FAIR VALUE OF ASSETS AND LIABILITIES

Fair Value Measurement – Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative fair value guidance establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. The Company’s Level 1 assets and liabilities primarily include certain cash equivalents and short-term investments and equity securities.

Level 2 - Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, and other market observable inputs. The Company’s Level 2 assets and liabilities include: fixed maturities (corporate public and private bonds, most government securities, certain asset-backed and mortgage-backed securities, etc.), certain equity securities (mutual funds, which do not trade in active markets because they are not publicly available), certain commercial mortgage loans, short-term investments and certain cash equivalents, and certain over-the-counter ("OTC") derivatives.

Level 3 - Fair value is based on at least one significant unobservable input for the asset or liability. The assets and liabilities in this category may require significant judgment or estimation in determining the fair value. The Company’s Level 3 assets and liabilities primarily include: certain private fixed maturities and equity securities, certain manually priced public equity securities and fixed maturities, short-term investments, certain highly structured OTC derivative contracts and embedded derivatives resulting from certain products with guaranteed benefits.

Assets and Liabilities by Hierarchy Level – The tables below present the balances of assets and liabilities reported at fair value on a recurring basis, as of the dates indicated.



	As of March 31, 2016
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	18,406	$	0	$	0		$	18,406
Obligations of U.S. states and their political subdivisions	0		24,587		0		0			24,587
Foreign government bonds	0		49,647		0		0			49,647
U.S. corporate public securities	0		931,933		15,000		0			946,933
U.S. corporate private securities	0		527,850		116,844		0			644,694
Foreign corporate public securities	0		147,034		0		0			147,034
Foreign corporate private securities	0		235,364		8,989		0			244,353
Asset-backed securities	0		99,809		62,719		0			162,528
Commercial mortgage-backed securities	0		285,103		0		0			285,103
Residential mortgage-backed securities	0		130,423		0		0			130,423
Sub total	0		2,450,156		203,552		0			2,653,708
Trading account assets:
Equity securities	5,295		0		2,036		0			7,331
Sub total	5,295		0		2,036		0			7,331
Equity securities, available-for-sale			18		0		0			18
Short-term investments	0		314		450		0			764
Cash equivalents	12,604		73,896		375		0			86,875
Other long-term investments	0		191,853		0		(38,525		)	153,328
Reinsurance recoverables	0		0		3,693,262		0			3,693,262
Receivables from parent and affiliates	0		32,522		2,847		0			35,369
Sub total excluding separate account assets	17,899		2,748,759		3,902,522		(38,525		)	6,630,655
Separate account assets(2)	0		38,392,917		0		0			38,392,917
Total assets	$	17,899	$	41,141,676	$	3,902,522	$	(38,525	)	$	45,023,572
Future policy benefits(3)	$	0	$	0	$	3,842,607	$	0		$	3,842,607
Payables to parent and affiliates	0		52,818		0		(52,818		)	0
Total liabilities	$	0	$	52,818	$	3,842,607	$	(52,818	)	$	3,842,607



	As of December 31, 2015
	Level 1		Level 2		Level 3		Netting(1)			Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S Treasury securities and obligations of U.S. government authorities and agencies	$	0	$	12,154	$	0	$	0		$	12,154
Obligations of U.S. states and their political subdivisions	0		20,212		0		0			20,212
Foreign government securities	0		49,283		0		0			49,283
U.S. corporate public securities	0		934,109		15,000		0			949,109
U.S. corporate private securities	0		523,298		107,777		0			631,075
Foreign corporate public securities	0		136,222		0		0			136,222
Foreign corporate private securities	0		220,818		4,531		0			225,349
Asset-backed securities	0		104,797		46,493		0			151,290
Commercial mortgage-backed securities	0		215,740		0		0			215,740
Residential mortgage-backed securities	0		133,838		0		0			133,838
Sub total	0		2,350,471		173,801		0			2,524,272
Trading account assets:
Equity securities	5,653		0		0		0			5,653
Sub total	5,653		0		0		0			5,653
Equity securities, available-for-sale	0		17		0		0			17
Short-term investments	157,257		520		450		0			158,227
Cash equivalents	0		0		225		0			225
Other long-term investments(4)	0		135,209		1,565		(21,508		)	115,266
Reinsurance recoverables	0		0		3,012,653		0			3,012,653
Receivables from parent and affiliates	0		29,676		7,664		0			37,340
Sub total excluding separate account assets	162,910		2,515,893		3,196,358		(21,508		)	5,853,653
Separate account assets(2)	0		39,250,159		0		0			39,250,159
Total assets	$	162,910	$	41,766,052	$	3,196,358	$	(21,508	)	$	45,103,812
Future policy benefits(3)	$	0	$	0	$	3,134,077	$	0		$	3,134,077
Payables to parent and affiliates	0		25,277		0		(25,277		)	0
Total liabilities	$	0	$	25,277	$	3,134,077	$	(25,277	)	$	3,134,077


(1)	“Netting” amounts represent cash collateral of $(14.3) million and $(3.8) million as of March 31, 2016 and December 31, 2015, respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting arrangements.

