XML 25 R13.htm IDEA: XBRL DOCUMENT

FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2020

Fair Value Hierarchy

U.S. 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.



	June 30, 2020
(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 maturity securities:
Government and agencies		$	34,980		$	1,507		$	0		$	36,487
Municipalities		0			2,492			0			2,492
Mortgage- and asset-backed securities		0			358			188			546
Public utilities		0			9,620			322			9,942
Sovereign and supranational		0			1,377			0			1,377
Banks/financial institutions		0			11,190			24			11,214
Other corporate		0			37,658			243			37,901
Total fixed maturity securities		34,980			64,202			777			99,959
Equity securities		587			76			86			749
Other investments		763			0			0			763
Cash and cash equivalents		5,528			0			0			5,528
Other assets:
Foreign currency swaps		0			73			87			160
Foreign currency forwards		0			299			0			299
Foreign currency options		0			1			0			1
Interest rate swaps		0			14			0			14
Total other assets		0			387			87			474
Total assets		$	41,858		$	64,665		$	950		$	107,473
Liabilities:
Other liabilities:
Foreign currency swaps		$	0		$	29		$	255		$	284
Foreign currency forwards		0			393			0			393
Foreign currency options		0			2			0			2
Forward bond purchase commitment		0			1			0			1
Total liabilities		$	0		$	425		$	255		$	680



	December 31, 2019
(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 maturity securities:
Government and agencies		$	34,878		$	1,522		$	0		$	36,400
Municipalities		0			1,847			0			1,847
Mortgage- and asset-backed securities		0			232			178			410
Public utilities		0			6,556			224			6,780
Sovereign and supranational		0			1,042			0			1,042
Banks/financial institutions		0			10,264			23			10,287
Other corporate		0			34,234			262			34,496
Total fixed maturity securities		34,878			55,697			687			91,262
Equity securities		642			80			80			802
Other investments		628			0			0			628
Cash and cash equivalents		4,896			0			0			4,896
Other assets:
Foreign currency swaps		0			72			169			241
Foreign currency forwards		0			238			0			238
Interest rate swaps		0			3			0			3
Total other assets		0			313			169			482
Total assets		$	41,044		$	56,090		$	936		$	98,070
Liabilities:
Other liabilities:
Foreign currency swaps		$	0		$	78		$	126		$	204
Foreign currency forwards		0			377			0			377
Foreign currency options		0			5			0			5
Total liabilities		$	0		$	460		$	126		$	586

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.



	June 30, 2020
(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 maturity securities:
Government and agencies		$	22,528		$	27,781		$	249		$	0		$	28,030
Municipalities		364			0			481			0			481
Public utilities		45			0			59			0			59
Sovereign and supranational		549			0			692			0			692
Other corporate		23			0			31			0			31
Commercial mortgage and other loans		10,717			0			0			10,650			10,650
Other investments ⁽¹⁾		27			0			27			0			27
Total assets		$	34,253		$	27,781		$	1,539		$	10,650		$	39,970
Liabilities:
Other policyholders’ funds		$	7,484		$	0		$	0		$	7,393		$	7,393
Notes payable (excluding leases)		7,618			0			8,200			276			8,476
Total liabilities		$	15,102		$	0		$	8,200		$	7,669		$	15,869

⁽¹⁾ Excludes policy loans of $263 and equity method investments of $718, at carrying value



	December 31, 2019
(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 maturity securities:
Government and agencies		$	22,241		$	27,937		$	354		$	0		$	28,291
Municipalities		821			0			1,083			0			1,083
Mortgage and asset-backed securities		16			0			7			10			17
Public utilities		2,535			0			2,954			0			2,954
Sovereign and supranational		1,123			0			1,320			0			1,320
Banks/financial institutions		916			0			1,018			0			1,018
Other corporate		2,433			0			2,911			0			2,911
Commercial mortgage and other loans		9,569			0			0			9,648			9,648
Other investments ⁽¹⁾		30			0			30			0			30
Total assets		$	39,684		$	27,937		$	9,677		$	9,658		$	47,272
Liabilities:
Other policyholders’ funds		$	7,317		$	0		$	0		$	7,234		$	7,234
Notes payable (excluding leases)		6,408			0			6,663			272			6,935
Total liabilities		$	13,725		$	0		$	6,663		$	7,506		$	14,169

⁽¹⁾ Excludes policy loans of $250 and equity method investments of $569, at carrying value

Fair Value of Financial Instruments

Fixed maturity and equity securities

The Company determines the fair values of fixed maturity 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 the Company obtains 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 credit default swap (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

4) bond indices that are comparative in rating, industry, maturity and region.

