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FAIR VALUE OF FINANCIAL INSTRUMENTS
 6 Months Ended
Jun. 30, 2016
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The Company determined the fair value of its financial instruments based on the fair value hierarchy established in FASB guidance referenced in the Fair Value Measurements and Disclosures Topic which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company has adopted the provisions from the FASB guidance that is referenced in the Fair Value Measurements and Disclosures Topic for non-financial assets and liabilities (such as property and equipment, goodwill, and other intangible assets) that are required to be measured at fair value on a periodic basis. The effect on the Company’s periodic fair value measurements for non-financial assets and liabilities was not material.

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level hierarchy. 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 fair value measurement of the instrument:
 
·                  Level 1: Unadjusted quoted prices for identical assets or liabilities in an active market.
 
·                  Level 2: Quoted prices in markets that are not active or significant inputs that are observable either directly or indirectly. Level 2 inputs include the following:
 
a)                                     Quoted prices for similar assets or liabilities in active markets
b)                                     Quoted prices for identical or similar assets or liabilities in non-active markets
c)                                      Inputs other than quoted market prices that are observable
d)                                     Inputs that are derived principally from or corroborated by observable market data through correlation or other means.
 
·                  Level 3: Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 (Successor Company):
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars In Thousands)
Assets:
 

 
 

 
 

 
 

Fixed maturity securities - available-for-sale
 

 
 

 
 

 
 

Residential mortgage-backed securities
$
—

 
$
1,931,810

 
$
3

 
$
1,931,813

Commercial mortgage-backed securities
—

 
1,578,172

 
—

 
1,578,172

Other asset-backed securities
—

 
587,501

 
533,141

 
1,120,642

U.S. government-related securities
1,108,503

 
263,293

 
—

 
1,371,796

State, municipalities, and political subdivisions
—

 
1,737,499

 
—

 
1,737,499

Other government-related securities
—

 
18,680

 
—

 
18,680

Corporate securities
—

 
27,279,444

 
783,143

 
28,062,587

Preferred stock
45,155

 
19,272

 
—

 
64,427

Total fixed maturity securities - available-for-sale
1,153,658

 
33,415,671

 
1,316,287

 
35,885,616

Fixed maturity securities - trading
 

 
 

 
 

 
 

Residential mortgage-backed securities
—

 
271,994

 
—

 
271,994

Commercial mortgage-backed securities
—

 
157,176

 
—

 
157,176

Other asset-backed securities
—

 
123,076

 
151,964

 
275,040

U.S. government-related securities
41,639

 
4,868

 
—

 
46,507

State, municipalities, and political subdivisions
—

 
362,504

 
—

 
362,504

Other government-related securities
—

 
60,261

 
—

 
60,261

Corporate securities
—

 
1,595,943

 
16,587

 
1,612,530

Preferred stock
3,432

 
147

 
—

 
3,579

Total fixed maturity securities - trading
45,071

 
2,575,969

 
168,551

 
2,789,591

Total fixed maturity securities
1,198,729

 
35,991,640

 
1,484,838

 
38,675,207

Equity securities
636,270

 
—

 
66,526

 
702,796

Other long-term investments (1)
311,141

 
266,478

 
62,920

 
640,539

Short-term investments
240,841

 
3,522

 
—

 
244,363

Total investments
2,386,981

 
36,261,640

 
1,614,284

 
40,262,905

Cash
295,143

 
—

 
—

 
295,143

Assets related to separate accounts
 

 
 

 
 

 
 

Variable annuity
12,891,214

 
—

 
—

 
12,891,214

Variable universal life
831,818

 
—

 
—

 
831,818

Total assets measured at fair value on a recurring basis
$
16,405,156

 
$
36,261,640

 
$
1,614,284

 
$
54,281,080

Liabilities:
 

 
 

 
 

 
 

Annuity account balances(2)
$
—

 
$
—

 
$
88,820

 
$
88,820

Other liabilities (1)
59,711

 
142,794

 
581,046

 
783,551

Total liabilities measured at fair value on a recurring basis
$
59,711

 
$
142,794

 
$
669,866

 
$
872,371

(1)Includes certain freestanding and embedded derivatives.
(2)Represents liabilities related to fixed indexed annuities.

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 (Successor Company):
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars In Thousands)
Assets:
 

 
 

 
 

 
 

Fixed maturity securities - available-for-sale
 

 
 

 
 

 
 

Residential mortgage-backed securities
$
—

 
$
1,765,270

 
$
3

 
$
1,765,273

Commercial mortgage-backed securities
—

 
1,285,864

 
—

 
1,285,864

Other asset-backed securities
—

 
210,020

 
587,031

 
797,051

U.S. government-related securities
1,054,353

 
477,824

 
—

 
1,532,177

State, municipalities, and political subdivisions
—

 
1,603,600

 
—

 
1,603,600

Other government-related securities
—

 
17,740

 
—

 
17,740

Corporate securities
83

 
24,876,455

 
902,119

 
25,778,657

Preferred stock
43,073

 
19,614

 
—

 
62,687

Total fixed maturity securities - available-for-sale
1,097,509

 
30,256,387

 
1,489,153

 
32,843,049

Fixed maturity securities - trading
 

 
 

 
 

 
 

Residential mortgage-backed securities
—

 
286,658

 
—

 
286,658

Commercial mortgage-backed securities
—

 
146,743

 
—

 
146,743

Other asset-backed securities
—

 
122,511

 
152,912

 
275,423

U.S. government-related securities
233,592

 
4,755

 
—

 
238,347

State, municipalities, and political subdivisions
—

 
313,354

 
—

 
313,354

Other government-related securities
—

 
58,827

 
—

 
58,827

Corporate securities
—

 
1,322,276

 
18,225

 
1,340,501

Preferred stock
2,794

 
1,402

 
—

 
4,196

Total fixed maturity securities - trading
236,386

 
2,256,526

 
171,137

 
2,664,049

Total fixed maturity securities
1,333,895

 
32,512,913

 
1,660,290

 
35,507,098

Equity securities
620,358

 
13,063

 
66,504

 
699,925

Other long-term investments (1)
113,699

 
141,487

 
68,384

 
323,570

Short-term investments
261,659

 
2,178

 
—

 
263,837

Total investments
2,329,611

 
32,669,641

 
1,795,178

 
36,794,430

Cash
212,358

 
—

 
—

 
212,358

Assets related to separate accounts
 

 
 

 
 

 
 

Variable annuity
12,829,188

 
—

 
—

 
12,829,188

Variable universal life
827,610

 
—

 
—

 
827,610

Total assets measured at fair value on a recurring basis
$
16,198,767

 
$
32,669,641

 
$
1,795,178

 
$
50,663,586

Liabilities:
 

 
 

 
 

 
 

Annuity account balances (2)
$
—

 
$
—

 
$
92,512

 
$
92,512

Other liabilities (1)
40,067

 
106,310

 
375,848

 
522,225

Total liabilities measured at fair value on a recurring basis
$
40,067

 
$
106,310

 
$
468,360

 
$
614,737

(1)Includes certain freestanding and embedded derivatives.
(2)Represents liabilities related to fixed indexed annuities.

 
Determination of fair values
 
The valuation methodologies used to determine the fair values of assets and liabilities reflect market participant assumptions and are based on the application of the fair value hierarchy that prioritizes observable market inputs over unobservable inputs. The Company determines the fair values of certain financial assets and financial liabilities based on quoted market prices, where available. The Company also determines certain fair values based on future cash flows discounted at the appropriate current market rate. Fair values reflect adjustments for counterparty credit quality, the Company’s credit standing, liquidity, and where appropriate, risk margins on unobservable parameters. The following is a discussion of the methodologies used to determine fair values for the financial instruments as listed in the above table.
 
