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Fair Value Measurements

6 Months Ended

Jun. 30, 2019

11. 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 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.

● 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.

● Level 3 – Fair values are based on at least one significant unobservable input for the asset or liability.

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 value 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 2019.

Fixed Maturities

Fixed maturities include bonds, ABS, redeemable preferred stock and certain non-redeemable 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 when 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 also 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. These are reflected in Level 3 in the fair value hierarchy and can include fixed maturities across all asset classes. As of June 30, 2019, less than 1% of our total fixed maturities were Level 3 securities valued using internal pricing models.

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, non-redeemable preferred stock and required regulatory 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, which reduces their fair value in the consolidated statements of financial position. The fair values of OTC cleared derivatives 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. Variation margin associated with OTC cleared derivatives is settled daily, which reduces their fair value in the consolidated statements of financial position. 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 or variation margin 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 and swaptions 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 interest rate options and have had 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 and currency options 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 and currency options 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.

Other Investments

Other investments reported at fair value include invested assets of consolidated sponsored investment funds, unconsolidated sponsored investment funds, other investment funds reported at fair value, commercial mortgage loans of consolidated VIEs for which the fair value option was elected, equity method real estate investments for which the fair value option was elected and certain redeemable preferred stock.

Invested assets of consolidated sponsored investment funds include equity securities, fixed maturities and other investments, for which fair values are determined as previously described, and are reflected in Level 1 and Level 2.

The fair value of unconsolidated sponsored investment funds and other investment funds is determined using the NAV of the fund. The NAV of the fund represents the price at which we would be able to initiate a transaction. Investments

for which the NAV represents a quoted price in an active market for identical assets are reflected in Level 1. Investments that do not have a quoted price in an active market are reflected in Level 2.

Commercial mortgage loans of consolidated VIEs are valued using the more observable fair value of the liabilities of the consolidated collateralized financing entities (“CCFEs”) under the measurement alternative guidance and are reflected in Level 2. The liabilities are affiliated so are not reflected in our consolidated results.

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.

The fair value of certain redeemable preferred stock is based on an internal model using unobservable inputs, which is reflected in Level 3. In 2018, the fair value was based on observable inputs and was reflected in Level 2.

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 three months or less. 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, cash equivalents 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 Contracts

Certain annuity contracts and other investment contracts include embedded derivatives that have been bifurcated from the host contract and 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 contracts and any embedded derivatives bifurcated from certain annuity and investment contracts is based on the current market credit spreads for debt-like instruments 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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis were as follows:

June 30, 2019

Assets/

Amount

(liabilities)

measured at

net asset

Fair value hierarchy level

fair value

value (4)

Level 1

Level 2

Level 3

(in millions)

Assets

Fixed maturities, available-for-sale:

U.S. government and agencies

1,536.4

—

1,125.6

410.8

—

Non-U.S. governments

1,000.7

—

2.0

994.8

3.9

States and political subdivisions

6,968.6

—

6,968.6

—

Corporate

38,171.3

—

19.1

38,107.5

44.7

Residential mortgage-backed securities

2,437.0

—

2,437.0

—

Commercial mortgage-backed securities

4,569.9

—

4,556.8

13.1

Collateralized debt obligations (1)

2,759.4

—

2,724.6

34.8

Other debt obligations

7,824.8

—

7,764.9

59.9

Total fixed maturities, available-for-sale

65,268.1

—

1,146.7

63,965.0

156.4

Fixed maturities, trading

686.8

—

686.3

0.5

Equity securities

1,895.2

—

633.5

1,261.7

—

Derivative assets (2)

291.5

—

261.3

30.2

Other investments

812.5

84.2

201.7

497.5

29.1

Cash equivalents

2,123.6

—

36.6

2,087.0

—

Sub-total excluding separate account assets

71,077.7

84.2

2,018.5

68,758.8

216.2

Separate account assets

162,848.6

129.7

91,789.6

62,239.5

8,689.8

Total assets

233,926.3

213.9

93,808.1

130,998.3

8,906.0

Liabilities

Investment contracts (3)