(2)

Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Unaudited Interim Statements of Financial Position.

(3)

As of March 31, 2016, the net embedded derivative liability position of $3,843 million includes $19 million of embedded derivatives in an asset position and $3,862 million of embedded derivatives in a liability position. As of December 31, 2015, the net embedded derivative liability position of $3,134 million includes $34 million of embedded derivatives in an asset position and $3,168 million of embedded derivatives in a liability position.


(4)	Prior period amounts are presented on a basis consistent with the current period presentation, reflecting the adoption of ASU 2015-07.

The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair value on a recurring basis are summarized below.

Fixed Maturity Securities – The fair values of the Company’s public fixed maturity securities are generally based on prices obtained from independent pricing services. Prices for each security are generally sourced from multiple pricing vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. The Company ultimately uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type. The pricing hierarchy is updated for new financial products and recent pricing experience with various vendors. Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. Typical inputs used by these pricing services include but are not limited to reported trades, benchmark yields, issuer spreads, bids, offers, and/or estimated cash flow, prepayment speeds and default rates. If the pricing information received from third party pricing services is deemed not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process with the pricing service or classify the securities as Level 3. If the pricing service updates the price to be more consistent with the presented market observations, the security remains within Level 2.

Internally-developed valuations or indicative broker quotes are also used to determine fair value in circumstances where vendor pricing is not available, or where the Company ultimately concludes that pricing information received from the independent pricing services is not reflective of market activity. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may override the information with an internally developed valuation. As of March 31, 2016 and December 31, 2015 overrides on a net basis were not material. Pricing service overrides, internally-developed valuations and indicative broker quotes are generally included in Level 3 in the fair value hierarchy.

The Company conducts several specific price monitoring activities. Daily analyses identify price changes over predetermined thresholds defined at the financial instrument level. Various pricing integrity reports are reviewed on a daily and monthly basis to determine if pricing is reflective of market activity or if it would warrant any adjustments. Other procedures performed include, but are not limited to, reviews of third-party pricing services methodologies, reviews of pricing trends, and back-testing.

The fair value of private fixed maturities, which are comprised of investments in private placement securities, originated by internal private asset managers, are primarily determined using discounted cash flow models. These models primarily use observable inputs that include Treasury or similar base rates plus estimated credit spreads to value each security. The credit spreads are obtained through a survey of private market intermediaries who are active in both primary and secondary transactions, and consider, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Since most private placements are valued using standard market observable inputs and inputs derived from, or corroborated by, market observable data including observed prices and spreads for similar publicly traded or privately traded issues, they have been reflected within Level 2. For certain private fixed maturities, the discounted cash flow model may incorporate significant unobservable inputs, which reflect the Company’s own assumptions about the inputs that market participants would use in pricing the asset. To the extent management determines that such unobservable inputs are significant to the price of a security, a Level 3 classification is made.

Trading Account Assets – Trading account assets consist primarily of equity securities whose fair values are determined consistent with similar instruments described below under “Equity Securities”.

Equity Securities – Equity securities consist principally of investments in common and preferred stock of publicly-traded companies, privately-traded securities, as well as mutual fund shares. The fair values of most publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. Estimated fair values for most privately traded equity securities are determined using discounted cash flow, earnings multiple and other valuation models that require a substantial level of judgment around inputs and therefore are classified within Level 3. The fair values of mutual fund shares that transact regularly (but do not trade in active markets because they are not publicly available) are based on transaction prices of identical fund shares and are classified within Level 2 in the fair value hierarchy.