The fair value of fixed maturity, short-term, and equity securities is determined by management after considering one of three primary sources of information: third party pricing services, non-binding independent broker quotations, or pricing matrices. Security pricing is applied using a “waterfall” approach whereby publicly available prices are first sought from third party pricing services, the remaining unpriced securities are submitted to independent brokers for non-binding prices, or lastly, securities are priced using a pricing matrix. Typical inputs used by these three pricing methods include, but are not limited to: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. Third party pricing services price approximately 90% of the Company’s available-for-sale and trading fixed maturity securities. Based on the typical trading volumes and the lack of quoted market prices for available-for-sale and trading fixed maturities, third party pricing services derive the majority of security prices from observable market inputs such as recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information outlined above. If there are no recent reported trades, the third party pricing services and brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Certain securities are priced via independent non-binding broker quotations, which are considered to have no significant unobservable inputs. When using non- binding independent broker quotations, the Company obtains one quote per security, typically from the broker from which we purchased the security. A pricing matrix is used to price securities for which the Company is unable to obtain or effectively rely on either a price from a third party pricing service or an independent broker quotation.
 
The pricing matrix used by the Company begins with current spread levels to determine the market price for the security. The credit spreads, assigned by brokers, incorporate the issuer’s credit rating, liquidity discounts, weighted- average of contracted cash flows, risk premium, if warranted, due to the issuer’s industry, and the security’s time to maturity. The Company uses credit ratings provided by nationally recognized rating agencies.

For securities that are priced via non-binding independent broker quotations, the Company assesses whether prices received from independent brokers represent a reasonable estimate of fair value through an analysis using internal and external cash flow models developed based on spreads and, when available, market indices. The Company uses a market-based cash flow analysis to validate the reasonableness of prices received from independent brokers. These analytics, which are updated daily, incorporate various metrics (yield curves, credit spreads, prepayment rates, etc.) to determine the valuation of such holdings. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon the analytics, the price received from the independent broker is adjusted accordingly. The Company did not adjust any quotes or prices received from brokers during the six months ended June 30, 2016 (Successor Company).
 
The Company has analyzed the third party pricing services’ valuation methodologies and related inputs and has also evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs that is in accordance with the Fair Value Measurements and Disclosures Topic of the ASC. Based on this evaluation and investment class analysis, each price was classified into Level 1, 2, or 3. Most prices provided by third party pricing services are classified into Level 2 because the significant inputs used in pricing the securities are market observable and the observable inputs are corroborated by the Company. Since the matrix pricing of certain debt securities includes significant non-observable inputs, they are classified as Level 3.
 
Asset-Backed Securities
 
This category mainly consists of residential mortgage-backed securities, commercial mortgage-backed securities, and other asset-backed securities (collectively referred to as asset-backed securities or “ABS”). As of June 30, 2016 (Successor Company), the Company held $4.6 billion of ABS classified as Level 2. These securities are priced from information provided by a third party pricing service and independent broker quotes. The third party pricing services and brokers mainly value securities using both a market and income approach to valuation. As part of this valuation process they consider the following characteristics of the item being measured to be relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, and 7) credit ratings of the securities.
 
After reviewing these characteristics of the ABS, the third party pricing service and brokers use certain inputs to determine the value of the security. For ABS classified as Level 2, the valuation would consist of predominantly market observable inputs such as, but not limited to: 1) monthly principal and interest payments on the underlying assets, 2) average life of the security, 3) prepayment speeds, 4) credit spreads, 5) treasury and swap yield curves, and 6) discount margin. The Company reviews the methodologies and valuation techniques (including the ability to observe inputs) in assessing the information received from external pricing services and in consideration of the fair value presentation.
 
As of June 30, 2016 (Successor Company), the Company held $685.1 million of Level 3 ABS, which included $533.1 million of other asset-backed securities classified as available-for-sale and $152.0 million of other asset-backed securities classified as trading. These securities are predominantly ARS whose underlying collateral is at least 97% guaranteed by the FFELP. As a result of the ARS market collapse during 2008, the Company prices its ARS using an income approach valuation model. As part of the valuation process the Company reviews the following characteristics of the ARS in determining the relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, 7) credit ratings of the securities, 8) liquidity premium, and 9) paydown rate.
 
Corporate Securities, U.S. Government-Related Securities, States, Municipals, and Political Subdivisions, and Other Government Related Securities
 
As of June 30, 2016 (Successor Company), the Company classified approximately $31.3 billion of corporate securities, U.S. government-related securities, states, municipals, and political subdivisions, and other government-related securities as Level 2. The fair value of the Level 2 securities is predominantly priced by broker quotes and a third party pricing service. The Company has reviewed the valuation techniques of the brokers and third party pricing service and has determined that such techniques used Level 2 market observable inputs. The following characteristics of the securities are considered to be the primary relevant inputs to the valuation: 1) weighted- average coupon rate, 2) weighted-average years to maturity, 3) seniority, and 4) credit ratings. The Company reviews the methodologies and valuation techniques (including the ability to observe inputs) in assessing the information received from external pricing services and in consideration of the fair value presentation.

The brokers and third party pricing service utilize valuation models that consist of a hybrid income and market approach to valuation. The pricing models utilize the following inputs: 1) principal and interest payments, 2) treasury yield curve, 3) credit spreads from new issue and secondary trading markets, 4) dealer quotes with adjustments for issues with early redemption features, 5) liquidity premiums present on private placements, and 6) discount margins from dealers in the new issue market.
 
As of June 30, 2016 (Successor Company), the Company classified approximately $799.7 million of securities as Level 3 valuations. Level 3 securities primarily represent investments in illiquid bonds for which no price is readily available. To determine a price, the Company uses a discounted cash flow model with both observable and unobservable inputs. These inputs are entered into an industry standard pricing model to determine the final price of the security. These inputs include: 1) principal and interest payments, 2) coupon rate, 3) sector and issuer level spread over treasury, 4) underlying collateral, 5) credit ratings, 6) maturity, 7) embedded options, 8) recent new issuance, 9) comparative bond analysis, and 10) an illiquidity premium.
 
Equities
 
As of June 30, 2016 (Successor Company), the Company held approximately $66.5 million of equity securities classified as Level 2 and Level 3. Of this total, $65.7 million represents Federal Home Loan Bank (“FHLB”) stock. The Company believes that the cost of the FHLB stock approximates fair value.
 
Other long-term investments and Other liabilities
 
Other long-term investments and other liabilities consist entirely of free-standing and embedded derivative financial instruments. Refer to Note 8, Derivative Financial Instruments for additional information related to derivatives. Derivative financial instruments are valued using exchange prices, independent broker quotations, or pricing valuation models, which utilize market data inputs. Excluding embedded derivatives, as of June 30, 2016 (Successor Company), 75.0% of derivatives based upon notional values were priced using exchange prices or independent broker quotations. The remaining derivatives were priced by pricing valuation models, which predominantly utilize observable market data inputs. Inputs used to value derivatives include, but are not limited to, interest swap rates, credit spreads, interest rate and equity market volatility indices, equity index levels, and treasury rates. The Company performs monthly analysis on derivative valuations that includes both quantitative and qualitative analyses.
 
Derivative instruments classified as Level 1 generally include futures and options, which are traded on active exchange markets.

Derivative instruments classified as Level 2 primarily include interest rate and inflation swaps, options, and swaptions. These derivative valuations are determined using independent broker quotations, which are corroborated with observable market inputs.

