities, trading	269.6			(0.3		)	—			(28.4		)	—		(19.4		)	221.5			(0.4		)
Equity securities, available-for-sale	48.2			(4.5		)	4.7			—			—		—			48.4			(4.5		)
Derivative assets	39.4			5.7			(0.1		)	(11.3		)	—		—			33.7			5.7
Other investments	122.2			—			—			(14.8		)	—		—			107.4			—
Separate account assets (2)	3,799.5			161.9			0.2			(52.3		)	—		(4.9		)	3,904.4			161.9
Liabilities
Investment-type insurance contracts	(4.2		)	(51.9		)	—			6.9			—		—			(49.2		)	(53.5		)
Derivative liabilities	(185.0		)	5.5			0.4			0.3			—		—			(178.8		)	6.3
Other liabilities (3)	(158.9		)	(6.1		)	(9.3		)	(4.5		)	—		—			(178.8		)	(6.1		)

	For the six months ended June 30, 2012																				Changes in
	Beginning																	Ending			unrealized
	asset/			Total realized/unrealized						Purchases,								asset/			gains (losses)
	(liability)			gains (losses)						sales,								(liability)			included in
	balance			Included			Included in			issuances								balance			net income
	as of			in net			other			and			Transfers		Transfers			as of			relating to
	December 31,			income			comprehensive			settlements			into		out of			June 30,			positions still
	2011			(1)			income			(4)			Level 3		Level 3			2012			held (1)
	(in millions)
Assets
Fixed maturities, available-for-sale
Non-U.S. governments	$	22.9		$	—		$	—		$	2.2		$	14.5	$	—		$	39.6		$	—
Corporate	297.0			(5.4		)	9.0			(31.5		)	26.0		(95.5		)	199.6			(2.7		)
Collateralized debt obligations	102.5			(0.2		)	(3.0		)	5.3			—		(27.0		)	77.6			(0.2		)
Other debt obligations	27.3			(2.2		)	(0.7		)	(25.3		)	6.0		—			5.1			(2.2		)
Total fixed maturities, available-for-sale	449.7			(7.8		)	5.3			(49.3		)	46.5		(122.5		)	321.9			(5.1		)
Fixed maturities, trading	220.8			(2.8		)	1.3			(43.1		)	9.5		—			185.7			(3.6		)
Equity securities, available-for-sale	18.0			—			(0.9		)	—			—		—			17.1			—
Derivative assets	60.2			(3.8		)	—			2.4			—		—			58.8			(2.8		)
Other investments	97.5			(0.7		)	—			(13.2		)	—		—			83.6			(0.7		)
Separate account assets (2)	4,198.2			212.4			0.3			29.8			1.6		(1.8		)	4,440.5			203.6
Liabilities
Investments-type insurance contracts	(195.8		)	22.4			—			(6.0		)	—		—			(179.4		)	21.2
Derivative liabilities	(177.1		)	12.8			0.2			17.0			—		—			(147.1		)	13.7
Other liabilities (3)	(24.2		)	(9.4		)	—			—			—		—			(33.6		)	(9.4		)

