FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2015

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, 2015
(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		$	18,361		$	495		$	0		$	18,856
Municipalities		0			1,260			0			1,260
Mortgage- and asset-backed securities		0			400			221			621
Public utilities		0			8,218			0			8,218
Sovereign and supranational		0			1,468			0			1,468
Banks/financial institutions		0			6,629			26			6,655
Other corporate		0			30,241			0			30,241
Total fixed maturities		18,361			48,711			247			67,319
Perpetual securities:
Banks/financial institutions		0			2,191			150			2,341
Other corporate		0			219			0			219
Total perpetual securities		0			2,410			150			2,560
Equity securities		19			6			3			28
Other assets:
Foreign currency swaps		0			528			109			637
Foreign currency forwards		0			64			0			64
Credit default swaps		0			0			1			1
Interest rate swaps		0			4			0			4
Total other assets		0			596			110			706
Other investments		179			0			0			179
Cash and cash equivalents		4,363			0			0			4,363
Total assets		$	22,922		$	51,723		$	510		$	75,155
Liabilities:
Foreign currency swaps		$	0		$	1		$	392		$	393
Foreign currency forwards		0			165			0			165
Foreign currency options		0			15			0			15
Interest rate swaptions		0			26			0			26
Total liabilities		$	0		$	207		$	392		$	599



	December 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		$	18,683		$	515		$	0		$	19,198
Municipalities		0			1,257			0			1,257
Mortgage- and asset-backed securities		0			379			223			602
Public utilities		0			7,897			0			7,897
Sovereign and supranational		0			1,416			0			1,416
Banks/financial institutions		0			6,572			26			6,598
Other corporate		0			28,605			0			28,605
Total fixed maturities		18,683			46,641			249			65,573
Perpetual securities:
Banks/financial institutions		0			2,289			149			2,438
Other corporate		0			231			0			231
Total perpetual securities		0			2,520			149			2,669
Equity securities		19			6			3			28
Other assets:
Foreign currency swaps		0			640			106			746
Foreign currency forwards		0			56			0			56
Total other assets		0			696			106			802
Other investments		171			0			0			171
Cash and cash equivalents		4,658			0			0			4,658
Total assets		$	23,531		$	49,863		$	507		$	73,901
Liabilities:
Foreign currency swaps		$	0		$	0		$	318		$	318
Foreign currency forwards		0			1,912			0			1,912
Foreign currency options		0			33			0			33
Interest rate swaptions		0			160			0			160
Total liabilities		$	0		$	2,105		$	318		$	2,423

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, 2015
(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		$	20,084		$	22,975		$	0		$	0		$	22,975
Municipalities		346			0			412			0			412
Mortgage and asset-backed securities		42			0			14			30			44
Public utilities		3,269			0			3,503			0			3,503
Sovereign and supranational		2,564			0			2,791			0			2,791
Banks/financial institutions		4,947			0			5,054			0			5,054
Other corporate		3,010			0			3,323			0			3,323
Total assets		$	34,262		$	22,975		$	15,097		$	30		$	38,102
Liabilities:
Other policyholders’ funds		$	6,139		$	0		$	0		$	6,005		$	6,005
Notes payable (excluding capital leases)		6,268			0			0			6,924			6,924
Total liabilities		$	12,407		$	0		$	0		$	12,929		$	12,929



	December 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		$	20,023		$	23,218		$	0		$	0		$	23,218
Municipalities		346			0			417			0			417
Mortgage and asset-backed securities		43			0			15			31			46
Public utilities		3,342			0			3,603			0			3,603
Sovereign and supranational		2,556			0			2,814			0			2,814
Banks/financial institutions		4,932			0			5,085			0			5,085
Other corporate		3,000			0			3,314			0			3,314
Total assets		$	34,242		$	23,218		$	15,248		$	31		$	38,497
Liabilities:
Other policyholders’ funds		$	6,031		$	0		$	0		$	5,905		$	5,905
Notes payable (excluding capital leases)		5,268			0			0			5,835			5,835
Total liabilities		$	11,299		$	0		$	0		$	11,740		$	11,740

