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.

Financial assets and liabilities recorded at fair value on the consolidated balance sheets are categorized as follows:

•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; and


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, 2018:



	Measurement Category	Level 1		Level 2		Level 3		Total
		(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	4	$	—	$	3,213,615	$	21,780	$	3,235,395
Commercial mortgage-backed securities	4	—		2,151,656		47,227		2,198,883
Other asset-backed securities	4	—		907,860		515,701		1,423,561
U.S. government-related securities	4	969,623		522,413		—		1,492,036
State, municipalities, and political subdivisions	4	—		3,633,803		—		3,633,803
Other government-related securities	4	—		399,772		—		399,772
Corporate securities	4	—		35,938,988		644,811		36,583,799
Redeemable preferred stock	4	71,292		18,284		—		89,576
Total fixed maturity securities - available-for-sale		1,040,915		46,786,391		1,229,519		49,056,825
Fixed maturity securities - trading
Residential mortgage-backed securities	3	—		259,755		—		259,755
Commercial mortgage-backed securities	3	—		141,469		—		141,469
Other asset-backed securities	3	—		89,655		24,852		114,507
U.S. government-related securities	3	30,761		5,814		—		36,575
State, municipalities, and political subdivisions	3	—		314,722		—		314,722
Other government-related securities	3	—		40,274		—		40,274
Corporate securities	3	—		1,580,036		5,254		1,585,290
Redeemable preferred stock	3	3,289		—		—		3,289
Total fixed maturity securities - trading		34,050		2,431,725		30,106		2,495,881
Total fixed maturity securities		1,074,965		49,218,116		1,259,625		51,552,706
Equity securities	3	576,707		—		65,553		642,260
Other long-term investments⁽¹⁾	3 & 4	63,220		316,833		170,594		550,647
Short-term investments	3	532,397		65,217		—		597,614
Total investments		2,247,289		49,600,166		1,495,772		53,343,227
Cash	3	164,232		—		—		164,232
Assets related to separate accounts	3
Variable annuity	3	13,414,407		—		—		13,414,407
Variable universal life	3	1,037,754		—		—		1,037,754
Total assets measured at fair value on a recurring basis		$	16,863,682	$	49,600,166	$	1,495,772	$	67,959,620
Liabilities:
Annuity account balances⁽²⁾	3	$	—	$	—	$	80,098	$	80,098
Other liabilities⁽¹⁾	3 & 4	5,172		248,864		457,008		711,044
Total liabilities measured at fair value on a recurring basis		$	5,172	$	248,864	$	537,106	$	791,142

(1) Includes certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.
(3) Fair Value through Net Income
(4) Fair Value through Other Comprehensive Income

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, 2017:



	Level 1		Level 2		Level 3		Total
	(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	$	—	$	2,318,493	$	—	$	2,318,493
Commercial mortgage-backed securities	—		1,860,488		—		1,860,488
Other asset-backed securities	—		745,184		504,365		1,249,549
U.S. government-related securities	958,775		264,477		—		1,223,252
State, municipalities, and political subdivisions	—		1,741,645		—		1,741,645
Other government-related securities	—		285,233		—		285,233
Corporate securities	—		28,910,645		626,901		29,537,546
Redeemable preferred stock	72,471		18,620		—		91,091
Total fixed maturity securities - available-for-sale	1,031,246		36,144,785		1,131,266		38,307,297
Fixed maturity securities - trading
Residential mortgage-backed securities	—		259,694		—		259,694
Commercial mortgage-backed securities	—		146,804		—		146,804
Other asset-backed securities	—		102,875		35,222		138,097
U.S. government-related securities	21,183		6,051		—		27,234
State, municipalities, and political subdivisions	—		326,925		—		326,925
Other government-related securities	—		63,925		—		63,925
Corporate securities	—		1,692,741		5,442		1,698,183
Redeemable preferred stock	3,327		—		—		3,327
Total fixed maturity securities - trading	24,510		2,599,015		40,664		2,664,189
Total fixed maturity securities	1,055,756		38,743,800		1,171,930		40,971,486
Equity securities	649,981		—		65,517		715,498
Other long-term investments⁽¹⁾	51,102		417,969		160,466		629,537
Short-term investments	394,394		132,750		—		527,144
Total investments	2,151,233		39,294,519		1,397,913		42,843,665
Cash	178,855		—		—		178,855
Assets related to separate accounts
Variable annuity	13,956,071		—		—		13,956,071
Variable universal life	1,035,202		—		—		1,035,202
Total assets measured at fair value on a recurring basis	$	17,321,361	$	39,294,519	$	1,397,913	$	58,013,793
Liabilities:
Annuity account balances⁽²⁾	$	—	$	—	$	83,472	$	83,472
Other liabilities⁽¹⁾	5,755		302,656		597,562		905,973
Total liabilities measured at fair value on a recurring basis	$	5,755	$	302,656	$	681,034	$	989,445

(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 93.4% 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, 2018.