	For the six months ended June 30, 2011																				Changes in
	Beginning																	Ending			unrealized
	asset/			Total realized/unrealized						Purchases,								asset/			gains (losses)
	(liability)			gains (losses)						sales,								(liability)			included in
	balance			Included			Included in			issuances								balance			net income
	as of			in net			other			and			Transfers		Transfers			as of			relating to
	December 31,			income			comprehensive			settlements			into		out of			June 30,			positions still
	2010			(1)			income			(4)			Level 3		Level 3			2011			held (1)
	(in millions)
Assets
Fixed maturities, available-for-sale
Non-U.S. governments	$	24.5		$	—		$	0.2		$	(1.4	)	$	—	$	—		$	23.3		$	—
Corporate	552.1			(8.9		)	0.1			(34.6		)	45.9		(20.0		)	534.6			(2.3		)
Commercial mortgage-backed securities	16.2			—			2.3			(0.1		)	—		(7.1		)	11.3			—
Collateralized debt obligations	109.3			(11.1		)	15.3			(1.3		)	—		(1.3		)	110.9			(0.7		)
Other debt obligations	88.8			—			0.9			(30.1		)	8.6		(31.1		)	37.1			—
Total fixed maturities, available-for-sale	790.9			(20.0		)	18.8			(67.5		)	54.5		(59.5		)	717.2			(3.0		)
Fixed maturities, trading	269.1			(4.4		)	—			(23.8		)	—		(19.4		)	221.5			(3.6		)
Equity securities, available-for-sale	43.2			(4.5		)	9.7			—			—		—			48.4			(4.5		)
Derivative assets	33.3			12.0			(0.2		)	(11.4		)	—		—			33.7			10.7
Other investments	128.3			(2.1		)	—			(18.8		)	—		—			107.4			(2.1		)
Separate account assets (2)	3,771.5			235.6			(0.1		)	(69.6		)	3.1		(36.1		)	3,904.4			231.1
Liabilities
Investments-type insurance contracts	(6.6		)	(56.4		)	—			13.8			—		—			(49.2		)	(56.2		)
Derivative liabilities	(181.5		)	6.9			2.4			(6.6		)	—		—			(178.8		)	8.8
Other liabilities (3)	(156.8		)	(1.7		)	(9.1		)	(11.2		)	—		—			(178.8		)	(1.7		)

(1)Both realized gains (losses) and mark-to-market unrealized gains (losses) are generally reported in net realized capital gains (losses) within the consolidated statements of operations. Realized and unrealized gains (losses) on certain fixed maturities, trading and certain derivatives used in relation to certain trading portfolios are reported in net investment income within the consolidated statements of operation.

(2)Gains and losses for separate account assets do not impact net income as the change in value of separate account assets is offset by a change in value of separate account liabilities. Foreign currency translation adjustments related to the Principal International segment separate account assets are recorded in AOCI and are offset by foreign currency translation adjustments of the corresponding separate account liabilities.

(3)Certain embedded derivatives reported in other liabilities are part of a cash flow hedge, with the effective portion of the unrealized gains (losses) recorded in AOCI.

(4)Gross purchases, sales, issuances and settlements were:

	For the three months ended June 30, 2012
													Net purchases,
													sales, issuances
	Purchases			Sales			Issuances			Settlements			and settlements
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	2.8		$	—		$	—		$	(0.3	)	$	2.5
Corporate	5.8			(20.0		)	—			(0.7		)	(14.9		)
Collateralized debt obligations	5.1			—			—			(0.3		)	4.8
Other debt obligations	—			—			—			(0.1		)	(0.1		)
Total fixed maturities, available-for-sale	13.7			(20.0		)	—			(1.4		)	(7.7		)
Fixed maturities, trading	—			—			—			(24.9		)	(24.9		)
Derivative assets	0.7			—			—			—			0.7
Other investments	—			—			—			(6.4		)	(6.4		)
Separate account assets	41.0			(28.7		)	(11.4		)	31.6			32.5
Liabilities
Investment-type insurance contracts	—			—			(4.8		)	0.8			(4.0		)
Derivative liabilities	(1.0		)	9.9			—			—			8.9

	For the three months ended June 30, 2011
												Net purchases,
												sales, issuances
	Purchases			Sales			Issuances		Settlements			and settlements
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	2.5		$	(3.9	)	$	—	$	—		$	(1.4	)
Corporate	0.8			—			—		(24.2		)	(23.4		)
Commercial mortgage-backed securities	—			—			—		(0.3		)	(0.3		)
Other debt obligations	—			—			—		(28.9		)	(28.9		)
Total fixed maturities, available-for-sale	3.3			(3.9		)	—		(53.4		)	(54.0		)
Fixed maturities, trading	—			(0.4		)	—		(28.0		)	(28.4		)
Derivative assets	0.8			(12.1		)	—		—			(11.3		)
Other investments	—			—			—		(14.8		)	(14.8		)
Separate account assets	38.2			(79.9		)	2.3		(12.9		)	(52.3		)
Liabilities
Investment-type insurance contracts	—			—			5.7		1.2			6.9
Derivative liabilities	(0.5		)	0.8			—		—			0.3
Other liabilities	—			—			—		(4.5		)	(4.5		)