Derivative Instruments – Derivatives are recorded at fair value either as assets, within “Other long-term investments” or as liabilities, within “Payables to parent and affiliates” except for embedded derivatives which are recorded with the associated host contract. The fair values of derivative contracts can be affected by changes in interest rates, foreign exchange rates, credit spreads, market volatility, expected returns, non-performance risk (“NPR”), liquidity and other factors. For derivative positions included within Level 3 of the fair value hierarchy, liquidity valuation adjustments are made to reflect the cost of exiting significant risk positions, and consider the bid-ask spread, maturity, complexity and other specific attributes of the underlying derivative position.

The majority of the Company’s derivative positions are traded in the OTC derivative market and are classified within Level 2 in the fair value hierarchy. OTC derivatives classified within Level 2 are valued using models that utilize actively quoted or observable market input values from external market data providers, third-party pricing vendors and/or recent trading activity. The Company’s policy is to use mid-market pricing in determining its best estimate of fair value. The fair values of most OTC derivatives, including interest rate and cross currency swaps and single name credit default swaps are determined using discounted cash flow models. The fair values of European style option contracts are determined using Black-Scholes option pricing models. These models’ key inputs include the contractual terms of the respective contract, along with significant observable inputs, including interest rates, currency rates, credit spreads, equity prices, index dividend yields, NPR, volatility and other factors.

The Company’s cleared interest rate swaps and credit derivatives linked to an index are valued using models that utilize actively quoted or observable market inputs, including Overnight Indexed Swap discount rates, obtained from external market data providers, third-party pricing vendors, and/or recent trading activity. These derivatives are classified as Level 2 in the fair value hierarchy.

The vast majority of the Company’s derivative agreements are with highly rated major international financial institutions. To reflect the market’s perception of its own and the counterparty’s NPR, the Company incorporates additional spreads over London Inter-Bank Offered Rate (“LIBOR”) into the discount rate used in determining the fair value of OTC derivative assets and liabilities that are not otherwise collateralized.

Derivatives classified as Level 3 include structured products. These derivatives are valued based upon models, such as Monte Carlo simulation models and other techniques that utilize significant unobservable inputs. Level 3 methodologies are validated through periodic comparison of the Company’s fair values to external broker-dealer values. As of March 31, 2016, there were no internally valued derivatives with the fair value classified within Level 3, and all derivatives were classified within Level 2. As of December 31, 2015, there was $1.6 million of internally valued derivatives with the fair value classified within Level 3. See Note 5 for more details on the fair value of derivative instruments by primary underlying.

As discussed in Note 2, the Company adopted ASU 2015-07, effective January 1, 2016, which resulted in the exclusion of certain "Other long-term investments" from the fair value hierarchy. The guidance was required to be applied retrospectively, and therefore, prior period amounts have been revised to conform to the current period presentation. At March 31, 2016 and December 31, 2015, the fair value of these investments were $0.5 million and $0.6 million, respectively, which had been previously classified in Level 3 at December 31, 2015.

Cash Equivalents and Short-Term Investments – Cash equivalents and short-term investments include money market instruments and other highly liquid debt instruments. Certain money market instruments are valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. The remaining instruments in this category are classified within Level 2 and Level 3. Level 2 instruments are generally fair valued based on market observable inputs. Level 3 instruments are internally valued based on internal asset manager valuations.

Separate Account Assets – Separate account assets include fixed maturity securities, treasuries, equity securities, and mutual funds for which values are determined consistent with similar instruments described above under “Fixed Maturity Securities” and “Equity Securities”.

Receivables from Parent and Affiliates – Receivables from parent and affiliates carried at fair value include affiliated bonds within the Company’s legal entity whose fair values are determined consistent with similar securities described above under “Fixed Maturity Securities” managed by affiliated asset managers.

Reinsurance Recoverables – Reinsurance recoverables carried at fair value include the reinsurance of the Company’s living benefit guarantees on certain of its variable annuity contracts. These guarantees are accounted for as embedded derivatives and are described below in “Future Policy Benefits”. The reinsurance agreements covering these guarantees are derivatives with fair value determined in the same manner as the living benefit guarantees.

Future Policy Benefits – The liability for future policy benefits is related to guarantees primarily associated with the living benefit features of certain variable-annuity contracts offered by the Company, including guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”), and guaranteed minimum income and withdrawal benefits (“GMIWB”), accounted for as embedded derivatives. The fair values of these liabilities are calculated as the present value of future expected benefit payments to contractholders less the present value of future rider fees attributable to the optional living benefit feature. This methodology could result in either a liability or contra-liability balance, given changing capital market conditions and various actuarial assumptions. Since there is no observable active market for the transfer of these obligations, the valuations are calculated using internally developed models with option pricing techniques. The models are based on a risk neutral valuation framework and incorporate premiums for risks inherent in valuation techniques, inputs, and the general uncertainty around the timing and amount of future cash flows. The determination of these risk premiums requires the use of management's judgment. The significant inputs to the valuation models for these embedded derivatives include capital market assumptions, such as interest rate levels and volatility assumptions, the Company’s market-perceived NPR, as well as actuarially determined assumptions, including contractholder behavior, such as lapse rates, benefit utilization rates, withdrawal rates and mortality rates. Since many of these assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 in the fair value hierarchy.

