5. Fair Value

Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. We determine fair value based on the following fair value hierarchy:

Level 1 – Unadjusted quoted prices for identical assets or liabilities in an active market.

Level 2 – Quoted prices for inactive markets or valuation techniques that require observable direct or indirect inputs for substantially the full term of the asset or liability. Level 2 inputs include the following:


•	Quoted prices for similar assets or liabilities in active markets,


•	Observable inputs other than quoted market prices, and


•	Observable inputs derived principally from market data through correlation or other means.

Level 3 – Prices or valuation techniques with unobservable inputs significant to the overall fair value estimate. These valuations use critical assumptions not readily available to market participants. Level 3 valuations are based on market standard valuation methodologies, including discounted cash flows, matrix pricing or other similar techniques.

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the instrument's fair value measurement.

We use a number of valuation sources to determine fair values. Valuation sources can include quoted market prices; third-party commercial pricing services; third-party brokers; industry-standard, vendor modeling software that uses market observable inputs; and other internal modeling techniques based on projected cash flows. We periodically review the assumptions and inputs of third-party commercial pricing services through internal valuation price variance reviews, comparisons to internal pricing models, back testing to recent trades, or monitoring trading volumes.

The following represents the hierarchy for our assets and liabilities measured at fair value on a recurring basis:



	June 30, 2017
(In millions)	Total		NAV¹		Level 1		Level 2		Level 3
Assets
AFS securities
Fixed maturity securities
U.S. government and agencies	$	57	$	—	$	28	$	29	$	—
U.S. state, municipal and political subdivisions	1,156		—		—		1,156		—
Foreign governments	2,213		—		—		2,199		14
Corporate	33,220		—		—		32,768		452
CLO	5,170		—		—		5,089		81
ABS	3,604		—		—		2,511		1,093
CMBS	1,865		—		—		1,743		122
RMBS	9,528		—		—		9,216		312
Total AFS fixed maturity securities	56,813		—		28		54,711		2,074
Equity securities	429		—		182		241		6
Total AFS securities	57,242		—		210		54,952		2,080
Trading securities
Fixed maturity securities
U.S. government and agencies	3		—		3		—		—
U.S. state, municipal and political subdivisions	136		—		—		119		17
Corporate	1,479		—		—		1,479		—
CLO	27		—		—		5		22
ABS	87		—		—		87		—
CMBS	64		—		—		64		—
RMBS	418		—		—		318		100
Total trading fixed maturity securities	2,214		—		3		2,072		139
Equity securities	478		—		—		478		—
Total trading securities	2,692		—		3		2,550		139
Mortgage loans	43		—		—		—		43
Investment funds	94		94		—		—		—
Funds withheld at interest – embedded derivative	279		—		—		—		279
Derivative assets	1,808		—		6		1,802		—
Short-term investments	106		—		34		72		—
Cash and cash equivalents	3,478		—		3,478		—		—
Restricted cash	105		—		105		—		—
Investments in related parties
AFS, fixed maturity securities
CLO	283		—		—		283		—
ABS	54		—		—		54		—
Total AFS securities – related party	337		—		—		337		—
Trading securities, CLO	166		—		—		43		123
Investment funds	22		22		—		—		—
Short-term investments	28		—		—		—		28
Reinsurance recoverable	1,782		—		—		—		1,782
Total assets measured at fair value	$	68,182	$	116	$	3,836	$	59,756	$	4,474
									(Continued)



	June 30, 2017
(In millions)	Total		NAV¹		Level 1		Level 2		Level 3
Liabilities
Interest sensitive contract liabilities
Embedded derivative	$	6,207	$	—	$	—	$	—	$	6,207
Universal life benefits	954		—		—		—		954
Unit-linked contracts	458		—		—		458		—
Future policy benefits
AmerUs Closed Block	1,621		—		—		—		1,621
ILICO Closed Block and life benefits	812		—		—		—		812
Derivative liabilities	63		—		1		56		6
Funds withheld liability – embedded derivative	15		—		—		15		—
Total liabilities measured at fair value	$	10,130	$	—	$	1	$	529	$	9,600

¹ Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy.
									(Concluded)