	For the six months ended June 30, 2012
													Net purchases,
													sales, issuances
	Purchases			Sales			Issuances			Settlements			and settlements
	(in millions)
Assets
Fixed maturities, available-for-sale
Non-U.S. government	$	6.7		$	(3.9	)	$	—		$	(0.6	)	$	2.2
Corporate	18.1			(46.6		)	—			(3.0		)	(31.5		)
Collateralized debt obligations	5.1			—			—			0.2			5.3
Other debt obligations	—			—			—			(25.3		)	(25.3		)
Total fixed maturities, available-for-sale	29.9			(50.5		)	—			(28.7		)	(49.3		)
Fixed maturities, trading	—			(0.9		)	—			(42.2		)	(43.1		)
Derivative assets	3.2			(0.8		)	—			—			2.4
Other investments	—			—			—			(13.2		)	(13.2		)
Separate account assets	168.5			(119.0		)	(146.3		)	126.6			29.8
Liabilities
Investment-type insurance contracts	—			—			(8.1		)	2.1			(6.0		)
Derivative liabilities	(1.7		)	18.7			—			—			17.0

	For the six months ended June 30, 2011
												Net purchases,
												sales, issuances
	Purchases			Sales			Issuances		Settlements			and settlements
	(in millions)
Assets
Fixed maturities, available-for-sale
Non-U.S. government	$	2.5		$	(3.9	)	$	—	$	—		$	(1.4	)
Corporate	8.4			(16.5		)	—		(26.5		)	(34.6		)
Commercial mortgage-backed securities	—			—			—		(0.1		)	(0.1		)
Collateralized debt obligations	0.3			(0.4		)	—		(1.2		)	(1.3		)
Other debt obligations	—			—			—		(30.1		)	(30.1		)
Total fixed maturities, available-for-sale	11.2			(20.8		)	—		(57.9		)	(67.5		)
Fixed maturities, trading	10.0			(5.7		)	—		(28.1		)	(23.8		)
Derivative assets	0.8			(12.2		)	—		—			(11.4		)
Other investments	—			—			—		(18.8		)	(18.8		)
Separate account assets	73.4			(124.6		)	2.3		(20.7		)	(69.6		)
Liabilities
Investment-type insurance contracts	—			—			12.0		1.8			13.8
Derivative liabilities	(9.9		)	3.3			—		—			(6.6		)
Other liabilities	(2.1		)	—			—		(9.1		)	(11.2		)

Transfers

Transfers of assets and liabilities measured at fair value on a recurring basis between fair value hierarchy levels are summarized below.

	For the three months ended June 30, 2012
	Transfers out		Transfers out		Transfers out		Transfers out		Transfers out		Transfers out
	of Level 1 into		of Level 1 into		of Level 2 into		of Level 2 into		of Level 3 into		of Level 3 into
	Level 2		Level 3		Level 1		Level 3		Level 1		Level 2
	(in millions)
Assets
Fixed maturities, available-for-sale:
Corporate	$	—	$	—	$	—	$	22.6	$	—	$	15.0
Total fixed maturities, available-for-sale	—		—		—		22.6		—		15.0
Fixed maturities, trading	—		—		—		9.5		—		—
Separate account assets	3,222.8		—		—		1.3		—		0.1