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, 2018, the Company held $6.8 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, 2018, the Company held $609.6 million of Level 3 ABS, which included $584.7 million of other asset-backed securities classified as available-for-sale and $24.9 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. 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. In periods where market activity increases and there are transactions at a price that is not the result of a distressed or forced sale we consider those prices as part of our valuation. If the market activity during a period is solely the result of the issuer redeeming positions we consider those transactions in our valuation, but still consider them to be level three measurements due to the nature of the transaction.

Corporate Securities, U.S. Government-Related Securities, States, Municipals, and Political Subdivisions, and Other Government-Related Securities

As of June 30, 2018, the Company classified approximately $42.5 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, 2018, the Company classified approximately $650.1 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, 2018, the Company held approximately $65.6 million of equity securities classified as Level 2 and Level 3. Of this total, $65.5 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 7, 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, 2018, 83.0% 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 utilize observable market data inputs to the extent they are available. 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 swaps, options, and swaptions, which are traded over-the-counter. Level 2 also includes certain centrally cleared derivatives. 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 7, Derivative Financial Instruments for more information related to each embedded derivatives gains and losses.

The fair value of the guaranteed living withdrawal benefits ("GLWB") 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 Ruark 2015 ALB table with attained age factors varying from 91.1% - 106.6%. 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 GLWB embedded derivative is categorized as Level 3. Policyholder assumptions are reviewed on an annual 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 with company experience, with attained age factors varying from 46% - 113%. 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 with company experience, with attained age factors varying from 34% - 152%. 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, 2018, the fair value of the embedded derivative is based upon the relationship between the statutory policy liabilities (net of policy loans) of $2.3 billion and the statutory unrealized gain (loss) of the securities of $76.8 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.

The Company and certain of its 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, 2018 was $92.8 million and is included in Other long-term investments. For information regarding realized gains on these derivatives please refer to Note 7, Derivative Financial Instruments.

The Interest Support Agreement provides that PLC will make payments to Golden Gate II Captive Insurance Company ("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 $40.4 million as of June 30, 2018. Golden Gate II recognized $0.6 million in gains related to payments made under this agreement for the three and six months ended June 30, 2018. As of June 30, 2018, certain interest support agreement obligations to Golden Gate II of approximately $4.9 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.

The YRT premium support agreements provide that PLC will make payments to Golden Gate Captive Insurance Company ("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, 2018 was $49.7 million. As of June 30, 2018, 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 West Coast Life Insurance Company ("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, 2018, was $2.7 million. As of June 30, 2018, 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, 2018, was a liability of $67.7 million.

Annuity Account Balances

The Company records a certain legacy block of FIA reserves at fair value. Based on the characteristics of these reserves, the Company believes that the fund value approximates fair value. The fair value measurement of these reserves is considered a Level 3 valuation due to the unobservable nature of the fund values. The Level 3 fair value as of June 30, 2018 is $80.1 million.

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:



	Fair Value As of June 30, 2018		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(Dollars In Thousands)
Assets:
Other asset-backed securities	$	515,379	Liquidation	Liquidation value	$90 - $97 ($94.91)
			Discounted cash flow	Liquidity premium	0.06% - 0.90% (0.38%)
				Paydown rate	11.18% - 12.98% (12.30%)
Corporate securities	637,479		Discounted cash flow	Spread over treasury	0.83% - 2.78% (1.53%)
Embedded derivatives - GLWB⁽²⁾	$	17,116	Actuarial cash flow model	Mortality	91.1% to 106.6% of Ruark 2015 ALB Table
				Lapse	Ruark predictive model product/duration/funded status of guarantee
				Utilization	99%. 10% of policies have a one-time over-utilization of 400%
				Nonperformance risk	0.13% - 0.93%
Liabilities:⁽¹⁾
Embedded derivative - FIA	283,569		Actuarial cash flow model	Expenses	$146 per policy
				Withdrawal rate	1.5% prior to age 70, 100% of the RMD for ages 70+
				Mortality	1994 MGDB table with company experience
				Lapse	1.0% - 30.0%, depending on duration/surrender charge period
				Nonperformance risk	0.13% - 0.93%
Embedded derivative - IUL	83,166		Actuarial cash flow model	Mortality	34% - 152% of 2015
					VBT Primary Tables
				Lapse	0.5% - 0.10%, depending on
					duration/distribution channel
					and smoking class
				Nonperformance risk	0.13% - 0.93%