(118.7)

—

(118.7)

Derivative liabilities (2)

(168.0)

—

(153.6)

(14.4)

Other liabilities (3)

(96.0)

—

(96.0)

—

Total liabilities

(382.7)

—

(249.6)

(133.1)

Net assets

233,543.6

213.9

93,808.1

130,748.7

8,772.9


	December 31, 2018
	Assets/		Amount
	(liabilities)		measured at
	measured at		net asset		Fair value hierarchy level
	fair value		value (4)		Level 1		Level 2		Level 3
	(in millions)
Assets
Fixed maturities, available-for-sale:
U.S. government and agencies	$	1,441.0	$	—	$	1,027.8	$	413.2	$	—
Non-U.S. governments		890.5		—		2.7		883.2		4.6
States and political subdivisions		6,225.7		—		—		6,225.7		—
Corporate		35,539.3		—		19.2		35,462.2		57.9
Residential mortgage-backed securities		2,460.6		—		—		2,460.6		—
Commercial mortgage-backed securities		3,945.6		—		—		3,936.1		9.5
Collateralized debt obligations (1)		2,420.8		—		—		2,412.5		8.3
Other debt obligations		7,185.0		—		—		7,126.5		58.5
Total fixed maturities, available-for-sale		60,108.5		—		1,049.7		58,920.0		138.8
Fixed maturities, trading		636.1		—		—		636.1		—
Equity securities		1,843.7		—		661.2		1,182.5		—
Derivative assets (2)		194.0		—		—		175.4		18.6
Other investments		828.6		75.4		125.9		610.1		17.2
Cash equivalents		1,775.9		—		46.3		1,729.6		—
Sub-total excluding separate account assets		65,386.8		75.4		1,883.1		63,253.7		174.6
Separate account assets		144,987.9		124.6		79,572.0		56,675.8		8,615.5
Total assets	$	210,374.7	$	200.0	$	81,455.1	$	119,929.5	$	8,790.1

Liabilities
Investment contracts (3)	$	(45.2)	$	—	$	—	$	—	$	(45.2)
Derivative liabilities (2)		(157.1)		—		—		(141.6)		(15.5)
Other liabilities (3)		(91.5)		—		—		(91.5)		—
Total liabilities	$	(293.8)	$	—	$	—	$	(233.1)	$	(60.7)

Net assets	$	210,080.9	$	200.0	$	81,455.1	$	119,696.4	$	8,729.4

(1)	Primarily consists of collateralized loan obligations backed by secured corporate loans.

(2)

Within the consolidated statements of financial position, derivative assets are reported with other investments and derivative liabilities are reported with other liabilities. The amounts are presented gross in the tables above to reflect the presentation on the consolidated statements of financial position; however, are presented net for purposes of the rollforward in the Changes in Level 3 Fair Value Measurements tables. Refer to Note 4, Derivative Financial Instruments, for further information on fair value by class of derivative instruments.

(3)	Includes bifurcated embedded derivatives that are reported at net asset (liability) fair value within the same line item in the consolidated statements of financial position in which the host contract is reported.

(4)

Certain investments are measured at fair value using the NAV per share (or its equivalent) practical expedient and have not been classified in the fair value hierarchy. Other investments using the NAV practical expedient consist of certain fund interests that are restricted until maturity with unfunded commitments totaling $24.7 million and $32.0 million as of June 30, 2019 and December 31, 2018, respectively. Separate account assets using the NAV practical expedient consist of hedge funds with varying investment strategies that also have a variety of redemption terms and conditions. We do not have unfunded commitments associated with these hedge funds.