	For the six months ended June 30, 2012
	Transfers out		Transfers out		Transfers out		Transfers out		Transfers out		Transfers out
	of Level 1 into		of Level 1 into		of Level 2 into		of Level 2 into		of Level 3 into		of Level 3 into
	Level 2		Level 3		Level 1		Level 3		Level 1		Level 2
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	—	$	—	$	—	$	14.5	$	—	$	—
Corporate	—		—		—		26.0		—		95.5
Collateralized debt obligations	—		—		—		—		—		27.0
Other debt obligations	—		—		—		6.0		—		—
Total fixed maturities, available-for-sale	—		—		—		46.5		—		122.5
Fixed maturities, trading	—		—		—		9.5		—		—
Separate account assets	3,222.8		0.3		—		1.3		—		1.8

Transfers between fair value hierarchy levels are recognized at the beginning of the reporting period.

During the three and six months ended June 30, 2011, $3,549.7 million and $3,552.0 million, respectively, of separate account assets transferred out of Level 1 into Level 2. Separate account assets transferred between Level 1 and Level 2 during the six months ended June 30, 2012 and during the three and six months ended June 30, 2011, primarily related to foreign equity securities. When these securities are valued at the local close price of the exchange where the assets traded, they are reflected in Level 1. When events materially affecting the value occur between the close of the local exchange and the New York Stock Exchange, we use adjusted prices determined by a third party pricing vendor to update the foreign market closing prices and the fair value is reflected in Level 2.

Assets transferred into Level 3 during the six months ended June 30, 2012 and 2011, primarily included those assets for which we are now unable to obtain pricing from a recognized third party pricing vendor as well as assets that were previously priced using a matrix valuation approach that may no longer be relevant when applied to asset-specific situations.

Assets transferred out of Level 3 during the six months ended June 30, 2012 and 2011, included those for which we are now able to obtain pricing from a recognized third party pricing vendor or from internal models using substantially all market observable information.

Quantitative Information about Level 3 Fair Value Measurements

The following table provides quantitative information about the significant unobservable inputs used for recurring fair value measurements categorized within Level 3, excluding assets and liabilities for which significant quantitative unobservable inputs are not developed internally, which primarily consists of those valued using broker quotes. Refer to “Assets and liabilities measured at fair value on a recurring basis” for a complete valuation hierarchy summary.

	As of June 30, 2012
	Assets /
	(liabilities)
	measured at		Valuation	Unobservable	Input/range of	Weighted
	fair value		technique(s)	input description	inputs	average
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	13.8	Discounted cash flow	Discount rate (1)	1.6%	1.6%
				Illiquidity premium	50 basis points (“bps”)	50bps
Corporate	64.7		Discounted cash flow	Discount rate (1)	2.1%-46.0%	12.0%
				Illiquidity premium	0bps-100bps	38bps
				Earnings before interest, taxes, depreciation and amortization multiple	4.5x-6.5x	5.5x
				Probability of default	0%-100%	7.5%
				Potential loss severity	0%-25%	1.9%
Collateralized debt obligations	36.2		Discounted cash flow	Discount rate (1)	1.8%-21.8%	14.6%
				Illiquidity premium	400bps-1,000bps	786bps
Other debt obligations	5.1		Discounted cash flow	Discount rate (1)	20.0%	20.0%
Fixed maturities, trading	37.8		Discounted cash flow	Discount rate (1)	2.1%-69.4%	8.5%
				Illiquidity premium	0bps-1,400bps	360bps
				Earnings before interest, taxes, depreciation and amortization multiple	0x-6.5x	0.5x
				Potential loss severity	0%-66%	11.1%
	132.4		See note (2)

