FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2014

Fair Value Hierarchy

GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. These two types of inputs create three valuation hierarchy levels. Level 1 valuations reflect quoted market prices for identical assets or liabilities in active markets. Level 2 valuations reflect quoted market prices for similar assets or liabilities in an active market, quoted market prices for identical or similar assets or liabilities in non-active markets or model-derived valuations in which all significant valuation inputs are observable in active markets. Level 3 valuations reflect valuations in which one or more of the significant inputs are not observable in an active market.

The following tables present the fair value hierarchy levels of the Company's assets and liabilities that are measured and carried at fair value on a recurring basis.



	March 31, 2014
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets:
Securities available for sale, carried at fair value:
Fixed maturities:
Government and agencies		$	18,407		$	499		$	0		$	18,906
Municipalities		0			1,097			0			1,097
Mortgage- and asset-backed securities		0			404			262			666
Public utilities		0			7,926			0			7,926
Sovereign and supranational		0			1,544			0			1,544
Banks/financial institutions		0			6,767			25			6,792
Other corporate		0			27,350			0			27,350
Total fixed maturities		18,407			45,587			287			64,281
Perpetual securities:
Banks/financial institutions		0			2,731			56			2,787
Other corporate		0			229			0			229
Total perpetual securities		0			2,960			56			3,016
Equity securities		14			4			3			21
Other assets:
Foreign currency swaps		0			320			106			426
Foreign currency forwards		0			58			0			58
Foreign currency options		0			26			0			26
Credit default swaps		0			0			1			1
Interest rate swaptions		0			12			0			12
Total other assets		0			416			107			523
Cash and cash equivalents		1,994			0			0			1,994
Total assets		$	20,415		$	48,967		$	453		$	69,835
Liabilities:
Foreign currency swaps		$	0		$	14		$	192		$	206
Foreign currency forwards		0			59			0			59
Foreign currency options		0			23			0			23
Credit default swaps		0			0			2			2
Interest rate swaptions		0			61			0			61
Futures		0			7			0			7
Total liabilities		$	0		$	164		$	194		$	358



	December 31, 2013
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets:
Securities available for sale, carried at fair value:
Fixed maturities:
Government and agencies		$	14,928		$	504		$	0		$	15,432
Municipalities		0			1,051			0			1,051
Mortgage- and asset-backed securities		0			402			369			771
Public utilities		0			7,562			0			7,562
Sovereign and supranational		0			1,523			0			1,523
Banks/financial institutions		0			6,486			23			6,509
Other corporate		0			25,222			0			25,222
Total fixed maturities		14,928			42,750			392			58,070
Perpetual securities:
Banks/financial institutions		0			2,686			52			2,738
Other corporate		0			209			0			209
Total perpetual securities		0			2,895			52			2,947
Equity securities		14			4			3			21
Other assets:
Foreign currency swaps		0			341			104			445
Foreign currency forwards		0			17			0			17
Foreign currency options		0			4			0			4
Credit default swaps		0			0			1			1
Interest rate swaps		0			0			1			1
Interest rate swaptions		0			20			0			20
Total other assets		0			382			106			488
Cash and cash equivalents		2,543			0			0			2,543
Total assets		$	17,485		$	46,031		$	553		$	64,069
Liabilities:
Foreign currency swaps		$	0		$	15		$	203		$	218
Foreign currency forwards		0			582			0			582
Foreign currency options		0			1			0			1
Credit default swaps		0			0			4			4
Interest rate swaptions		0			32			0			32
Total liabilities		$	0		$	630		$	207		$	837

The following tables present the carrying amount and fair value categorized by fair value hierarchy level for the Company's financial instruments that are not carried at fair value.