Derivative instruments classified as Level 3 were embedded derivatives and include at least one significant non-observable input. A derivative instrument containing Level 1 and Level 2 inputs will be classified as a Level 3 financial instrument in its entirety if it has at least one significant Level 3 input.

The Company utilizes derivative instruments to manage the risk associated with certain assets and liabilities. However, the derivative instruments may not be classified within the same fair value hierarchy level as the associated assets and liabilities. Therefore, the changes in fair value on derivatives reported in Level 3 may not reflect the offsetting impact of the changes in fair value of the associated assets and liabilities.

The embedded derivatives are carried at fair value in “other long-term investments” and “other liabilities” on the Company’s consolidated condensed balance sheet. The changes in fair value are recorded in earnings as “Realized investment gains (losses)-Derivative financial instruments”. Refer to Note 8, Derivative Financial Instruments for more information related to each embedded derivatives gains and losses.
 
The fair value of the GMWB embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using multiple risk neutral stochastic equity scenarios and policyholder behavior assumptions. The risk neutral scenarios are generated using the current swap curve and projected equity volatilities and correlations. The projected equity volatilities are based on a blend of historical volatility and near- term equity market implied volatilities. The equity correlations are based on historical price observations. For policyholder behavior assumptions, expected lapse and utilization assumptions are used and updated for actual experience, as necessary. The Company assumes age-based mortality from the National Association of Insurance Commissioners 1994 Variable Annuity MGDB Mortality Table with company experience, with attained age factors varying from 44.5% - 100%. The present value of the cash flows is determined using the discount rate curve, which is based upon LIBOR plus a credit spread (to represent the Company’s non-performance risk). As a result of using significant unobservable inputs, the GMWB embedded derivative is categorized as Level 3. These assumptions are reviewed on a quarterly basis.
 
The balance of the FIA embedded derivative is impacted by policyholder cash flows associated with the FIA product that are allocated to the embedded derivative in addition to changes in the fair value of the embedded derivative during the reporting period. The fair value of the FIA embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using current index values and volatility, the hedge budget used to price the product, and policyholder assumptions (both elective and non-elective). For policyholder behavior assumptions, expected lapse and withdrawal assumptions are used and updated for actual experience, as necessary. The Company assumes age-based mortality from the 1994 Variable Annuity MGDB mortality table modified for company experience, with attained age factors varying from 49% - 80%. The present value of the cash flows is determined using the discount rate curve, which is based upon LIBOR up to one year and constant maturity treasury rates plus a credit spread (to represent the Company’s non-performance risk) thereafter. Policyholder assumptions are reviewed on an annual basis. As a result of using significant unobservable inputs, the FIA embedded derivative is categorized as Level 3.
 
The balance of the indexed universal life (“IUL”) embedded derivative is impacted by policyholder cash flows associated with the IUL product that are allocated to the embedded derivative in addition to changes in the fair value of the embedded derivative during the reporting period. The fair value of the IUL embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using current index values and volatility, the hedge budget used to price the product, and policyholder assumptions (both elective and non-elective). For policyholder behavior assumptions, expected lapse and withdrawal assumptions are used and updated for actual experience, as necessary. The Company assumes age-based mortality from the SOA 2015 VBT Primary Tables modified for company experience, with attained age factors varying from 38% - 153%. The present value of the cash flows is determined using the discount rate curve, which is based upon LIBOR up to one year and constant maturity treasury rates plus a credit spread (to represent the Company’s non-performance risk) thereafter. Policyholder assumptions are reviewed on an annual basis. As a result of using significant unobservable inputs, the IUL embedded derivative is categorized as Level 3.
 
The Company has assumed and ceded certain blocks of policies under modified coinsurance agreements in which the investment results of the underlying portfolios inure directly to the reinsurers. As a result, these agreements contain embedded derivatives that are reported at fair value. Changes in their fair value are reported in earnings. The investments supporting these agreements are designated as “trading securities”; therefore changes in their fair value are also reported in earnings. As of June 30, 2016 (Successor Company), the fair value of the embedded derivative is based upon the relationship between the statutory policy liabilities (net of policy loans) of $2.4 billion and the statutory unrealized gain (loss) of the securities of $253.2 million. As a result, changes in the fair value of the embedded derivatives are largely offset by the changes in fair value of the related investments and each are reported in earnings. The fair value of the embedded derivative is considered a Level 3 valuation due to the unobservable nature of the policy liabilities.
 
Certain of the Company’s subsidiaries have entered into interest support, yearly renewable term (“YRT”) premium support, and portfolio maintenance agreements with PLC. These agreements meet the definition of a derivative and are accounted for at fair value and are considered Level 3 valuations. The fair value of these derivatives as of June 30, 2016 (Successor Company) was $37.3 million and is included in Other long-term investments. For information regarding realized gains on these derivatives please refer to Note 8, Derivative Financial Instruments.
 
The Interest Support Agreement provides that PLC will make payments to Golden Gate II if actual investment income on certain of Golden Gate II’s asset portfolios falls below a calculated investment income amount as defined in the Interest Support Agreement. The calculated investment income amount is a level of investment income deemed to be sufficient to support certain of Golden Gate II’s obligations under a reinsurance agreement with the Company, dated July 1, 2007. The derivative is valued using an internal valuation model that assumes a conservative projection of investment income under an adverse interest rate scenario and the probability that the expectation falls below the calculated investment income amount. This derivative had a fair value of $29.6 million as of June 30, 2016 (Successor Company), however, interest support agreement obligations to Golden Gate II of approximately $1.5 million have been collateralized by PLC. Re-evaluation and, if necessary, adjustments of any support agreement collateralization amounts occur annually during the first quarter pursuant to the terms of the support agreement. As of June 30, 2016 (Successor Company), no payments have been triggered under this agreement.

The YRT premium support agreements provide that PLC will make payments to Golden Gate and Golden Gate II in the event that YRT premium rates increase. The derivatives are valued using an internal valuation model. The valuation model is a probability weighted discounted cash flow model. The value is primarily a function of the likelihood and severity of future YRT premium increases. The fair value of these derivatives as of June 30, 2016 (Successor Company) was $3.3 million. As of June 30, 2016 (Successor Company), no payments have been made under these agreements.
 
The portfolio maintenance agreements provide that PLC will make payments to Golden Gate, Golden Gate V, and WCL in the event of other-than-temporary impairments on investments that exceed defined thresholds. The derivatives are valued using an internal discounted cash flow model. The significant unobservable inputs are the projected probability and severity of credit losses used to project future cash flows on the investment portfolios. The fair value of the portfolio maintenance agreements as of June 30, 2016 (Successor Company), was $4.4 million. As of June 30, 2016 (Successor Company), no payments have been made under these agreements.
 
The Funds Withheld derivative results from a reinsurance agreement with Shades Creek where the economic performance of certain hedging instruments held by the Company is ceded to Shades Creek. The value of the Funds Withheld derivative is directly tied to the value of the hedging instruments held in the funds withheld account. The hedging instruments predominantly consist of derivative instruments the fair values of which are classified as a Level 2 measurement; as such, the fair value of the Funds Withheld derivative has been classified as a Level 2 measurement. The fair value of the Funds Withheld derivative as of June 30, 2016 (Successor Company) was a liability of $129.5 million.
 
Annuity account balances
 
The Company records certain of its FIA reserves at fair value. The fair value is considered a Level 3 valuation. The FIA valuation model calculates the present value of future benefit cash flows less the projected future profits to quantify the net liability that is held as a reserve. This calculation is done using multiple risk neutral stochastic equity scenarios. The cash flows are discounted using LIBOR plus a credit spread. Best estimate assumptions are used for partial withdrawals, lapses, expenses and asset earned rate with a risk margin applied to each. These assumptions are reviewed at least annually as a part of the formal unlocking process. If an event were to occur within a quarter that would make the assumptions unreasonable, the assumptions would be reviewed within the quarter.
 
