Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance established a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value, and identifies three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices for identical instruments in active markets. Level 1 fair values generally are supported by market transactions that occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, and inputs to model-derived valuations that are directly observable or can be corroborated by observable market data.

Level 3 Unobservable inputs supported by little or no market activity and often requiring significant management judgment or estimation, such as an entity's own assumptions about the cash flows or other significant components of value that market participants would use in pricing the asset or liability.

MLOA defines fair value as the quoted market prices for those instruments that are actively traded in financial markets. In cases where quoted market prices are not available, fair values are measured using present value or other valuation techniques. The fair value determinations are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such adjustments do not reflect any premium or discount that could result from offering for sale at one time MLOA's entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair values cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instrument.

Fair Value Measurements


				Level 1		Level 2		Level 3		Total

				(In Millions)
September 30, 2011:
Assets:
Investments:
	Fixed maturities, available-for-sale:
		Corporate		$	-	$	1,725	$	12	$	1,737
		U.S. Treasury, government and agency			-		78		-		78
		States and political subdivisions			-		23		-		23
		Foreign governments			-		4		-		4
		Commercial mortgage-backed			-		-		30		30
		Residential mortgage-backed⁽¹⁾			-		29		-		29
		Asset-backed⁽²⁾			-		5		5		10
		Redeemable preferred stock			19		57		-		76
			Subtotal		19		1,921		47		1,987
	Other equity investments				1		-		-		1
Cash equivalents					17		-		-		17
GMIB reinsurance contracts					-		-		8		8
Separate Accounts' assets					1,503		15		-		1,518
		Total Assets		$	1,540	$	1,936	$	55	$	3,531

December 31, 2010:
Assets:
Investments:
	Fixed maturities, available-for-sale:
		Corporate		$	-	$	1,610	$	19	$	1,629
		U.S. Treasury, government and agency			-		88		-		88
		States and political subdivisions			-		20		-		20
		Foreign governments			-		4		-		4
		Commercial mortgage-backed			-		-		36		36
		Residential mortgage-backed⁽¹⁾			-		35		-		35
		Asset-backed⁽²⁾			-		6		5		11
		Redeemable preferred stock			19		58		-		77
			Subtotal		19		1,821		60		1,900
	Other equity investments				1		-		-		1
Cash equivalents					87		-		-		87
GMIB reinsurance contracts					-		-		2		2
Separate Accounts' assets					1,825		15		-		1,840
		Total Assets		$	1,932	$	1,836	$	62	$	3,830

(1) Includes publicly traded agency pass-through securities and collateralized obligations.

(2) Includes credit-tranched securities collateralized by sub-prime mortgages and other asset types and credit tenant loans.

At September 30, 2011 and December 31, 2010, respectively, investments classified as Level 1 comprise approximately 43.7% and 50.5% of invested assets measured at fair value on a recurring basis and primarily include redeemable preferred stock, cash equivalents and Separate Accounts assets. Fair value measurements classified as Level 1 include exchange-traded prices of fixed maturities, equity securities and net asset values for transacting subscriptions and redemptions of mutual fund shares held by Separate Accounts. Cash equivalents classified as Level 1 include money market accounts, overnight commercial paper and highly liquid debt instruments purchased with an original maturity of three months or less, and are carried at cost as a proxy for fair value measurement due to their short-term nature.

At September 30, 2011 and December 31, 2010, respectively, investments classified as Level 2 comprise approximately 54.9% and 47.9% of invested assets measured at fair value on a recurring basis and primarily include U.S. government and agency securities and certain corporate debt securities, such as private fixed maturities. As market quotes generally are not readily available or accessible for these securities, their fair value measures are determined utilizing relevant information generated by market transactions involving comparable securities and often are based on model pricing techniques that effectively discount prospective cash flows to present value using appropriate sector-adjusted credit spreads commensurate with the security's duration, also taking into consideration issuer-specific credit quality and liquidity. These valuation methodologies have been studied and evaluated by MLOA and the resulting prices determined to be representative of exit values.

Observable inputs generally used to measure the fair value of securities classified as Level 2 include benchmark yields, reported secondary trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers, and reference data. Additional observable inputs are used when available, and as may be appropriate, for certain security types, such as prepayment, default, and collateral information for the purpose of measuring the fair value of mortgage- and asset-backed securities. At September 30, 2011 and December 31, 2010, respectively, approximately $29 million and $35 million of AAA-rated mortgage- and asset-backed securities are classified as Level 2 for which the observability of market inputs to their pricing models is supported by sufficient, albeit more recently contracted, market activity in these sectors.

