Fair Value of Assets and Liabilities

3 Months Ended

Mar. 31, 2019

Fair Value Disclosures [Abstract]

Fair Value of Assets and Liabilities

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.

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.

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.

For a discussion of the Company's valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 5 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

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, 2019
	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	$	6,428,415	$	8,779	$	0		$	6,437,194
Obligations of U.S. states and their political subdivisions	0		135,099		0		0			135,099
Foreign government bonds	0		211,474		0		0			211,474
U.S. corporate public securities	0		1,619,726		0		0			1,619,726
U.S. corporate private securities	0		1,010,861		53,364		0			1,064,225
Foreign corporate public securities	0		301,031		217		0			301,248
Foreign corporate private securities	0		885,090		31,219		0			916,309
Asset-backed securities(2)	0		493,289		19,680		0			512,969
Commercial mortgage-backed securities	0		386,155		30,578		0			416,733
Residential mortgage-backed securities	0		85,517		0		0			85,517
Subtotal	0		11,556,657		143,837		0			11,700,494
Fixed maturities, trading	0		335,751		0		0			335,751
Equity securities	5,324		5,307		5,616		0			16,247
Short-term investments	0		115,560		0		0			115,560
Cash equivalents	499,687		831,841		0		0			1,331,528
Other invested assets(3)	463		4,467,486		0		(4,467,947		)	2
Reinsurance recoverables	0		0		283,991		0			283,991
Receivables from parent and affiliates	0		3,171		0		0			3,171
Subtotal excluding separate account assets	505,474		17,315,773		433,444		(4,467,947		)	13,786,744
Separate account assets(4)	0		33,071,354		0		0			33,071,354
Total assets	$	505,474	$	50,387,127	$	433,444	$	(4,467,947	)	$	46,858,098
Future policy benefits(5)	$	0	$	0	$	9,316,905	$	0		$	9,316,905
Policyholders' account balances	0		0		80,579		0			80,579
Payables to parent and affiliates	0		2,246,793		0		(2,094,591		)	152,202
Other liabilities	13,888		0		0		(463		)	13,425
Total liabilities	$	13,888	$	2,246,793	$	9,397,484	$	(2,095,054	)	$	9,563,111

	As of December 31, 2018
	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	$	4,875,959	$	8,132	$	0		$	4,884,091
Obligations of U.S. states and their political subdivisions	0		131,164		0		0			131,164
Foreign government bonds	0		199,636		0		0			199,636
U.S. corporate public securities	0		1,473,973		0		0			1,473,973
U.S. corporate private securities	0		1,008,632		54,321		0			1,062,953
Foreign corporate public securities	0		291,086		0		0			291,086
Foreign corporate private securities	0		781,101		31,131		0			812,232
Asset-backed securities(2)	0		495,908		9,336		0			505,244
Commercial mortgage-backed securities	0		361,880		0		0			361,880
Residential mortgage-backed securities	0		49,414		0		0			49,414
Subtotal	0		9,668,753		102,920		0			9,771,673
Fixed maturities, trading	0		289,752		0		0			289,752
Equity securities	4,896		12		5,705		0			10,613
Short-term investments	0		29,818		0		0			29,818
Cash equivalents	1,098,903		2,593,456		0		0			3,692,359
Other invested assets(3)	4,380		4,843,414		0		(4,804,816		)	42,978
Reinsurance recoverables	0		0		239,911		0			239,911
Receivables from parent and affiliates	0		37,193		0		0			37,193
Subtotal excluding separate account assets	1,108,179		17,462,398		348,536		(4,804,816		)	14,114,297
Separate account assets(4)	0		31,210,346		0		0			31,210,346
Total assets	$	1,108,179	$	48,672,744	$	348,536	$	(4,804,816	)	$	45,324,643
Future policy benefits(5)	$	0	$	0	$	8,332,474	$	0		$	8,332,474
Policyholders' account balances	0		0		42,350		0			42,350
Payables to parent and affiliates	0		2,133,496		0		(2,133,496		)	0
Other liabilities	7,293		0		0		(664		)	6,629
Total liabilities	$	7,293	$	2,133,496	$	8,374,824	$	(2,134,160	)	$	8,381,453

 

(1) “Netting” amounts represent cash collateral of $2,373 million and $2,671 million as of March 31, 2019 and December 31, 2018, respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting arrangements.