The discount rate for the fixed indexed annuities is based on an upward sloping rate curve which is updated each quarter. The discount rates for June 30, 2016 (Successor Company), ranged from a one month rate of 0.68%, a 5 year rate of 1.82%, and a 30 year rate of 3.03%. A credit spread component is also included in the calculation to accommodate non-performance risk.
 
Separate Accounts
 
Separate account assets are invested in open-ended mutual funds and are included in Level 1.

Valuation of Level 3 Financial Instruments
 
The following table presents the valuation method for material financial instruments included in Level 3, as well as the unobservable inputs used in the valuation of those financial instruments:
 
 
Successor Company
 
 
 
 
 
 
 
Fair Value
As of
June 30, 2016
 
Valuation
Technique
 
Unobservable
Input
 
Range
(Weighted Average)
 
(Dollars In Thousands)
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Other asset-backed securities
$
524,166

 
Discounted cash flow
 
Liquidity premium
 
0.24% - 1.14% (0.55%)
 
 

 
 
 
Paydown rate
 
9.37% - 11.91% (10.16%)
Corporate securities
758,312

 
Discounted cash flow
 
Spread over treasury
 
0.70% - 6.25% (2.45%)
Liabilities:
 

 
 
 
 
 
 
Embedded derivatives - GMWB(1)
$
151,212

 
Actuarial cash flow model
 
Mortality
 
1994 MGDB table with
 
 

 
 
 
 
 
company experience
 
 

 
 
 
Lapse
 
0.3% - 15%, depending on
 
 

 
 
 
 
 
product/duration/funded
 
 

 
 
 
 
 
status of guarantee
 
 

 
 
 
Utilization
 
99%. 10% of policies have
 
 

 
 
 
 
 
a one-time over-utilization
 
 

 
 
 
 
 
of 400%
 
 

 
 
 
Nonperformance risk
 
0.22% - 1.20%
Annuity account balances(2)
88,820

 
Actuarial cash flow model
 
Asset earned rate
 
4.53% - 5.67%
 
 

 
 
 
Expenses
 
$83 per policy
 
 

 
 
 
Withdrawal rate
 
2.20%
 
 

 
 
 
Mortality
 
1994 MGDB table with
 
 

 
 
 
 
 
company experience
 
 

 
 
 
Lapse
 
2.2% - 33.0%, depending
 
 

 
 
 
 
 
on duration/surrender
 
 

 
 
 
 
 
charge period
 
 

 
 
 
Return on assets
 
1.50% - 1.85% depending on
 
 

 
 
 
 
 
surrender charge period
 
 

 
 
 
Nonperformance risk
 
0.22% - 1.20%
Embedded derivative - FIA
119,997

 
Actuarial cash flow model
 
Expenses
 
$83 per policy
 
 

 
 
 
Withdrawal rate
 
1.1% - 4.5% depending on
 
 

 
 
 
 
 
duration and tax qualification
 
 

 
 
 
Mortality
 
1994 MGDB table with
 
 

 
 
 
 
 
company experience
 
 

 
 
 
Lapse
 
2.5% - 40.0%, depending on
 
 

 
 
 
 
 
on duration/surrender
 
 

 
 
 
 
 
charge period
 
 

 
 
 
Nonperformance risk
 
0.22% - 1.20%
Embedded derivative - IUL
46,711

 
Actuarial cash flow model
 
Mortality
 
38% - 153% of 2015
 
 

 
 
 
 
 
VBT Primary Tables
 
 

 
 
 
Lapse
 
0.5% - 10.0%, depending on
 
 

 
 
 
 
 
duration/distribution channel
 
 

 
 
 
 
 
and smoking class
 
 

 
 
 
Nonperformance risk
 
0.22% - 1.20%
 
(1)The fair value for the GMWB embedded derivative is presented as a net liability for the purposes of this chart. Excludes modified coinsurance arrangements.
(2)Represents liabilities related to fixed indexed annuities.
 
The chart above excludes Level 3 financial instruments that are valued using broker quotes and those which book value approximates fair value.

The Company has considered all reasonably available quantitative inputs as of June 30, 2016 (Successor Company), but the valuation techniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company. This resulted in $202.4 million of financial instruments being classified as Level 3 as of June 30, 2016 (Successor Company). Of the $202.4 million, $160.9 million are other asset-backed securities and $41.4 million are corporate securities.
 
In certain cases the Company has determined that book value materially approximates fair value. As of June 30, 2016 (Successor Company), the Company held $66.5 million of financial instruments where book value approximates fair value which were predominantly FHLB stock.

The following table presents the valuation method for material financial instruments included in Level 3, as well as the unobservable inputs used in the valuation of those financial instruments:
 
 
Successor Company
 
 
 
 
 
 
 
Fair Value
As of
December 31, 2015
 
Valuation
Technique
 
Unobservable
Input
 
Range
(Weighted Average)
 
(Dollars In Thousands)
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Other asset-backed securities
$
587,031

 
Discounted cash flow
 
Liquidity premium
 
0.27% - 1.49% (0.42%)
 
 
 
 
 
Paydown rate
 
10.20% - 14.72% (13.11%)
Corporate securities
875,810

 
Discounted cash flow
 
Spread over
 
0.10% - 19.00% (2.61%)
 
 
 
 
 
treasury
 
 
Liabilities:
 
 
 
 
 
 
 
Embedded derivatives - GMWB(1)
$
18,511

 
Actuarial cash flow model
 
Mortality
 
1994 MGDB table with
 
 
 
 
 
 
 
company experience
 
 
 
 
 
Lapse
 
0.3% - 15%, depending on
 
 
 
 
 
 
 
product/duration/funded
 
 
 
 
 
 
 
status of guarantee
 
 
 
 
 
Utilization
 
99%. 10% of policies have
 
 
 
 
 
 
 
a one-time over-utilization
 
 
 
 
 
 
 
of 400%
 
 
 
 
 
Nonperformance risk
 
0.18% - 1.04%
Annuity account balances(2)
92,512

 
Actuarial cash flow model
 
Asset earned rate
 
4.53% - 5.67%
 
 

 
 
 
Expenses
 
$81 per policy
 
 

 
 
 
Withdrawal rate
 
2.20%
 
 

 
 
 
Mortality
 
1994 MGDB table with
 
 

 
 
 
 
 
company experience
 
 

 
 
 
Lapse
 
2.2% - 33.0%, depending
 
 

 
 
 
 
 
on duration/surrender
 
 

 
 
 
 
 
charge period
 
 

 
 
 
Return on assets
 
1.50% - 1.85% depending on
 
 

 
 
 
 
 
surrender charge period
 
 

 
 
 
Nonperformance risk
 
0.18% - 1.04%
Embedded derivative - FIA
100,329

 
Actuarial cash flow model
 
Expenses
 
$81.50 per policy
 
 

 
 
 
Withdrawal rate
 
1.1% - 4.5% depending on
 
 

 
 
 
 
 
duration and tax qualification
 
 

 
 
 
Mortality
 
1994 MGDB table with
 
 

 
 
 
 
 
company experience
 
 

 
 
 
Lapse
 
2.5% - 40.0%, depending
 
 

 
 
 
 
 
on duration/surrender
 
 

 
 
 
 
 
charge period
 
 

 
 
 
Nonperformance risk
 
0.18% - 1.04%
Embedded derivative - IUL
29,629

 
Actuarial cash flow model
 
Mortality
 
38% - 153% of 2015
 
 
 
 
 
 
 
VBT Primary Tables
 
 
 
 
 
Lapse
 
0.5% - 10.0%, depending
 
 
 
 
 
 
 
on duration/distribution
 
 
 
 
 
 
 
channel and smoking class
 
 
 
 
 
Nonperformance risk
 
0.18% - 1.04%
 
(1)The fair value for the GMWB embedded derivative is presented as a net liability, for the purposes of this chart.  Excludes modified coinsurance arrangements.
(2)Represents liabilities related to fixed indexed annuities.