	As of June 30, 2012
	Assets /
	(liabilities)
	measured at		Valuation	Unobservable	Input/range of	Weighted
	fair value		technique(s)	input description	inputs	average
	(in millions)
Other investments	89.8		Discounted cash flow	Discount rate (1)	4.3%	4.3%
				Illiquidity premium	334bps	334bps
Separate account assets	4,123.9		Discounted cash flow - mortgage loans	Discount rate (1)	1.0%-12.6%	4.2%
				Illiquidity premium	0bps-50bps
				Credit spread rate	70bps-1,245bps	352bps
			Discounted cash flow - real estate	Discount rate (1)	6.5%-10.5%	8.2%
				Terminal capitalization rate	5.5%-9.5%	7.3%
				Average market rent growth rate	2.3%-5.7%	3.4%
Liabilities
Investment-type insurance contracts	(179.4	)	Discounted cash flow	Long duration interest rate	2.4%-2.5% (3)	See note (3)
				Long-term equity market volatility	16.1%-44.5%
				Non-performance risk	0.9%-2.9%
				Utilization rate	See note (4)	See note (4)
				Lapse rate	0.5%-16.0%
				Mortality rate	See note (5)	See note (5)
Derivative liabilities	(94.7	)	See note (2)
Other liabilities	(33.6	)	See note (2)

(1)Represents market comparable interest rate or an index adjusted rate used as the base rate in the discounted cash flow analysis prior to any credit spread, illiquidity or other adjustments, where applicable.

(2)Relates to a consolidated collateralized private investment vehicle that is a VIE. Fixed maturity, trading represents the underlying collateral of the investment structure and consists of high-grade fixed maturity investments, which are over-collateralized based on outstanding notes priced at par. The derivative liability represents credit default swaps that are valued using a correlation model to the credit default swap (“CDS”) Index (“CDX”) and inputs to the valuation are based on observable market data such as the end of period swap curve, CDS constituents of the index and spread levels of the index, as well as CDX tranche spreads. The other liabilities represent obligations to third party note holders due at maturity or termination of the trust. The value of the obligations reflect the third parties’ interest in the investment structure.

(3)Represents the range of rate curves used in the valuation analysis that we have determined market participants would use when pricing the instrument. Derived from interpolation between observable 20 and 30-year swap rates.

(4)This input factor is the number of contractholders taking withdrawals as well as the amount and timing of the withdrawals and a range does not provide a meaningful presentation.

(5)This input is based on an appropriate industry mortality table and a range does not provide a meaningful presentation.

Market comparable discount rates are used as the base rate in the discounted cash flows used to determine the fair value of certain assets. Increases or decreases in the credit spreads on the comparable assets could cause the fair value of asset to significantly decrease or increase, respectively. Additionally, we may adjust the base discount rate or the modeled price by applying an illiquidity premium given the highly structured nature of certain assets. Increases or decreases in this illiquidity premium could cause significant decreases or increases, respectively, in the fair value of the asset.

Embedded derivatives can be either assets or liabilities within the investment-type insurance contracts line item, depending on certain inputs at the reporting date.  Increases to an asset or decreases to a liability are described as increases to fair value.  Increases or decreases in market volatilities could cause significant decreases or increases, respectively, in the fair value of embedded derivatives in investment-type insurance contracts. Long duration interest rates are used as the mean return when projecting the growth in the value of associated account value and impact the discount rate used in the discounted future cash flows valuation. The amount of claims will increase if account value is not sufficient to cover guaranteed withdrawals. Increases or decreases in risk free rates could cause the fair value of the embedded derivative to significantly increase or decrease, respectively. Increases or decreases in our own credit risks, which impact the rates used to discount future cash flows, could significantly increase or decrease, respectively, the fair value of the embedded derivative. All of these changes in fair value would impact net income.