Capital market inputs and actual policyholders’ account values are updated each quarter based on capital market conditions as of the end of the quarter, including interest rates, equity markets and volatility. In the risk neutral valuation, the initial swap curve drives the total return used to grow the policyholders’ account values. The Company’s discount rate assumption is based on the LIBOR swap curve, adjusted for an additional spread relative to LIBOR to reflect NPR.

Actuarial assumptions, including contractholder behavior and mortality, are reviewed at least annually, and updated based upon emerging experience, future expectations, and other data, including any observable market data. These assumptions are generally updated annually unless a material change that the Company feels is indicative of a long-term trend is observed in an interim period.

Transfers between Levels 1 and 2 – Transfers between levels are made to reflect changes in observability of inputs and market activity. Transfers into or out of any level are generally reported as the value as of the beginning of the quarter in which the transfers occur for any such assets still held at the end of the quarter. Periodically there are transfers between Level 1 and Level 2 for assets held in the Company’s Separate Account. During the three months ended March 31, 2016 and 2015, there were no transfers between Level 1 and Level 2.

Level 3 Assets and Liabilities by Price Source – The tables below present the balances of Level 3 assets and liabilities measured at fair value with their corresponding pricing sources.



	As of March 31, 2016
	Internal (1)		External (2)		Total
	(in thousands)
Corporate securities(3)	$	124,818	$	16,015	$	140,833
Asset-backed securities(4)	0		62,719		62,719
Trading account assets:
Equity securities	2,036		0		2,036
Short-term investments	450		0		450
Cash equivalents	375		0		375
Reinsurance recoverables	3,693,262		0		3,693,262
Receivables from parent and affiliates	0		2,847		2,847
Total assets	$	3,820,941	$	81,581	$	3,902,522
Future policy benefits	$	3,842,607	$	0	$	3,842,607
Total liabilities	$	3,842,607	$	0	$	3,842,607



	As of December 31, 2015
	Internal (1)		External (2)		Total
	(in thousands)
Corporate securities(3)	$	111,295	$	16,013	$	127,308
Asset-backed securities(4)	0		46,493		46,493
Short-term investments	450		0		450
Cash equivalents	225		0		225
Other long-term investments(5)	1,565		0		1,565
Reinsurance recoverables	3,012,653		0		3,012,653
Receivables from parent and affiliates	0		7,664		7,664
Total assets	$	3,126,188	$	70,170	$	3,196,358
Future policy benefits	$	3,134,077	$	0	$	3,134,077
Total liabilities	$	3,134,077	$	0	$	3,134,077


(1)	Represents valuations reflecting both internally-derived and market inputs as well as third-party pricing information or quotes. See below for additional information related to internally-developed valuation for significant items in the above table.


(2)	Represents unadjusted prices from independent pricing services and independent indicative broker quotes where pricing inputs are not readily available.


(3)	Includes assets classified as fixed maturities available-for-sale.


(4)	Includes credit-tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans and other asset types.


(5)	Prior period amounts are presented on a basis consistent with the current period presentation, reflecting the adoption of ASU 2015-07.

Quantitative Information Regarding Internally Priced Level 3 Assets and Liabilities – The tables below present quantitative information on significant internally-priced Level 3 assets and liabilities.



	As of March 31, 2016
	Fair Value		Primary Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value (1)
	(in thousands)
Assets:
Corporate securities	$	124,818	Discounted cash flow	Discount rate	3.38	%	20.38	%	4.97	%	Decrease
Reinsurance recoverables	$	3,693,262	Fair values are determined in the same manner as future policy benefits
Liabilities:
Future policy benefits (2)	$	3,842,607	Discounted cash flow	Lapse rate (3)	0	%	14	%			Decrease
				NPR spread (4)	0.44	%	2.07	%			Decrease
				Utilization rate (5)	63	%	95	%			Increase
				Withdrawal rate (6)	74	%	100	%			Increase
				Mortality rate (7)	0	%	14	%			Decrease
				Equity volatility curve	16	%	28	%			Increase