	March 31, 2014
(In millions)	Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets:
Securities held to maturity, carried at amortized cost:
Fixed maturities:
Government and agencies		$	23,461		$	25,129		$	0		$	0		$	25,129
Municipalities		409			0			455			0			455
Mortgage and asset-backed securities		58			0			20			41			61
Public utilities		3,993			0			4,075			0			4,075
Sovereign and supranational		3,011			0			3,118			0			3,118
Banks/financial institutions		6,398			0			6,277			0			6,277
Other corporate		3,528			0			3,701			0			3,701
Total assets		$	40,858		$	25,129		$	17,646		$	41		$	42,816
Liabilities:
Other policyholders’ funds		$	6,547		$	0		$	0		$	6,391		$	6,391
Notes payable (excluding capital leases)		4,908			0			0			5,389			5,389
Total liabilities		$	11,455		$	0		$	0		$	11,780		$	11,780



	December 31, 2013
(In millions)	Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets:
Securities held to maturity, carried at amortized cost:
Fixed maturities:
Government and agencies		$	27,362		$	28,708		$	0		$	0		$	28,708
Municipalities		399			0			440			0			440
Mortgage and asset-backed securities		58			0			20			41			61
Public utilities		3,900			0			3,928			0			3,928
Sovereign and supranational		2,941			0			3,040			0			3,040
Banks/financial institutions		6,310			0			6,128			0			6,128
Other corporate		3,445			0			3,541			0			3,541
Total assets		$	44,415		$	28,708		$	17,097		$	41		$	45,846
Liabilities:
Other policyholders’ funds		$	5,861		$	0		$	0		$	5,715		$	5,715
Notes payable (excluding capital leases)		4,891			0			0			5,241			5,241
Total liabilities		$	10,752		$	0		$	0		$	10,956		$	10,956

Fair Value of Financial Instruments

U.S. GAAP requires disclosure of the fair value of certain financial instruments including those that are not carried at fair value. The carrying amounts for cash and cash equivalents, receivables, accrued investment income, accounts payable, cash collateral and payables for security transactions approximated their fair values due to the short-term nature of these instruments. Liabilities for future policy benefits and unpaid policy claims are not financial instruments as defined by GAAP.

Fixed maturities, perpetual securities, and equity securities

We determine the fair values of our fixed maturity securities, perpetual securities, and privately issued equity securities using the following approaches or techniques: price quotes and valuations from third party pricing vendors (including quoted market prices readily available from public exchange markets) and non-binding price quotes we obtain from outside brokers.

A third party pricing vendor has developed valuation models to determine fair values of privately issued securities to reflect the impact of the persistent economic environment and the changing regulatory framework. These models are discounted cash flow (DCF) valuation models, but also use information from related markets, specifically the CDS market to estimate expected cash flows. These models take into consideration any unique characteristics of the securities and make various adjustments to arrive at an appropriate issuer-specific loss adjusted credit curve. This credit curve is then used with the relevant recovery rates to estimate expected cash flows and modeling of additional features, including illiquidity adjustments, if necessary, to price the security by discounting those loss adjusted cash flows. In cases where a credit curve cannot be developed from the specific security features, the valuation methodology takes into consideration other market observable inputs, including: 1) the most appropriate comparable security(ies) of the issuer; 2) issuer-specific CDS spreads; 3) bonds or CDS spreads of comparable issuers with similar characteristics such as rating, geography, or sector; or 4) bond indices that are comparative in rating, industry, maturity and region.

The pricing data and market quotes we obtain from outside sources, including third party pricing services, are reviewed internally for reasonableness. If a fair value appears unreasonable, we will re-examine the inputs and assess the reasonableness of the pricing data with the vendor. Additionally, we may compare the inputs to relevant market indices and other performance measurements. The output of this analysis is presented to the Company's Valuation and Classifications Subcommittee, or VCS. Based on the analysis provided to the VCS, the valuation is confirmed or may be revised if there is evidence of a more appropriate estimate of fair value based on available market data. We have performed verification of the inputs and calculations in any valuation models to confirm that the valuations represent reasonable estimates of fair value.

The fixed maturities classified as Level 3 consist of securities for which there are limited or no observable valuation inputs. For Level 3 securities that are investment grade, we estimate the fair value of these securities by obtaining non-binding broker quotes from a limited number of brokers. These brokers base their quotes on a combination of their knowledge of the current pricing environment and market conditions. We consider these inputs to be unobservable. For Level 3 investments that are below-investment-grade securities, we consider a variety of significant valuation inputs in the valuation process, including forward exchange rates, yen swap rates, dollar swap rates, interest rate volatilities, credit spread data on specific issuers, assumed default and default recovery rates, and certain probability assumptions. In obtaining these valuation inputs, we have determined that certain pricing assumptions and data used by our pricing sources are difficult to validate or corroborate by the market and/or appear to be internally developed rather than observed in or corroborated by the market. The use of these unobservable valuation inputs causes more subjectivity in the valuation process for these securities.