Decreases or increases in the mortality rate assumption could cause the fair value of the embedded derivative to decrease or increase, respectively. Decreases or increases in the overall lapse rate assumption could cause the fair value of the embedded derivative to decrease or increase, respectively. The lapse rate assumption varies dynamically based on the relationship of the guarantee and associated account value. A stronger or weaker dynamic lapse rate assumption could cause the fair value of the embedded derivative to decrease or increase, respectively. The utilization rate assumption includes how many contractholders will take withdrawals, when they will take them and how much of their benefit they will take.  Increases or decreases in the assumption of the number of contractholders taking withdrawals could cause the fair value of the embedded derivative to decrease or increase, respectively. Assuming contractholders take withdrawals earlier or later could cause the fair value of the embedded derivative to decrease or increase, respectively. Assuming contractholders take more or less of their benefit could cause the fair value of the embedded derivative to decrease or increase, respectively.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis. During the six months ended June 30, 2012, certain mortgage loans had been marked to fair value of $172.7 million. The net impact of impairments and improvements in estimated fair value of previously impaired loans resulted in a net loss of $3.4 million and $11.2 million for the three and six months ended June 30, 2012, respectively, that was recorded in net realized capital gains (losses) as part of the mortgage loan valuation allowance. This includes the impact of certain loans no longer on our books. These collateral-dependent mortgage loans are a Level 3 fair value measurement, as fair value is based on the fair value of the underlying real estate collateral, which is estimated using appraised values that involve significant unobservable inputs. The fair value of the underlying collateral is determined based on a discounted cash flow valuation either from an external broker opinion of value or an internal model. Significant inputs used in the discounted cash flow calculation include: a discount rate, terminal capitalization rate and average market rent growth. The ranges of inputs used in the fair value measurements for the mortgage loans marked to fair value during the six months ended June 30, 2012, were:

Discount rate = 8.0% - 20.0%

Terminal capitalization rate = 6.3% - 10.5%

Average market rent growth = 3.0% - 8.0%

During the six months ended June 30, 2012, certain mortgage servicing rights had been marked to fair value of $5.9 million. The net impact of impairments and subsequent improvements in estimated fair value of previously impaired mortgage servicing rights resulted in a net loss of $0.1 million and zero for the three and six months ended June 30, 2012, that was recorded in operating expenses. These mortgage servicing rights are a Level 3 fair value measurement, as fair value is determined by calculating the present value of the future servicing cash flows from the underlying mortgage loans. The discount rate used in calculating the present value of the future servicing cash flows was 3.1% for the six months ended June 30, 2012.

During the six months ended June 30, 2011, certain mortgage loans had been marked to fair value of $97.4 million. The net impact of impairments and improvements in estimated fair value of previously impaired loans resulted in a net loss of $14.8 million and $14.0 million for the three months and six ended June 30, 2011, respectively, that was recorded in net realized capital gains (losses) as part of the mortgage loan valuation allowance. This includes the impact of certain loans no longer on our books. These collateral-dependent mortgage loans are a Level 3 fair value measurement, as fair value is based on the fair value of the underlying real estate collateral, which is estimated using appraised values that involve significant unobservable inputs.

During the six months ended June 30, 2011, certain mortgage servicing rights had been written down to fair value of $1.0 million. The net impact of impairments and improvements in estimated fair value of previously impaired mortgage servicing rights resulted in a net loss of $0.1 million and zero for the three months and six ended June 30, 2011, that was recorded in operating expenses. These mortgage servicing rights are a Level 3 fair value measurement, as fair value is determined by calculating the present value of the future servicing cash flows from the underlying mortgage loans.

Fair Value Option

As a result of our implementation of new authoritative guidance related to the accounting for VIEs effective January 1, 2010, we elected fair value accounting for certain assets and liabilities of newly consolidated VIEs for which it was not practicable for us to determine the carrying value. The fair value option was elected for commercial mortgage loans reported with other investments and obligations reported with other liabilities in the consolidated statements of financial position. The changes in fair value of these items are reported in net realized capital gains (losses) on the consolidated statements of operations.