	As of December 31, 2015
	Fair Value		Primary Valuation Techniques	Unobservable Inputs	Minimum		Maximum		Weighted Average		Impact of Increase in Input on Fair Value (1)
	(in thousands)
Assets:
Corporate securities	$	111,295	Discounted cash flow	Discount rate	3.71	%	17.95	%	4.43	%	Decrease
Reinsurance recoverables	$	3,012,653	Fair values are determined in the same manner as future policy benefits
Liabilities:
Future policy benefits (2)	$	3,134,077	Discounted cash flow	Lapse rate (3)	0	%	14	%			Decrease
				NPR spread (4)	0.06	%	1.76	%			Decrease
				Utilization rate (5)	63	%	95	%			Increase
				Withdrawal rate (6)	74	%	100	%			Increase
				Mortality rate (7)	0	%	14	%			Decrease
				Equity volatility curve	17	%	28	%			Increase


(1)	Conversely, the impact of a decrease in input would have the opposite impact for the fair value as that presented in the table.

(2)

Future policy benefits primarily represent general account liabilities for the living benefit features of the Company’s variable annuity contracts which are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.


(3)	Lapse rates are adjusted at the contract level based on the in-the-moneyness of the living benefit and reflect other factors, such as the applicability of any surrender charges. Lapse rates are reduced when contracts are more in-the-money. Lapse rates are also generally assumed to be lower for the period where surrender charges apply.

(4)

To reflect NPR, the Company incorporates an additional spread over LIBOR into the discount rate used in the valuation of individual living benefit contracts in a liability position and generally not to those in a contra-liability position. The NPR spread reflects the financial strength ratings of the Company and its affiliates, as these are insurance liabilities and senior to debt. The additional spread over LIBOR is determined by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium.

(5)

The utilization rate assumption estimates the percentage of contracts that will utilize the benefit during the contract duration, and begin lifetime withdrawals at various time intervals from contract inception. The remaining contractholders are assumed to either begin lifetime withdrawals immediately or never utilize the benefit. Utilization assumptions may vary by product type, tax status and age. The impact of changes in these assumptions is highly dependent on the product type, the age of the contractholder at the time of the sale, and the timing of the first lifetime income withdrawal. Range reflects the utilization rate for the vast majority of business with living benefits.


(6)	The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These assumptions may vary based on the product type, contractholder age, tax status and withdrawal timing. The fair value of the liability will generally increase the closer the withdrawal rate is to 100%.

(7)

Range reflects the mortality rate for the vast majority of business with living benefits, with policyholders ranging from 35 to 90 years old. While the majority of living benefits have a minimum age requirement, certain benefits do not have an age restriction. This results in contractholders for certain benefits with mortality rates approaching 0%. Based on historical experience, the Company applies a set of age and duration specific mortality rate adjustments compared to standard industry tables. A mortality improvement assumption is also incorporated into the overall mortality table.

Interrelationships Between Unobservable Inputs – In addition to the sensitivities of fair value measurements to changes in each unobservable input in isolation, as reflected in the table above, interrelationships between these inputs may also exist, such that a change in one unobservable input may give rise to a change in another, or multiple, inputs. Examples of such interrelationships for significant internally-priced Level 3 assets and liabilities are as follows:

Corporate Securities – The rate used to discount future cash flows reflects current risk-free rates plus credit and liquidity spread requirements that market participants would use to value an asset. The discount rate may be influenced by many factors, including market cycles, expectations of default, collateral, term and asset complexity. Each of these factors can influence discount rates, either in isolation, or in response to other factors.

Future Policy Benefits – The Company expects efficient benefit utilization and withdrawal rates to generally be correlated with lapse rates. However, behavior is generally highly dependent on the facts and circumstances surrounding the individual contractholder, such as their liquidity needs or tax situation, which could drive lapse behavior independent of other contractholder behavior assumptions. To the extent more efficient contractholder behavior results in greater in-the-moneyness at the contract level, lapse rates may decline for those contracts. Similarly, to the extent that increases in equity volatility are correlated with overall declines in the capital markets, lapse rates may decline as contracts become more in-the-money.