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) was as follows:

For the three months ended June 30, 2019

Changes in

Beginning

Net

Ending

unrealized

asset/

Total realized/unrealized

purchases,

asset/

gains (losses)

(liability)

gains (losses)

sales,

(liability)

included in

balance

Included in

issuances

balance

net income

as of

net

other

and

Transfers

as of

relating to

April 1,

income

comprehensive

settlements

into

out of

June 30,

positions still

2019

(1)

income (3)

(4)

Level 3

2019

held (1)

(in millions)

Assets

Fixed maturities, available-for-sale:

Non-U.S. governments

4.2

—

(0.3)

—

3.9

—

Corporate

58.5

—

(13.8)

—

44.7

—

Commercial mortgage-backed securities

12.0

(3.2)

2.9

—

3.7

(2.3)

13.1

(2.1)

Collateralized debt obligations

5.9

—

0.5

(1.6)

30.0

—

34.8

—

Other debt obligations

43.4

—

0.5

16.0

—

59.9

—

Total fixed maturities, available-for-sale

124.0

(3.2)

3.9

0.3

33.7

(2.3)

156.4

(2.1)

Fixed maturities,trading

—

0.5

—

0.5

—

Equity securities

0.4

—

(0.4)

—

Other investments

29.4

0.1

—

(0.4)

—

29.1

0.1

Separate account assets (2)

8,718.7

138.9

0.5

4.2

—

(172.5)

8,689.8

126.4

Liabilities

Investment contracts

(40.5)

(76.2)

(0.2)

(1.8)

—

(118.7)

(75.5)

Derivatives

Net derivative assets (liabilities)

3.4

6.6

—

5.8

—

15.8

11.2


	For the three months ended June 30, 2018
															Changes in
	Beginning						Net						Ending		unrealized
	asset/		Total realized/unrealized				purchases,						asset/		gains (losses)
	(liability)		gains (losses)				sales,						(liability)		included in
	balance		Included in		Included in		issuances						balance		net income
	as of		net		other		and		Transfers		Transfers		as of		relating to
	April 1,		income		comprehensive		settlements		into		out of		June 30,		positions still
	2018		(1)		income (3)		(4)		Level 3		Level 3		2018		held (1)
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	7.0	$	—	$	—	$	(0.4)	$	—	$	—	$	6.6	$	—
Corporate		103.8		—		(0.7)		(6.0)		0.4		(11.5)		86.0		—
Commercial mortgage-backed securities		11.1		—		(0.1)		—		—		(0.9)		10.1		—
Collateralized debt obligations		80.7		—		(0.4)		27.8		12.0		(39.9)		80.2		—
Other debt obligations		2.1		(0.1)		0.3		92.5		—		—		94.8		—
Total fixed maturities, available-for-sale		204.7		(0.1)		(0.9)		113.9		12.4		(52.3)		277.7		—
Fixed maturities, trading		—		—		—		3.7		—		—		3.7		—
Equity securities		14.9		0.7		—		(15.6)		—		—		—		—
Other investments		9.3		0.3		—		3.6		—		—		13.2		0.3
Separate account assets (2)		7,991.9		245.4		0.1		54.5		—		(0.4)		8,291.5		257.9

Liabilities
Investment contracts		(96.2)		52.0		(0.1)		1.5		—		—		(42.8)		51.6

Derivatives
Net derivative assets (liabilities)		16.8		(11.1)		—		(0.3)		—		—		5.4		(12.4)

For the six months ended June 30, 2019

Changes in

Beginning

Net

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

as of

relating to

January 1,

income

comprehensive

settlements

into

out of

June 30,

positions still

2019

(1)

income (3)

(4)

Level 3

2019

held (1)

(in millions)

Assets

Fixed maturities, available-for-sale:

Non-U.S. governments

4.6

—

(0.7)

—

3.9

—

Corporate

57.9

—

0.4

(13.6)

—

44.7

—

Commercial mortgage-backed securities

9.5

(3.2)

3.2

2.2

3.7

(2.3)

13.1

(2.1)

Collateralized debt obligations

8.3

(2.5)

0.3

(1.3)

30.0

—

34.8

(2.5)

Other debt obligations

58.5

—

1.6

25.8

—

(26.0)

59.9

—

Total fixed maturities, available-for-sale

138.8

(5.7)