The fair value and aggregate contractual principal amounts of commercial mortgage loans for which the fair value option has been elected were $83.6 million and $82.8 million as of June 30, 2012, and $97.5 million and $96.1 million as of December 31, 2011, respectively. The change in fair value of the loans resulted in a $0.2 million and $0.0 million pre-tax gain (loss) for the three months ended June 30, 2012 and 2011, respectively, and a ($0.7) million and ($2.1) million pre-tax gain (loss) for the six months ended June 30, 2012 and 2011, respectively, none of which related to instrument-specific credit risk. None of these loans were more than 90 days past due or in nonaccrual status. Interest income on these commercial mortgage loans is included in net investment income on the consolidated statements of operations and is recorded based on the effective interest rates as determined at the closing of the loan. Interest income recorded on these commercial mortgage loans was $1.7 million and $2.1 million for the three months ended June 30, 2012 and 2011, respectively, and $3.5 million and $4.6 million for the six months ended June 30, 2012 and 2011, respectively.

The fair value and aggregate unpaid principal amounts of obligations for which the fair value option has been elected were $84.1 million and $215.2 million as of June 30, 2012, and $88.4 million and $169.8 million as of December 31, 2011, respectively. For the three months ended June 30, 2012 and 2011, the change in fair value of the obligations resulted in a pre-tax gain (loss) of $7.5 million and ($6.1) million, which includes a pre-tax gain (loss) of $7.2 million and ($6.1) million related to instrument-specific credit risk that is estimated based on credit spreads and quality ratings, respectively. For the six months ended June 30, 2012 and 2011, the change in fair value of the obligations resulted in a pre-tax gain (loss) of ($8.5) million and $0.2 million, which includes a pre-tax gain (loss) of ($9.4) million and ($1.7) million related to instrument-specific credit risk that is estimated based on credit spreads and quality ratings, respectively. Interest expense recorded on these obligations is included in operating expenses on the consolidated statements of operations and was $1.3 million and $1.7 million for the three months ended June 30, 2012 and 2011, respectively, and $2.7 million and $3.6 million for the six months ended June 30, 2012 and 2011, respectively.

Financial Instruments Not Reported at Fair Value

The carrying value and estimated fair value of financial instruments not recorded at fair value on a recurring basis but required to be disclosed at fair value were as follows:

	June 30, 2012
							Fair value hierarchy level
	Carrying amount			Fair value			Level 1			Level 2			Level 3
							(in millions)
Assets (liabilities)
Mortgage loans	$	11,158.6		$	11,706.9		$	—		$	—		$	11,706.9
Policy loans	867.8			1,079.0			—			—			1,079.0
Other investments	244.5			245.3			—			158.8			86.5
Cash and cash equivalents	791.9			791.9			791.9			—			—
Investments-type insurance contracts	(31,215.0		)	(30,977.2		)	—			(6,727.7		)	(24,249.5		)
Short-term debt	(262.9		)	(262.9		)	—			(262.9		)	—
Long-term debt	(1,576.9		)	(1,819.3		)	—			(1,789.7		)	(29.6		)
Separate account liabilities	(68,014.8		)	(67,070.3		)	—			—			(67,070.3		)
Bank deposits	(2,132.1		)	(2,137.9		)	(1,324.1		)	(813.8		)	—
Cash collateral payable	(279.1		)	(279.1		)	(279.1		)	—			—

	December 31, 2011
	Carrying amount			Fair value
	(in millions)
Assets (liabilities)
Mortgage loans	$	10,727.2		$	11,223.4
Policy loans	885.1			1,114.2
Other investments	165.6			165.6
Cash and cash equivalents	1,174.1			1,174.1
Investments-type insurance contracts	(32,408.5		)	(32,234.0		)
Short-term debt	(105.2		)	(105.2		)
Long-term debt	(1,564.8		)	(1,750.7		)
Separate account liabilities	(64,016.2		)	(62,906.9		)
Bank deposits	(2,142.8		)	(2,150.2		)
Cash collateral payable	(234.0		)	(234.0		)

Mortgage Loans

Fair values of commercial and residential mortgage loans are primarily determined by discounting the expected cash flows at current treasury rates plus an applicable risk spread, which reflects credit quality and maturity of the loans. The risk spread is based on market clearing levels for loans with comparable credit quality, maturities and risk. The fair value of mortgage loans may also be based on the fair value of the underlying real estate collateral less cost to sell, which is estimated using appraised values. These are reflected in Level 3.