Valuation Process for Fair Value Measurements Categorized within Level 3 – The Company has established an internal control infrastructure over the valuation of financial instruments that requires ongoing oversight by its various business groups. These management control functions are segregated from the trading and investing functions. For invested assets, the Company has established oversight teams, often in the form of pricing committees within each asset management group. The teams, which typically include representation from investment, accounting, operations, legal and other disciplines are responsible for overseeing and monitoring the pricing of the Company’s investments and performing periodic due diligence reviews of independent pricing services. An actuarial valuation team oversees the valuation of living benefit features of the Company’s variable annuity contracts.

The Company has also established policies and guidelines that require the establishment of valuation methodologies and consistent application of such methodologies. These policies and guidelines govern the use of inputs and price source hierarchies and provide controls around the valuation processes. These controls include appropriate review and analysis of investment prices against market activity or indicators of reasonableness, analysis of portfolio returns to corresponding benchmark returns, back-testing, review of bid/ask spreads to assess activity, approval of price source changes, price overrides, methodology changes and classification of fair value hierarchy levels. For living benefit features of the Company’s variable annuity products, the actuarial valuation unit periodically tests contract input data and actuarial assumptions are reviewed at least annually, and updated based upon emerging experience, future expectations and other data, including any observable market data. The valuation policies and guidelines are reviewed and updated as appropriate.

Within the trading and investing functions, the Company has established policies and procedures that relate to the approval of all new transaction types, transaction pricing sources and fair value hierarchy coding within the financial reporting system. For variable annuity product changes or new launches of living benefit features, the actuarial valuation unit validates input logic and new product features and agrees new input data directly to source documents.

Changes in Level 3 assets and liabilities – The following tables provide summaries of the changes in fair values of Level 3 assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods.



	Three Months Ended March 31, 2016
	Fixed Maturities Available-For-Sale
	U.S. Corporate Public Securities		U.S. Corporate Private Securities			Foreign Corporate Private Securities			Asset-Backed Securities			Trading Account Assets -Equity Securities		Short-Term Investments
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	15,000	$	107,777		$	4,531		$	46,493		$	0	$	450
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		(962		)	0			0			0		0
Asset management fees and other income	0		0			0			0			471		0
Included in other comprehensive income (loss)	0		(1,437		)	(2,538		)	(225		)	0		0
Net investment income	0		1,381			50			54			0		0
Purchases	0		119			0			0			0		0
Sales	0		0			0			0			0		0
Issuances	0		0			0			0			0		0
Settlements	0		(210		)	(1,740		)	(440		)	0		0
Transfers into Level 3(1)	0		10,176			8,686			17,824			0		0
Transfers out of Level 3(1)	0		0			0			(987		)	0		0
Other(3)	0		0			0			0			1,565		0
Fair Value, end of period assets/(liabilities)	$	15,000	$	116,844		$	8,989		$	62,719		$	2,036	$	450
Unrealized gains (losses) for assets/(liabilities) still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	(962	)	$	0		$	0		$	0	$	0
Asset management fees and other income	$	0	$	0		$	0		$	0		$	470	$	0



	Three Months Ended March 31, 2016
	Cash Equivalents		Other Long-term Investments			Reinsurance Recoverables		Receivables from Parent and Affiliates			Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	225	$	1,565		$	3,012,653	$	7,664		$	(3,134,077	)
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		0			624,974		(13		)	(650,030		)
Asset management fees and other income	0		0			0		0			0
Included in other comprehensive income (loss)	0		0			0		141			0
Net investment income	0		0			0		0			0
Purchases	150		0			55,635		0			0
Sales	0		0			0		(1,988		)	0
Issuances	0		0			0		0			(58,500		)
Settlements	0		0			0		0			0
Transfers into Level 3(1)	0		0			0		0			0
Transfers out of Level 3(1)	0		0			0		(2,957		)	0
Other(3)	0		(1,565		)	0		0			0
Fair Value, end of period assets/(liabilities)	$	375	$	0		$	3,693,262	$	2,847		$	(3,842,607	)
Unrealized gains (losses) for assets/(liabilities) still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0		$	643,330	$	0		$	(669,159	)
Asset management fees and other income	$	0	$	0		$	0	$	0		$	0



