FAIR VALUE DISCLOSURES

12 Months Ended

Dec. 31, 2014

5) FAIR VALUE DISCLOSURES

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, 2014 and 2013, 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, 2014
Assets:
Investments:
	Fixed maturity Securities, available-for-sale:
		Corporate		$	-	$	793	$	8	$	801
		U.S. Treasury, government and agency			-		27		-		27
		States and political subdivisions			-		6		-		6
		Commercial mortgage-backed			-		-		26		26
		Redeemable preferred stock			10		8		-		18
			Subtotal		10		834		34		878
	Other equity investments				1		-		-		1
	Options				-		26		-		26
Cash equivalents					42		-		-		42
Separate Accounts' assets					1,794		15		-		1,809
		Total Assets		$	1,847	$	875	$	34	$	2,756

Liabilities:
MSO and IUL indexed features’ liability				$	-	$	26	$	-	$	26
		Total Liabilities		$	-	$	26	$	-	$	26

December 31, 2013
Assets:
Investments:
	Fixed maturity Securities, available-for-sale:
		Corporate		$	-	$	624	$	9	$	633
		U.S. Treasury, government and agency			-		34		-		34
		States and political subdivisions			-		6		-		6
		Foreign governments			-		-		-		-
		Commercial mortgage-backed			-		-		24		24
		Redeemable preferred stock			8		8		-		16
			Subtotal		8		672		33		713
	Other equity investments				1		-		-		1
	Options				-		14		-		14
Cash equivalents					127		-		-		127
GMIB reinsurance contracts					-		-		-		-
Separate Accounts' assets					1,823		15		-		1,838
		Total Assets		$	1,959	$	701	$	33	$	2,693

Liabilities:
MSO and IUL indexed features’ liability				$	-	$	14	$	-	$	14
		Total Liabilities		$	-	$	14	$	-	$	14

At December 31, 2014 and 2013, respectively, the fair value of public fixed maturities is approximately $661 million and $556 million or approximately 24.0% and 20.6% of MLOA’s total assets measured at fair value on a recurring basis (excluding GMIB reinsurance contracts measured at fair value on a recurring basis at December 31, 2013). The fair values of MLOA’s public fixed maturity securities are generally based on prices obtained from independent valuation service providers and for which MLOA maintains a vendor hierarchy by asset type based on historical pricing experience and vendor expertise. Although each security generally is priced by multiple independent valuation service providers, MLOA ultimately uses the price received from the independent valuation service provider highest in the vendor hierarchy based on the respective asset type, with limited exception. To validate reasonableness, prices also are internally reviewed by those with relevant expertise through comparison with directly observed recent market trades. Consistent with the fair value hierarchy, public fixed maturity securities validated in this manner generally are reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. If the pricing information received from independent valuation service providers is not reflective of market activity or other inputs observable in the market, MLOA may challenge the price through a formal process in accordance with the terms of the respective independent valuation service provider agreement. If as a result it is determined that the independent valuation service provider is able to reprice the security in a manner agreed as more consistent with current market observations, the security remains within Level 2. Alternatively, a Level 3 classification may result if the pricing information then is sourced from another vendor, non-binding broker quotes, or internally-developed valuations for which MLOA’s own assumptions about market-participant inputs would be used in pricing the security.

At December 31, 2014 and 2013, respectively, the fair value of private fixed maturities is approximately $217 million and $157 million or approximately 7.9% and 5.8% of MLOA’s total assets measured at fair value on a recurring basis. The fair values of MLOA’s private fixed maturities, which primarily are comprised of investments in private placement securities generally are determined using a discounted cash flow model. In certain cases, these models use observable inputs with a discount rate based upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions, taking into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Generally, these securities have been reflected within Level 2. For certain private fixed maturities, the discounted cash flow model may also incorporate unobservable inputs, which reflect MLOA’s own assumptions about the inputs market participants would use in pricing the asset. To the extent management determines that such unobservable inputs are significant to the fair value measurement of a security, a Level 3 classification generally is made.

At December 31, 2014 and 2013, respectively, investments classified as Level 1 comprise approximately 67.0% and 72.8% of 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 December 31, 2014 and 2013, respectively, investments classified as Level 2 comprise approximately 31.7% and 26.0% of 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 public and 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.

MLOA’s IUL product and in the MSO investment option available in some life contracts offer investment options which permit the contract owner to participate in the performance of an index, ETF or commodity price. These investment options, which depending on the product and on the index selected can currently have 1 or 3 year terms, provide for participation in the performance of specified indices, ETFs or commodity price movement up to a segment-specific declared maximum rate. Under certain conditions that vary by product, e.g. holding these segments for the full term, these segments also shield policyholders from some or all negative investment performance associated with these indices, ETFs or commodity price. These investment options have defined formulaic liability amounts, and the current values of the option component of these segment reserves are accounted for as Level 2 embedded derivatives. The fair values of these embedded derivatives are based on prices obtained from independent valuation service providers.