The chart above excludes Level 3 financial instruments that are valued using broker quotes and those which book value approximates fair value.
 
The Company has considered all reasonably available quantitative inputs as of December 31, 2015 (Successor Company), but the valuation techniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company. This resulted in $197.5 million of financial instruments being classified as Level 3 as of December 31, 2015 (Successor Company). Of the $197.5 million, $152.9 million are other asset backed securities and $44.6 million are corporate securities.
 
In certain cases the Company has determined that book value materially approximates fair value. As of December 31, 2015 (Successor Company), the Company held $66.5 million of financial instruments where book value approximates fair value which are predominantly FHLB stock.
 
The asset-backed securities classified as Level 3 are predominantly ARS. A change in the paydown rate (the projected annual rate of principal reduction) of the ARS can significantly impact the fair value of these securities. A decrease in the paydown rate would increase the projected weighted average life of the ARS and increase the sensitivity of the ARS’ fair value to changes in interest rates. An increase in the liquidity premium would result in a decrease in the fair value of the securities, while a decrease in the liquidity premium would increase the fair value of these securities.

The fair value of corporate bonds classified as Level 3 is sensitive to changes in the interest rate spread over the corresponding U.S. Treasury rate. This spread represents a risk premium that is impacted by company specific and market factors. An increase in the spread can be caused by a perceived increase in credit risk of a specific issuer and/or an increase in the overall market risk premium associated with similar securities. The fair values of corporate bonds are sensitive to changes in spread. When holding the treasury rate constant, the fair value of corporate bonds increases when spreads decrease, and decreases when spreads increase.

The fair value of the GMWB embedded derivative is sensitive to changes in the discount rate which includes the Company’s nonperformance risk, volatility, lapse, and mortality assumptions. The volatility assumption is an observable input as it is based on market inputs. The Company’s nonperformance risk, lapse, and mortality are unobservable. An increase in the three unobservable assumptions would result in a decrease in the fair value of the liability and conversely, if there is a decrease in the assumptions the fair value would increase. The fair value is also dependent on the assumed policyholder utilization of the GMWB where an increase in assumed utilization would result in an increase in the fair value of the liability and conversely, if there is a decrease in the assumption, the fair value would decrease.

The fair value of the FIA account balance liability is predominantly impacted by observable inputs such as discount rates and equity returns. However, the fair value of the FIA embedded derivative is sensitive to non-performance risk, which is unobservable. The value of the liability increases with decreases in discount rate and non-performance risk and decreases with increases in the discount rate and non-performance risk. The value of the liability increases with increases in equity returns and the liability decreases with a decrease in equity returns.

The fair value of the FIA embedded derivative is predominantly impacted by observable inputs such as discount rates and equity returns. However, the fair value of the FIA embedded derivative is sensitive to non-performance risk, which is unobservable. The value of the liability increases with decreases in the discount rate and non-performance risk and decreases with increases in the discount rate and nonperformance risk. The value of the liability increases with increases in equity returns and the liability decreases with a decrease in equity returns.

The fair value of the IUL embedded derivative is predominantly impacted by observable inputs such as discount rates and equity returns. However, the fair value of the IUL embedded derivative is sensitive to non-performance risk, which is unobservable. The value of the liability increases with decreases in the discount rate and non-performance risk and decreases with increases in the discount rate and non-performance risk. The value of the liability increases with increases in equity returns and the liability decreases with a decrease in equity returns.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended June 30, 2016 (Successor Company), for which the Company has used significant unobservable inputs (Level 3):
 
 
 
 
Total
Realized and Unrealized
Gains
 
Total
Realized and Unrealized
Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
Gains (losses)
included in
 
Beginning
Balance
 
Included in
Earnings
 
Included in
Other
Comprehensive
Income
 
Included in
Earnings
 
Included in
Other
Comprehensive
Income
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
in/out of
Level 3
 
Other
 
Ending
Balance
 
Earnings
related to
Instruments
still held at
the Reporting
Date
 
(Dollars In Thousands)
Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities available-for-sale
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
$
3

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
3

 
$
—

Other asset-backed securities
537,831

 
—

 
769

 
—

 
(8,350
)
 
9,597

 
(7,629
)
 
—

 
—

 
—

 
923

 
533,141

 
—

Corporate securities
833,737

 
925

 
16,189

 
—

 
(694
)
 
9,558

 
(57,123
)
 
—

 
—

 
(16,773
)
 
(2,676
)
 
783,143

 
—

Total fixed maturity securities - available-for-sale
1,371,571

 
925

 
16,958

 
—

 
(9,044
)
 
19,155

 
(64,752
)
 
—

 
—

 
(16,773
)
 
(1,753
)
 
1,316,287

 
—

Fixed maturity securities - trading
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Other asset-backed securities
150,683

 
1,822

 
—

 
(8
)
 
—

 
—

 
(609
)
 
—

 
—

 
—

 
76

 
151,964

 
1,814

Corporate securities
5,677

 
24

 
—

 
—

 
—

 
10,908

 
1

 
—

 
—

 
—

 
(23
)
 
16,587

 
25

Total fixed maturity securities - trading
156,360

 
1,846

 
—

 
(8
)
 
—

 
10,908

 
(608
)
 
—

 
—

 
—

 
53

 
168,551

 
1,839

Total fixed maturity securities
1,527,931

 
2,771

 
16,958

 
(8
)
 
(9,044
)
 
30,063

 
(65,360
)
 
—

 
—

 
(16,773
)
 
(1,700
)
 
1,484,838

 
1,839

Equity securities
66,504

 
—

 
—

 
—

 
—

 
22

 
—

 
—

 
—

 
—

 
—

 
66,526

 
—

Other long-term investments(1)
57,048

 
16,275

 
—

 
(10,403
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
62,920

 
5,872

Short-term investments
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total investments
1,651,483

 
19,046

 
16,958

 
(10,411
)
 
(9,044
)
 
30,085

 
(65,360
)
 
—

 
—

 
(16,773
)
 
(1,700
)
 
1,614,284

 
7,711

Total assets measured at fair value on a recurring basis
$
1,651,483

 
$
19,046

 
$
16,958

 
$
(10,411
)
 
$
(9,044
)
 
$
30,085

 
$
(65,360
)
 
$
—

 
$
—

 
$
(16,773
)
 
$
(1,700
)
 
$
1,614,284

 
$
7,711

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Annuity account balances(2)
$
90,123

 
$
—

 
$
—

 
$
(530
)
 
$
—

 
$
—

 
$
—

 
$
63

 
$
1,896

 
—

 
$
—

 
$
88,820

 
$
—

Other liabilities(1)
496,238

 
15,217

 
—

 
(100,025
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
581,046

 
(84,808
)
Total liabilities measured at fair value on a recurring basis
$
586,361

 
$
15,217

 
$
—

 
$
(100,555
)
 
$
—

 
$
—

 
$
—

 
$
63

 
$
1,896

 
$
—

 
$
—

 
$
669,866

 
$
(84,808
)

(1)Represents certain freestanding and embedded derivatives.
(2)Represents liabilities related to fixed indexed annuities.
 