Historically, we have not adjusted the quotes or prices we obtain from the pricing services and brokers we use.

The following tables present the pricing sources for the fair values of our fixed maturities, perpetual securities, and equity securities.



	March 31, 2014
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Securities available for sale, carried at fair value:
Fixed maturities:
Government and agencies:
Third party pricing vendor		$	18,407		$	499		$	0		$	18,906
Total government and agencies		18,407			499			0			18,906
Municipalities:
Third party pricing vendor		0			1,097			0			1,097
Total municipalities		0			1,097			0			1,097
Mortgage- and asset-backed securities:
Third party pricing vendor		0			404			0			404
Broker/other		0			0			262			262
Total mortgage- and asset-backed securities		0			404			262			666
Public utilities:
Third party pricing vendor		0			7,926			0			7,926
Total public utilities		0			7,926			0			7,926
Sovereign and supranational:
Third party pricing vendor		0			1,544			0			1,544
Total sovereign and supranational		0			1,544			0			1,544
Banks/financial institutions:
Third party pricing vendor		0			6,767			0			6,767
Broker/other		0			0			25			25
Total banks/financial institutions		0			6,767			25			6,792
Other corporate:
Third party pricing vendor		0			27,350			0			27,350
Total other corporate		0			27,350			0			27,350
Total fixed maturities		18,407			45,587			287			64,281
Perpetual securities:
Banks/financial institutions:
Third party pricing vendor		0			2,731			56			2,787
Total banks/financial institutions		0			2,731			56			2,787
Other corporate:
Third party pricing vendor		0			229			0			229
Total other corporate		0			229			0			229
Total perpetual securities		0			2,960			56			3,016
Equity securities:
Third party pricing vendor		14			4			0			18
Broker/other		0			0			3			3
Total equity securities		14			4			3			21
Total securities available for sale		$	18,421		$	48,551		$	346		$	67,318



	March 31, 2014
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Securities held to maturity, carried at amortized cost:
Fixed maturities:
Government and agencies:
Third party pricing vendor		$	25,129		$	0		$	0		$	25,129
Total government and agencies		25,129			0			0			25,129
Municipalities:
Third party pricing vendor		0			455			0			455
Total municipalities		0			455			0			455
Mortgage- and asset-backed securities:
Third party pricing vendor		0			20			0			20
Broker/other		0			0			41			41
Total mortgage- and asset-backed securities		0			20			41			61
Public utilities:
Third party pricing vendor		0			4,075			0			4,075
Total public utilities		0			4,075			0			4,075
Sovereign and supranational:
Third party pricing vendor		0			3,118			0			3,118
Total sovereign and supranational		0			3,118			0			3,118
Banks/financial institutions:
Third party pricing vendor		0			6,277			0			6,277
Total banks/financial institutions		0			6,277			0			6,277
Other corporate:
Third party pricing vendor		0			3,669			0			3,669
Broker/other		0			32			0			32
Total other corporate		0			3,701			0			3,701
Total securities held to maturity		$	25,129		$	17,646		$	41		$	42,816



	December 31, 2013
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Securities available for sale, carried at fair value:
Fixed maturities:
Government and agencies:
Third party pricing vendor		$	14,928		$	504		$	0		$	15,432
Total government and agencies		14,928			504			0			15,432
Municipalities:
Third party pricing vendor		0			1,051			0			1,051
Total municipalities		0			1,051			0			1,051
Mortgage- and asset-backed securities:
Third party pricing vendor		0			402			0			402
Broker/other		0			0			369			369
Total mortgage- and asset-backed securities		0			402			369			771
Public utilities:
Third party pricing vendor		0			7,562			0			7,562
Total public utilities		0			7,562			0			7,562
Sovereign and supranational:
Third party pricing vendor		0			1,523			0			1,523
Total sovereign and supranational		0			1,523			0			1,523
Banks/financial institutions:
Third party pricing vendor		0			6,486			0			6,486
Broker/other		0			0			23			23
Total banks/financial institutions		0			6,486			23			6,509
Other corporate:
Third party pricing vendor		0			25,220			0			25,220
Broker/other		0			2			0			2
Total other corporate		0			25,222			0			25,222
Total fixed maturities		14,928			42,750			392			58,070
Perpetual securities:
Banks/financial institutions:
Third party pricing vendor		0			2,686			52			2,738
Total banks/financial institutions		0			2,686			52			2,738
Other corporate:
Third party pricing vendor		0			209			0			209
Total other corporate		0			209			0			209
Total perpetual securities		0			2,895			52			2,947
Equity securities:
Third party pricing vendor		14			4			0			18
Broker/other		0			0			3			3
Total equity securities		14			4			3			21
Total securities available for sale		$	14,942		$	45,649		$	447		$	61,038