The pricing data and market quotes the Company obtains from outside sources, including third party pricing services, are reviewed internally for reasonableness. If a fair value appears unreasonable, the Company will re-examine the inputs and assess the reasonableness of the pricing data with the vendor. Additionally, the Company may compare the inputs to relevant market indices and other performance measurements. Based on management's analysis, 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. The Company has performed verification of the inputs and calculations in any valuation models to confirm that the valuations represent reasonable estimates of fair value.

For the periods presented, the Company has not adjusted the quotes or prices it obtains from the pricing services and brokers it uses.

The following tables present the pricing sources for the fair values of the Company's fixed maturity and equity securities.



	June 30, 2020
(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 maturity securities:
Government and agencies:
Third party pricing vendor		$	34,980		$	1,507		$	0		$	36,487
Total government and agencies		34,980			1,507			0			36,487
Municipalities:
Third party pricing vendor		0			2,492			0			2,492
Total municipalities		0			2,492			0			2,492
Mortgage- and asset-backed securities:
Third party pricing vendor		0			358			0			358
Broker/other		0			0			188			188
Total mortgage- and asset-backed securities		0			358			188			546
Public utilities:
Third party pricing vendor		0			9,620			0			9,620
Broker/other		0			0			322			322
Total public utilities		0			9,620			322			9,942
Sovereign and supranational:
Third party pricing vendor		0			1,377			0			1,377
Total sovereign and supranational		0			1,377			0			1,377
Banks/financial institutions:
Third party pricing vendor		0			11,190			0			11,190
Broker/other		0			0			24			24
Total banks/financial institutions		0			11,190			24			11,214
Other corporate:
Third party pricing vendor		0			37,658			0			37,658
Broker/other		0			0			243			243
Total other corporate		0			37,658			243			37,901
Total securities available for sale		$	34,980		$	64,202		$	777		$	99,959
Equity securities, carried at fair value:
Third party pricing vendor		$	587		$	76		$	0		$	663
Broker/other		0			0			86			86
Total equity securities		$	587		$	76		$	86		$	749



	June 30, 2020
(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 maturity securities:
Government and agencies:
Third party pricing vendor		$	27,781		$	249		$	0		$	28,030
Total government and agencies		27,781			249			0			28,030
Municipalities:
Third party pricing vendor		0			481			0			481
Total municipalities		0			481			0			481
Public utilities:
Third party pricing vendor		0			59			0			59
Total public utilities		0			59			0			59
Sovereign and supranational:
Third party pricing vendor		0			692			0			692
Total sovereign and supranational		0			692			0			692
Other corporate:
Third party pricing vendor		0			31			0			31
Total other corporate		0			31			0			31
Total securities held to maturity		$	27,781		$	1,512		$	0		$	29,293



	December 31, 2019
(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 maturity securities:
Government and agencies:
Third party pricing vendor		$	34,878		$	1,522		$	0		$	36,400
Total government and agencies		34,878			1,522			0			36,400
Municipalities:
Third party pricing vendor		0			1,847			0			1,847
Total municipalities		0			1,847			0			1,847
Mortgage- and asset-backed securities:
Third party pricing vendor		0			232			0			232
Broker/other		0			0			178			178
Total mortgage- and asset-backed securities		0			232			178			410
Public utilities:
Third party pricing vendor		0			6,556			0			6,556
Broker/other		0			0			224			224
Total public utilities		0			6,556			224			6,780
Sovereign and supranational:
Third party pricing vendor		0			1,042			0			1,042
Total sovereign and supranational		0			1,042			0			1,042
Banks/financial institutions:
Third party pricing vendor		0			10,264			0			10,264
Broker/other		0			0			23			23
Total banks/financial institutions		0			10,264			23			10,287
Other corporate:
Third party pricing vendor		0			34,234			0			34,234
Broker/other		0			0			262			262
Total other corporate		0			34,234			262			34,496
Total securities available for sale		$	34,878		$	55,697		$	687		$	91,262
Equity securities, carried at fair value:
Third party pricing vendor		$	642		$	80		$	0		$	722
Broker/other		0			0			80			80
Total equity securities		$	642		$	80		$	80		$	802