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

(3) Other invested assets excluded from the fair value hierarchy include certain hedge funds, private equity funds and other funds for which fair value is measured at net asset value ("NAV") per share (or its equivalent) as a practical expedient. As of March 31, 2019 and December 31, 2018, the fair values of such investments were $8.2 million and $8.0 million, respectively.

(4) 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.

(5) As of March 31, 2019, the net embedded derivative liability position of $9,317 million includes $608 million of embedded derivatives in an asset position and $9,925 million of embedded derivatives in a liability position. As of December 31, 2018, the net embedded derivative liability position of $8,332 million includes $625 million of embedded derivatives in an asset position and $8,957 million of embedded derivatives in a liability position.

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, 2019
	Fair Value		Valuation Techniques	Unobservable     Inputs	Minimum		Maximum		Weighted     Average		Impact of Increase in Input on Fair     Value(1)
	(in thousands)
Assets:
Corporate securities(2)	$	14,957	Discounted cash flow	Discount rate	7.89	%	20.00	%	13.18	%	Decrease
			Market Comparables(3)	EBITDA multiples(8)	6.7X		6.7X		6.7X		Increase
			Liquidation value	Liquidation value	13.18	%	13.18	%	13.18	%	Increase
Reinsurance recoverables	$	283,991	Fair values are determined using the same unobservable inputs as future policy benefits.
Liabilities:
Future policy benefits(4)	$	9,316,905	Discounted cash flow	Lapse rate(5)	1	%	13	%			Decrease
				Spread over LIBOR(6)	0.12	%	1.35	%			Decrease
				Utilization rate(7)	50	%	97	%			Increase
				Withdrawal rate	See table footnote (8) below.
				Mortality rate(9)	0	%	15	%			Decrease
				Equity volatility curve	15	%	22	%			Increase

	As of December 31, 2018
	Fair Value		Valuation Techniques	Unobservable     Inputs	Minimum		Maximum		Weighted     Average		Impact of Increase in Input on Fair     Value(1)
	(in thousands)
Assets:
Corporate securities(2)	$	18,609	Discounted cash flow	Discount rate	7.00	%	20.00	%	11.30	%	Decrease
			Market Comparables(3)	EBITDA multiples(8)	6.7	X	6.7	X	6.7	X	Increase
			Liquidation	Liquidation value	41.00	%	41.00	%	41.00	%	Increase
Reinsurance recoverables	$	239,911	Fair values are determined using the same unobservable inputs as future policy benefits.
Liabilities:
Future policy benefits(4)	$	8,332,474	Discounted cash flow	Lapse rate(5)	1	%	13	%			Decrease
				Spread over LIBOR(6)	0.36	%	1.60	%			Decrease
				Utilization rate(7)	50	%	97	%			Increase
				Withdrawal rate	See table footnote (8) below.
				Mortality rate(9)	0	%	15	%			Decrease
				Equity volatility curve	18	%	22	%			Increase

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

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

(3) Represents multiples of earnings before interest, taxes, depreciation and amortization ("EBITDA"), and are amounts used when the Company has determined that market participants would use such multiples when valuing the investments.

(4) 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.

(5) 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.

(6) The spread over the London Inter-Bank Offered Rate ("LIBOR") swap curve represents the premium added to the proxy for the risk-free rate (LIBOR) to reflect our estimates of rates that a market participant would use to value the living benefit contracts in both the accumulation and payout phases. This spread includes an estimate of NPR, which is the risk that the obligation will not be fulfilled by the Company. NPR is primarily estimated by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium. In order to reflect the financial strength ratings of the Company, credit spreads associated with funding agreements, as opposed to credit spread associated with debt, are utilized in developing this estimate because both funding agreements and living benefit contracts are insurance liabilities and are therefore senior to debt.

(7) 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.

(8) The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These assumptions vary based on the age of the contractholder, the tax status of the contract and the duration since the contractholder began lifetime withdrawals. As of March 31, 2019 and December 31, 2018, the minimum withdrawal rate assumption is 78% and the maximum withdrawal rate assumption may be greater than 100%. The fair value of the liability will generally increase the closer the withdrawal rate is to 100% and decrease as the withdrawal rate moves further away from 100%.

(9) Range reflects the mortality rate for the vast majority of business with living benefits, with policyholders ranging from 50 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. For the discussion of the relationships between unobservable inputs as well as market factors that may affect the range of inputs used in the valuation of Level 3 assets and liabilities, see Note 5 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

Changes in Level 3 Assets and Liabilities – The following tables describe 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. When a determination is made to classify assets and liabilities within Level 3, the determination is based on significance of the unobservable inputs in the overall fair value measurement. All transfers are based on changes in the observability of the valuation inputs, including the availability of pricing service information that the Company can validate. All transfers are generally reported at the value as of the beginning of the quarter in which transfers occur for any such assets still held at the end of the quarter.