	December 31, 2016
(In millions)	Total		NAV¹		Level 1		Level 2		Level 3
Assets
AFS securities
Fixed maturity securities
U.S. government and agencies	$	60	$	—	$	29	$	31	$	—
U.S. state, municipal and political subdivisions	1,140		—		—		1,135		5
Foreign governments	2,235		—		—		2,221		14
Corporate	30,020		—		—		29,650		370
CLO	4,822		—		—		4,664		158
ABS	2,936		—		—		1,776		1,160
CMBS	1,847		—		—		1,695		152
RMBS	8,973		—		—		8,956		17
Total AFS fixed maturity securities	52,033		—		29		50,128		1,876
Equity securities	353		—		79		269		5
Total AFS securities	52,386		—		108		50,397		1,881
Trading securities
Fixed maturity securities
U.S. government and agencies	3		—		3		—		—
U.S. state, municipal and political subdivisions	137		—		—		120		17
Corporate	1,423		—		—		1,423		—
CLO	43		—		—		—		43
ABS	82		—		—		82		—
CMBS	81		—		—		81		—
RMBS	387		—		—		291		96
Total trading fixed maturity securities	2,156		—		3		1,997		156
Equity securities	425		—		—		425		—
Total trading securities	2,581		—		3		2,422		156
									(Continued)



	December 31, 2016
(In millions)	Total		NAV¹		Level 1		Level 2		Level 3
Mortgage loans	44		—		—		—		44
Investment funds	99		99		—		—		—
Funds withheld at interest – embedded derivative	140		—		—		—		140
Derivative assets	1,370		—		9		1,361		—
Short-term investments	189		—		19		170		—
Cash and cash equivalents	2,445		—		2,445		—		—
Restricted cash	57		—		57		—		—
Investments in related parties
AFS, fixed maturity securities
CLO	279		—		—		279		—
ABS	56		—		—		—		56
Total AFS fixed maturity securities	335		—		—		279		56
AFS, equity securities	20		—		20		—		—
Total AFS securities – related party	355		—		20		279		56
Trading securities, CLO	195		—		—		—		195
Reinsurance recoverable	1,692		—		—		—		1,692
Total assets measured at fair value	$	61,553	$	99	$	2,661	$	54,629	$	4,164
Liabilities
Interest sensitive contract liabilities
Embedded derivative	$	5,283	$	—	$	—	$	—	$	5,283
Universal life benefits	883		—		—		—		883
Unit-linked contracts	408		—		—		408		—
Future policy benefits
AmerUs Closed Block	1,606		—		—		—		1,606
ILICO Closed Block and life benefits	794		—		—		—		794
Derivative liabilities	40		—		—		33		7
Funds withheld liability – embedded derivative	6		—		—		6		—
Total liabilities measured at fair value	$	9,020	$	—	$	—	$	447	$	8,573

¹ Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy.
									(Concluded)

Refer to Note 4 – Variable Interest Entities for fair value disclosures associated with consolidated VIEs.

Fair Value Valuation Methods—We used the following valuation methods and assumptions to estimate fair value:

AFS and trading securities

Fixed maturity – We obtain the fair value for most marketable bonds without an active market from several commercial pricing services. These are classified as Level 2 assets. The pricing services incorporate a variety of market observable information in their valuation techniques, including benchmark yields, trading activity, credit quality, issuer spreads, bids, offers and other reference data. This category typically includes U.S. and non-U.S. corporate bonds, U.S. agency and government guaranteed securities, ABS, CMBS and RMBS.

We value privately placed fixed maturity securities based on the credit quality and duration of comparable marketable securities, which may be securities of another issuer with similar characteristics. In some instances, we use a matrix-based pricing model. These models consider the current level of risk-free interest rates, corporate spreads, credit quality of the issuer and cash flow characteristics of the security. We also consider additional factors such as net worth of the borrower, value of collateral, capital structure of the borrower, presence of guarantees and our evaluation of the borrower's ability to compete in its relevant market. Privately placed fixed maturity securities are classified as Level 2 or 3.

Equity securities – Fair values of publicly traded equity securities are based on quoted market prices and classified as Level 1. Other equity securities, typically private equities or equity securities not traded on an exchange, we value based on other sources, such as commercial pricing services or brokers and are classified as Level 2 or 3.