	December 31, 2019
(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 maturity securities:
Government and agencies:
Third party pricing vendor		$	27,937		$	354		$	0		$	28,291
Total government and agencies		27,937			354			0			28,291
Municipalities:
Third party pricing vendor		0			1,083			0			1,083
Total municipalities		0			1,083			0			1,083
Mortgage- and asset-backed securities:
Third party pricing vendor		0			7			0			7
Broker/other		0			0			10			10
Total mortgage- and asset-backed securities		0			7			10			17
Public utilities:
Third party pricing vendor		0			2,954			0			2,954
Total public utilities		0			2,954			0			2,954
Sovereign and supranational:
Third party pricing vendor		0			1,320			0			1,320
Total sovereign and supranational		0			1,320			0			1,320
Banks/financial institutions:
Third party pricing vendor		0			1,018			0			1,018
Total banks/financial institutions		0			1,018			0			1,018
Other corporate:
Third party pricing vendor		0			2,911			0			2,911
Total other corporate		0			2,911			0			2,911
Total securities held to maturity		$	27,937		$	9,647		$	10		$	37,594

The following is a discussion of the determination of fair value of the Company's remaining financial instruments.

Derivatives

The Company uses 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 significant inputs to pricing derivatives are generally observable in the market or can be derived by observable market data. When these inputs are observable, the derivatives are classified as Level 2.

The fair value of foreign currency forward and options are based on observable market inputs, therefore they are classified as Level 2.

To determine the fair value of its interest rate derivatives, the Company uses inputs that are generally observable in the market or can be derived from observable market data. Interest rate swaps are cleared trades. In a cleared swap contract, the clearinghouse provides benefits to the counterparties similar to contracts listed for investment traded on an exchange since it maintains a daily margin to mitigate counterparties' credit risk. These derivatives are priced using observable inputs, accordingly, they are classified as Level 2. For its interest rate swaptions, the Company estimates their fair values using observable market data, including interest rate curves and volatilities. Their fair values are also classified as Level 2.

For derivatives associated with VIEs where the Company is the primary beneficiary, the Company is 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. Based on an analysis of these derivatives and a review of the methodology employed by the pricing vendor, the Company 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 the Company's consolidated VIEs are classified as Level 3 of the fair value hierarchy.

For forward bond purchase commitments with VIEs, the fair value of the derivative is based on the difference in the fixed purchase price and the current market value of the related bond prior to the settlement date. Since the bond is typically a public bond with readily available pricing, the derivatives associated with the forward purchase commitment are classified as Level 2 of the fair value hierarchy.

Commercial mortgage and other loans

Commercial mortgage and other loans include transitional real estate loans, commercial mortgage loans and middle market loans. The Company's loan receivables do not have readily determinable market prices and generally lack market liquidity. Fair values for loan receivables are determined based on the present value of expected future cash flows discounted at the applicable U.S. Treasury or London Interbank Offered Rate (LIBOR) yield plus an appropriate spread that considers other risk factors, such as credit and liquidity risk. The spreads are a significant component of the pricing inputs and are generally considered unobservable. Therefore, these investments have been assigned a Level 3 within the fair value hierarchy.

Other investments

Other investments includes short-term investments that are measured at fair value where amortized cost approximates fair value.

Other policyholders' funds

The largest component of the other policyholders' funds liability is the Company's annuity line of business in Aflac Japan. The Company's annuities have fixed benefits and premiums. For this product, the Company estimates 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. The Company periodically checks the cash value against discounted cash flow projections for reasonableness. The Company considers its inputs for this valuation to be unobservable and have accordingly classified this valuation as Level 3.

Notes payable

The fair values of the Company's publicly issued notes payable are determined by utilizing available sources of observable inputs from third party pricing vendors and are classified as Level 2. The fair values of the Company's yen-denominated loans approximate their carrying values and are classified as Level 3.

Transfers between Hierarchy Levels and Level 3 Rollforward

The following tables present the changes in fair value of the Company's investments and derivatives carried at fair value classified as Level 3.



Three Months Ended June 30, 2020
	Fixed Maturity Securities													Equity Securities			Derivatives ⁽¹⁾
(In millions)	Mortgage- and Asset- Backed Securities			Public Utilities				Banks/ Financial Institutions		Other Corporate							Foreign Currency Swaps			Total
Balance, beginning of period	$	188		$	298			$	23	$	245			$	82		$	(146	)	$	690
Realized investment gains (losses) included in earnings	0			0				0		0				0			(20		)	(20		)
Unrealized gains (losses) included in other comprehensive income (loss)	1			0				0		1				0			(2		)	0
Purchases, issuances, sales and settlements:
Purchases	0			13				1		12				5			0			31
Issuances	0			0				0		0				0			0			0
Sales	0			0				0		0				(1		)	0			(1		)
Settlements	(1		)	(4		)		0		0				0			0			(5		)
Transfers into Level 3	0			15			⁽²⁾	0		0				0			0			15
Transfers out of Level 3	0			0				0		(15		)	⁽²⁾	0			0			(15		)
Balance, end of period	$	188		$	322			$	24	$	243			$	86		$	(168	)	$	695
Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in earnings	$	0		$	0			$	0	$	0			$	0		$	(20	)	$	(20	)