At December 31, 2014 and 2013, respectively, investments classified as Level 3 comprise approximately 1.2% and 1.2% of assets measured at fair value on a recurring basis and primarily include commercial mortgage-backed securities (“CMBS”) and 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 December 31, 2013, were approximately $0 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 $26 million and $24 million of mortgage- and asset-backed securities, including CMBS, are classified as Level 3 at December 31, 2014 and 2013, respectively. MLOA utilizes prices obtained from an independent valuation service vendor to measure fair value of CMBS securities.

In 2014 and 2013, there were no AFS fixed maturities transferred from Level 2 into the Level 3 or from Level 3 to Level 2 classification.

The table below presents a reconciliation for all Level 3 assets at December 31, 2014 and 2013, respectively.

Level 3 Instruments
Fair Value Measurements


							Commercial				GMIB
							Mortgage-		Asset-		Reinsurance
					Corporate		backed		backed		Contracts

					(In Millions)

Balance, January 1, 2014					$	9	$	24	$	-	$	-
	Total gains (losses), realized and unrealized, included in:
		Earnings (loss) as:
			Investment gains (losses), net			(1)		(11)		-		-
		Other comprehensive income (loss)				1		13		-		-
Sales						(1)		-		-		-
Balance, December 31, 2014					$	8	$	26	$	-	$	-

Balance, January 1, 2013					$	35	$	35	$	6	$	7
	Total gains (losses), realized and unrealized included in:
		Earnings (loss) as:
			Investment gains (losses), net			2		(9)		2		-
			Increase (decrease) in the fair value of
				reinsurance contracts		-		-		-		(7)
		Other comprehensive income (loss)				(2)		(1)		(2)		-
Sales						(26)		(1)		(6)		-
Balance, December 31, 2013					$	9	$	24	$	-	$	-

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

Transfers into/out of Level 3 classification are reflected at beginning-of-period fair values.

The table below details changes in unrealized gains (losses) for 2014 and 2013 by category for Level 3 assets still held at December 31, 2014 and 2013, respectively.


						OCI

					(In Millions)
Level 3 Instruments
Full Year 2014
Still Held at December 31, 2014:
	Change in unrealized gains (losses):
		Fixed maturity securities, available-for-sale:
			Corporate			$	1
			Commercial mortgage-backed				12
				Total		$	13

Level 3 Instruments
Full Year 2013
Still Held at December 31, 2013:
	Change in unrealized gains (losses):
		Fixed maturity securities, available-for-sale:
			Commercial mortgage-backed			$	(2)
				Total		$	(2)

At December 31, 2014 and 2013, MLOA had $34 million and $33 million, respectively, of investments classified as Level 3. The underlying quantitative inputs to measure the fair value of these investments are not developed by MLOA and are not readily available. 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.

The carrying values and fair values at December 31, 2014 and December 31, 2013 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.


	Carrying		Fair Value
	Value		Level 1		Level 2		Level 3		Total

	(In Millions)
December 31, 2014
Policyholders liabilities: Investment contracts	$	6	$	-	$	-	$	6	$	6
Policy Loans		151		-		-		184		184

December 31, 2013
Mortgage loans on real estate	$	28	$	-	$	-	$	28	$	28
Policyholders liabilities: Investment contracts		193		-		-		196		196
Policy Loans		142		-		-		174		174

Fair values for commercial mortgage loans on real estate are measured by discounting future contractual cash flows to be received on the mortgage loan using interest rates at which loans with similar characteristics and credit quality would be made. The discount rate is derived from taking the appropriate U.S. Treasury rate with a like term to the remaining term of the loan and adding a spread reflective of the risk premium associated with the specific loan. Fair values for mortgage loans anticipated to be foreclosed and problem mortgage loans are limited to the fair value of the underlying collateral, if lower.

The fair value of policy loans is calculated by discounting expected cash flows based upon the U.S. treasury yield curve and historical loan repayment patterns.

The fair values for MLOA’s supplementary contracts not involving life contingencies (“SCNILC”), single premium deferred annuities and certain annuities, which are included in Policyholder’s account balances, are estimated using projected cash flows discounted at rates reflecting current market rates. Significant unobservable inputs reflected in the cash flows include lapse rates and withdrawal rates. Incremental adjustments may be made to the fair value to reflect non-performance risk.

- 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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