Mortgage loans – Mortgage loans for which we have elected the fair value option or those held for sale are carried at fair value. We estimate fair value on a monthly basis using discounted cash flow analysis and rates being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. The discounted cash flow model uses unobservable inputs, including estimates of discount rates and loan prepayments. Mortgage loans are classified as Level 3.

Funds withheld (embedded derivative) – We estimate the fair value of the embedded derivative based on the change in the fair value of the assets supporting the funds withheld payable under the combined coinsurance, modco and coinsurance funds withheld reinsurance agreements. As a result, the fair value of the embedded derivative is classified as Level 2 or 3 based on the valuation methods used for the assets held in trust supporting the reinsurance agreements.

Derivatives – Derivative contracts can be exchange traded or over-the-counter. Exchange-traded derivatives typically fall within Level 1 of the fair value hierarchy depending on trading activity. Over-the-counter derivatives are valued using valuation models or an income approach using third-party broker valuations. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlation of the inputs. We consider and incorporate counterparty credit risk in the valuation process through counterparty credit rating requirements and monitoring of overall exposure. We also evaluate and include our own nonperformance risk in valuing derivatives. The majority of our derivatives trade in liquid markets; therefore, we can verify model inputs and model selection does not involve significant management judgment. These are typically classified within Level 2 of the fair value hierarchy.

Cash and cash equivalents – The carrying amount for cash equals fair value. We estimate the fair value for cash equivalents based on quoted market prices. These assets are classified as Level 1.

Interest sensitive contract liabilities (embedded derivative) – Embedded derivatives related to interest sensitive contract liabilities with fixed indexed annuity products are classified as Level 3. The valuations include significant unobservable inputs associated with economic assumptions and actuarial assumptions for policyholder behavior.

Unit-linked contracts – Unit-linked contracts are valued based on the fair value of the investments supporting the contract. The underlying investments are trading securities comprised primarily of mutual funds. The valuations of these are based on quoted market prices for similar assets and are classified as Level 2, resulting in a corresponding classification for the unit-linked contracts.

AmerUs Closed Block – We elected the fair value option for the future policy benefits liability in the AmerUs Closed Block. Our valuation technique is to set the fair value of policyholder liabilities equal to the fair value of assets. There is an additional component which captures the fair value of the open block's cost to hold capital in excess of existing liabilities on the closed block. This component uses a present value of future cash flows, which includes investment earnings and policyholder liability movements. Unobservable inputs include estimates for these items. The target surplus as a percentage of statutory reserves is 3.85% based on the statutory risk-based capital ratio applicable to this block of business. The AmerUs Closed Block policyholder liabilities and any corresponding reinsurance recoverable are classified as Level 3.

ILICO Closed Block – We elected the fair value option for the ILICO Closed Block. Our valuation technique is to set the fair value of policyholder liabilities equal to the fair value of assets. There is an additional component which captures the fair value of the open block's obligations to the closed block business. This component uses the present value of future cash flows. The cash flows include commissions, administrative expenses, reinsurance premiums and benefits, and an explicit cost of capital. Unobservable inputs include estimates for these items. The explicit cost of capital assumption is 9% of required capital, post tax. A margin of 8.94% is included in the discount rates to reflect the business risk. An additional 0.25% is included to reflect non-performance risk. The ILICO Closed Block policyholder liabilities and corresponding reinsurance recoverable are classified as Level 3.

Universal life liabilities and other life benefits – We elected the fair value option for certain blocks of universal and other life business ceded to Global Atlantic Financial Group Limited (together with its subsidiaries, Global Atlantic). We use a present value of liability cash flows. Unobservable inputs include estimates of mortality, persistency, expenses, premium payments and a risk margin used in the discount rates that reflects the riskiness of the business. The risk margin was 0.09%. These universal life policyholder liabilities and corresponding reinsurance recoverable are classified as Level 3.

