10. 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. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety considering factors specific to the asset or liability.

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, 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. Our level 2 assets also include commercial mortgage loan investments of consolidated VIEs for which the fair value option was elected.

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

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. Beginning in 2015 a measurement alternative is used for consolidated collateralized financing entities (“CCFEs”) utilizing the more observable of the fair value of the financial assets or the financial liabilities for both the financial assets and financial liabilities. We did not make any other significant changes to our valuation processes during 2015.

Fixed Maturities

Fixed maturities include bonds, ABS, redeemable preferred stock and certain nonredeemable preferred securities. 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 September 30, 2015, 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.

States 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 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, nonredeemable preferred stock and regulatory required investments. 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 or the net asset value (“NAV”), 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 futures that are settled daily such that their fair value is not reflected in the consolidated statements of financial position. The fair values of derivative instruments cleared through centralized clearinghouses are determined through market prices published by the clearinghouses, which are reflected in Level 2. The clearinghouses may utilize the overnight indexed swap (“OIS”) curve in their valuation. The fair values of bilateral OTC derivative instruments are determined using either pricing valuation models that utilize market observable inputs or broker quotes. The majority of our bilateral OTC 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 bilateral OTC 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 non-cleared 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. Our centrally cleared derivative contracts are conducted with regulated centralized clearinghouses, which provide for daily exchange of cash collateral equal to the difference in the daily market values of those contracts that eliminates the non-performance risk on these trades.

Interest Rate Contracts. For non-cleared 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. For centrally cleared contracts we use published prices from clearinghouses. 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. Currency forwards are valued using observable market inputs, including forward currency exchange rates. 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.

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 include seed money investments, other investment funds, commercial mortgage loans of consolidated VIEs and equity method real estate investments for which the fair value option was elected.

The fair value of seed money and other investment funds is determined using the NAV of the fund. The NAV 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 NAV represents a quoted price in an active market for identical assets are reflected in Level 1. Seed money investments in mutual funds that do not have a quoted price in an active market and other investment funds, which are relatively illiquid due to restrictions on sale, are reflected in Level 2.

Commercial mortgage loans of consolidated VIEs valued using the measurement alternative for CCFEs are reflected in Level 2. These investments are based on the more observable fair value of the liabilities of the consolidated VIEs.

Prior to 2015, commercial mortgage loans of consolidated VIEs for which the fair value option was elected were reflected in Level 3. The fair value of the commercial mortgage loans was computed utilizing a discount rate based on the current market. The market discount rate was then adjusted based on various factors that differentiate it from our pool of loans. Equity method real estate investments for which the fair value option was elected are reflected in Level 3. The equity method real estate investments consist of underlying real estate and debt. The real estate fair value is estimated using a discounted cash flow valuation model that utilizes public real estate market data inputs such as transaction prices, market rents, vacancy levels, leasing absorption, market cap rates and discount rates. The debt fair value is estimated using a discounted cash flow analysis based on our incremental borrowing rate for similar borrowing arrangements.

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 various public real estate market data inputs. In addition, each property is appraised annually by an independent appraiser. The real estate included in separate account assets is recorded net of related mortgage encumbrances for which the fair value is estimated using discounted cash flow analysis based on our incremental borrowing rate for similar borrowing arrangements. 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). Risk margins are included in the policyholder behavior assumptions. The assumptions are based on a combination of historical data and actuarial judgment. The embedded derivative liabilities are valued using stochastic models that incorporate a spread reflecting our own creditworthiness.

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. The VIEs’ obligations are valued either based on prices obtained from third party pricing vendors which are reflected in Level 2, or internal pricing models, 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.

	September 30, 2015
	Assets/
	(liabilities)			Fair value hierarchy level
	measured at
	fair value			Level 1		Level 2			Level 3
	(in millions)
Assets
Fixed maturities, available-for-sale:
U.S. government and agencies	$	1,543.6		$	895.7	$	647.9		$	—
Non-U.S. governments	787.7			2.8		736.0			48.9
States and political subdivisions	4,455.7			—		4,455.7			—
Corporate	31,278.7			38.6		31,003.3			236.8
Residential mortgage-backed securities	2,680.2			—		2,680.2			—
Commercial mortgage-backed securities	3,861.2			—		3,845.9			15.3
Collateralized debt obligations	633.0			—		569.8			63.2
Other debt obligations	4,540.5			—		4,527.0			13.5