	December 31, 2013
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Securities held to maturity, carried at amortized cost:
Fixed maturities:
Government and agencies:
Third party pricing vendor		$	28,708		$	0		$	0		$	28,708
Total government and agencies		28,708			0			0			28,708
Municipalities:
Third party pricing vendor		0			440			0			440
Total municipalities		0			440			0			440
Mortgage- and asset-backed securities:
Third party pricing vendor		0			20			0			20
Broker/other		0			0			41			41
Total mortgage- and asset-backed securities		0			20			41			61
Public utilities:
Third party pricing vendor		0			3,928			0			3,928
Total public utilities		0			3,928			0			3,928
Sovereign and supranational:
Third party pricing vendor		0			3,040			0			3,040
Total sovereign and supranational		0			3,040			0			3,040
Banks/financial institutions:
Third party pricing vendor		0			6,128			0			6,128
Total banks/financial institutions		0			6,128			0			6,128
Other corporate:
Third party pricing vendor		0			3,509			0			3,509
Broker/other		0			32			0			32
Total other corporate		0			3,541			0			3,541
Total securities held to maturity		$	28,708		$	17,097		$	41		$	45,846

The following is a discussion of the determination of fair value of our remaining financial instruments.

Derivatives

We use derivative instruments to manage the risk associated with certain assets. However, the derivative instrument may not be classified in the same fair value hierarchy level as the associated asset. Inputs used to value derivatives include, but are not limited to, interest rates, credit spreads, foreign currency forward and spot rates, and interest volatility.

The fair values of the foreign currency forwards and interest rate swaptions associated with certain fixed-maturity securities, the foreign currency options, the foreign currency swaps associated with our senior notes and subordinated debentures, and the interest rate swap associated with our yen-denominated notes are based on the amounts we would expect to receive or pay. The determination of the fair value of these derivatives is based on observable market inputs, therefore they are classified as Level 2.

For derivatives associated with VIEs where we are the primary beneficiary, we are not the direct counterparty to the swap contracts. As a result, the fair value measurements incorporate the credit risk of the collateral associated with the VIE. We receive valuations from a third party pricing vendor for these derivatives. Based on an analysis of these derivatives and a review of the methodology employed by the pricing vendor, we determined that due to the long duration of these swaps and the need to extrapolate from short-term observable data to derive and measure long-term inputs, certain inputs, assumptions and judgments are required to value future cash flows that cannot be corroborated by current inputs or current observable market data. As a result, the derivatives associated with our consolidated VIEs are classified as Level 3 of the fair value hierarchy.

Other policyholders' funds

The largest component of the other policyholders' funds liability is our annuity line of business in Aflac Japan. Our annuities have fixed benefits and premiums, with short payouts that are almost all annuity-certain. For this product, we estimated the fair value to be equal to the cash surrender value. This is analogous to the value paid to policyholders on the valuation date if they were to surrender their policy. We periodically check the cash value against discounted cash flow projections for reasonableness. We consider our inputs for this valuation to be unobservable and have accordingly classified this valuation as Level 3.

Notes payable

The fair values of our publicly issued notes payable classified as Level 3 were obtained from a limited number of independent brokers. These brokers base their quotes on a combination of their knowledge of the current pricing environment and market conditions. We consider these inputs to be unobservable. The fair values of our yen-denominated loans approximate their carrying values.