Fair Value Option—The following represents the gains (losses) recorded for instruments for which we have elected the fair value option:



	Three months ended June 30,						Six months ended June 30,
(In millions)	2017			2016			2017			2016
Trading securities	$	44		$	53		$	46		$	65
Investment funds	7			(3		)	14			—
Future policy benefits	(19		)	(48		)	(15		)	(101		)
Total gains (losses)	$	32		$	2		$	45		$	(36	)

Gains and losses on trading securities are recorded in investment related gains (losses) on the condensed consolidated statements of income. For fair value option mortgage loans, we record interest income in net investment income and subsequent changes in fair value in investment related gains (losses) on the condensed consolidated statements of income. Gains and losses related to investment funds, including related party investment funds, are recorded in net investment income on the condensed consolidated statements of income. We record the change in fair value of future policy benefits to future policy and other policy benefits on the condensed consolidated statements of income.

The following summarizes information for fair value option mortgage loans:



(In millions)	June 30, 2017		December 31, 2016
Unpaid principal balance	$	41	$	42
Mark to fair value	2		2
Fair value	$	43	$	44

There were no fair value option mortgage loans 90 days or more past due as of June 30, 2017 and December 31, 2016.

Transfers Between Levels—Transfers into Level 3 generally represent securities that were valued using pricing sources which, due to changing market conditions, were less observable than in prior periods as indicated by the increased volatility, which was reflected in vendor prices obtained for individual securities. Additionally, changes in pricing sources also led to securities transferring into Level 3.

Transfers out of Level 3 generally represent securities that were valued using pricing sources which, due to changing market conditions, were more observable than in prior periods as indicated by decreased volatility, which was reflected in vendor prices obtained for individual securities. Additionally, changes in pricing sources also led to securities transferring into Level 2.

Transfers into or out of any level are assumed to occur at the end of the period. For the three and six months ended June 30, 2017 and 2016, there were no transfers between Level 1 and Level 2.

Level 3 Financial Instruments—The following is a reconciliation for all Level 3 assets and liabilities measured at fair value on a recurring basis:



	Three months ended June 30, 2017
				Total realized and unrealized gains (losses)								Transfers
(In millions)	Beginning Balance			Included in income			Included in OCI		Purchases, issuances, sales and settlements, net			In		(Out)			Ending Balance			Total gains (losses) included in earnings¹
Assets
AFS securities
Fixed maturity
Foreign governments	$	13		$	1		$	—	$	—		$	—	$	—		$	14		$	—
Corporate	490			3			4		28			—		(73		)	452			—
CLO	100			—			4		17			11		(51		)	81			—
ABS	1,222			5			3		11			—		(148		)	1,093			—
CMBS	147			1			—		13			48		(87		)	122			—
RMBS	60			1			2		6			243		—			312			—
Equity securities	5			—			—		1			—		—			6			—
Trading securities
Fixed maturity
U.S. state, municipal and political subdivisions	17			—			—		—			—		—			17			—
CLO	27			—			—		—			—		(5		)	22			1
RMBS	82			(4		)	—		22			—		—			100			—
Mortgage loans	44			—			—		(1)			—		—			43			—
Funds withheld at interest – embedded derivative	212			67			—		—			—		—			279			—
Investments in related parties
Trading securities, CLO	131			5			—		(12		)	31		(32		)	123			5
Short-term investments	20			—			—		8			—		—			28			—
Reinsurance recoverable	1,738			44			—		—			—		—			1,782			—
Total Level 3 assets	$	4,308		$	123		$	13	$	93		$	333	$	(396	)	$	4,474		$	6

Liabilities
Interest sensitive contract liabilities
Embedded derivative	$	(5,793	)	$	(302	)	$	—	$	(112	)	$	—	$	—		$	(6,207	)	$	—
Universal life liabilities	(910		)	(44		)	—		—			—		—			(954		)	—
Future policy benefits
AmerUs Closed Block	(1,602		)	(19		)	—		—			—		—			(1,621		)	—
ILICO Closed Block and life benefits	(813		)	1			—		—			—		—			(812		)	—
Derivative liabilities	(7		)	1			—		—			—		—			(6		)	—
Total Level 3 liabilities	$	(9,125	)	$	(363	)	$	—	$	(112	)	$	—	$	—		$	(9,600	)	$	—

¹ Related to instruments held at end of period.