Total fixed maturities, available-for-sale	49,780.6			937.1		48,465.8			377.7
Fixed maturities, trading	710.2			101.7		469.5			139.0
Equity securities, available-for-sale	465.3			105.8		355.4			4.1
Equity securities, trading	869.1			101.8		767.3			—
Derivative assets (1)	821.3			—		768.8			52.5
Other investments (2)	425.4			177.8		216.1			31.5
Cash equivalents (3)	1,153.6			—		1,153.6			—

Sub-total excluding separate account assets	54,225.5			1,424.2		52,196.5			604.8

Separate account assets	134,045.8			69,860.6		57,449.1			6,736.1

Total assets	$	188,271.3		$	71,284.8	$	109,645.6		$	7,340.9


Liabilities
Investment-type insurance contracts (4)	$	(210.3	)	$	—	$	—		$	(210.3	)
Derivative liabilities (1)	(816.9		)	—		(771.2		)	(45.7		)
Other liabilities (4)	(301.4		)	—		(236.7		)	(64.7		)

Total liabilities	$	(1,328.6	)	$	—	$	(1,007.9	)	$	(320.7	)


Net assets	$	186,942.7		$	71,284.8	$	108,637.7		$	7,020.2

	December 31, 2014
	Assets/
	(liabilities)			Fair value hierarchy level
	measured at
	fair value			Level 1		Level 2			Level 3
	(in millions)
Assets
Fixed maturities, available-for-sale:
U.S. government and agencies	$	1,121.8		$	720.5	$	401.3		$	—
Non-U.S. governments	891.1			—		852.4			38.7
States and political subdivisions	4,204.0			—		4,204.0			—
Corporate	31,535.0			40.3		31,249.1			245.6
Residential mortgage-backed securities	2,822.9			—		2,822.9			—
Commercial mortgage-backed securities	3,975.5			—		3,975.5			—
Collateralized debt obligations	504.1			—		439.9			64.2
Other debt obligations	4,616.4			—		4,552.7			63.7

Total fixed maturities, available-for-sale	49,670.8			760.8		48,497.8			412.2
Fixed maturities, trading	604.6			—		464.9			139.7
Equity securities, available-for-sale	123.0			64.2		54.7			4.1
Equity securities, trading	840.2			105.9		734.3			—
Derivative assets (1)	661.8			—		608.1			53.7
Other investments (2)	478.9			3.3		348.4			127.2
Cash equivalents (3)	1,041.7			—		1,041.7			—

Sub-total excluding separate account assets	53,421.0			934.2		51,749.9			736.9

Separate account assets	140,072.8			73,363.4		60,818.0			5,891.4

Total assets	$	193,493.8		$	74,297.6	$	112,567.9		$	6,628.3


Liabilities
Investment-type insurance contracts (4)	$	(176.4	)	$	—	$	—		$	(176.4	)
Derivative liabilities (1)	(791.8		)	—		(756.3		)	(35.5		)
Other liabilities (4)	(310.1		)	—		(243.8		)	(66.3		)

Total liabilities	$	(1,278.3	)	$	—	$	(1,000.1	)	$	(278.2	)


Net assets	$	192,215.5		$	74,297.6	$	111,567.8		$	6,350.1

(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, other investment funds, commercial mortgage loans of consolidated VIEs and equity method investments 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 September 30, 2015
			Total realized/unrealized																		Changes in
	Beginning			gains (losses)						Net								Ending			unrealized
	asset/									purchases,								asset/			gains (losses)
	(liability)									sales,								(liability)			included in
	balance						Included in			issuances								balance			net income
	as of			Included in			other			and			Transfers		Transfers			as of			relating to
	June 30,			net income			comprehensive			settlements			into		out of			September 30,			positions still
	2015			(1)			income			(4)			Level 3		Level 3			2015			held (1)
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	45.6		$	(0.1	)	$	0.3		$	3.1		$	—	$	—		$	48.9		$	(0.1	)
Corporate	227.0			(0.1		)	(2.4		)	3.4			15.0		(6.1		)	236.8			(0.1		)
Commercial mortgage-backed securities	—			—			0.1			15.2			—		—			15.3			—
Collateralized debt obligations	63.3			0.1			—			(0.2		)	—		—			63.2			—
Other debt obligations	41.4			—			0.9			5.2			—		(34.0		)	13.5			—