(1) Excludes modified coinsurance arrangements.
(2) The fair value for the GLWB embedded derivative is presented as a net asset.

The chart above excludes Level 3 financial instruments that are valued using broker quotes and for which book value approximates fair value.

The Company has considered all reasonably available quantitative inputs as of June 30, 2018, but the valuation techniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company. This resulted in $85.0 million of financial instruments being classified as Level 3 as of June 30, 2018. Of the $85.0 million, $72.4 million are other asset-backed securities, and $12.6 million are corporate securities.

In certain cases the Company has determined that book value materially approximates fair value. As of June 30, 2018, the Company held $87.3 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:



	Fair Value As of December 31, 2017		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(Dollars In Thousands)
Assets:
Other asset-backed securities	$	504,228	Liquidation	Liquidation value	$90 - $97 ($94.91)
			Discounted cash flow	Liquidity premium	0.06% - 1.17% (0.75%)
				Paydown Rate	11.31% - 11.97% (11.54%)
Corporate securities	617,770		Discounted cash flow	Spread over treasury	0.31% - 4.50% (1.06%)
Liabilities:⁽¹⁾
Embedded derivatives - GLWB⁽²⁾	$	15,554	Actuarial cash flow model	Mortality	91.1% to 106.6% of Ruark 2015 ALB Table
				Lapse	1.0% - 30.0%, depending on product/duration/funded status of guarantee
				Utilization	99%. 10% of policies have a one-time over-utilization of 400%
				Nonperformance risk	0.11% - 0.79%
Embedded derivative - FIA	218,676		Actuarial cash flow model	Expenses	$146 per policy
				Withdrawal rate	1.5% prior to age 70, 100% of the RMD for ages 70+
				Mortality	1994 MGDB table with company experience
				Lapse	1.0% - 30.0%, depending on duration/surrender charge period
				Nonperformance risk	0.11% - 0.79%
Embedded derivative - IUL	80,212		Actuarial cash flow model	Mortality	34% - 152% of 2015 VBT Primary Tables
				Lapse	0.5% - 10.0%, depending on duration/distribution channel and smoking class
				Nonperformance risk	0.11% - 0.79%

(1) Excludes modified coinsurance arrangements.
(2) The fair value for the GLWB embedded derivative is presented as a net liability.

The chart above excludes Level 3 financial instruments that are valued using broker quotes and for which book value approximates fair value.

The Company had considered all reasonably available quantitative inputs as of December 31, 2017, but the valuation techniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company. This resulted in $50.0 million of financial instruments being classified as Level 3 as of December 31, 2017. Of the $50.0 million, $35.4 million are other asset backed securities, and $14.6 million are corporate securities.

In certain cases the Company has determined that book value materially approximates fair value. As of December 31, 2017, the Company held $65.5 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 liquidation values for these securities are sensitive to the issuer's available cash flows and ability to redeem the securities, as well as the current holders' willingness to liquidate at the specified price.