	Three months ended June 30, 2016
					Total realized and unrealized gains (losses)									Transfers
(In millions)	Beginning balance				Included in income			Included in OCI			Purchases, issuances, sales and settlements, net			In		Out			Ending balance			Total gains (losses) included in earnings¹
Assets
AFS securities
Fixed maturity
Foreign governments	$	17			$	—		$	(1	)	$	—		$	—	$	—		$	16		$	—
Corporate	449				3			3			3			35		(91		)	402			—
CLO	1,037				1			53			17			89		(912		)	285			—
ABS	1,361				24			1			(86		)	2		(64		)	1,238			—
CMBS	83				—			3			—			50		(56		)	80			—
RMBS	689				—			13			(32		)	—		(670		)	—			—
Equity securities	10				—			—			—			—		—			10			—
Trading securities
Fixed maturity
U.S. state, municipal and political subdivisions	17				—			—			—			—		—			17			—
Corporate	—			—	—			—			—			1		—			1			—
CLO	97				8			—			(1		)	—		—			104			12
ABS	96				(7		)	—			—			—		—			89			—
RMBS	71				—			—			61			—		(10		)	122			3
Mortgage loans	45				1			—			(1		)	—		—			45			—
Funds withheld at interest – embedded derivative	37				85			—			—			—		—			122			—
Investments in related parties
AFS securities
Fixed maturity
CLO	46				—			1			—			—		(47		)	—			—
ABS	59				—			—			(1		)	—		—			58			—
Trading securities, CLO	213				(10		)	—			8			—		—			211			6
Reinsurance recoverable	2,012				(114		)	—			—			—		—			1,898			—
Total Level 3 assets	$	6,339			$	(9	)	$	73		$	(32	)	$	177	$	(1,850	)	$	4,698		$	21

Liabilities
Interest sensitive contract liabilities
Embedded derivative	$	(4,583	)		$	(132	)	$	—		$	(92	)	$	—	$	—		$	(4,807	)	$	—
Universal life liabilities	(1,119		)		60			—			—			—		—			(1,059		)	—
Future policy benefits
AmerUs Closed Block	(1,634		)		(48		)	—			—			—		—			(1,682		)	—
ILICO Closed Block and life benefits	(877		)		54			—			—			—		—			(823		)	—
Derivative liabilities	(8		)		—			—			—			—		—			(8		)	—
Total Level 3 liabilities	$	(8,221	)		$	(66	)	$	—		$	(92	)	$	—	$	—		$	(8,379	)	$	—

¹Related to instruments held at end of period.



	Six months ended June 30, 2017
				Total realized and unrealized gains (losses)									Transfers
(In millions)	Beginning Balance			Included in income			Included in OCI			Purchases, issuances, sales and settlements, net			In		(Out)			Ending Balance			Total gains (losses) included in earnings¹
Assets
AFS securities
Fixed maturity
U.S. state, municipal and political subdivisions	$	5		$	16		$	(1	)	$	(20	)	$	—	$	—		$	—		$	—
Foreign governments	14			1			—			(1		)	—		—			14			—
Corporate	370			4			10			105			—		(37		)	452			—
CLO	158			—			9			7			11		(104		)	81			—
ABS	1,160			9			17			42			—		(135		)	1,093			—
CMBS	152			1			(3		)	13			17		(58		)	122			—
RMBS	17			1			—			6			296		(8		)	312			—
Equity securities	5			—			—			1			—		—			6			—
Trading securities
Fixed maturity
U.S. state, municipal and political subdivisions	17			—			—			—			—		—			17			—
CLO	43			(1		)	—			(15		)	—		(5		)	22			2
RMBS	96			(9		)	—			24			—		(11		)	100			(1		)
Mortgage loans	44			—			—			(1		)	—		—			43			—
Funds withheld at interest – embedded derivative	140			139			—			—			—		—			279			—
Investments in related parties
AFS securities
Fixed maturity
ABS	56			—			1			(4		)	—		(53		)	—			—
Trading securities, CLO	195			(3		)	—			(26		)	—		(43		)	123			(1		)
Short-term investments	—			—			—			28			—		—			28			—
Reinsurance recoverable	1,692			90			—			—			—		—			1,782			—
Total Level 3 assets	$	4,164		$	248		$	33		$	159		$	324	$	(454	)	$	4,474		$	—

