Assets measured at fair value on a recurring basis are summarized below. Fair value measurements also 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 December 31, 2012 and 2011, no assets were required to be measured at fair value on a non-recurring basis.

Fair Value Measurements

				Level 1		Level 2		Level 3		Total

				(In Millions)
December 31, 2012
Assets:
Investments:
	Fixed maturities, available-for-sale:
		Corporate		$	0	$	1,684	$	35	$	1,719
		U.S. Treasury, government and agency			0		113		0		113
		States and political subdivisions			0		28		0		28
		Foreign governments			0		2		0		2
		Commercial mortgage-backed			0		0		35		35
		Residential mortgage-backed⁽¹⁾			0		20		0		20
		Asset-backed⁽²⁾			0		5		6		11
		Redeemable preferred stock			37		61		0		98
			Subtotal		37		1,913		76		2,026
	Other equity investments				1		0		0		1
Cash equivalents					145		0		0		145
GMIB reinsurance contracts					0		0		7		7
Separate Accounts' assets					1,623		15		0		1,638
		Total Assets		$	1,806	$	1,928	$	83	$	3,817

December 31, 2011
Assets:
Investments:
	Fixed maturities, available-for-sale:
		Corporate		$	0	$	1,659	$	34	$	1,693
		U.S. Treasury, government and agency			0		105		0		105
		States and political subdivisions			0		22		0		22
		Foreign governments			0		4		0		4
		Commercial mortgage-backed			0		0		29		29
		Residential mortgage-backed⁽¹⁾			0		28		0		28
		Asset-backed⁽²⁾			0		5		5		10
		Redeemable preferred stock			19		57		0		76
			Subtotal		19		1,880		68		1,967
	Other equity investments				1		0		0		1
Cash equivalents					57		0		0		57
GMIB reinsurance contracts					0		0		9		9
Separate Accounts' assets					1,589		15		0		1,604
		Total Assets		$	1,666	$	1,895	$	77	$	3,638

(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.

In 2012, AFS fixed maturities with fair values of $3 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 0.4% of total equity at December 31, 2012.

In 2011, AFS fixed maturities with fair values of $5 million were transferred out of Level 3 and into Level 2 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 $22 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 4.0% of total equity at December 31, 2011.

The table below presents a reconciliation for all Level 3 assets at December 31, 2012 and 2011, respectively.

Level 3 Instruments
Fair Value Measurements


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

						(In Millions)

Balance, January 1, 2012						$	34	$	29	$	5	$	0	$	9
	Total gains (losses), realized and unrealized, included in:
		Earnings (loss) as:
			Net investment income (loss)				0		0		0		0		0
			Investment gains (losses), net				1		(7)		0		0		0
			Increase (decrease) in the fair value of
				reinsurance contracts			0		0		0		0		(2)
					Subtotal		1		(7)		0		0		(2)
		Other comprehensive income (loss)					0		13		1		0		0
Purchases							0		0		0		0		0
Sales							(3)		0		0		0		0
Transfers into Level 3⁽²⁾							3		0		0		0		0
Balance, December 31, 2012⁽¹⁾						$	35	$	35	$	6	$	0	$	7

Balance, January 1, 2011						$	19	$	36	$	5	$	0	$	2
	Total gains (losses), realized and unrealized included in:
		Earnings (loss) as:
			Net investment income (loss)				0		0		0		0		0
			Investment gains (losses), net				0		(1)		0		0		0
			Increase (decrease) in the fair value of
				reinsurance contracts			0		0		0		0		7
					Subtotal	$	0	$	(1)	$	0	$	0	$	7
		Other comprehensive income (loss)					(2)		(3)		0		0		0
Sales							(1)		(3)		0		0		0
Transfers into Level 3⁽²⁾							22		0		0		0		0
Transfers out of Level 3⁽²⁾							(4)		0		0		0		0
Balance, December 31, 2011⁽¹⁾						$	34	$	29	$	5	$	0	$	9

The table below details changes in unrealized gains (losses) for 2012 and 2011 by category for Level 3 assets still held at December 31, 2012 and 2011, respectively.