	Three Months Ended March 31, 2015
	Fixed Maturities Available-For-Sale(4)
	U.S. Corporate Public Securities			U.S. Corporate Private Securities			Foreign Corporate Private Securities			Asset-Backed Securities(5)
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	16,860		$	98,544		$	666		$	40,524
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0			0			62			0
Asset management fees and other income	0			0			0			0
Included in other comprehensive income (loss)	(23		)	(145		)	(51		)	81
Net investment income	9			1,267			1			12
Purchases	15,000			2,270			0			0
Sales	(15,000		)	(212		)	0			0
Issuances	0			0			0			0
Settlements	(119		)	(129		)	(678		)	(579		)
Transfers into Level 3(1)	0			0			0			9,783
Transfers out of Level 3(1)	0			0			0			(983		)
Fair Value, end of period assets/(liabilities)	$	16,727		$	101,595		$	0		$	48,838
Unrealized gains (losses) for assets still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0		$	0		$	0		$	0
Asset management fees and other income	$	0		$	0		$	0		$	0



	Three Months Ended March 31, 2015
	Cash Equivalents		Other Long- Term Investments (4)		Reinsurance Recoverables		Receivables from Parent and Affiliates			Future Policy Benefits
	(in thousands)
Fair Value, beginning of period assets/(liabilities)	$	225	$	0	$	2,996,154	$	22,320		$	(3,112,411	)
Total gains or (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net	0		0		246,814		1			(257,315		)
Asset management fees and other income	0		0		0		0			0
Included in other comprehensive income (loss)	0		0		0		(292		)	0
Net investment income	0		0		0		0			0
Purchases	0		0		57,644		0			0
Sales	0		0		0		0			0
Issuances	0		0		0		0			(60,523		)
Settlements	0		0		0		0			0
Transfers into Level 3(1)	0		0		0		1,986			0
Transfers out of Level 3(1)	0		0		0		0			0
Other(3)	0		0		0		0			0
Fair Value, end of period assets/(liabilities)	$	225	$	0	$	3,300,612	$	24,015		$	(3,430,249	)
Unrealized gains (losses) for assets/(liabilities) still held(2):
Included in earnings:
Realized investment gains (losses), net	$	0	$	0	$	272,379	$	0		$	(283,739	)
Asset management fees and other income	$	0	$	0	$	0	$	0		$	0


(1)	Transfers into or out of any level are generally reported as the value as of the beginning of the quarter in which the transfer occurs for any such assets still held at the end of the quarter.


(2)	Unrealized gains or losses related to assets still held at the end of the period do not include amortization or accretion of premiums and discounts.


(3)	Primarily related to private warrants reclassified from derivatives to trading securities.


(4)	Prior period amounts have been reclassified to conform to current period presentation, including the adoption of ASU 2015-07.


(5)	Includes credit-tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans and other asset types.

Transfers – Transfers into Level 3 are generally the result of unobservable inputs utilized within valuation methodologies and the use of indicative broker quotes for assets that were previously valued using observable inputs. Transfers out of Level 3 are generally due to the use of observable inputs in valuation methodologies as well as the availability of pricing service information for certain assets that the Company is able to validate.

Fair Value of Financial Instruments

The table below presents the carrying amount and fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. The financial instruments presented below are reported at carrying value on the Company’s Unaudited Interim Statements of Financial Position; however, in some cases, as described below, the carrying amount equals or approximates fair value.



	March 31, 2016
	Fair Value								Carrying Amount (1)
	Level 1		Level 2		Level 3		Total		Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	0	$	2,746	$	466,942	$	469,688	$	446,620
Policy loans	0		0		13,094		13,094		13,094
Cash and cash equivalents	19,603		0		0		19,603		19,603
Accrued investment income	0		27,028		0		27,028		27,028
Receivables from parent and affiliates	0		13,718		0		13,718		13,718
Other assets	0		1,477		0		1,477		1,477
Total assets	$	19,603	$	44,969	$	480,036	$	544,608	$	521,540
Liabilities:
Policyholders’ account balances - investment contracts	$	0	$	0	$	100,507	$	100,507	$	100,368
Cash collateral for loaned securities	0		3,683		0		3,683		3,683
Payables to parent and affiliates	0		25,868		0		25,868		25,868
Other liabilities	0		98,097		0		98,097		98,097
Separate account liabilities - investment contracts	0		263		0		263		263
Total liabilities	$	0	$	127,911	$	100,507	$	228,418	$	228,279