⁽¹⁾ Derivative assets and liabilities are presented net

⁽²⁾ Transfer due to sector classification change



Three Months Ended June 30, 2019
	Fixed Maturity Securities												Equity Securities		Derivatives ⁽¹⁾
(In millions)	Mortgage- and Asset- Backed Securities		Public Utilities				Banks/ Financial Institutions		Other Corporate							Foreign Currency Swaps		Total
Balance, beginning of period	$	178	$	85			$	23	$	284			$	46		$	70	$	686
Realized investment gains (losses) included in earnings	0		0				0		0				0			24		24
Unrealized gains (losses) included in other comprehensive income (loss)	5		5				1		6				0			0		17
Purchases, issuances, sales and settlements:
Purchases	0		0				0		25				0			0		25
Issuances	0		0				0		0				19			0		19
Sales	0		0				0		0				0			0		0
Settlements	0		(2		)		0		0				0			0		(2		)
Transfers into Level 3	0		116			⁽²⁾	0		0				0			0		116
Transfers out of Level 3	0		0				0		(116		)	⁽²⁾	0			0		(116		)
Balance, end of period	$	183	$	204			$	24	$	199			$	65		$	94	$	769
Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in earnings	$	0	$	0			$	0	$	0			$	0		$	24	$	24

⁽¹⁾ Derivative assets and liabilities are presented net

⁽²⁾ Transfer due to sector classification change



Six Months Ended June 30, 2020
	Fixed Maturity Securities														Equity Securities			Derivatives ⁽¹⁾
(In millions)	Mortgage- and Asset- Backed Securities				Public Utilities				Banks/ Financial Institutions		Other Corporate							Foreign Currency Swaps			Total
Balance, beginning of period	$	178			$	224			$	23	$	262			$	80		$	43		$	810
Net investment gains (losses) included in earnings	0				0				0		0				0			(205		)	(205		)
Unrealized gains (losses) included in other comprehensive income (loss)	2				(9		)		0		(16		)		0			(6		)	(29		)
Purchases, issuances, sales and settlements:
Purchases	0				96				1		12				7			0			116
Issuances	0				0				0		0				0			0			0
Sales	0				0				0		0				(1		)	0			(1		)
Settlements	(1		)		(4		)		0		0				0			0			(5		)
Transfers into Level 3	9			⁽²⁾	15			⁽³⁾	0		0				0			0			24
Transfers out of Level 3	0				0				0		(15		)	⁽³⁾	0			0			(15		)
Balance, end of period	$	188			$	322			$	24	$	243			$	86		$	(168	)	$	695
Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in earnings	$	0			$	0			$	0	$	0			$	0		$	(205	)	$	(205	)

⁽¹⁾ Derivative assets and liabilities are presented net

⁽²⁾ Transfer due to reclassification of level 3 securities from HTM to AFS

⁽³⁾ Transfer due to sector classification change



Six Months Ended June 30, 2019
	Fixed Maturity Securities												Equity Securities		Derivatives ⁽¹⁾
(In millions)	Mortgage- and Asset- Backed Securities		Public Utilities				Banks/ Financial Institutions		Other Corporate						Foreign Currency Swaps			Total
Balance, beginning of period	$	177	$	109			$	23	$	213			$	46	$	80		$	648
Net investment gains (losses) included in earnings	0		0				0		0				0		16			16
Unrealized gains (losses) included in other comprehensive income (loss)	6		6				1		7				0		(2		)	18
Purchases, issuances, sales and settlements:
Purchases	0		0				0		88				19		0			107
Issuances	0		0				0		0				0		0			0
Sales	0		0				0		(2		)		0		0			(2		)
Settlements	0		(2		)		0		0				0		0			(2		)
Transfers into Level 3	0		116			⁽²⁾	0		25			⁽²⁾	0		0			141
Transfers out of Level 3	0		(25		)	⁽²⁾	0		(132		)	^(2),(3)	0		0			(157		)
Balance, end of period	$	183	$	204			$	24	$	199			$	65	$	94		$	769
Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in earnings	$	0	$	0			$	0	$	0			$	0	$	16		$	16

⁽¹⁾ Derivative assets and liabilities are presented net

⁽²⁾ Transfer due to sector classification change

⁽³⁾ Transfer due to availability of observable market inputs

Fair Value Sensitivity

Level 3 Significant Unobservable Input Sensitivity

The following tables summarize the significant unobservable inputs used in the valuation of the Company's Level 3 investments and derivatives carried at fair value. Included in the tables are the inputs or range of possible inputs that have an effect on the overall valuation of the financial instruments.