5.5

12.4

33.7

(28.3)

156.4

(4.6)

Fixed maturities, trading

—

0.5

—

0.5

—

Other investments

17.2

2.3

—

(0.4)

10.0

—

29.1

2.3

Separate account assets (2)

8,615.5

313.5

0.1

(66.1)

—

(173.2)

8,689.8

327.2

Liabilities

Investment contracts

(45.2)

(71.9)

(0.1)

(1.5)

—

(118.7)

(70.3)

Derivatives

Net derivative assets (liabilities)

3.1

5.0

—

7.7

—

15.8

8.9


	For the six months ended June 30, 2018
															Changes in
	Beginning						Net						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
	January 1,		income		comprehensive		settlements		into		out of		June 30,		positions still
	2018		(1)		income (3)		(4)		Level 3		Level 3		2018		held (1)
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	7.4	$	—	$	(0.1)	$	(0.7)	$	—	$	—	$	6.6	$	—
Corporate		128.0		1.1		(0.3)		(3.6)		1.0		(40.2)		86.0		—
Commercial mortgage-backed securities		10.6		(2.5)		0.5		(0.1)		2.5		(0.9)		10.1		—
Collateralized debt obligations		125.0		(0.6)		0.6		2.3		12.1		(59.2)		80.2		(0.6)
Other debt obligations		2.3		—		0.2		92.3		—		—		94.8		—
Total fixed maturities, available-for-sale		273.3		(2.0)		0.9		90.2		15.6		(100.3)		277.7		(0.6)
Fixed maturities, trading		—		—		—		3.7		—		—		3.7		—
Equity securities		2.7		12.9		—		(15.6)		—		—		—		—
Other investments		6.5		1.8		—		4.9		—		—		13.2		1.8
Separate account assets (2)		7,651.4		409.8		(0.6)		231.3		—		(0.4)		8,291.5		402.6

Liabilities
Investment contracts		(160.3)		115.7		0.1		1.7		—		—		(42.8)		115.3

Derivatives
Net derivative assets (liabilities)		18.1		(16.1)		—		3.4		—		—		5.4		(16.0)

(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 securities with an investment objective to realize economic value through mark-to-market changes 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)	Includes foreign currency translation adjustments related to our Principal International segment.

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

For the three months ended June 30, 2019

Net purchases,

sales, issuances

Purchases

Sales

Issuances

Settlements

and settlements

(in millions)

Assets

Fixed maturities, available-for-sale:

Non-U.S. governments

—

(0.3)

Corporate

5.2

(0.2)

—

(18.8)

(13.8)

Collateralized debt obligations

—

(1.6)

Other debt obligations

16.8

—

(0.8)

16.0

Total fixed maturities, available-for-sale

22.0

(0.2)

—

(21.5)

0.3

Fixed maturities, trading

0.5

—

0.5

Other investments

4.5

(4.9)

—

(0.4)

Separate account assets (5)

41.0

(112.8)

(156.5)

232.5

4.2

Liabilities

Investment contracts

—

(3.5)

1.7

(1.8)

Derivatives

Net derivative assets (liabilities)

—

5.8

—

5.8


	For the three months ended June 30, 2018
									Net purchases,
									sales, issuances
	Purchases		Sales		Issuances		Settlements		and settlements
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	—	$	—	$	—	$	(0.4)	$	(0.4)
Corporate		0.7		—		—		(6.7)		(6.0)
Collateralized debt obligations		28.1		—		—		(0.3)		27.8
Other debt obligations		94.4		—		—		(1.9)		92.5
Total fixed maturities, available-for-sale		123.2		—		—		(9.3)		113.9
Fixed maturities, trading		3.7		—		—		—		3.7
Equity securities		—		(15.6)		—		—		(15.6)
Other investments		3.6		—		—		—		3.6
Separate account assets (5)		231.4		(124.1)		(60.0)		7.2		54.5