Total fixed maturities, available-for-sale	377.3			(0.1		)	(1.1		)	26.7			15.0		(40.1		)	377.7			(0.2		)
Fixed maturities, trading	139.8			(0.8		)	—			—			—		—			139.0			(0.8		)
Equity securities, available-for-sale	4.1			—			—			—			—		—			4.1			—
Derivative assets	45.1			7.4			—			—			—		—			52.5			7.4
Other investments	29.7			0.5			—			1.3			—		—			31.5			0.5
Separate account assets (2)	6,406.0			344.4			—			(14.3		)	0.1		(0.1		)	6,736.1			267.5

Liabilities
Investment-type insurance contracts	(117.0		)	(98.1		)	—			4.8			—		—			(210.3		)	(98.9		)
Derivative liabilities	(37.0		)	(9.1		)	0.4			—			—		—			(45.7		)	(9.5		)
Other liabilities (3)	(67.5		)	2.8			—			—			—		—			(64.7		)	2.8

	For the three months ended September 30, 2014
				Total realized/unrealized																	Changes in
	Beginning			gains (losses)						Net								Ending			unrealized
	asset/									purchases,								asset/			gains (losses)
	(liability)									sales,								(liability)			included in
	balance			Included in			Included in			issuances								balance			net income
	as of			net			other			and			Transfers		Transfers			as of			relating to
	June 30,			income			comprehensive			settlements			into		out of			September 30,			positions still
	2014			(1)			income			(4)			Level 3		Level 3			2014			held (1)
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	39.6		$	—		$	(0.2	)	$	1.9		$	—	$	—		$	41.3		$	—
States and political subdivisions	1.7			—			—			—			—		—			1.7			—
Corporate	170.0			(1.4		)	(2.8		)	40.7			15.7		—			222.2			(1.4		)
Commercial mortgage-backed securities	6.7			(1.0		)	0.2			0.2			0.7		(1.4		)	5.4			(0.9		)
Collateralized debt obligations	68.5			—			0.1			9.5			—		(16.5		)	61.6			—
Other debt obligations	47.1			—			—			(1.4		)	—		—			45.7			—

Total fixed maturities, available-for-sale	333.6			(2.4		)	(2.7		)	50.9			16.4		(17.9		)	377.9			(2.3		)
Fixed maturities, trading	159.6			3.7			—			(24.0		)	—		—			139.3			0.2
Equity securities, available-for-sale	17.5			(0.3		)	0.2			—			—		—			17.4			(0.3		)
Derivative assets	62.3			(14.4		)	—			9.8			—		—			57.7			(14.3		)
Other investments	134.6			3.8			—			(14.1		)	—		—			124.3			3.8
Separate account assets (2)	5,533.6			167.0			(0.3		)	79.0			2.3		(4.2		)	5,777.4			163.7

Liabilities
Investment-type insurance contracts	(37.6		)	(62.8		)	—			6.3			—		—			(94.1		)	(56.1		)
Derivative liabilities	(24.7		)	(13.3		)	(0.6		)	0.8			—		—			(37.8		)	(14.5		)
Other liabilities (3)	(79.9		)	9.9			—			9.0			—		—			(61.0		)	9.8

	For the nine months ended September 30, 2015
				Total realized/unrealized																	Changes in
	Beginning			gains (losses)						Net								Ending			unrealized
	asset/									purchases,								asset/			gains (losses)
	(liability)									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			September 30,			positions still
	2014			(1)			income			(4)			Level 3		Level 3			2015			held (1)
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	38.7		$	(0.2	)	$	0.4		$	10.0		$	—	$	—		$	48.9		$	(0.2	)
Corporate	245.6			(0.2		)	(3.3		)	27.1			41.2		(73.6		)	236.8			(0.2		)
Commercial mortgage-backed securities	—			—			0.1			15.2			—		—			15.3			—
Collateralized debt obligations	64.2			0.1			(0.1		)	(1.0		)	—		—			63.2			—
Other debt obligations	63.7			—			0.8			7.3			—		(58.3		)	13.5			—

Total fixed maturities, available-for-sale	412.2			(0.3		)	(2.1		)	58.6			41.2		(131.9		)	377.7			(0.4		)
Fixed maturities, trading	139.7			(0.6		)	—			(0.1		)	—		—			139.0			(0.7		)
Equity securities, available-for-sale	4.1			—			—			—			—		—			4.1			—
Derivative assets	53.7			(3.6		)	—			2.4			—		—			52.5			(3.4		)
Other investments	127.2			4.5			—			(65.2		)	—		(35.0		)	31.5			4.5
Separate account assets (2)	5,891.4			799.3			—			45.4			0.2		(0.2		)	6,736.1			705.2