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

					(In Millions)
Level 3 Instruments
Full Year 2012
Still Held at December 31, 2012:⁽¹⁾
	Change in unrealized gains (losses):
		Fixed maturities, available-for-sale:
			Commercial mortgage-backed			0		0		0		13
			Other fixed maturities, available-for-sale			0		0		0		1
				Subtotal	$	0	$	0	$	0	$	14
		GMIB reinsurance contracts				0		0		(2)		0
				Total	$	0	$	0	$	(2)	$	14

Level 3 Instruments
Full Year 2011
Still Held at December 31, 2011:⁽¹⁾
	Change in unrealized gains (losses):
		Fixed maturities, available-for-sale:
			Commercial mortgage-backed			0		0		0		(4)
			Other fixed maturities, available-for-sale			0		0		0		(2)
				Subtotal	$	0	$	0	$	0	$	(6)
		GMIB reinsurance contracts				0		0		7		0
				Total	$	0	$	0	$	7	$	(6)

(1) There were no Equity securities classified as AFS, Other equity investments, Cash equivalents and Separate Accounts' assets at December 31, 2012 and 2011.

The following table discloses quantitative information about Level 3 fair value measurements by category for assets and liabilities as of December 31, 2012.

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2012

Fair

Valuation

Significant

Value

Technique

Unobservable Input

Range

Assets:

(In Millions)

Investments:

Fixed maturities, available-for-sale:

Corporate

Matrix pricing model

Spread over the industry-specific

benchmark yield curve

600 bps - 650 bps

Commercial mortgage-backed

Discounted Cash flow

Constant default rate

3.0% - 25.0%

Probability of default

55.0%

Loss severity

49.0%

Discount rate

3.72% - 13.42%

Excluded from the table above are approximately $30 million Level 3 fair value measurements of investments for which the underlying quantitative inputs are not developed by MLOA and are not reasonably available. The fair value measurements of these Level 3 investments comprise approximately 39.5% of total assets classified as Level 3 and represent only 0.8% of total assets measured at fair value on a recurring basis. These investments primarily consist of certain privately placed debt securities with limited trading activity, including asset-backed instruments, and their fair values generally reflect unadjusted prices obtained from independent valuation service providers and indicative, non-binding quotes obtained from third-party broker-dealers recognized as market participants. Significant increases or decreases in the fair value amounts received from these pricing sources may result in MLOA's reporting significantly higher or lower fair value measurements for these Level 3 investments.

Included in the table above are approximately $11 million fair value of privately placed, available-for-sale corporate debt securities classified as Level 3 at December 31, 2012 that is determined by application of a matrix pricing model, representing approximately 31.4% of the total fair value of Level 3 securities in the corporate fixed maturities asset class. The significant unobservable input to the matrix pricing model is the spread over the industry-specific benchmark yield curve. Generally, an increase or decrease in spreads would lead to directionally inverse movement in the fair value measurements of these securities.

Commercial mortgage-backed securities classified as Level 3 consist of holdings subordinate to the AAA-tranche position and for which MLOA applies a discounted cash flow methodology to measure fair value. The process for determining fair value first adjusts the contractual principal and interest payments to reflect performance expectations and then discounts the securities' cash flows to reflect an appropriate risk-adjusted return. The significant unobservable inputs used in these fair value measurements are default rate and probability, loss severity, and the discount rate. An increase either in the cumulative default rate, probability of default, or loss severity would result in a decrease in the fair value of these securities; generally, those assumptions would change in a directionally similar manner. A decrease in the discount rate would result in directionally inverse movement in the fair value measurement of these securities.

Significant unobservable inputs with respect to the fair value measurement of the Level 3 GMIB reinsurance contract asset and the Level 3 liabilities identified in the table above are developed using Company data. Validations of unobservable inputs are performed to the extent MLOA has experience. When an input is changed the model is updated and the results of each step of the model are analyzed for reasonableness.

The significant unobservable inputs used in the fair value measurement of MLOA's GMIB reinsurance contract asset are lapse rates, withdrawal rates and GMIB utilization rates. Significant increases in GMIB utilization rates or decreases in lapse or withdrawal rates in isolation would tend to increase the GMIB reinsurance contract asset.

Fair value measurement of the GMIB reinsurance contract asset includes dynamic lapse and GMIB utilization assumptions whereby projected contractual lapses and GMIB utilization reflect the projected net amount of risks of the contract. As the net amount of risk of a contract increases, the assumed lapse rate decreases and the GMIB utilization increases. Increases in volatility would increase the asset.

The carrying values and fair values at December 31, 2012 and December 31, 2011 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 and pension and other postretirement obligations.

- 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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