Liabilities
Investment contracts		—		—		0.7		0.8		1.5

Derivatives
Net derivative assets (liabilities)		(1.2)		0.9		—		—		(0.3)

For the six months ended June 30, 2019

Net purchases,

sales, issuances

Purchases

Sales

Issuances

Settlements

and settlements

(in millions)

Assets

Fixed maturities, available-for-sale:

Non-U.S. governments

—

(0.7)

Corporate

5.7

(0.4)

—

(18.9)

(13.6)

Commercial mortgage-backed securities

2.4

—

(0.2)

2.2

Collateralized debt obligations

—

(1.3)

Other debt obligations

26.8

—

(1.0)

25.8

Total fixed maturities, available-for-sale

34.9

(0.4)

—

(22.1)

12.4

Fixed maturities, trading

0.5

—

0.5

Other investments

4.5

(4.9)

—

(0.4)

Separate account assets (5)

120.0

(214.5)

(203.8)

232.2

(66.1)

Liabilities

Investment contracts

—

(4.8)

3.3

(1.5)

Derivatives

Net derivative assets (liabilities)

—

7.7

—

7.7


	For the six months ended June 30, 2018
									Net purchases,
									sales, issuances
	Purchases		Sales		Issuances		Settlements		and settlements
	(in millions)
Assets
Fixed maturities, available-for-sale:
Non-U.S. governments	$	—	$	—	$	—	$	(0.7)	$	(0.7)
Corporate		12.0		(4.2)		—		(11.4)		(3.6)
Commercial mortgage-backed securities		—		—		—		(0.1)		(0.1)
Collateralized debt obligations		28.1		—		—		(25.8)		2.3
Other debt obligations		94.4		—		—		(2.1)		92.3
Total fixed maturities, available-for-sale		134.5		(4.2)		—		(40.1)		90.2
Fixed maturities, trading		3.7		—		—		—		3.7
Equity securities		—		(15.6)		—		—		(15.6)
Other investments		4.9		—		—		—		4.9
Separate account assets (5)		571.8		(228.5)		(105.5)		(6.5)		231.3

Liabilities
Investment contracts		—		—		0.2		1.5		1.7

Derivatives
Net derivative assets (liabilities)		1.9		1.5		—		—		3.4

(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 were as follows:

For the three months ended June 30, 2019

Transfers out

of Level 1 into

of Level 2 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:

Commercial mortgage-backed securities

—

3.7

—

2.3

Collateralized debt obligations

—

30.0

—

Total fixed maturities, available-for-sale

—

33.7

—

2.3

Separate account assets

102.7

—

172.5


	For the three months ended June 30, 2018
	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	$	—	$	—	$	—	$	0.4	$	—	$	11.5
Commercial mortgage-backed securities		—		—		—		—		—		0.9
Collateralized debt obligations		—		—		—		12.0		—		39.9
Total fixed maturities, available-for-sale		—		—		—		12.4		—		52.3
Separate account assets		0.1		—		0.1		—		0.2		0.2

For the six months ended June 30, 2019

Transfers out

of Level 1 into

of Level 2 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:

U.S. government and agencies

—

1.1

—

Commercial mortgage-backed securities

—

3.7

—

2.3

Collateralized debt obligations

—

30.0

—

Other debt obligations

—

1.1

—

26.0

Total fixed maturities, available-for-sale

—

2.2

33.7

—

28.3

Other investments

—

10.0

—

Separate account assets

102.7

—

173.2


	For the six months ended June 30, 2018
	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	$	—	$	—	$	—	$	1.0	$	—	$	40.2
Commercial mortgage-backed securities		—		—		—		2.5		—		0.9
Collateralized debt obligations		—		—		—		12.1		—		59.2
Total fixed maturities, available-for-sale		—		—		—		15.6		—		100.3
Separate account assets		292.5		—		0.8		—		0.2		0.2

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

Separate account assets transferred from Level 1 to Level 2 during the three and six months ended June 30, 2019, included certain separate accounts we now value using the unit trust approved pooled investment fund (“APIF”) as the unit of account that were previously valued using the underlying investments of the unit trust APIF. Separate account assets transferred from Level 1 to Level 2 during the six months ended June 30, 2018, primarily included cash equivalents as a result of additional analysis to clarify the source of the price.