Level 3 Rollforward and Transfers between Hierarchy Levels

The following tables present the changes in fair value of our available-for-sale investments and derivatives classified as Level 3.



Three Months Ended March 31, 2014
	Fixed Maturities											Perpetual Securities		Equity Securities		Derivatives ⁽¹⁾
(In millions)	Mortgage- and Asset- Backed Securities			Public Utilities		Sovereign and Supranational		Banks/ Financial Institutions		Other Corporate		Banks/ Financial Institutions				Interest Rate Swaps			Foreign Currency Swaps			Credit Default Swaps			Total
Balance, beginning of period	$	369		$	0	$	0	$	23	$	0	$	52	$	3	$	1		$	(99	)	$	(3	)	$	346
Realized investment gains (losses) included in earnings	0			0		0		0		0		0		0		(1		)	(10		)	2			(9		)
Unrealized gains (losses) included in other comprehensive income (loss)	(104		)	0		0		2		0		4		0		0			(1		)	0			(99		)
Purchases, issuances, sales and settlements:
Purchases	0			0		0		0		0		0		0		0			0			0			0
Issuances	0			0		0		0		0		0		0		0			0			0			0
Sales	0			0		0		0		0		0		0		0			0			0			0
Settlements	(3		)	0		0		0		0		0		0		0			24			0			21
Transfers into Level 3	0			0		0		0		0		0		0		0			0			0			0
Transfers out of Level 3	0			0		0		0		0		0		0		0			0			0			0
Balance, end of period	$	262		$	0	$	0	$	25	$	0	$	56	$	3	$	0		$	(86	)	$	(1	)	$	259
Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in realized investment gains (losses)	$	0		$	0	$	0	$	0	$	0	$	0	$	0	$	(1	)	$	(10	)	$	2		$	(9	)

⁽¹⁾ Derivative assets and liabilities are presented net



Three Months Ended March 31, 2013
	Fixed Maturities															Perpetual Securities			Equity Securities		Derivatives⁽¹⁾
(In millions)	Mortgage- and Asset- Backed Securities			Public Utilities			Sovereign and Supranational			Banks/ Financial Institutions			Other Corporate			Banks/ Financial Institutions					Interest Rate Swaps			Foreign Currency Swaps			Credit Default Swaps			Total
Balance, beginning of period	$	338		$	420		$	418		$	1,024		$	986		$	215		$	4	$	29		$	(172	)	$	(65	)	$	3,197
Realized investment gains (losses) included in earnings	0			0			0			0			0			0			0		(4		)	(5		)	11			2
Unrealized gains (losses) included in other comprehensive income (loss)	(21		)	(20		)	0			(1		)	0			0			0		0			(7		)	0			(49		)
Purchases, issuances, sales and settlements:
Purchases	0			0			0			0			0			0			0		0			0			0			0
Issuances	0			0			0			0			0			0			0		0			0			0			0
Sales	0			(400		)	0			0			0			0			0		0			0			0			(400		)
Settlements	(3		)	0			0			0			0			0			0		0			0			0			(3		)
Transfers into Level 3⁽²⁾	125			0			0			0			0			0			0		0			0			0			125
Transfers out of Level 3⁽³⁾	0			0			(418		)	(997		)	(986		)	(215		)	0		0			0			0			(2,616		)
Balance, end of period	$	439		$	0		$	0		$	26		$	0		$	0		$	4	$	25		$	(184	)	$	(54	)	$	256
Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in realized investment gains (losses)	$	0		$	0		$	0		$	0		$	0		$	0		$	0	$	(4	)	$	(5	)	$	11		$	2

⁽¹⁾Derivative assets and liabilities are presented net

⁽²⁾ Due to a lack of visibility to observe significant inputs to price

⁽³⁾ A result of changing our pricing methodology to a valuation method that uses observable market data as significant inputs to estimate fair value

Transfers into and/or out of Level 3 are attributable to a change in the observability of inputs. The most significant transfer out of Level 3 into Level 2 during the three-month period ended March 31, 2013 related to our callable reverse dual-currency bonds (RDCs). RDCs are securities that have principal denominated in yen while paying U.S. dollar (USD) coupons. The market standard approach is to use implied volatility to value options or instruments with optionality because historical volatility may not represent current market participants' expectations about future volatility. Under our previous valuation approach, we used historical foreign exchange volatility as an input for valuing these investments. Given the importance of this input to the overall valuation of these RDCs and the determination of this input to be unobservable, we made the decision at December 31, 2011 to move these holdings to Level 3 of the fair value hierarchy. During the first quarter of 2013, we implemented a new valuation methodology for these securities that relies on comparable securities in the market, the observable forward foreign exchange curve and other market inputs. Given that the significant inputs to the valuation of these items are now based on observable data, in the first quarter of 2013, we transferred these bonds from Level 3 to Level 2 of the fair value hierarchy.