Liabilities
Investment-type insurance contracts	(176.4		)	(40.5		)	—			6.6			—		—			(210.3		)	(43.8		)
Derivative liabilities	(35.5		)	(12.0		)	1.6			0.2			—		—			(45.7		)	(12.6		)
Other liabilities (3)	(66.3		)	1.6			—			—			—		—			(64.7		)	1.5

	For the nine months ended September 30, 2014
				Total realized/unrealized																	Changes in
	Beginning			gains (losses)						Net								Ending			unrealized
	asset/									purchases,								asset/			gains (losses)
	(liability)									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			September 30,			positions still
	2013			(1)			income			(4)			Level 3		Level 3			2014			held (1)
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	47.5		$	(0.1	)	$	(0.2	)	$	(5.9	)	$	—	$	—		$	41.3		$	(0.1	)
States and political subdivisions	1.8			—			—			(0.1		)	—		—			1.7			—
Corporate	164.0			(1.6		)	(1.7		)	21.0			46.6		(6.1		)	222.2			(1.5		)
Commercial mortgage-backed securities	1.6			(1.6		)	1.3			(0.2		)	6.8		(2.5		)	5.4			(1.5		)
Collateralized debt obligations	37.8			—			1.4			46.4			—		(24.0		)	61.6			—
Other debt obligations	84.1			—			1.1			(9.8		)	—		(29.7		)	45.7			—

Total fixed maturities, available-for-sale	336.8			(3.3		)	1.9			51.4			53.4		(62.3		)	377.9			(3.1		)
Fixed maturities, trading	169.9			9.5			—			(40.1		)	—		—			139.3			0.8
Equity securities, available-for-sale	16.9			(0.3		)	0.6			—			0.2		—			17.4			(0.3		)
Derivative assets	74.2			(26.4		)	—			9.9			—		—			57.7			(26.4		)
Other investments	142.9			6.6			—			(25.2		)	—		—			124.3			6.6
Separate account assets (2)	5,265.2			358.4			(0.2		)	161.3			4.4		(11.7		)	5,777.4			359.9

Liabilities
Investment-type insurance contracts	(6.9		)	(109.9		)	—			22.7			—		—			(94.1		)	(109.9		)
Derivative liabilities	(39.6		)	0.5			0.7			0.6			—		—			(37.8		)	(3.7		)
Other liabilities (3)	(73.9		)	3.9			—			9.0			—		—			(61.0		)	4.5

(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 operations.

(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 September 30, 2015
												Net purchases,
												sales, issuances
	Purchases		Sales			Issuances			Settlements			and settlements
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	3.4	$	—		$	—		$	(0.3	)	$	3.1
Corporate	5.5		—			—			(2.1		)	3.4
Commercial mortgage-backed securities	15.2		—			—			—			15.2
Collateralized debt obligations	—		—			—			(0.2		)	(0.2		)
Other debt obligations	6.4		—			—			(1.2		)	5.2

Total fixed maturities, available-for-sale	30.5		—			—			(3.8		)	26.7
Other investments	1.3		—			—			—			1.3
Separate account assets (5)	69.6		(29.7		)	(54.7		)	0.5			(14.3		)

Liabilities
Investment-type insurance contracts	—		—			3.7			1.1			4.8

	For the three months ended September 30, 2014
													Net purchases,
													sales, issuances
	Purchases			Sales			Issuances			Settlements			and settlements
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	2.2		$	—		$	—		$	(0.3	)	$	1.9
Corporate	46.5			(5.5		)	—			(0.3		)	40.7
Commercial mortgage-backed securities	—			—			—			0.2			0.2
Collateralized debt obligations	9.7			—			—			(0.2		)	9.5
Other debt obligations	—			—			—			(1.4		)	(1.4		)

Total fixed maturities, available-for-sale	58.4			(5.5		)	—			(2.0		)	50.9
Fixed maturities, trading	—			(10.0		)	—			(14.0		)	(24.0		)
Derivative assets	9.8			—			—			—			9.8
Other investments	—			—			—			(14.1		)	(14.1		)
Separate account assets (5)	228.5			(127.3		)	(196.5		)	174.3			79.0