At September 30, 2011 and December 31, 2010, respectively, investments classified as Level 3 comprise approximately 1.4% and 1.6% of invested assets measured at fair value on a recurring basis and primarily include corporate debt securities. Determinations to classify fair value measures within Level 3 of the valuation hierarchy generally are based upon the significance of the unobservable factors to the overall fair value measurement. Included in the Level 3 classification at September 30, 2011 and December 31, 2010, respectively, were approximately $0 million and $18 million of fixed maturities with indicative pricing obtained from brokers that otherwise could not be corroborated to market observable data. MLOA applies various due-diligence procedures, as considered appropriate, to validate these non-binding broker quotes for reasonableness, based on its understanding of the markets, including use of internally-developed assumptions about inputs a market participant would use to price the security. In addition, approximately $36 million and $42 million of mortgage- and asset-backed securities, including CMBS, are classified as Level 3 at September 30, 2011 and December 31, 2010, respectively. At September 30, 2011, MLOA continued to apply a risk-adjusted present value technique to estimate the fair value of CMBS securities below the senior AAA tranche due to ongoing insufficient frequency and volume of observable trading activity in these securities. In applying this valuation methodology, MLOA adjusted the projected cash flows of these securities for origination year, default metrics, and level of subordination, with the objective of maximizing observable inputs, and weighted the result with a 10% attribution to pricing sourced from a third party service whose process placed significant reliance on market trading activity.

Level 3 also includes the GMIB reinsurance asset which is accounted for as a derivative contract. The GMIB reinsurance asset's fair value reflects the present value of reinsurance premiums and recoveries and risk margins over a range of market consistent economic scenarios. The valuation of the GMIB asset incorporates significant non-observable assumptions related to policyholder behavior, risk margins and projections of equity Separate Account funds consistent with the S&P 500 Index. Incremental adjustment is made to the resulting fair values of the GMIB asset to reflect changes in the claims-paying ratings of counterparties to the reinsurance treaties and of MLOA, respectively. After giving consideration to collateral arrangements, MLOA made no adjustment to reduce the fair value of its GMIB asset at September 30, 2011 to recognize incremental counterparty non-performance risk.

In the first nine months of 2011, AFS fixed maturities with fair values of $5 million and $0 million were transferred out of Level 3 and into Level 2 and out of Level 2 and into Level 1, respectively, principally due to the availability of trading activity and/or market observable inputs to measure and validate their fair values. In addition, AFS fixed maturities with fair value of $0 million were transferred into the Level 3 classification. These transfers in the aggregate represent approximately 0.75% of total equity at September 30, 2011.

In the first nine months of 2010, AFS fixed maturities with fair values of $9 million and $1 million were transferred out of Level 3 and into Level 2 and out of Level 2 and into Level 1, respectively, principally due to the availability of trading activity and/or market observable inputs to measure and validate their fair values. In addition, AFS fixed maturities with fair value of $2 million were transferred into the Level 3 classification. These transfers in the aggregate represent approximately 1.8% of total equity at September 30, 2010.

The table below presents a reconciliation for all Level 3 assets for third quarter and the first nine months of 2011 and 2010 respectively:

Level 3 Instruments
Fair Value Measurements


							Commercial				Redeemable		GMIB
							Mortgage-		Asset-		Preferred		Reinsurance
					Corporate		backed		backed		Stock		Contracts

					(In Millions)

Balance, July 1, 2011					$	18	$	35	$	6	$	-	$	2
Total gains (losses), realized and
	unrealized, included in:
	Earnings (loss) as:
		Net investment income (loss)				-		-		-		-		-
		Investment gains (losses), net				-		-		-		-		-
		Increase (decrease) in the fair value
			of the reinsurance contracts			-		-		-		-		6
				Subtotal		-		-		-		-		6
	Other comprehensive income (loss)					(1)		(5)		(1)		-		-
Purchases						-		-		-		-		-
Issuances						-		-		-		-		-
Sales						-		-		-		-		-
Settlements						-		-		-		-		-
Transfers into Level 3⁽²⁾						-		-		-		-		-
Transfers out of Level 3⁽²⁾						(5)		-		-		-		-
Balance, September 30, 2011					$	12	$	30	$	5	$	-	$	8

Balance, July 1, 2010					$	21	$	43	$	6	$	-	$	4
Total gains (losses), realized and
	unrealized, included in:
	Earnings (loss) as:
		Net investment income (loss)				-		-		-		-		-
		Investment gains (losses), net				-		(29)		-		-		-
		Increase (decrease) in the fair value
			of the reinsurance contracts			-		-		-		-		(2)
				Subtotal		-		(29)		-		-		(2)
		Other comprehensive income (loss)				-		26		-		-		-
Purchases/issuances						-		-		-		-		-
Sales/settlements						-		-		-		-		-
Transfers into/out of Level 3⁽²⁾						-		-		-		-		-
Balance, September 30, 2010					$	21	$	40	$	6	$	-	$	2



							Commercial				Redeemable		GMIB
							Mortgage-		Asset-		Preferred		Reinsurance
					Corporate		backed		backed		Stock		Contracts

					(In Millions)