Assets transferred into Level 3 during the three and six months ended June 30, 2019 and 2018, 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. In addition, other investments transferred from Level 2 into Level 3 during the six months ended June 30, 2019, included certain redeemable preferred stock for which at least one significant unobservable input is now used to determine fair value.

Assets transferred out of Level 3 during the three and six months ended June 30, 2019, primarily included certain separate accounts we now value using the unit trust APIF as the unit of account that were previously valued using the underlying investments of the unit trust APIF. Assets transferred out of Level 3 during the three and six months ended June 30, 2018, primarily included those assets 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 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.

June 30, 2019

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

3.9

Discounted cash flow

Discount rate (1)

2.6%

Illiquidity premium

50 basis points ("bps")

50bps

Comparability adjustment

(25)bps

Corporate

30.9

Discounted cash flow

Discount rate (1)

2.3%

6.0%

3.1%

Illiquidity premium

0bps

60bps

31bps

Comparability adjustment

0bps

130bps

21bps

Commercial mortgage-backed securities

2.8

Discounted cash flow

Discount rate (1)

35.0%

Probability of default

100.0%

Potential loss severity

44.8%

Other debt obligations

1.9

Discounted cash flow

Discount rate (1)

5.0%

Illiquidity premium

500bps

Separate account assets

8,689.0

Discounted cash flow -
mortgage loans

Discount rate (1)

3.2%

Illiquidity premium

60bps

Credit spread rate

138bps

Discounted cash flow -
real estate

Discount rate (1)

5.6%

14.0%

6.7%

Terminal capitalization rate

4.3%

9.3%

5.7%

Average market rent growth rate

1.8%

4.6%

2.9%

Discounted cash flow -
real estate debt

Loan to value

11.0%

68.6%

46.2%

Market interest rate

3.2%

6.0%

3.7%


Liabilities
Investment contracts (5)	(118.7)	Discounted cash flow	Long duration interest rate	2.2%	-	2.3%	(2)
			Long-term equity market volatility	15.0%	-	26.6%
			Non-performance risk	0.4%	-	1.4%
			Utilization rate	See note (3)
			Lapse rate	1.3%	-	16.0%
			Mortality rate	See note (4)


	December 31, 2018
	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	$	4.6	Discounted cash flow	Discount rate (1)			3.2%	3.2%
				Illiquidity premium			50bps	50bps
				Comparability adjustment			(25)bps	(25)bps
Corporate		25.4	Discounted cash flow	Discount rate (1)	3.3%	-	4.5%	3.9%
				Illiquidity premium	0bps	-	60bps	36bps
Other debt obligations		1.7	Discounted cash flow	Discount rate (1)			5.0%	5.0%
				Illiquidity premium			500bps	500bps
Separate account assets		8,440.8	Discounted cash flow - mortgage loans	Discount rate (1)	3.3%	-	4.7%	4.2%
				Illiquidity premium	0bps	-	60bps	56bps
				Credit spread rate	85bps	-	172bps	168bps
			Discounted cash flow - real estate	Discount rate (1)	5.6%	-	11.5%	6.7%
				Terminal capitalization rate	4.3%	-	9.3%	5.8%
				Average market rent growth rate	2.0%	-	4.7%	2.9%
			Discounted cash flow - real estate debt	Loan to value	11.0%	-	69.3%	45.9%
				Market interest rate	3.9%	-	6.0%	4.3%


Liabilities
Investment contracts (5)	(45.2)	Discounted cash flow	Long duration interest rate	2.8%	-	2.9%	(2)
			Long-term equity market volatility	16.7%	-	27.8%
			Non-performance risk	0.6%	-	1.6%
			Utilization rate			See note (3)
			Lapse rate	1.3%	-	16.0%
			Mortality rate	See note (4)

(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 illiquidity or other adjustments, where applicable.