In addition to the callable RDCs, we transferred certain other corporate securities from Level 3 to Level 2 in the first quarter of 2013. Prices for these securities were previously obtained from brokers and/or arrangers with minimal transparency around how the valuation was determined. Similar to the RDCs, these securities are now valued using the same methodology described above for our other privately issued securities.

There were no transfers between Level 1 and 2 for the three-month periods ended March 31, 2014 and 2013.

Fair Value Sensitivity

Level 3 Significant Unobservable Input Sensitivity

The following tables summarize the significant unobservable inputs used in the valuation of our Level 3 available-for-sale investments and derivatives. Included in the tables are the inputs or range of possible inputs that have an effect on the overall valuation of the financial instruments.

March 31, 2014

(In millions)

Fair Value

Valuation Technique(s)

Unobservable Input

Range
(Weighted Average)

Assets:

Securities available for sale, carried at fair value:

Fixed maturities:

Mortgage- and asset-backed securities

262

Consensus pricing

Offered quotes

N/A

^(e)

Banks/financial institutions

Consensus pricing

Offered quotes

N/A

^(e)

Perpetual securities:

Banks/financial institutions

Model pricing

Offered quotes

N/A

^(e)

Equity securities

Net asset value

Offered quotes

$1-$793 ($7)

Other assets:

Foreign currency swaps

Discounted cash flow

Interest rates (USD)

2.84% - 3.56%

^(b)

Interest rates (JPY)

.83% - 1.96%

^(c)

CDS spreads

11 - 124 bps

Foreign exchange rates

20.45%

^(d)

Discounted cash flow

Interest rates (USD)

2.84% - 3.56%

^(b)

Interest rates (JPY)

.83% - 1.96%

^(c)

CDS spreads

21 - 120 bps

Discounted cash flow

Interest rates (USD)

2.84% - 3.56%

^(b)

Interest rates (JPY)

.83% - 1.96%

^(c)

Foreign exchange rates

20.45%

^(d)

Credit default swaps

Discounted cash flow

Base correlation

65% - 75% (72%)

^(a)

CDS spreads

66 - 101 (86) bps

Recovery rate

37.00%

Total assets

453

(a) Weighted-average range of base correlations for our bespoke tranches for attachment and detachment points corresponding to market indices

(b) Inputs derived from U.S. long-term rates to accommodate long maturity nature of our swaps

(d) Based on 10 year volatility of JPY/USD exchange rate

(e) N/A represents securities where we receive unadjusted broker quotes and for which there is no transparency into the providers' valuation techniques or unobservable inputs.

March 31, 2014

(In millions)

Fair Value

Valuation Technique(s)

Unobservable Input

Range
(Weighted Average)

Liabilities:

Foreign currency swaps

100

Discounted cash flow

Interest rates (USD)

2.84% - 3.56%

^(b)

Interest rates (JPY)

.83% - 1.96%

^(c)

CDS spreads

11 - 124 bps

Foreign exchange rates

20.45%

^(d)

Discounted cash flow

Interest rates (USD)

2.84% - 3.56%

^(b)

Interest rates (JPY)

.83% - 1.96%

^(c)

CDS spreads

10 - 177 bps

Discounted cash flow

Interest rates (USD)

2.84% - 3.56%

^(b)

Interest rates (JPY)

.83% - 1.96%

^(c)

Foreign exchange rates

20.45%

^(d)

Credit default swaps

Discounted cash flow

Base correlations

65% - 75% (72%)

^(a)

CDS spreads

66 - 101 (86) bps

Recovery rate

37.00%

Total liabilities

194

(a) Weighted-average range of base correlations for our bespoke tranches for attachment and detachment points corresponding to market indices