Liabilities
Investment-type insurance contracts	—			—			4.2			2.1			6.3
Derivative liabilities	(0.6		)	1.4			—			—			0.8
Other liabilities	—			9.0			—			—			9.0

	For the nine months ended September 30, 2015
												Net purchases,
												sales, issuances
	Purchases		Sales			Issuances			Settlements			and settlements
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	10.9	$	—		$	—		$	(0.9	)	$	10.0
Corporate	47.1		(5.7		)	—			(14.3		)	27.1
Commercial mortgage-backed securities	15.2		—			—			—			15.2
Collateralized debt obligations	—		—			—			(1.0		)	(1.0		)
Other debt obligations	16.5		—			—			(9.2		)	7.3

Total fixed maturities, available-for-sale	89.7		(5.7		)	—			(25.4		)	58.6
Fixed maturities, trading	—		(0.2		)	—			0.1			(0.1		)
Derivative assets	2.5		(0.1		)	—			—			2.4
Other investments	2.5		(67.7		)	—			—			(65.2		)
Separate account assets (5)	430.6		(189.1		)	(200.5		)	4.4			45.4

Liabilities
Investment-type insurance contracts	—		—			1.4			5.2			6.6
Derivative liabilities	—		0.2			—			—			0.2

	For the nine months ended September 30, 2014
													Net purchases,
													sales, issuances
	Purchases			Sales			Issuances			Settlements			and settlements
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	5.8		$	(10.8	)	$	—		$	(0.9	)	$	(5.9	)
States and political subdivisions	—			—			—			(0.1		)	(0.1		)
Corporate	64.5			(39.2		)	—			(4.3		)	21.0
Commercial mortgage-backed securities	—			—			—			(0.2		)	(0.2		)
Collateralized debt obligations	61.3			—			—			(14.9		)	46.4
Other debt obligations	—			—			—			(9.8		)	(9.8		)

Total fixed maturities, available-for-sale	131.6			(50.0		)	—			(30.2		)	51.4
Fixed maturities, trading	—			(10.0		)	—			(30.1		)	(40.1		)
Derivative assets	9.9			—			—			—			9.9
Other investments	0.2			—			—			(25.4		)	(25.2		)
Separate account assets (5)	467.2			(257.5		)	(290.1		)	241.7			161.3

Liabilities
Investment-type insurance contracts	—			—			18.7			4.0			22.7
Derivative liabilities	(0.8		)	1.4			—			—			0.6
Other liabilities	—			9.0			—			—			9.0

(5)

Issuances and settlements include amounts related to mortgage encumbrances associated with real estate in our separate accounts.

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 September 30, 2015
	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	$	—	$	—	$	—	$	15.0	$	—	$	6.1
Other debt obligations	—		—		—		—		—		34.0

Total fixed maturities, available-for-sale	—		—		—		15.0		—		40.1
Other investments	—		—		141.4		—		—		—
Separate account assets	24.6		—		1.2		0.1		—		0.1

	For the three months ended September 30, 2014
	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	$	—	$	—	$	—	$	15.7	$	—	$	—
Commercial mortgage-backed securities	—		—		—		0.7		—		1.4
Collateralized debt obligations	—		—		—		—		—		16.5

Total fixed maturities, available-for-sale	—		—		—		16.4		—		17.9
Separate account assets	2.1		—		17.5		2.3		—		4.2

	For the nine months September 30, 2015
	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	$	—	$	—	$	—	$	41.2	$	—	$	73.6
Other debt obligations	—		—		—		—		—		58.3

Total fixed maturities, available-for-sale	—		—		—		41.2		—		131.9
Other investments	—		—		141.4		—		—		35.0
Separate account assets	26.6		—		8.0		0.2		—		0.2

	For the nine months September 30, 2014
	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	$	—	$	—	$	—	$	46.6	$	—	$	6.1
Commercial mortgage-backed securities	—		—		—		6.8		—		2.5
Collateralized debt obligations	—		—		—		—		—		24.0
Other debt obligations	—		—		—		—		—		29.7

Total fixed maturities, available-for-sale	—		—		—		53.4		—		62.3
Equity securities, available-for-sale	—		—		—		0.2		—		—
Separate account assets	17.5		—		71.3		4.4		—		11.7

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

Assets transferred from Level 2 into Level 1 for the three and nine months ended September 30, 2015, primarily included assets valued using a NAV with a quoted price in an active market for identical assets as a result of additional analysis to clarify the source of the quoted price.