	December 31, 2015(2)
	Fair Value								Carrying Amount(1)
	Level 1		Level 2		Level 3		Total		Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	0	$	2,793	$	448,349	$	451,142	$	438,172
Policy loans	0		0		13,054		13,054		13,054
Cash and cash equivalents	311		0		0		311		311
Accrued investment income	0		22,615		0		22,615		22,615
Receivables from parent and affiliates	0		14,868		0		14,868		14,868
Other assets	0		1,085		0		1,085		1,085
Total assets	$	311	$	41,361	$	461,403	$	503,075	$	490,105
Liabilities:
Policyholders’ account balances - investment contracts	$	0	$	0	$	102,438	$	102,438	$	103,003
Cash collateral for loaned securities	0		10,568		0		10,568		10,568
Short-term debt	0		1,000		0		1,000		1,000
Payables to parent and affiliates	0		25,678		0		25,678		25,678
Other liabilities	0		83,464		0		83,464		83,464
Separate account liabilities - investment contracts	0		293		0		293		293
Total liabilities	$	0	$	121,003	$	102,438	$	223,441	$	224,006

(1)

Carrying values presented herein differ from those in the Company’s Unaudited Interim Statements of Financial Position because certain items within the respective financial statement captions are not considered financial instruments or out of scope under authoritative guidance relating to disclosures of the fair value of financial instruments. Financial statement captions excluded from the above table are not considered financial instruments.

(2)

As discussed in Note 2, the Company adopted ASU 2015-07, effective January 1, 2016, which resulted in the exclusion of certain other long-term investments from the fair value hierarchy. The guidance was required to be applied retrospectively, and therefore, prior period amounts have been revised to conform to the current period presentation. At March 31, 2016 and December 31, 2015, the fair values of these cost method investments were $3.2 million and $3.3 million, respectively, which had been previously classified in level 3 at December 31, 2015. The carrying values of these investments were $3.2 million and $3.1 million as of March 31, 2016 and December 31, 2015, respectively.

The fair values presented above have been determined by using available market information and by applying market valuation methodologies, as described in more detail below.

Commercial Mortgage and Other Loans

The fair value of most commercial mortgage loans is based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate plus an appropriate credit spread for similar quality loans. The quality ratings for these loans, a primary determinant of the credit spreads and a significant component of the pricing process, are based on an internally-developed methodology.

Policy Loans

Policy loans carrying value approximates fair value.

Other Long-Term Investments

Other long-term investments include investments in joint ventures and limited partnerships. The estimated fair values of these cost method investments are generally based on the Company’s share of the NAV as provided in the financial statements of the investees. In certain circumstances, management may adjust the NAV by a premium or discount when it has sufficient evidence to support applying such adjustments. No such adjustments were made as of March 31, 2016 and December 31, 2015.

Cash and Cash Equivalents, Accrued Investment Income, Receivables from Parent and Affiliates, and Other Assets

The Company believes that due to the short-term nature of certain assets, the carrying value approximates fair value. These assets include: cash and cash equivalents, accrued investment income, and other assets that meet the definition of financial instruments, including receivables such as unsettled trades and accounts receivable.

Policyholders’ Account Balances - Investment Contracts

Only the portion of policyholders’ account balances related to products that are investment contracts (those without significant mortality or morbidity risk) are reflected in the table above. For payout annuities and other similar contracts without life contingencies, fair values are generally derived using discounted projected cash flows based on interest rates that are representative of the Company’s financial strength ratings, and hence reflect the Company’s own NPR. For those balances that can be withdrawn by the customer at any time without prior notice or penalty, the fair value is the amount estimated to be payable to the customer as of the reporting date, which is generally the carrying value.

Cash Collateral for Loaned Securities

Cash collateral for loaned securities represents the collateral received or paid in connection with loaning or borrowing securities. For these transactions, the carrying value of the related asset or liability approximates fair value as they equal the amount of cash collateral received or paid.

Debt

The fair value of short-term debt is generally determined by either prices obtained from independent pricing services, which are validated by the Company, or discounted cash flow models. These fair values consider the Company’s own NPR. Discounted cash flow models predominately use market observable inputs such as the borrowing rates currently available to the Company for debt and financial instruments with similar terms and remaining maturities. For debt with a maturity of less than 90 days, the carrying value approximates fair value.

Other Liabilities and Payables to Parent and Affiliates

Other liabilities and payables to parent and affiliates are primarily payables, such as unsettled trades, drafts, escrow deposits and accrued expense payables. Due to the short-term until settlement of most of these liabilities, the Company believes that carrying value approximates fair value.

Separate Account Liabilities - Investment Contracts

Only the portion of separate account liabilities related to products that are investment contracts are reflected in the table above. Separate account liabilities are recorded at the amount credited to the contractholder, which reflects the change in fair value of the corresponding separate account assets including contractholder deposits less withdrawals and fees; therefore, carrying value approximates fair value.