For the three months ended June 30, 2016 (Successor Company), there were $27.2 million transfers of securities into Level 3.
 
For the three months ended June 30, 2016 (Successor Company), $44.0 million of securities were transferred into Level 2. This amount was transferred from Level 3. These transfers resulted from securities that were priced internally using significant unobservable inputs where market observable inputs were not available in previous periods but were priced by independent pricing services or brokers as of June 30, 2016 (Successor Company).
 
For the three months ended June 30, 2016 (Successor Company), there were no transfers of securities from Level 2 to Level 1.
 
For the three months ended June 30, 2016 (Successor Company), there were no transfers of securities from Level 1.
The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the six months ended June 30, 2016 (Successor Company), for which the Company has used significant unobservable inputs (Level 3):
 
 
 
 
Total
Realized and Unrealized
Gains
 
Total
Realized and Unrealized
Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
Gains (losses)
included in
 
Beginning
Balance
 
Included
 in
Earnings
 
Included 
in
Other
Comprehensive
Income
 
Included 
in
Earnings
 
Included 
in
Other
Comprehensive
Income
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
in/out of
Level 3
 
Other
 
Ending
Balance
 
Earnings
related to
Instruments
still held at
the Reporting
Date
 
(Dollars In Thousands)
Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities available-for-sale
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
$
3

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
3

 
$
—

Other asset-backed securities
587,031

 
6,859

 
769

 
—

 
(21,407
)
 
9,597

 
(58,449
)
 
—

 
—

 
7,457

 
1,284

 
533,141

 
—

Corporate securities
902,119

 
925

 
31,111

 
(4,135
)
 
(6,981
)
 
25,558

 
(81,865
)
 
—

 
—

 
(77,952
)
 
(5,637
)
 
783,143

 
—

Total fixed maturity securities - available-for-sale
1,489,153

 
7,784

 
31,880

 
(4,135
)
 
(28,388
)
 
35,155

 
(140,314
)
 
—

 
—

 
(70,495
)
 
(4,353
)
 
1,316,287

 
—

Fixed maturity securities - trading
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Other asset-backed securities
152,912

 
2,050

 
—

 
(942
)
 
—

 
—

 
(2,212
)
 
—

 
—

 
172

 
(16
)
 
151,964

 
1,105

Corporate securities
18,225

 
332

 
—

 
(259
)
 
—

 
10,908

 
(4,071
)
 
—

 
—

 
(8,479
)
 
(69
)
 
16,587

 
241

Total fixed maturity securities - trading
171,137

 
2,382

 
—

 
(1,201
)
 
—

 
10,908

 
(6,283
)
 
—

 
—

 
(8,307
)
 
(85
)
 
168,551

 
1,346

Total fixed maturity securities
1,660,290

 
10,166

 
31,880

 
(5,336
)
 
(28,388
)
 
46,063

 
(146,597
)
 
—

 
—

 
(78,802
)
 
(4,438
)
 
1,484,838

 
1,346

Equity securities
66,504

 
—

 
—

 
—

 
—

 
22

 
—

 
—

 
—

 
—

 
—

 
66,526

 
—

Other long-term investments(1)
68,384

 
20,492

 
—

 
(27,385
)
 
—

 
1,429

 
—

 
—

 
—

 
—

 
—

 
62,920

 
(6,893
)
Total investments
1,795,178

 
30,658

 
31,880

 
(32,721
)
 
(28,388
)
 
47,514

 
(146,597
)
 
—

 
—

 
(78,802
)
 
(4,438
)
 
1,614,284

 
(5,547
)
Total assets measured at fair value on a recurring basis
$
1,795,178

 
$
30,658

 
$
31,880

 
$
(32,721
)
 
$
(28,388
)
 
$
47,514

 
$
(146,597
)
 
$
—

 
$
—

 
$
(78,802
)
 
$
(4,438
)
 
$
1,614,284

 
$
(5,547
)
Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Annuity account balances(2)
$
92,512

 
$
—

 
$
—

 
$
(1,096
)
 
$
—

 
$
—

 
$
—

 
$
250

 
$
5,038

 
$
—

 
$
—

 
$
88,820

 
$
—

Other liabilities(1)
375,848

 
15,585

 
—

 
(220,783
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
581,046

 
(205,198
)
Total liabilities measured at fair value on a recurring basis
$
468,360

 
$
15,585

 
$
—

 
$
(221,879
)
 
$
—

 
$
—

 
$
—

 
$
250

 
$
5,038

 
$
—

 
$
—

 
$
669,866

 
$
(205,198
)

(1)Represents certain freestanding and embedded derivatives.
(2)Represents liabilities related to fixed indexed annuities.
     
For the six months ended June 30, 2016 (Successor Company), $71.3 million of securities were transferred into Level 3.
 
For the six months ended June 30, 2016 (Successor Company), $150.1 million of securities were transferred into Level 2. This amount was transferred from Level 3. These transfers resulted from securities that were priced internally using significant unobservable inputs where market observable inputs were not available in previous periods but were priced by independent pricing services or brokers as of June 30, 2016 (Successor Company).
 
For the six months ended June 30, 2016 (Successor Company), $12.2 million of securities were transferred from Level 2 to Level 1.
 
For the six months ended June 30, 2016 (Successor Company), $0.1 million of securities were transferred from Level 1.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended June 30, 2015 (Successor Company), for which the Company has used significant unobservable inputs (Level 3):
 
 
 
 
Total
Realized and Unrealized
Gains
 
Total
Realized and Unrealized
Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
Gains (losses)
included in
 
Beginning
Balance
 
Included
 in
Earnings
 
Included 
in
Other
Comprehensive
Income
 
Included 
in
Earnings
 
Included 
in
Other
Comprehensive
Income
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
in/out of
Level 3
 
Other
 
Ending
Balance
 
Earnings
related to
Instruments
still held at
the Reporting
Date
 
(Dollars In Thousands)
Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities available-for-sale
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
$
3

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
3

 
$
—

Other asset-backed securities
600,132

 
—

 
165

 
(92
)
 
(9,323
)
 
—

 
(87
)
 
—

 
—

 
—

 
90

 
590,885

 
—

Corporate securities
1,283,142

 
3,656

 
4,001

 
(687
)
 
(24,247
)
 
89,929

 
(219,148
)
 
—

 
—

 
(21,803
)
 
(3,412
)
 
1,111,431

 
—

Total fixed maturity securities - available-for-sale
1,883,277

 
3,656

 
4,166

 
(779
)
 
(33,570
)
 
89,929

 
(219,235
)
 
—

 
—

 
(21,803
)
 
(3,322
)
 
1,702,319

 
—

Fixed maturity securities - trading
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Other asset-backed securities
170,500

 
589

 
—

 
(5,173
)
 
—

 
—

 
(5,468
)
 
—

 
—

 
—

 
146

 
160,594

 
(4,587
)
Corporate securities
19,614

 
140

 
—

 
(233
)
 
—

 
—

 
(161
)
 
—

 
—

 
—

 
(44
)
 
19,316

 
(93
)
Total fixed maturity securities - trading
190,114

 
729

 
—

 
(5,406
)
 
—

 
—

 
(5,629
)
 
—

 
—

 
—

 
102

 
179,910

 
(4,680
)
Total fixed maturity securities
2,073,391

 
4,385

 
4,166

 
(6,185
)
 
(33,570
)
 
89,929

 
(224,864
)
 
—

 
—

 
(21,803
)
 
(3,220
)
 
1,882,229

 
(4,680
)
Equity securities
66,691

 
—

 
—

 
—

 
—

 
—

 
(231
)
 