(b) Inputs derived from U.S. long-term rates to accommodate long maturity nature of our swaps

(d) Based on 10 year volatility of JPY/USD exchange rate

December 31, 2013

(In millions)

Fair Value

Valuation Technique(s)

Unobservable Input

Range
(Weighted Average)

Assets:

Securities available for sale, carried at fair value:

Fixed maturities:

Mortgage- and asset-backed securities

369

Consensus pricing

Offered quotes

N/A

^(e)

Banks/financial institutions

Consensus pricing

Offered quotes

N/A

^(e)

Perpetual securities:

Banks/financial institutions

Consensus pricing

Offered quotes

N/A

^(e)

Equity securities

Net asset value

Offered quotes

$1-$774 ($7)

Other assets:

Foreign currency swaps

Discounted cash flow

Interest rates (USD)

3.09% - 3.96%

^(b)

Interest rates (JPY)

.93% - 2.02%

^(c)

CDS spreads

16 - 141 bps

Foreign exchange rates

21.16%

^(d)

Discounted cash flow

Interest rates (USD)

3.09% - 3.96%

^(b)

Interest rates (JPY)

.93% - 2.02%

^(c)

CDS spreads

17 - 149 bps

Discounted cash flow

Interest rates (USD)

3.09% - 3.96%

^(b)

Interest rates (JPY)

.93% - 2.02%

^(c)

Foreign exchange rates

21.16%

^(d)

Credit default swaps

Discounted cash flow

Base correlation

65% - 76% (72%)

^(a)

CDS spreads

65 - 106 (92) bps

Recovery rate

37.00%

Interest rate swaps

Discounted cash flow

Base correlation

65% - 76% (72%)

^(a)

CDS spreads

65 - 106 (92) bps

Recovery rate

37.00%

Total assets

553

(a) Weighted-average range of base correlations for our bespoke tranches for attachment and detachment points corresponding to market indices

(b) Inputs derived from U.S. long-term rates to accommodate long maturity nature of our swaps

(d) Based on 10 year volatility of JPY/USD exchange rate

(e) N/A represents securities where we receive unadjusted broker quotes and for which there is no transparency into the providers' valuation techniques or unobservable inputs.

December 31, 2013

(In millions)

Fair Value

Valuation Technique(s)

Unobservable Input

Range
(Weighted Average)

Liabilities:

Foreign currency swaps

Discounted cash flow

Interest rates (USD)

3.09% - 3.96%

^(b)

Interest rates (JPY)

.93% - 2.02%

^(c)

CDS spreads

16 - 141 bps

Foreign exchange rates

21.16%

^(d)

Discounted cash flow

Interest rates (USD)

3.09% - 3.96%

^(b)

Interest rates (JPY)

.93% - 2.02%

^(c)

CDS spreads

11 - 189 bps

Discounted cash flow

Interest rates (USD)

3.09% - 3.96%

^(b)

Interest rates (JPY)

.93% - 2.02%

^(c)

Foreign exchange rates

21.16%

^(d)

Credit default swaps

Discounted cash flow

Base correlations

65% - 76% (72%)

^(a)

CDS spreads

65 - 106 (92) bps

Recovery rate

37.00%

Total liabilities

207

(a) Weighted-average range of base correlations for our bespoke tranches for attachment and detachment points corresponding to market indices

(b) Inputs derived from U.S. long-term rates to accommodate long maturity nature of our swaps

(d) Based on 10 year volatility of JPY/USD exchange rate

The following is a discussion of the significant unobservable inputs or valuation technique used in determining the fair value of securities and derivatives classified as Level 3.

Net Asset Value

We hold certain unlisted equity securities whose fair value is derived based on the financial statements published by the investee. These securities do not trade on an active market and the valuations derived are dependent on the availability of timely financial reporting of the investee. Net asset value is an unobservable input in the determination of fair value of equity securities.

Offered Quotes

In circumstances where our valuation model price is overridden because it implies a value that is not consistent with current market conditions, we will solicit bids from a limited number of brokers. We also receive unadjusted prices from brokers for our mortgage and asset-backed securities. These quotes are non-binding but are reflective of valuation best estimates at that particular point in time. Offered quotes are an unobservable input in the determination of fair value of mortgage- and asset-backed securities, certain banks/financial institutions, certain other corporate, and equity securities investments.