Liabilities
Interest sensitive contract liabilities
Embedded derivative	$	(5,283	)	$	(733	)	$	—		$	(191	)	$	—	$	—		$	(6,207	)	$	—
Universal life liabilities	(883		)	(71		)	—			—			—		—			(954		)	—
Future policy benefits
AmerUs Closed Block	(1,606		)	(15		)	—			—			—		—			(1,621		)	—
ILICO Closed Block and life benefits	(794		)	(18		)	—			—			—		—			(812		)	—
Derivative liabilities	(7		)	1			—			—			—		—			(6		)	1
Total Level 3 liabilities	$	(8,573	)	$	(836	)	$	—		$	(191	)	$	—	$	—		$	(9,600	)	$	1

¹ Related to instruments held at end of period.



	Six months ended June 30, 2016
				Total realized and unrealized gains (losses)									Transfers
(In millions)	Beginning balance			Included in income			Included in OCI			Purchases, issuances, sales and settlements, net			In		Out			Ending balance			Total gains (losses) included in earnings¹
Assets
AFS securities
Fixed maturity
Foreign governments	$	17		$	1		$	(1	)	$	(1	)	$	—	$	—		$	16		$	—
Corporate	636			3			19			(16		)	47		(287		)	402			—
CLO	517			2			(1		)	16			136		(385		)	285			—
ABS	1,813			76			(13		)	(615		)	105		(128		)	1,238			—
CMBS	67			—			1			7			50		(45		)	80			—
RMBS	758			1			6			(108		)	—		(657		)	—			—
Equity securities	9			—			1			—			—		—			10			—
Trading securities
Fixed maturity
U.S. state, municipal and political subdivisions	17			—			—			—			—		—			17			—
Corporate	16			—			—			(4		)	1		(12		)	1			4
CLO	108			(3		)	—			(1		)	—		—			104			4
ABS	98			(9		)	—			—			—		—			89			—
RMBS	29			(2		)	—			100			—		(5		)	122			2
Mortgage loans	48			—			—			(3		)	—		—			45			—
Funds withheld at interest – embedded derivative	36			86			—			—			—		—			122			—
Investments in related parties
AFS securities
Fixed maturity
CLO	7			—			(1		)	—			—		(6		)	—			—
ABS	60			—			—			(2		)	—		—			58			—
Trading securities, CLO	191			(23		)	—			17			26		—			211			16
Reinsurance recoverable	2,377			(479		)	—			—			—		—			1,898			—
Total Level 3 assets	$	6,804		$	(347	)	$	11		$	(610	)	$	365	$	(1,525	)	$	4,698		$	26

Liabilities
Interest sensitive contract liabilities
Embedded derivative	$	(4,464	)	$	(147	)	$	—		$	(196	)	$	—	$	—		$	(4,807	)	$	—
Universal life liabilities	(1,464		)	405			—			—			—		—			(1,059		)	—
Future policy benefits
AmerUs Closed Block	(1,581		)	(101		)	—			—			—		—			(1,682		)	—
ILICO Closed Block and life benefits	(897		)	74			—			—			—		—			(823		)	—
Derivative liabilities	(7		)	(1		)	—			—			—		—			(8		)	(1		)
Total Level 3 liabilities	$	(8,413	)	$	230		$	—		$	(196	)	$	—	$	—		$	(8,379	)	$	(1	)

¹Related to instruments held at end of period.



	Three months ended June 30, 2017
(In millions)	Purchases		Issuances			Sales			Settlements			Purchases, issuances, sales and settlements, net
Assets
AFS securities
Fixed maturity
Corporate	$	30	$	—		$	(1	)	$	(1	)	$	28
CLO	24		—			(5		)	(2		)	17
ABS	99		—			—			(88		)	11
CMBS	13		—			—			—			13
RMBS	7		—			—			(1		)	6
Equity securities	1		—			—			—			1
Trading securities
Fixed maturity
RMBS	22		—			—			—			22
Mortgage loans	—		—			—			(1)			(1		)
Investments in related parties
Trading securities, CLO	—		—			(12		)	—			(12		)
Short-term investments	8		—			—			—			8
Total Level 3 assets	$	204	$	—		$	(18	)	$	(93	)	$	93