—

 
—

 
—

 
—

 
66,460

 
—

Other long-term investments(1)
79,222

 
24,982

 
—

 
(3,685
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
100,519

 
21,297

Total investments
2,219,304

 
29,367

 
4,166

 
(9,870
)
 
(33,570
)
 
89,929

 
(225,095
)
 
—

 
—

 
(21,803
)
 
(3,220
)
 
2,049,208

 
16,617

Total assets measured at fair value on a recurring basis
$
2,219,304

 
$
29,367

 
$
4,166

 
$
(9,870
)
 
$
(33,570
)
 
$
89,929

 
$
(225,095
)
 
$
—

 
$
—

 
$
(21,803
)
 
$
(3,220
)
 
$
2,049,208

 
$
16,617

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Annuity account balances(2)
$
97,108

 
$
—

 
$
—

 
$
(911
)
 
$
—

 
$
—

 
$
—

 
$
72

 
$
2,913

 
$
—

 
$
—

 
$
95,178

 
$
—

Other liabilities(1)
477,729

 
147,963

 
—

 
(13,179
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
342,945

 
134,784

Total liabilities measured at fair value on a recurring basis
$
574,837

 
$
147,963

 
$
—

 
$
(14,090
)
 
$
—

 
$
—

 
$
—

 
$
72

 
$
2,913

 
$
—

 
$
—

 
$
438,123

 
$
134,784


(1)Represents certain freestanding and embedded derivatives.
(2)Represents liabilities related to fixed indexed annuities.
     
For the three months ended June 30, 2015 (Successor Company), there were no securities transferred into Level 3.
 
For the three months ended June 30, 2015 (Successor Company), $21.8 million of securities were transferred into Level 2. This amount was transferred from Level 3. These transfers resulted from securities that were priced internally using significant unobservable inputs where market observable inputs were not available in previous periods but were priced by independent pricing services or brokers as of June 30, 2015 (Successor Company).
 
For the three months ended June 30, 2015 (Successor Company), there were no securities transferred from Level 2 to Level 1.
 
For the three months ended June 30, 2015 (Successor Company), there were no securities transferred from Level 1.


The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the period of February 1, 2015 to June 30, 2015 (Successor Company), for which the Company has used significant unobservable inputs (Level 3):
 
 
 
 
Total
Realized and Unrealized
Gains
 
Total
Realized and Unrealized
Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
Gains (losses)
included in
 
Beginning
Balance
 
Included in
Earnings
 
Included in
Other
Comprehensive
Income
 
Included in
Earnings
 
Included in
Other
Comprehensive
Income
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
in/out of
Level 3
 
Other
 
Ending
Balance
 
Earnings
related to
Instruments
still held at
the Reporting
Date
 
(Dollars In Thousands)
Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities available-for-sale
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
$
3

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
3

 
$
—

Other asset-backed securities
603,646

 
—

 
165

 
(92
)
 
(12,891
)
 
—

 
(127
)
 
—

 
—

 
—

 
184

 
590,885

 
—

States, municipals, and political subdivisions
3,675

 
—

 
—

 
—

 
—

 
—

 
(3,675
)
 
—

 
—

 
—

 
—

 
—

 
—

Corporate securities
1,307,259

 
4,291

 
15,619

 
(687
)
 
(24,247
)
 
111,929

 
(254,935
)
 
—

 
—

 
(41,853
)
 
(5,945
)
 
1,111,431

 
—

Total fixed maturity securities - available-for-sale
1,914,583

 
4,291

 
15,784

 
(779
)
 
(37,138
)
 
111,929

 
(258,737
)
 
—

 
—

 
(41,853
)
 
(5,761
)
 
1,702,319

 
—

Fixed maturity securities - trading
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Other asset-backed securities
169,473

 
3,949

 
—

 
(5,173
)
 
—

 
—

 
(7,876
)
 
—

 
—

 
—

 
221

 
160,594

 
(5,829
)
Corporate securities
25,130

 
174

 
—

 
(299
)
 
—

 
—

 
(5,584
)
 
—

 
—

 
—

 
(105
)
 
19,316

 
(1,180
)
Total fixed maturity securities - trading
194,603

 
4,123

 
—

 
(5,472
)
 
—

 
—

 
(13,460
)
 
—

 
—

 
—

 
116

 
179,910

 
(7,009
)
Total fixed maturity securities
2,109,186

 
8,414

 
15,784

 
(6,251
)
 
(37,138
)
 
111,929

 
(272,197
)
 
—

 
—

 
(41,853
)
 
(5,645
)
 
1,882,229

 
(7,009
)
Equity securities
66,691

 
—

 
—

 
—

 
—

 
—

 
(231
)
 
—

 
—

 
—

 
—

 
66,460

 
—

Other long-term investments(1)
64,200

 
40,032

 
—

 
(3,713
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
100,519

 
36,319

Short-term investments
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total investments
2,240,077

 
48,446

 
15,784

 
(9,964
)
 
(37,138
)
 
111,929

 
(272,428
)
 
—

 
—

 
(41,853
)
 
(5,645
)
 
2,049,208

 
29,310

Total assets measured at fair value on a recurring basis
$
2,240,077

 
$
48,446

 
$
15,784

 
$
(9,964
)
 
$
(37,138
)
 
$
111,929

 
$
(272,428
)
 
$
—

 
$
—

 
$
(41,853
)
 
$
(5,645
)
 
$
2,049,208

 
$
29,310

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Annuity account balances(2)
$
98,279

 
$
—

 
$
—

 
$
(1,544
)
 
$
—

 
$
—

 
$
—

 
$
86

 
$
4,731

 
$
—

 
$
—

 
$
95,178

 
$
—

Other liabilities(1)
530,118

 
212,854

 
—

 
(25,681
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
342,945

 
187,173

Total liabilities measured at fair value on a recurring basis
$
628,397

 
$
212,854

 
$
—

 
$
(27,225
)
 
$
—

 
$
—

 
$
—

 
$
86

 
$
4,731

 
$
—

 
$
—

 
$
438,123

 
$
187,173

 
(1)Represents certain freestanding and embedded derivatives.
(2)Represents liabilities related to fixed indexed annuities.
 
For the period of February 1, 2015 to June 30, 2015 (Successor Company), there were no transfers of securities into Level 3.
 
For the period of February 1, 2015 to June 30, 2015 (Successor Company), $41.9 million of securities were transferred into Level 2. This amount was transferred from Level 3. These transfers resulted from securities that were priced internally using significant unobservable inputs where market observable inputs were not available in previous periods but were priced by independent pricing services or brokers as of June 30, 2015 (Successor Company).
 
For the period of February 1, 2015 to June 30, 2015 (Successor Company), $90.4 million of securities were transferred from Level 2 to Level 1.
 