Assets transferred into Level 3 during the three and nine months ended September 30, 2015 and 2014, 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 three and nine months ended September 30, 2015 and 2014, 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. In addition, for the nine months ended September 30, 2015, assets transferred out of Level 3 included assets valued using the measurement alternative for CCFEs for which the corresponding liabilities have the more observable fair value and are reflected in Level 2.

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 or the measurement alternative for CCFEs. Refer to “Assets and liabilities measured at fair value on a recurring basis” for a complete valuation hierarchy summary.

	As of September 30, 2015
	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	$	9.4	Discounted cash flow	Discount rate (1)	1.7%	1.7	%
				Illiquidity premium	50 basis points ("bps")	50	bps
Corporate	42.0		Discounted cash flow	Discount rate (1)	1.6%-7.6%	4.8	%
				Comparability adjustment	0bps-14bps	3	bps
				Illiquidity premium	0bps-60bps	34	bps
Commercial mortgage-backed securities	15.3		Discounted cash flow	Discount rate (1)	3.7%-4.9%	4.3	%
Collateralized debt obligations	3.1		Discounted cash flow	Discount rate (1)	12.1%	12.1	%
				Probability of default	100.0%	100.0	%
				Potential loss severity	67.0%	67.0	%
Other debt obligations	7.8		Discounted cash flow	Discount rate (1)	5.0%	5.0	%
				Illiquidity premium	750bps	750	bps
Fixed maturities, trading	14.2		Discounted cash flow	Discount rate (1)	2.1%-16.0%	6.4	%
				Illiquidity premium	200bps-800bps	430	bps
Other investments	31.5		Discounted cash flow - equity method real estate investments	Discount rate (1)	7.9%	7.9	%
				Terminal capitalization rate	6.8%	6.8	%
				Average market rent growth rate	3.3%	3.3	%
			Discounted cash flow - equity method real estate investments - debt	Loan to value	54.9%	54.9	%
				Credit spread rate	2.3%	2.3	%

	As of September 30, 2015
	Assets /
	(liabilities)
	measured at		Valuation	Unobservable	Input/range of		Weighted
	fair value		technique(s)	input description	inputs		average
	(in millions)
Separate account assets	6,616.4		Discounted cash flow - mortgage loans	Discount rate (1)	1.1%-7.1%		3.3	%
				Illiquidity premium	0bps-60bps		7	bps
				Credit spread rate	85bps-665bps		226	bps
			Discounted cash flow - real estate	Discount rate (1)	5.6%-38.1%		7.3	%
				Terminal capitalization rate	4.3%-9.5%		6.2	%
				Average market rent growth rate	0%-4.4%		3.1	%
			Discounted cash flow - real estate debt	Loan to value	15.3%-65.2%		45.8	%
				Credit spread rate	1.6%-4.3%		2.3	%
Liabilities
Investment-type insurance contracts	(210.3	)	Discounted cash flow	Long duration interest rate	2.4%-2.5%	(3)
				Long-term equity market volatility	14.9%-44.9%
				Non-performance risk	0.5%-1.9%
				Utilization rate	See note	(4)
				Lapse rate	0.5%-14.1%
				Mortality rate	See note	(5)

December 31, 2014

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

10.3

Discounted cash flow

Discount rate (1)

2.2%

2.2

Illiquidity premium

50 bps

bps

Corporate

83.0

Discounted cash flow

Discount rate (1)

1.8%-6.7%

4.0

Comparability adjustment

0bps-1bps

bps

Illiquidity premium

0bps-25bps

bps

	December 31, 2014
	Assets /
	(liabilities)
	measured at	Valuation	Unobservable	Input/range of	Weighted
	fair value	technique(s)	input description	inputs	average
	(in millions)
Collateralized debt obligations	12.7	Discounted cash flow	Discount rate (1)	2.7%-17.1%	6.1	%
			Probability of default	0%-100%	23.5	%
			Potential loss severity	0%-70.0%	16.4	%
Other debt obligations	49.3	Discounted cash flow	Discount rate (1)	1.4%-5.0%	2.3	%
			Illiquidity premium	0bps-1,000bps	175	bps
Fixed maturities, trading	15.2	Discounted cash flow	Discount rate (1)	1.8%-126.9%	3.5	%
			Illiquidity premium	200bps-1,400bps	460	bps
	100.4	See note (2)
Other investments	35.0	Discounted cash flow - commercial mortgage loans of consolidated VIEs	Discount rate (1)	4.2%	4.2	%
			Illiquidity premium	76bps	76	bps
	92.2	Discounted cash flow - equity method real estate investments	Discount rate (1)	7.3%-8.0%	7.6	%
			Terminal capitalization rate	5.5%-6.8%	6.1	%
			Average market rent growth rate	3.3%-3.7%	3.5	%
		Discounted cash flow - equity method real estate investments - debt	Loan to value	34.2%-58.9%	46.5	%
			Credit spread rate	1.8%-2.0%	1.9	%