Liabilities
Interest sensitive contract liabilities
Embedded derivative	$	—	$	(160	)	$	—		$	48		$	(112	)
Total Level 3 liabilities	$	—	$	(160	)	$	—		$	48		$	(112	)



	Three months ended June 30, 2016
(In millions)	Purchases		Issuances			Sales			Settlements			Purchases, issuances, sales and settlements, net
Assets
AFS securities
Fixed maturity
Corporate	$	28	$	—		$	(23	)	$	(2	)	$	3
CLO	20		—			(3		)	—			17
ABS	216		—			(34		)	(268		)	(86		)
RMBS	—		—			—			(32		)	(32		)
Trading securities
Fixed maturity
CLO	—		—			(1		)	—			(1		)
RMBS	61		—			—			—			61
Mortgage loans	—		—			—			(1		)	(1		)
Investments in related parties
AFS securities
Fixed maturity
ABS	—		—			—			(1		)	(1		)
Trading securities, CLO	8		—			—			—			8
Total Level 3 assets	$	333	$	—		$	(61	)	$	(304	)	$	(32	)

Liabilities
Interest sensitive contract liabilities
Embedded derivative	$	—	$	(129	)	$	—		$	37		$	(92	)
Total Level 3 liabilities	$	—	$	(129	)	$	—		$	37		$	(92	)

The following represents the gross components of purchases, issuances, sales and settlements, net, shown above:



	Six months ended June 30, 2017
(In millions)	Purchases		Issuances			Sales			Settlements			Purchases, issuances, sales and settlements, net
Assets
AFS securities
Fixed maturity
U.S. state, municipal and political subdivisions	$	—	$	—		$	—		$	(20	)	$	(20	)
Foreign governments	—		—			—			(1		)	(1		)
Corporate	110		—			(2		)	(3		)	105
CLO	24		—			(2		)	(15		)	7
ABS	182		—			—			(140		)	42
CMBS	13		—			—			—			13
RMBS	7		—			—			(1		)	6
Equity securities	1		—			—			—			1
Trading securities
Fixed maturity
CLO	—		—			(15		)	—			(15		)
RMBS	24		—			—			—			24
Mortgage loans	—		—			—			(1		)	(1		)
Investments in related parties
AFS securities
Fixed maturity
ABS	5		—			—			(9		)	(4		)
Trading securities, CLO	—		—			(26		)	—			(26		)
Short-term investments	28		—			—			—			28
Total Level 3 assets	$	394	$	—		$	(45	)	$	(190	)	$	159

Liabilities
Interest sensitive contract liabilities
Embedded derivative	$	—	$	(270	)	$	—		$	79		$	(191	)
Total Level 3 liabilities	$	—	$	(270	)	$	—		$	79		$	(191	)



	Six months ended June 30, 2016
(In millions)	Purchases		Issuances			Sales			Settlements			Purchases, issuances, sales and settlements, net
Assets
AFS securities
Fixed maturity
Foreign governments	$	—	$	—		$	—		$	(1	)	$	(1	)
Corporate	40		—			(54		)	(2		)	(16		)
CLO	19		—			(3		)	—			16
ABS	239		—			(34		)	(820		)	(615		)
CMBS	7		—			—			—			7
RMBS	—		—			—			(108		)	(108		)
Trading securities
Fixed maturity
Corporate	—		—			(4		)	—			(4		)
CLO	—		—			(1		)	—			(1		)
RMBS	100		—			—			—			100
Mortgage loans	—		—			—			(3		)	(3		)
Investments in related parties
AFS securities
Fixed maturity
ABS	—		—			—			(2		)	(2		)
Trading securities, CLO	33		—			(16		)	—			17
Total Level 3 assets	$	438	$	—		$	(112	)	$	(936	)	$	(610	)

Liabilities
Interest sensitive contract liabilities
Embedded derivative	$	—	$	(273	)	$	—		$	77		$	(196	)
Total Level 3 liabilities	$	—	$	(273	)	$	—		$	77		$	(196	)

Significant Unobservable Inputs—Significant unobservable inputs occur when we could not obtain or corroborate the quantitative detail of the inputs. This applies to AFS securities, trading securities, mortgage loans and certain derivatives, as well as embedded derivatives in liabilities. Additional significant unobservable inputs are described below.