Interest Rates, CDS Spreads, Foreign Exchange Rates

The significant drivers of the valuation of the interest and foreign exchange swaps are interest rates, foreign exchange rates and CDS spreads. Our swaps have long maturities that increase the sensitivity of the swaps to interest rate fluctuations. Since most of our yen-denominated cross currency swaps are in a net liability position, an increase in interest rates will decrease the liabilities and increase the value of the swap.

Foreign exchange swaps also have a lump-sum final settlement of foreign exchange principal receivables at the termination of the swap. An increase in yen interest rates will decrease the value of the final settlement foreign exchange receivables and decrease the value of the swap, and an increase in USD interest rates increase the swap value.

A similar sensitivity pattern is observed for the foreign exchange rates. When the spot U.S. dollar/Japanese yen (USD/JPY) foreign exchange rate decreases and the swap is receiving a final exchange payment in JPY, the swap value will increase due to the appreciation of the JPY. Most of our swaps are designed to receive payments in JPY at the termination and will thus be impacted by the USD/JPY foreign exchange rate in this way. In cases where there is no final foreign exchange receivable in JPY and we are paying JPY as interest payments and receiving USD, a decrease in the foreign exchange rate will lead to a decrease in the swap value.

The extinguisher feature in most of our swaps results in a cessation of cash flows and no further payments between the parties to the swap in the event of a default on the referenced or underlying collateral. To price this feature, we apply the survival probability of the referenced entity to the projected cash flows. The survival probability uses the CDS spreads and recovery rates to adjust the present value of the cash flows. For extinguisher swaps with positive values, an increase in CDS spreads decreases the likelihood of receiving the final exchange payments and reduces the value of the swap.

Due to the long duration of these swaps and the need to extrapolate from short-term observable data to derive and measure long-term inputs, certain inputs, assumptions and judgments are required to value future cash flows that cannot be corroborated by current inputs or current observable market data.

Interest rates, CDS spreads, and foreign exchange rates are unobservable inputs in the determination of fair value of foreign currency swaps.

Base Correlations, CDS Spreads, Recovery Rates

Our CDOs are tranches on baskets of single-name credit default swaps. The risks in these types of synthetic CDOs come from the single-name CDS risk and the correlations between the single names. The valuation of synthetic CDOs is dependent on the calibration of market prices for interest rates, single name CDS default probabilities and base correlation using financial modeling tools. Since there is limited or no observable data available for these tranches, these base correlations must be obtained from commonly traded market tranches such as the CDX and iTraxx indices. From the historical prices of these indices, base correlations can be obtained to develop a pricing curve of CDOs with different seniorities. Since the reference entities of the market indices do not match those in our portfolio underlying the synthetic CDO to be valued, several processing steps are taken to map the securities in our portfolio to the indices. With the base correlation determined and the appropriate spreads selected, a valuation is calculated. An increase in the CDS spreads in the underlying portfolio leads to a decrease in the value due to higher probability of defaults and losses. The impact on the valuation due to base correlation depends on a number of factors, including the riskiness between market tranches and the modeled tranche based on our portfolio and the equivalence between detachment points in these tranches. Generally speaking, an increase in base correlation will decrease the value of the senior tranches while increasing the value of junior tranches. This may result in a positive or negative value change.

The CDO tranches in our portfolio are junior tranches and, due to the low level of credit support for these tranches, exhibit equity-like behavior. As a result, an increase in recovery rates tends to cause their values to decrease.

Our interest rate swaps are linked to the underlying synthetic CDOs. The valuation of these swaps is performed using a similar approach to that of the synthetic CDOs themselves; that is, the base correlation model is used to ensure consistency between the synthetic CDOs and the swaps.

Base correlations, CDS spreads, and recovery rates are unobservable inputs in the determination of fair value of credit default swaps and interest rate swaps.

For additional information on our investments and financial instruments, see the accompanying Notes 1, 3 and 4 and Notes 1, 3 and 4 of the Notes to the Consolidated Financial Statements in our annual report to shareholders for the year ended December 31, 2013.

- Definition

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

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