Balance, January 1, 2011					$	19	$	36	$	5	$	-	$	2
Total gains (losses), realized and
	unrealized, included in:
	Earnings (loss) as:
		Net investment income (loss)				-		-		-		-		-
		Investment gains (losses), net				-		-		-		-		-
		Increase (decrease) in the fair value
			of the reinsurance contracts			-		-		-		-		6
				Subtotal		-		-		-		-		6
	Other comprehensive income (loss)					(2)		(3)		-		-		-
Purchases						-		-		-		-		-
Issuances						-		-		-		-		-
Sales						(1)		(3)		-		-		-
Settlements						-		-		-		-		-
Transfers into Level 3⁽²⁾						-		-		-		-		-
Transfers out of Level 3⁽²⁾						(4)		-		-		-		-
Balance, September 30, 2011					$	12	$	30	$	5	$	-	$	8

Balance, January 1, 2010					$	24	$	64	$	6	$	5	$	1
Total gains (losses), realized and
	unrealized, included in:
	Earnings (loss) as:
		Net investment income (loss)				-		-		-		-		-
		Investment gains (losses), net				-		(35)		-		2		-
		Increase (decrease) in the fair value
			of the reinsurance contracts			-		-		-		-		1
				Subtotal		-		(35)		-		2		1
		Other comprehensive income (loss)				2		11		-		-		-
Purchases/issuances						4		-		-		-		-
Sales/settlements						(2)		-		-		(7)		-
Transfers into/out of Level 3⁽²⁾						(7)		-		-		-		-
Balance, September 30, 2010					$	21	$	40	$	6	$	-	$	2

The table below details changes in unrealized gains (losses) for the third quarter and first nine months of 2011 and 2010 by category for Level 3 assets still held at September 30, 2011 and 2010, respectively:

					Earnings (Loss)
									Increase
					Net		Investment		(Decrease) in
					Investment		Gains		Fair Value of
					Income		(Losses),		Reinsurance
					(Loss)		Net		Contracts		OCI

					(In Millions)
Level 3 Instruments:
Third Quarter 2011
Still Held at September 30, 2011:⁽¹⁾
	Change in unrealized gains (losses):
		Fixed maturities, available-for-sale:
			Commercial mortgage-backed		$	-	$	-	$	-	$	(5)
			Other fixed maturities, available-for-sale			-		-		-		(1)
				Subtotal		-		-		-		(6)
		GMIB reinsurance contracts				-		-		6		-
				Total	$	-	$	-	$	6	$	(6)

Level 3 Instruments
Third Quarter 2010
Still Held at September 30, 2010:⁽¹⁾
	Change in unrealized gains (losses):
		Fixed maturities, available-for-sale:
			Commercial mortgage-backed			-		-		-		26
			Other fixed maturities, available-for-sale			-		-		-		1
				Subtotal		-		-		-		27
		GMIB reinsurance contracts				-		-		(1)		-
				Total	$	-	$	-	$	(1)	$	27

(1) There were no Equity securities classified as AFS, Other equity investments, Cash equivalents and Separate Accounts' assets at September 30, 2011 and 2010.

					Earnings (Loss)
									Increase
					Net		Investment		(Decrease) in
					Investment		Gains		Fair Value of
					Income		(Losses),		Reinsurance
					(Loss)		Net		Contracts		OCI

					(In Millions)
Level 3 Instruments:
First Nine Months of 2011
Still Held at September 30, 2011:⁽¹⁾
	Change in unrealized gains (losses):
		Fixed maturities, available-for-sale:
			Commercial mortgage-backed		$	-	$	-	$	-	$	(4)
			Other fixed maturities, available-for-sale			-		-		-		(2)
				Subtotal		-		-		-		(6)
		GMIB reinsurance contracts				-		-		6		-
				Total	$	-	$	-	$	6	$	(6)

Level 3 Instruments
First Nine Months of 2010
Still Held at September 30, 2010:⁽¹⁾
	Change in unrealized gains (losses):
		Fixed maturities, available-for-sale:
			Corporate		$	-	$	-	$	-	$	2
			Commercial mortgage-backed			-		-		-		11
			Other fixed maturities, available-for-sale			-		-		-		-
				Subtotal		-		-		-		13
		GMIB reinsurance contracts				-		-		1		-
				Total	$	-	$	-	$	1	$	13

(1) There were no Equity securities classified as AFS, Other equity investments, Cash equivalents, and Separate Accounts' assets at September 30, 2011 and 2010.

Fair value measurements are required on a non-recurring basis for certain assets, including goodwill, mortgage loans on real estate, equity real estate held for production of income, and equity real estate held for sale, only when an OTTI or other event occurs. When such fair value measurements are recorded, they must be classified and disclosed within the fair value hierarchy. At September 30, 2011 and December 31, 2010, no assets were required to be measured at fair value on a non-recurring basis.

The carrying values and fair values at September 30, 2011 and December 31, 2010 for financial instruments not otherwise disclosed in Note 3 are presented in the table below. Certain financial instruments are exempt from the requirements for fair value disclosure, such as insurance liabilities other than financial guarantees and investment contracts.

- 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

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