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 GLWB 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 GLWB 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 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, 2018, 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 Earnings related to Instruments still held at the Reporting Date
	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
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	—	$	—	$	—	$	—		$	(457	)	$	22,225	$	—		$	—	$	—		$	—		$	12		$	21,780	$	—
Commercial mortgage-backed securities	—		—		—		—			(1,284		)	48,621		(94		)	—		—			—			(16		)	47,227		—
Other asset-backed securities	503,789		—		11,353		—			(13		)	—		(9		)	—		—			222			359			515,701		—
Corporate securities	626,409		—		5,662		—			(6,828		)	43,491		(14,817		)	—		—			(7,895		)	(1,211		)	644,811		—
Total fixed maturity securities - available-for-sale	1,130,198		—		17,015		—			(8,582		)	114,337		(14,920		)	—		—			(7,673		)	(856		)	1,229,519		—
Fixed maturity securities - trading
Other asset-backed securities	34,958		—		—		(3,570		)	—			4,600		(11,273		)	—		—			164			(27		)	24,852		(3,570		)
Corporate securities	5,324		—		—		(45		)	—			—		—			—		—			—			(25		)	5,254		(45		)
Total fixed maturity securities - trading	40,282		—		—		(3,615		)	—			4,600		(11,273		)	—		—			164			(52		)	30,106		(3,615		)
Total fixed maturity securities	1,170,480		—		17,015		(3,615		)	(8,582		)	118,937		(26,193		)	—		—			(7,509		)	(908		)	1,259,625		(3,615		)
Equity securities	65,516		1		—		—			—			36		—			—		—			—			—			65,553		(14		)
Other long-term investments⁽¹⁾	176,359		5,995		—		(11,133		)	—			—		—			—		(627		)	—			—			170,594		(5,765		)
Total investments	1,412,355		5,996		17,015		(14,748		)	(8,582		)	118,973		(26,193		)	—		(627		)	(7,509		)	(908		)	1,495,772		(9,394		)
Total assets measured at fair value on a recurring basis	$	1,412,355	$	5,996	$	17,015	$	(14,748	)	$	(8,582	)	$	118,973	$	(26,193	)	$	—	$	(627	)	$	(7,509	)	$	(908	)	$	1,495,772	$	(9,394	)
Liabilities:
Annuity account balances⁽²⁾	$	81,399	$	—	$	—	$	(1,059	)	$	—		$	—	$	—		$	89	$	2,449		—			$	—		$	80,098	$	—
Other liabilities⁽¹⁾	488,596		68,621		—		(37,033		)	—			—		—			—		—			—			—			457,008		31,588
Total liabilities measured at fair value on a recurring basis	$	569,995	$	68,621	$	—	$	(38,092	)	$	—		$	—	$	—		$	89	$	2,449		$	—		$	—		$	537,106	$	31,588

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

For the three months ended June 30, 2018, there were $11.1 million securities transferred into Level 3.

For the three months ended June 30, 2018, there were $18.6 million securities 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, 2018.

For the three months ended June 30, 2018, there were no transfers from Level 2 to Level 1.

For the three months ended June 30, 2018, there were no transfers from Level 1 into Level 2.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the six months ended June 30, 2018, 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 Earnings related to Instruments still held at the Reporting Date
	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
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	—	$	—	$	—	$	—		$	(457	)	$	22,225	$	—		$	—	$	—		$	—		$	12		$	21,780	$	—
Commercial mortgage-backed securities	—		—		—		—			(1,284		)	48,621		(94		)	—		—			—			(16		)	47,227		—
Other asset-backed securities	504,365		—		11,867		—			(1,647		)	—		(23		)	—		—			222			917			515,701		—
Corporate securities	626,901		—		7,061		—			(18,929		)	78,491		(38,452		)	—		—			(7,895		)	(2,366		)	644,811		—
Total fixed maturity securities - available-for-sale	1,131,266		—		18,928		—			(22,317		)	149,337		(38,569		)	—		—			(7,673		)	(1,453		)	1,229,519		—
Fixed maturity securities - trading
Other asset-backed securities	35,222		194		—		(3,598		)	—			4,600		(11,669		)	—		—			164			(61		)	24,852		(3,405		)
Corporate securities	5,442		—		—		(139		)	—			—		—			—		—			—			(49		)	5,254		(139		)
Total fixed maturity securities - trading	40,664		194		—		(3,737		)	—			4,600		(11,669		)	—		—			164			(110		)	30,106		(3,544		)
Total fixed maturity securities	1,171,930		194		18,928		(3,737		)	(22,317		)	153,937		(50,238		)	—		—			(7,509		)	(1,563		)	1,259,625		(3,544		)
Equity securities	65,518		1		—		(1		)	—			36		—			—		—			—			(1		)	65,553		(63		)
Other long-term investments⁽¹⁾	160,466		22,404		—		(11,649		)	—			—		—			—		(627		)	—			—			170,594		10,128
Short-term investments	—		—		—		—			—			—		—			—		—			—			—			—		—
Total investments	1,397,914		22,599		18,928		(15,387		)	(22,317		)	153,973		(50,238		)	—		(627		)	(7,509		)	(1,564		)	1,495,772		6,521
Total assets measured at fair value on a recurring basis	$	1,397,914	$	22,599	$	18,928	$	(15,387	)	$	(22,317	)	$	153,973	$	(50,238	)	$	—	$	(627	)	$	(7,509	)	$	(1,564	)	$	1,495,772	$	6,521
Liabilities:
Annuity account balances⁽²⁾	$	83,472	$	—	$	—	$	(1,853	)	$	—		$	—	$	—		$	530	$	5,757		—			$	—		$	80,098	$	—
Other liabilities⁽¹⁾	597,562		188,110		—		(47,556		)	—			—		—			—		—			—			—			457,008		140,554
Total liabilities measured at fair value on a recurring basis	$	681,034	$	188,110	$	—	$	(49,409	)	$	—		$	—	$	—		$	530	$	5,757		$	—		$	—		$	537,106	$	140,554