(2)	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.

(3)	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.

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

(5)	Includes bifurcated embedded derivatives that are reported at net asset (liability) fair value within the same line item in the consolidated statements of financial position in which the host contract is reported.

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 within our investment contracts liability can be in either an asset or liability position, 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 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

No significant assets and liabilities were measured at fair value on a nonrecurring basis for the three and six months ended June 30, 2019 and 2018.

Fair Value Option

We elected fair value accounting for:

● Certain commercial mortgage loans of consolidated VIEs for which it was not practicable for us to determine the carrying value.

● Certain real estate ventures that are subject to the equity method of accounting because the nature of the investments is 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.

The following tables present information regarding the assets and liabilities for which the fair value option was elected.


	June 30, 2019		December 31, 2018
	(in millions)
Commercial mortgage loans of consolidated VIEs (1) (2)
Fair value	$	5.4	$	6.4
Aggregate contractual principal		5.4		6.5

Real estate ventures (1)
Fair value		19.1		17.2

(1)	Reported with other investments in the consolidated statements of financial position.

(2)	None of the loans were more than 90 days past due or in non-accrual status.


	For the three months ended June 30,				For the six months ended June 30,
	2019		2018		2019		2018
	(in millions)
Commercial mortgage loans of consolidated VIEs
Change in fair value pre-tax loss (1) (2)	$	—	$	—	$	—	$	(0.1)
Interest income (3)		0.1		0.2		0.2		0.4

Real estate ventures
Change in fair value pre-tax gain (4)		0.1		0.3		2.3		1.8

(1)	None of the change in fair value related to instrument-specific credit risk.

(2)	Reported in net realized capital gains (losses) on the consolidated statements of operations.

(3)	Reported in net investment income on the consolidated statements of operations and recorded based on the effective interest rates as determined at the closing of the loan.

(4)	Reported in net investment income on the consolidated statements of operations.

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, 2019

Fair value hierarchy level

Carrying amount

Fair value

Level 1

Level 2

Level 3

(in millions)

Assets (liabilities)

Mortgage loans

16,136.8

16,805.7

—

16,805.7

Policy loans

800.9

1,038.1

—

1,038.1

Other investments

261.8

266.1

—

175.0

91.1

Cash and cash equivalents

1,192.3

1,117.7

74.6

—

Investment contracts

(32,386.1)

(32,182.8)

—

(3,880.9)

(28,301.9)

Short-term debt

(76.8)

—

(76.8)

—

Long-term debt

(3,762.4)

(4,023.6)

—

(3,887.4)

(136.2)

Separate account liabilities

(149,038.5)

(147,848.3)

—

(147,848.3)

Bank deposits (1)

(485.1)

(481.3)

—

(481.3)

—

Cash collateral payable

(116.1)

—


	December 31, 2018
					Fair value hierarchy level
	Carrying amount		Fair value		Level 1		Level 2		Level 3
	(in millions)
Assets (liabilities)
Mortgage loans	$	15,336.9	$	15,383.6	$	—	$	—	$	15,383.6
Policy loans		801.4		965.5		—		—		965.5
Other investments		247.4		239.8		—		157.5		82.3
Cash and cash equivalents		1,201.6		1,201.6		1,148.6		53.0		—
Investment contracts		(32,572.1)		(31,428.2)		—		(4,085.7)		(27,342.5)
Short-term debt		(42.9)		(42.9)		—		(42.9)		—
Long-term debt		(3,259.6)		(3,257.1)		—		(3,129.3)		(127.8)
Separate account liabilities		(132,562.9)		(131,491.4)		—		—		(131,491.4)
Bank deposits (1)		(500.0)		(489.1)		—		(489.1)		—
Cash collateral payable		(79.5)		(79.5)		(79.5)		—		—

(1)	Excludes deposit liabilities without defined or contractual maturities.

- Definition

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

+ References + Details