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, other investments, 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 public 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, 2015
(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		$	18,361		$	495		$	0		$	18,856
Total government and agencies		18,361			495			0			18,856
Municipalities:
Third party pricing vendor		0			1,260			0			1,260
Total municipalities		0			1,260			0			1,260
Mortgage- and asset-backed securities:
Third party pricing vendor		0			400			0			400
Broker/other		0			0			221			221
Total mortgage- and asset-backed securities		0			400			221			621
Public utilities:
Third party pricing vendor		0			8,218			0			8,218
Total public utilities		0			8,218			0			8,218
Sovereign and supranational:
Third party pricing vendor		0			1,468			0			1,468
Total sovereign and supranational		0			1,468			0			1,468
Banks/financial institutions:
Third party pricing vendor		0			6,629			0			6,629
Broker/other		0			0			26			26
Total banks/financial institutions		0			6,629			26			6,655
Other corporate:
Third party pricing vendor		0			30,241			0			30,241
Total other corporate		0			30,241			0			30,241
Total fixed maturities		18,361			48,711			247			67,319
Perpetual securities:
Banks/financial institutions:
Third party pricing vendor		0			2,191			0			2,191
Broker/other		0			0			150			150
Total banks/financial institutions		0			2,191			150			2,341
Other corporate:
Third party pricing vendor		0			219			0			219
Total other corporate		0			219			0			219
Total perpetual securities		0			2,410			150			2,560
Equity securities:
Third party pricing vendor		19			6			0			25
Broker/other		0			0			3			3
Total equity securities		19			6			3			28
Total securities available for sale		$	18,380		$	51,127		$	400		$	69,907



	March 31, 2015
(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		$	22,975		$	0		$	0		$	22,975
Total government and agencies		22,975			0			0			22,975
Municipalities:
Third party pricing vendor		0			412			0			412
Total municipalities		0			412			0			412
Mortgage- and asset-backed securities:
Third party pricing vendor		0			14			0			14
Broker/other		0			0			30			30
Total mortgage- and asset-backed securities		0			14			30			44
Public utilities:
Third party pricing vendor		0			3,503			0			3,503
Total public utilities		0			3,503			0			3,503
Sovereign and supranational:
Third party pricing vendor		0			2,791			0			2,791
Total sovereign and supranational		0			2,791			0			2,791
Banks/financial institutions:
Third party pricing vendor		0			4,804			0			4,804
Broker/other		0			250			0			250
Total banks/financial institutions		0			5,054			0			5,054
Other corporate:
Third party pricing vendor		0			3,296			0			3,296
Broker/other		0			27			0			27
Total other corporate		0			3,323			0			3,323
Total securities held to maturity		$	22,975		$	15,097		$	30		$	38,102



	December 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		$	18,683		$	515		$	0		$	19,198
Total government and agencies		18,683			515			0			19,198
Municipalities:
Third party pricing vendor		0			1,257			0			1,257
Total municipalities		0			1,257			0			1,257
Mortgage- and asset-backed securities:
Third party pricing vendor		0			379			0			379
Broker/other		0			0			223			223
Total mortgage- and asset-backed securities		0			379			223			602
Public utilities:
Third party pricing vendor		0			7,897			0			7,897
Total public utilities		0			7,897			0			7,897
Sovereign and supranational:
Third party pricing vendor		0			1,416			0			1,416
Total sovereign and supranational		0			1,416			0			1,416
Banks/financial institutions:
Third party pricing vendor		0			6,514			0			6,514
Broker/other		0			58			26			84
Total banks/financial institutions		0			6,572			26			6,598
Other corporate:
Third party pricing vendor		0			28,605			0			28,605
Total other corporate		0			28,605			0			28,605
Total fixed maturities		18,683			46,641			249			65,573
Perpetual securities:
Banks/financial institutions:
Third party pricing vendor		0			2,289			0			2,289
Broker/other		0			0			149			149
Total banks/financial institutions		0			2,289			149			2,438
Other corporate:
Third party pricing vendor		0			231			0			231
Total other corporate		0			231			0			231
Total perpetual securities		0			2,520			149			2,669
Equity securities:
Third party pricing vendor		19			6			0			25
Broker/other		0			0			3			3
Total equity securities		19			6			3			28
Total securities available for sale		$	18,702		$	49,167		$	401		$	68,270



	December 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		$	23,218		$	0		$	0		$	23,218
Total government and agencies		23,218			0			0			23,218
Municipalities:
Third party pricing vendor		0			417			0			417
Total municipalities		0			417			0			417
Mortgage- and asset-backed securities:
Third party pricing vendor		0			15			0			15
Broker/other		0			0			31			31
Total mortgage- and asset-backed securities		0			15			31			46
Public utilities:
Third party pricing vendor		0			3,603			0			3,603
Total public utilities		0			3,603			0			3,603
Sovereign and supranational:
Third party pricing vendor		0			2,814			0			2,814
Total sovereign and supranational		0			2,814			0			2,814
Banks/financial institutions:
Third party pricing vendor		0			5,085			0			5,085
Total banks/financial institutions		0			5,085			0			5,085
Other corporate:
Third party pricing vendor		0			3,287			0			3,287
Broker/other		0			27			0			27
Total other corporate		0			3,314			0			3,314
Total securities held to maturity		$	23,218		$	15,248		$	31		$	38,497

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, options, and interest rate swaptions associated with certain fixed-maturity securities; the foreign currency forwards used to hedge certain portions of forecasted yen cash flows; and the foreign currency swaps associated with certain senior notes and our subordinated debentures 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. 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.