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

For the six months ended June 30, 2018, there were $11.1 million securities transferred into Level 3.

For the six months ended June 30, 2018, there were $18.6 million securities 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, 2018.

For the six months ended June 30, 2018, there were no transfers from Level 2 to Level 1.

For the six months ended June 30, 2018, there were no transfers from Level 1 into Level 2.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended June 30, 2017, 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 Earnings related to Instruments still held at the Reporting Date
	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
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	—	$	—	$	—	$	—		$	—		$	11,862	$	—		$	—	$	—	$	—		$	—		$	11,862	$	—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Other asset-backed securities	556,936		—		—		—			(4,257		)	—		(12		)	—		—		—			296			552,963		—
Corporate securities	666,705		—		10,027		—			(260		)	43,492		(54,066		)	—		—		(2,220		)	(1,024		)	662,654		—
Total fixed maturity securities - available-for-sale	1,223,641		—		10,027		—			(4,517		)	55,354		(54,078		)	—		—		(2,220		)	(728		)	1,227,479		—
Fixed maturity securities - trading
Other asset-backed securities	68,752		205		—		(215		)	—			—		(14,020		)	—		—		—			201			54,923		196
Corporate securities	5,504		40		—		—			—			—		—			—		—		—			(24		)	5,520		40
Total fixed maturity securities - trading	74,256		245		—		(215		)	—			—		(14,020		)	—		—		—			177			60,443		236
Total fixed maturity securities	1,297,897		245		10,027		(215		)	(4,517		)	55,354		(68,098		)	—		—		(2,220		)	(551		)	1,287,922		236
Equity securities	65,788		—		—		—			—			—		(103		)	—		—		—			1			65,686		—
Other long-term investments⁽¹⁾	103,895		731		—		(11,381		)	—			—		—			—		—		—			—			93,245		(10,650		)
Total investments	1,467,580		976		10,027		(11,596		)	(4,517		)	55,354		(68,201		)	—		—		(2,220		)	(550		)	1,446,853		(10,414		)
Total assets measured at fair value on a recurring basis	$	1,467,580	$	976	$	10,027	$	(11,596	)	$	(4,517	)	$	55,354	$	(68,201	)	$	—	$	—	$	(2,220	)	$	(550	)	$	1,446,853	$	(10,414	)
Liabilities:
Annuity account balances⁽²⁾	$	86,415	$	—	$	—	$	(1,110	)	$	—		$	—	$	—		$	212	$	1,643	$	—		$	—		$	86,094	$	—
Other liabilities⁽¹⁾	438,801		—		—		(93,962		)	—			—		—			—		—		—			—			532,763		(93,962		)
Total liabilities measured at fair value on a recurring basis	$	525,216	$	—	$	—	$	(95,072	)	$	—		$	—	$	—		$	212	$	1,643	$	—		$	—		$	618,857	$	(93,962	)

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

For the three months ended June 30, 2017, there were no securities transferred into Level 3.

For the three months ended June 30, 2017, there were $2.2 million of securities 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, 2017.

For the three months ended June 30, 2017, there were no transfers from Level 2 to Level 1.