	December 31, 2014
	Assets /
	(liabilities)
	measured at		Valuation	Unobservable	Input/range of		Weighted
	fair value		technique(s)	input description	inputs		average
	(in millions)
Separate account assets	5,857.4		Discounted cash flow - mortgage loans	Discount rate (1)	1.1%-6.9%		3.2	%
				Illiquidity premium	0bps-60bps		7	bps
				Credit spread rate	70bps-632bps		221	bps
			Discounted cash flow - real estate	Discount rate (1)	6.0%-24.6%		7.4	%
				Terminal capitalization rate	4.5%-9.5%		6.4	%
				Average market rent growth rate	1.3%-4.4%		3.0	%
			Discounted cash flow - real estate debt	Loan to value	6.8%-64.1%		46.5	%
				Credit spread rate	2.1%-4.8%		3.4	%

Liabilities
Investment-type insurance contracts	(176.4	)	Discounted cash flow	Long duration interest rate	2.6%-2.7%	(3)
				Long-term equity market volatility	14.9%-39.5%
				Non-performance risk	0.1%-1.4%
				Utilization rate	See note	(4)
				Lapse rate	0.5%-14.1%
				Mortality rate	See note	(5)
Derivative liabilities	(19.3	)	See note (2)
Other liabilities	(66.3	)	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)

Prior to 2015, the assets and liabilities fair values relate to a consolidated collateralized private investment vehicle that is a VIE. Fixed maturities, 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 value of the obligations, which are due at maturity or termination of the trust, 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 various observable 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 the assets 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 nine months ended September 30, 2015, certain mortgage loans had been marked to fair value of $13.9 million. The net impact of write-downs of loans reclassified to held-for-sale, impairments and improvements in estimated fair value of previously impaired loans resulted in a net loss of $1.5 million and $3.3 million for the three and nine months ended September 30, 2015, 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 our annual testing process for impairment of goodwill and other intangible assets in the third quarter of 2015, identified intangibles that originated from the acquisition of our mutual fund company in Brazil were deemed to be impaired, and were marked to fair value of zero. These impairments were driven by the current macroeconomic and market conditions in Brazil, including higher discount rates and change in the mix of business. The fair value calculation for intangibles is a Level 3 fair value measurement, as the fair value is determined by calculating the present value of future cash flows that are expected to emerge from the identified intangibles. The net impact of impairments of identified intangibles resulted in a loss of $23.0 million that was recorded in operating expenses.

During the nine months ended September 30, 2014, certain mortgage loans had been marked to fair value of $63.8 million. The net impact of impairments and improvements in estimated fair value of previously impaired loans resulted in a net loss of $9.7 million and $9.1 million for the three and nine months ended September 30, 2014, 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 ranges of inputs used in the fair value measurements for the mortgage loans marked to fair value during the nine months ended September 30, 2014, were:

Discount rate = 8.8% -11.0%

Terminal capitalization rate = 7.3% - 9.0%

Average market rent growth = 2.5% - 10.9%

Fair Value Option

We elected fair value accounting for certain assets and liabilities of 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 $25.1 million and $23.6 million as of September 30, 2015, and $35.0 million and $32.4 million as of December 31, 2014, respectively. The change in fair value of the loans resulted in a $1.0 million and $(0.2) million pre-tax gain (loss) for the three months ended September 30, 2015 and 2014, respectively, and a $1.1 million and $0.8 million pre-tax loss for the nine months ended September 30, 2015 and 2014, 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 $0.7 million and $3.2 million for the three months ended September 30, 2015 and 2014, respectively, and $2.2 million and $5.4 million for the nine months ended September 30, 2015 and 2014, respectively.