Transfers between Hierarchy Levels and Level 3 Rollforward

There were no transfers between Level 1 and 2 for the three-month periods ended March 31, 2015 and 2014.

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, 2015
	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	$	223		$	0	$	0	$	26	$	0	$	149	$	3	$	0	$	(212	)	$	0	$	189
Realized investment gains (losses) included in earnings	0			0		0		0		0		0		0		0		(83		)	1		(82		)
Unrealized gains (losses) included in other comprehensive income (loss)	(1		)	0		0		0		0		1		0		0		(4		)	0		(4		)
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	(1		)	0		0		0		0		0		0		0		16			0		15
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	$	221		$	0	$	0	$	26	$	0	$	150	$	3	$	0	$	(283	)	$	1	$	118
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	$	0	$	(83	)	$	1	$	(82	)

⁽¹⁾ Derivative assets and liabilities are presented net



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

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, 2015

(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

221

Consensus pricing

Offered quotes

N/A

^(e)

Banks/financial institutions

Consensus pricing

Offered quotes

N/A

^(e)

Perpetual securities:

Banks/financial institutions

150

Consensus pricing

Offered quotes

N/A

^(e)

Equity securities

Net asset value

Offered quotes

$1 - $679 ($6)

Other assets:

Foreign currency swaps

Discounted cash flow

Interest rates (USD)

2.02% - 2.39%

^(b)

Interest rates (JPY)

.58% - 1.36%

^(c)

CDS spreads

20 - 110 bps

Foreign exchange rates

20.32%

^(d)

105

Discounted cash flow

Interest rates (USD)

2.02% - 2.39%

^(b)

Interest rates (JPY)

.58% - 1.36%

^(c)

Foreign exchange rates

20.32%

^(d)

Credit default swaps

Discounted cash flow

Base correlation

59% - 62%

^(a)

CDS spreads

93 bps

Recovery rate

36.69%

Total assets

510

(a) Range of base correlation for our bespoke tranche 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, 2015

(In millions)

Fair Value

Valuation Technique(s)

Unobservable Input

Range
(Weighted Average)

Liabilities:

Foreign currency swaps

212

Discounted cash flow

Interest rates (USD)

2.02% - 2.39%

^(a)

Interest rates (JPY)

.58% - 1.36%

^(b)

CDS spreads

20 - 110 bps

Foreign exchange rates

20.32%

^(c)

161

Discounted cash flow

Interest rates (USD)

2.02% - 2.39%

^(a)

Interest rates (JPY)

.58% - 1.36%

^(b)

CDS spreads

16 - 151 bps

Discounted cash flow

Interest rates (USD)

2.02% - 2.39%

^(a)

Interest rates (JPY)

.58% - 1.36%

^(b)

Foreign exchange rates

20.32%

^(c)

Total liabilities

392

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

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

December 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

223

Consensus pricing

Offered quotes

N/A

^(d)

Banks/financial institutions

Consensus pricing

Offered quotes

N/A

^(d)

Perpetual securities:

Banks/financial institutions

149

Consensus pricing

Offered quotes

N/A

^(d)

Equity securities

Net asset value

Offered quotes

$1-$677 ($6)

Other assets:

Foreign currency swaps

Discounted cash flow

Interest rates (USD)

2.28% - 2.70%

^(a)

Interest rates (JPY)

.53% - 1.34%

^(b)

CDS spreads

16 - 105 bps

Foreign exchange rates

20.50%

^(c)

Discounted cash flow

Interest rates (USD)

2.28% - 2.70%

^(a)

Interest rates (JPY)

.53% - 1.34%

^(b)

Foreign exchange rates

20.50%

^(c)

Total assets

507

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

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

(d) 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, 2014

(In millions)

Fair Value

Valuation Technique(s)

Unobservable Input

Range
(Weighted Average)

Liabilities:

Foreign currency swaps

176

Discounted cash flow

Interest rates (USD)

2.28% - 2.70%

^(a)

Interest rates (JPY)

.53% - 1.34%

^(b)

CDS spreads

16 - 105 bps

Foreign exchange rates

20.50%

^(c)

111

Discounted cash flow

Interest rates (USD)

2.28% - 2.70%

^(a)

Interest rates (JPY)

.53% - 1.34%

^(b)

CDS spreads

13 - 145 bps

Discounted cash flow

Interest rates (USD)

2.28% - 2.70%

^(a)

Interest rates (JPY)

.53% - 1.34%

^(b)

Foreign exchange rates

20.50%

^(c)

Total liabilities

318

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

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

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.

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, 2014.

- 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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