For the three months ended June 30, 2017, there were no transfers from Level 1 to Level 2.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the six months ended June 30, 2017, 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 Earnings related to Instruments still held at the Reporting Date
	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
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	3	$	—	$	—	$	—		$	—		$	11,862	$	(3	)	$	—	$	—	$	—		$	—		$	11,862	$	—
Other asset-backed securities	562,604		—		3,530		—			(5,088		)	—		(2,027		)	—		—		(6,643		)	587			552,963		—
Corporate securities	664,046		—		17,798		—			(542		)	80,751		(92,950		)	—		—		(4,867		)	(1,582		)	662,654		—
Total fixed maturity securities - available-for-sale	1,226,653		—		21,328		—			(5,630		)	92,613		(94,980		)	—		—		(11,510		)	(995		)	1,227,479		—
Fixed maturity securities - trading
Other asset-backed securities	84,563		3,679		—		(801		)	—			—		(33,328		)	—		—		—			810			54,923		3,598
Corporate securities	5,492		74		—		—			—			—		—			—		—		—			(46		)	5,520		74
Total fixed maturity securities - trading	90,055		3,753		—		(801		)	—			—		(33,328		)	—		—		—			764			60,443		3,672
Total fixed maturity securities	1,316,708		3,753		21,328		(801		)	(5,630		)	92,613		(128,308		)	—		—		(11,510		)	(231		)	1,287,922		3,672
Equity securities	65,786		—		—		—			—			—		(103		)	—		—		3			—			65,686		—
Other long-term investments⁽¹⁾	115,516		5,976		—		(28,247		)	—			—		—			—		—		—			—			93,245		—
Short-term investments	—		—		—		—			—			—		—			—		—		—			—			—		(22,271		)
Total investments	1,498,010		9,729		21,328		(29,048		)	(5,630		)	92,613		(128,411		)	—		—		(11,507		)	(231		)	1,446,853		(18,599		)
Total assets measured at fair value on a recurring basis	$	1,498,010	$	9,729	$	21,328	$	(29,048	)	$	(5,630	)	$	92,613	$	(128,411	)	$	—	$	—	$	(11,507	)	$	(231	)	$	1,446,853	$	(18,599	)
Liabilities:
Annuity account balances⁽²⁾	$	87,616	$	—	$	—	$	(1,997	)	$	—		$	—	$	—		$	392	$	3,911	$	—		$	—		$	86,094	$	—
Other liabilities⁽¹⁾	405,803		15,280		—		(142,240		)	—			—		—			—		—		—			—			532,763		(126,960		)
Total liabilities measured at fair value on a recurring basis	$	493,419	$	15,280	$	—	$	(144,237	)	$	—		$	—	$	—		$	392	$	3,911	$	—		$	—		$	618,857	$	(126,960	)

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

For the six months ended June 30, 2017, there were an immaterial amount of securities transferred into Level 3.

For the six months ended June 30, 2017, there were $11.5 million of securities 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, 2017.

For the six months ended June 30, 2017, there were no transfers from Level 2 to Level 1.

For the six months ended June 30, 2017, there were no transfers from Level 1 to Level 2.

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:



		As of
		June 30, 2018				December 31, 2017
	Fair Value Level	Carrying Amounts		Fair Values		Carrying Amounts		Fair Values
		(Dollars In Thousands)
Assets:
Mortgage loans on real estate	3	$	7,516,192	$	7,330,137	$	6,817,723	$	6,740,177
Policy loans	3	1,721,743		1,721,743		1,615,615		1,615,615
Fixed maturities, held-to-maturity⁽¹⁾	3	2,677,726		2,582,938		2,718,904		2,776,327
Liabilities:
Stable value product account balances	3	$	5,025,930	$	4,978,498	$	4,698,371	$	4,698,868
Future policy benefits and claims⁽²⁾	3	224,249		244,249		220,498		220,498
Other policyholders' funds⁽³⁾	3	134,976		135,631		133,508		134,253
Debt:⁽⁴⁾
Non-recourse funding obligations⁽⁵⁾	3	$	2,913,621	$	2,820,229	$	2,952,822	$	2,980,495
Subordinated funding obligations	3	110,000		98,775		—		—

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) Single premium immediate annuity without life contingencies.
(3) Supplementary contracts without life contingencies.
(4) Excludes capital lease obligations of $1.6 million.
(5) As of June 30, 2018, carrying amount of $2.7 billion and a fair value of $2.6 billion related to non-recourse funding obligations issued by Golden Gate and Golden Gate V. As of December 31, 2017, carrying amount of $2.7 billion and a fair value of $2.8 billion related 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 policyholders 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 other investment contract balances

The Company estimates the fair value of stable value product account balances and other investment contract balances (included in Future policy benefits and claims as well as Other policyholder funds line items on our balance sheet) 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.

Funding obligations

The Company estimates the fair value of its subordinated and 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.