For the period of February 1, 2015 to June 30, 2015 (Successor Company), there were no transfers from Level 1.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for period of January 1, 2015 to January 31, 2015 (Predecessor Company), for which the Company has used significant unobservable inputs (Level 3):
 
 
 
 
Total
Realized and Unrealized
Gains
 
Total
Realized and Unrealized
Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
Gains (losses)
included in
 
Beginning
Balance
 
Included in
Earnings
 
Included in
Other
Comprehensive
Income
 
Included in
Earnings
 
Included in
Other
Comprehensive
Income
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
in/out of
Level 3
 
Other
 
Ending
Balance
 
Earnings
related to
Instruments
still held at
the Reporting
Date
 
(Dollars In Thousands)
Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities available-for-sale
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
$
3

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
3

 
$
—

Other asset-backed securities
563,961

 
—

 
—

 
—

 
(3,867
)
 
—

 
(32
)
 
—

 
—

 
43,205

 
379

 
603,646

 
—

States, municipals, and political subdivisions
3,675

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3,675

 
—

Corporate securities
1,325,683

 
—

 
12,282

 
—

 
(23,029
)
 
—

 
(7,062
)
 
—

 
—

 
—

 
(615
)
 
1,307,259

 
—

Total fixed maturity securities - available-for-sale
1,893,322

 
—

 
12,282

 
—

 
(26,896
)
 
—

 
(7,094
)
 
—

 
—

 
43,205

 
(236
)
 
1,914,583

 
—

Fixed maturity securities - trading
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Other asset-backed securities
169,461

 
586

 
—

 
(139
)
 
—

 
—

 
(472
)
 
—

 
—

 
—

 
37

 
169,473

 
447

Corporate securities
24,744

 
602

 
—

 
(196
)
 
—

 
—

 
(20
)
 
—

 
—

 
—

 
—

 
25,130

 
406

Total fixed maturity securities - trading
194,205

 
1,188

 
—

 
(335
)
 
—

 
—

 
(492
)
 
—

 
—

 
—

 
37

 
194,603

 
853

Total fixed maturity securities
2,087,527

 
1,188

 
12,282

 
(335
)
 
(26,896
)
 
—

 
(7,586
)
 
—

 
—

 
43,205

 
(199
)
 
2,109,186

 
853

Equity securities
66,691

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
66,691

 
—

Other long-term investments(1)
44,625

 
16,617

 
—

 
(15,166
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
46,076

 
1,451

Short-term investments
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total investments
2,198,843

 
17,805

 
12,282

 
(15,501
)
 
(26,896
)
 
—

 
(7,586
)
 
—

 
—

 
43,205

 
(199
)
 
2,221,953

 
2,304

Total assets measured at fair value on a recurring basis
$
2,198,843

 
$
17,805

 
$
12,282

 
$
(15,501
)
 
$
(26,896
)
 
$
—

 
$
(7,586
)
 
$
—

 
$
—

 
$
43,205

 
$
(199
)
 
$
2,221,953

 
$
2,304

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Annuity account balances(2)
$
97,825

 
$
—

 
$
—

 
$
(536
)
 
$
—

 
$
—

 
$
—

 
$
7

 
$
419

 
$
—

 
$
—

 
$
97,949

 
$
—

Other liabilities(1)
506,343

 
61

 
—

 
(125,995
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
632,277

 
(125,934
)
Total liabilities measured at fair value on a recurring basis
$
604,168

 
$
61

 
$
—

 
$
(126,531
)
 
$
—

 
$
—

 
$
—

 
$
7

 
$
419

 
$
—

 
$
—

 
$
730,226

 
$
(125,934
)

(1)Represents certain freestanding and embedded derivatives.
(2)Represents liabilities related to fixed indexed annuities.
 
For the period of January 1, 2015 to January 31, 2015 (Predecessor Company), $43.2 million of securities were transferred into Level 3. This amount was transferred from Level 2. These transfers resulted from securities that were priced by independent pricing services or brokers in previous periods, using no significant unobservable inputs, but were priced internally using significant unobservable inputs where market observable inputs were no longer available as of January 31, 2015 (Predecessor Company). All transfers are recognized as of the end of the period.
 
For the period of January 1, 2015 to January 31, 2015 (Predecessor Company), there were no transfers from Level 3 to Level 2.
 
For the period of January 1, 2015 to January 31, 2015 (Predecessor Company), there were no transfers from Level 2 to Level 1 and there were no transfers out of Level 1.

     Total realized and unrealized gains (losses) on Level 3 assets and liabilities are primarily reported in either realized investment gains (losses) within the consolidated condensed statements of income (loss) or other comprehensive income (loss) within shareowner’s equity based on the appropriate accounting treatment for the item.
 
Purchases, sales, issuances, and settlements, net, represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily relates to purchases and sales of fixed maturity securities and issuances and settlements of fixed indexed annuities.
 
The Company reviews the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. The asset transfers in the table(s) above primarily related to positions moved from Level 3 to Level 2 as the Company determined that certain inputs were observable.
 
The amount of total gains (losses) for assets and liabilities still held as of the reporting date primarily represents changes in fair value of trading securities and certain derivatives that exist as of the reporting date and the change in fair value of fixed indexed annuities.
 
Estimated Fair Value of Financial Instruments
 
The carrying amounts and estimated fair values of the Company’s financial instruments as of the periods shown below are as follows:
 
 
 
 
Successor Company
 
 
 
As of
June 30, 2016
 
As of
December 31, 2015
 
Fair Value
Level
 
Carrying
Amounts
 
Fair Values
 
Carrying
Amounts
 
Fair Values
 
 
 
(Dollars In Thousands)
Assets:
 
 
 

 
 

 
 

 
 

Mortgage loans on real estate
3
 
$
5,748,675

 
$
5,735,650

 
$
5,662,812

 
$
5,529,803

Policy loans
3
 
1,670,218

 
1,670,218

 
1,699,508

 
1,699,508

Fixed maturities, held-to-maturity(1)
3
 
2,779,280

 
2,853,788

 
593,314

 
515,000

Liabilities:
 
 
 

 
 

 
 

 
 

Stable value product account balances
3
 
$
2,838,674

 
$
2,855,064

 
$
2,131,822

 
$
2,124,712

Annuity account balances
3
 
10,678,701

 
10,221,680

 
10,719,862

 
10,274,571

Debt:
 
 
 

 
 

 
 

 
 

Non-recourse funding obligations(2)
3
 
$
2,981,271

 
$
3,054,637

 
$
1,951,563

 
$
1,621,773

 
Except as noted below, fair values were estimated using quoted market prices.

(1)    Securities purchased from unconsolidated affiliates, Red Mountain LLC and Steel City LLC.
(2)    Of this carrying amount, $2.8 billion, fair value of $2.8 billion, as of June 30, 2016 (Successor Company), and $500.0 million, fair value of $495.5 million, as of December 31, 2015 (Successor Company), relates to non-recourse funding obligations issued by Golden Gate and Golden Gate V.

Fair Value Measurements
 
Mortgage loans on real estate
 
The Company estimates the fair value of mortgage loans using an internally developed model. This model includes inputs derived by the Company based on assumed discount rates relative to the Company’s current mortgage loan lending rate and an expected cash flow analysis based on a review of the mortgage loan terms. The model also contains the Company’s determined representative risk adjustment assumptions related to credit and liquidity risks.
 
Policy loans
 
The Company believes the fair value of policy loans approximates book value. Policy loans are funds provided to policy holders in return for a claim on the policy. The funds provided are limited to the cash surrender value of the underlying policy. The nature of policy loans is to have a negligible default risk as the loans are fully collateralized by the value of the policy. Policy loans do not have a stated maturity and the balances and accrued interest are repaid either by the policyholder or with proceeds from the policy. Due to the collateralized nature of policy loans and unpredictable timing of repayments, the Company believes the fair value of policy loans approximates carrying value.
 
Fixed maturities, held-to-maturity
 
The Company estimates the fair value of its fixed maturity, held-to-maturity securities using internal discounted cash flow models. The discount rates used in the model are based on a current market yield for similar financial instruments.
 
Stable Value Product and Annuity Account Balances
 
The Company estimates the fair value of stable value product account balances and annuity account balances using models based on discounted expected cash flows. The discount rates used in the models are based on a current market rate for similar financial instruments.
 
Non-recourse Funding Obligations
 
The Company estimates the fair value of its non-recourse funding obligations using internal discounted cash flow models. The discount rates used in the model are based on a current market yield for similar financial instruments.