Fixed maturity securities – For certain fixed maturity securities, internal models are used to calculate the fair value. We use a discounted cash flow approach. The discount rate is the significant unobservable input due to the determined credit spread being internally developed, illiquid, or as a result of other adjustments made to the base rate. The base rate represents a market comparable rate for securities with similar characteristics. As of June 30, 2017, discounts ranged from 3% to 6%. This excludes assets for which significant unobservable inputs are not developed internally, primarily consisting of broker quotes.

Interest sensitive contract liabilities – embedded derivative – Significant unobservable inputs we use in the fixed indexed annuities embedded derivative of the interest sensitive contract liabilities valuation include:

Non-performance risk – For contracts we issue, we use the credit spread from the U.S. treasury curve based on our public credit rating as of the valuation date. This represents our credit risk for use in the estimate of the fair value of embedded derivatives. For contracts reinsured through funds withheld reinsurance, the cedant company holds collateral against its exposure; therefore, immaterial non-performance risk is ascribed to these contracts.


2.	Option budget – We assume future hedge costs in the derivative's fair value estimate. The level of option budgets determines the future costs of the options and impacts future policyholder account value growth.


3.	Policyholder behavior – We regularly review the lapse and withdrawal assumptions (surrender rate). These are based on our initial pricing assumptions updated for actual experience. Actual experience may be limited for recently issued products.

The following summarizes the unobservable inputs for the embedded derivatives of fixed indexed annuities:



	June 30, 2017
(In millions, except for percentages)	Fair value		Valuation technique	Unobservable inputs	Input/range of inputs				Impact of an increase in the input on fair value
Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives	$	6,207	Option budget method	Non-performance risk	0.3	%	–	1.4%	Decrease
				Option budget	0.8	%	–	3.8%	Increase
				Surrender rate	0.0	%	–	16.5%	Decrease



	December 31, 2016
(In millions, except for percentages)	Fair value		Valuation technique	Unobservable inputs	Input/range of inputs				Impact of an increase in the input on fair value
Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives	$	5,283	Option budget method	Non-performance risk	0.7	%	–	1.5%	Decrease
				Option budget	0.8	%	–	3.8%	Increase
				Surrender rate	0.0	%	–	16.3%	Decrease

Fair Value of Financial Instruments Not Carried at Fair Value—The following represents our financial instruments not carried at fair value on the condensed consolidated balance sheets:



		June 30, 2017				December 31, 2016
(In millions)	Fair Value Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Mortgage loans	3	$	5,981	$	6,152	$	5,426	$	5,560
Investment funds	NAV¹	603		603		590		590
Policy loans	2	579		579		602		602
Funds withheld at interest	3	6,555		6,555		6,398		6,398
Other investments	3	91		91		81		81
Investments in related parties
Investment funds	NAV¹	1,238		1,238		1,198		1,198
Other investments	3	238		266		237		262
Total assets not carried at fair value		$	15,285	$	15,484	$	14,532	$	14,691
Liabilities
Interest sensitive contract liabilities	3	$	29,786	$	29,249	$	27,628	$	26,930
Funds withheld liability	2	376		376		374		374
Total liabilities not carried at fair value		$	30,162	$	29,625	$	28,002	$	27,304

¹ Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy.

We estimate the fair value for financial instruments not carried at fair value using the same methods and assumptions as those we carry at fair value. The financial instruments presented above are reported at carrying value on the condensed consolidated balance sheets; however, in the case of policy loans, funds withheld at interest and liability, and other investments, the carrying amount approximates fair value.

Investment in related parties – Other investments – The fair value of related party other investments is determined using a discounted cash flow model using discount rates for similar investments.

Interest sensitive contract liabilities – The carrying and fair value of interest sensitive contract liabilities above includes fixed indexed and traditional fixed annuities without mortality or morbidity risks, funding agreements and payout annuities without life contingencies. The embedded derivatives within fixed indexed annuities without mortality or morbidity risks are excluded, as they are carried at fair value. The valuation of these investment contracts is based on discounted cash flow methodologies using significant unobservable inputs. The estimated fair value is determined using current market risk-free interest rates, adding a spread to reflect our nonperformance risk and subtracting a risk margin to reflect uncertainty inherent in the projected cash flows.