Policy Loans

Fair values of policy loans are estimated by discounting expected cash flows using a risk-free rate based on the U.S. Treasury curve. The expected cash flows reflect an estimate of timing of the repayment of the loans. These are reflected in Level 3.

Other Investments

The fair value of commercial loans and certain consumer loans included in other investments is calculated by discounting scheduled cash flows through the estimated maturity date using market interest rates that reflect the credit and interest rate risk inherent in the loans. The estimate of term to maturity is based on historical experience, adjusted as required, for current economic and lending conditions. The effect of nonperforming loans is considered in assessing the credit risk inherent in the fair value estimate. These are reflected in Level 3. The carrying value of the remaining investments reported in this line item approximate their fair value and are of a short-term nature. These are reflected in Level 2.

Cash and Cash Equivalents

The carrying amounts of cash and cash equivalents that are not reported at fair value on a recurring basis approximate their fair value, which are reflected in Level 1 given the nature of cash.

Investment-Type Insurance Contracts

The fair values of our reserves and liabilities for investment-type insurance contracts are determined via a third party pricing vendor or using discounted cash flow analyses when we are unable to find a price from third party pricing vendors. Third party pricing on various outstanding medium-term notes and funding agreements is based on observable inputs such as benchmark yields and spreads based on reported trades for our medium-term notes and funding agreement issuances. These are reflected in Level 2. The discounted cash flow analyses for the remaining contracts is based on current interest rates, including non-performance risk, being offered for similar contracts with maturities consistent with those remaining for the investment-type contracts being valued. These are reflected in Level 3. Investment-type insurance contracts include insurance, annuity and other policy contracts that do not involve significant mortality or morbidity risk and are only a portion of the policyholder liabilities appearing in the consolidated statements of financial position. Insurance contracts include insurance, annuity and other policy contracts that do involve significant mortality or morbidity risk. The fair values for our insurance contracts, other than investment-type contracts, are not required to be disclosed.

Short-Term Debt

The carrying amount of short-term debt approximates its fair value because of the relatively short time between origination of the debt instrument and its maturity, which is reflected in Level 2.

Long-Term Debt

Long-term debt primarily includes senior note issuances for which the fair values are determined using inputs that are observable in the market or that can be derived from or corroborated with observable market data. These are reflected in Level 2. Additionally, our long-term debt includes non-recourse mortgages and notes payable that are primarily financings for real estate developments for which the fair values are estimated using discounted cash flow analysis based on our incremental borrowing rate for similar borrowing arrangements. These are reflected in Level 3.

Separate Account Liabilities

Fair values of separate account liabilities, excluding insurance-related elements, are estimated based on market assumptions around what a potential acquirer would pay for the associated block of business, including both the separate account assets and liabilities. As the applicable separate account assets are already reflected at fair value, any adjustment to the fair value of the block is an assumed adjustment to the separate account liabilities. To compute fair value, the separate account liabilities are originally set to equal separate account assets because these are pass-through contracts. The separate account liabilities are reduced by the amount of future fees expected to be collected that are intended to offset upfront acquisition costs already incurred that a potential acquirer would not have to pay. The estimated future fees are adjusted by an adverse deviation discount and the amount is then discounted at a risk-free rate as measured by the yield on U.S. Treasury securities at maturities aligned with the estimated timing of fee collection. These are reflected in Level 3.

Bank Deposits

The fair value of deposits of our Principal Bank subsidiary with no stated maturity, such as demand deposits, savings, and interest-bearing demand accounts, is equal to the amount payable on demand (i.e., their carrying amounts). These are reflected in Level 1. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount is estimated using the rates currently offered for deposits of similar remaining maturities. These are reflected in Level 2.

Cash Collateral Payable

The carrying amount of the payable associated with our obligation to return the cash collateral received under derivative credit support annex (collateral) agreements approximates its fair value, which is reflected in Level 1.