The fair value and aggregate unpaid principal amounts of obligations for which the fair value option has been elected were $64.7 million and $124.0 million as of September 30, 2015, and $71.0 million and $132.8 million as of December 31, 2014, respectively. For the three months ended September 30, 2015 and 2014, the change in fair value of the obligations resulted in a pre-tax gain of $1.5 million and $10.4 million, which includes a pre-tax gain of $2.8 million and $8.9 million related to instrument-specific credit risk that is estimated based on credit spreads and quality ratings, respectively. For the nine months ended September 30, 2015 and 2014, the change in fair value of the obligations resulted in a pre-tax gain of $1.3 million and $4.7 million, which includes a pre-tax gain of $1.5 million and $2.9 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 $0.4 million and $2.7 million for the three months ended September 30, 2015 and 2014, respectively, and $0.8 million and $3.8 million for the nine months ended September 30, 2015 and 2014, respectively.

We invest in real estate ventures for the purpose of earning investment returns and for capital appreciation. We elected the fair value option for certain ventures that are subject to the equity method of accounting because the nature of the investments are to add value to the properties and generate income from the operations of the properties. Other equity method real estate investments are not fair valued because the investments mainly generate income from the operations of the underlying properties. These investments are reported with other investments in the consolidated statements of financial position. The changes in fair value are reported in net investment income on the consolidated statements of operations. The fair value of the equity method investments for which the fair value option has been elected was $31.5 million and $92.2 million as of September 30, 2015 and December 31, 2014, respectively. The decrease from December 31, 2014, is due to a real estate disposal during the first quarter of 2015. The change in fair value of the investments resulted in a $0.5 million and $4.0 million pre-tax gain for the three months ended September 30, 2015 and 2014, respectively, and $4.5 million and $7.6 million pre-tax gain for the nine months ended September 30, 2015 and 2014, 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:

	September 30, 2015
							Fair value hierarchy level
	Carrying amount			Fair value			Level 1			Level 2			Level 3
	(in millions)
Assets (liabilities)
Mortgage loans	$	12,232.1		$	12,752.8		$	—		$	—		$	12,752.8
Policy loans	822.8			1,049.0			—			—			1,049.0
Other investments	238.2			251.2			—			170.8			80.4
Cash and cash equivalents	1,360.6			1,360.6			1,360.6			—			—
Investment-type insurance contracts	(28,483.4		)	(28,281.9		)	—			(4,733.5		)	(23,548.4		)
Short-term debt	(221.6		)	(221.6		)	—			(221.6		)	—
Long-term debt	(3,286.1		)	(3,431.0		)	—			(3,392.7		)	(38.2		)
Separate account liabilities	(122,714.6		)	(121,486.1		)	—			—			(121,486.1		)
Bank deposits	(2,004.6		)	(2,008.7		)	(1,388.3		)	(620.4		)	—
Cash collateral payable	(267.5		)	(267.5		)	(267.5		)	—			—

	December 31, 2014
							Fair value hierarchy level
	Carrying amount			Fair value			Level 1			Level 2			Level 3
	(in millions)
Assets (liabilities)
Mortgage loans	$	11,811.6		$	12,350.2		$	—		$	—		$	12,350.2
Policy loans	829.2			1,083.2			—			—			1,083.2
Other investments	211.2			211.6			—			183.7			27.9
Cash and cash equivalents	822.2			822.2			822.2			—			—
Investment-type insurance contracts	(28,256.3		)	(28,322.7		)	—			(5,455.4		)	(22,867.3		)
Short-term debt	(28.0		)	(28.0		)	—			(28.0		)	—
Long-term debt	(2,531.2		)	(2,786.1		)	—			(2,703.8		)	(82.3		)
Separate account liabilities	(128,480.5		)	(127,131.0		)	—			—			(127,131.0		)
Bank deposits	(1,979.7		)	(1,985.5		)	(1,343.8		)	(641.7		)	—
Cash collateral payable	(148.3		)	(148.3		)	(148.3		)	—			—

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 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 expected 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 fair value of certain tax credit investments are estimated by discounting expected future tax benefits using estimated investment return rates. These are reflected in Level 3. The carrying value of the remaining investments reported in this line item approximate their fair value. These are reflected in Level 2.

Cash and Cash Equivalents

Certain cash equivalents not reported at fair value include short-term investments with maturities of less than three months for which public quotations are not available to use in determining fair value. Because of the highly liquid nature of these assets, carrying amounts are used to approximate fair value, which are reflected in Level 2. The carrying amounts of the remaining 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 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 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.