June 30, 2020

(In millions)

Fair Value

Valuation Technique(s)

Unobservable Input

Range
(Weighted Average)

Assets:

Securities available for sale, carried at fair value:

Fixed maturity securities:

Mortgage- and asset-backed securities

188

Consensus pricing

Offered quotes

N/A

^(a)

Public utilities

322

Discounted cash flow

Credit spreads

N/A

^(a)

Banks/financial institutions

Consensus pricing

Offered quotes

N/A

^(a)

Other corporate

243

Discounted cash flow

Credit spreads

N/A

^(a)

Equity securities

Net asset value

Offered quotes

N/A

^(a)

Other assets:

Foreign currency swaps

Discounted cash flow

Interest rates (USD)

.61% - .88%

^(b)

Interest rates (JPY)

.06% - .37%

^(c)

CDS spreads

12 - 119 bps

Discounted cash flow

Interest rates (USD)

.61% - .88%

^(b)

Interest rates (JPY)

.06% - .37%

^(c)

Total assets

950

Liabilities:

Other liabilities:

Foreign currency swaps

237

Discounted cash flow

Interest rates (USD)

.61% - .88%

^(b)

Interest rates (JPY)

.06% - .37%

^(c)

CDS spreads

46 - 202 bps

Discounted cash flow

Interest rates (USD)

.61% - .88%

^(b)

Interest rates (JPY)

.06% - .37%

^(c)

Total liabilities

255

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

(b) Inputs derived from U.S. long-term rates to accommodate long maturity nature of the Company's swaps

December 31, 2019

(In millions)

Fair Value

Valuation Technique(s)

Unobservable Input

Range
(Weighted Average)

Assets:

Securities available for sale, carried at fair value:

Fixed maturity securities:

Mortgage- and asset-backed securities

178

Consensus pricing

Offered quotes

N/A

^(a)

Public utilities

224

Discounted cash flow

Credit spreads

N/A

^(a)

Banks/financial institutions

Consensus pricing

Offered quotes

N/A

^(a)

Other corporate

262

Discounted cash flow

Credit spreads

N/A

^(a)

Equity securities

Net asset value

Offered quotes

N/A

^(a)

Other assets:

Foreign currency swaps

106

Discounted cash flow

Interest rates (USD)

1.89% - 2.09%

^(b)

Interest rates (JPY)

.12% - .43%

^(c)

CDS spreads

10 - 100 bps

Discounted cash flow

Interest rates (USD)

1.89% - 2.09%

^(b)

Interest rates (JPY)

.12% - .43%

^(c)

Total assets

936

Liabilities:

Other liabilities:

Foreign currency swaps

118

Discounted cash flow

Interest rates (USD)

1.89% - 2.09%

^(b)

Interest rates (JPY)

.12% - .43%

^(c)

CDS spreads

13 - 159 bps

Discounted cash flow

Interest rates (USD)

1.89% - 2.09%

^(b)

Interest rates (JPY)

.12% - .43%

^(c)

Total liabilities

126

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

(b) Inputs derived from U.S. long-term rates to accommodate long maturity nature of the Company's swaps

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

Net Asset Value

The Company holds 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 the Company's valuation model price is overridden because it implies a value that is not consistent with current market conditions, the Company will solicit bids from a limited number of brokers. The Company also receives unadjusted prices from brokers for its 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 and CDS Spreads

The significant drivers of the valuation of the foreign exchange swaps are interest rates and CDS spreads. Some of the Company's swaps have long maturities that increase the sensitivity of the swaps to interest rate fluctuations. For the Company's foreign exchange or cross currency swaps that are in a net asset position, an increase in yen interest rates (all other factors held constant) will decrease the present value of the yen final settlement receivable (receive leg), thus decreasing the value of the swap as long as the derivative remains in a net asset position.

Foreign exchange swaps also have a lump-sum final settlement of foreign exchange principal amounts at the termination of the swap. Assuming all other factors are held constant, an increase in yen interest rates will decrease the receive leg and decrease the net value of the swap. Likewise, holding all other factors constant, an increase in U.S. dollar interest rates will increase the swap's net value due to the decrease in the present value of the dollar final settlement payable (pay leg).

The extinguisher feature in most of the Company's VIE 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, the Company applies 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.

For additional information on the Company's 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 the 2019 Annual Report.

- 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.

+ References + Details