	Three Months Ended March 31, 2019
	Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases		Sales			Issuances			Settlements			Other(2)		Transfers into Level 3		Transfers out of Level 3		Fair Value, end of period			Unrealized gains (losses) for assets still held(3)
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Government	$	8,132		$	0		$	647	$	0		$	0		$	0		$	0	$	0	$	0	$	8,779		$	0
Corporate Securities(4)	85,452			610			3,226		0			0			(5,463		)	0		975		0		84,800			(1,996		)
Structured Securities(5)	9,336			145			44,273		0			0			(4,047		)	0		551		0		50,258			(2		)
Other assets:
Equity securities	5,705			106			0		(195		)	0			0			0		0		0		5,616			118
Other invested assets	0			0			0		0			0			0			0		0		0		0			0
Short-term investments	0			0			0		0			0			0			0		0		0		0			0
Reinsurance recoverables	239,911			17,625			4,559		0			0			0			21,896		0		0		283,991			17,625
Receivables from parent and affiliates	0			0			0		0			0			0			0		0		0		0			0
Liabilities:
Future policy benefits	(8,332,474		)	(727,090		)	0		0			(257,341		)	0			0		0		0		(9,316,905		)	(790,926		)
Policyholders' account balances	(42,350		)	(7,983		)	0		0			(30,246		)	0			0		0		0		(80,579		)	(7,983		)

	Three Months Ended March 31, 2019
	Total realized and unrealized gains (losses)									Unrealized gains (losses) for assets still held(3)
	Realized investment gains (losses), net(1)			Asset administration fees and other income		Included in other comprehensive income (losses)		Net investment income		Realized investment gains (losses), net			Asset administration fees and other income
	(in thousands)
Fixed maturities, available-for-sale	$	(725	)	$	0	$	1,441	$	39	$	(1,998	)	$	0
Other assets:
Equity securities	0			106		0		0		0			118
Other invested assets	0			0		0		0		0			0
Short-term investments	0			0		0		0		0			0
Reinsurance recoverables	17,625			0		0		0		17,625			0
Receivables from parent and affiliates	0			0		0		0		0			0
Liabilities:
Future policy benefits	(727,090		)	0		0		0		(790,926		)	0
Policyholders' account balances	(7,983		)	0		0		0		(7,983		)	0

	Three Months Ended March 31, 2018(6)
	Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases		Sales			Issuances			Settlements			Other (2)			Transfers into Level 3		Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(3)
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Government	$	5,237		$	0		$	645	$	0		$	0		$	0		$	0		$	0	$	0		$	5,882		$	0
Corporate Securities(4)	95,206			1,179			151		(36		)	0			(6,035		)	23			0		(215		)	90,273			(76		)
Structured Securities(5)	185,358			(100		)	63,810		0			0			(8,899		)	0			41,954		(25,879		)	256,244			0
Other assets:
Equity securities	9,758			712			0		0			0			0			147			0		0			10,617			0
Other invested assets	147			0			0		0			0			0			(147		)	0		0			0			0
Short-term investments	87			(53		)	0		0			0			0			(23		)	0		0			11			0
Reinsurance recoverables	244,006			(41,042		)	4,850		0			0			0			(12,317		)	0		0			195,497			(38,617		)
Receivables from parent and affiliates	0			(106		)	0		0			0			0			0			34,269		0			34,163			0
Liabilities:
Future policy benefits	(8,151,902		)	1,828,612			0		0			(254,920		)	0			0			0		0			(6,578,210		)	1,745,629
Policyholders' account balances	0			0			0		0			0			0			0			0		0			0			0
Reinsurance payable	0			0			0		0			0			0			(129		)	0		0			(129		)	(12,317		)

	Three Months Ended March 31, 2018(6)
	Total realized and unrealized gains (losses)										Unrealized gains (losses) for assets still held(3)
	Realized investment gains (losses), net(1)			Asset administration fees and other income		Included in other comprehensive income (losses)			Net investment income		Realized investment gains (losses), net			Asset administration fees and other income
	(in thousands)
Fixed maturities, available-for-sale	$	(66	)	$	0	$	1,050		$	95	$	(76	)	$	0
Other assets:
Equity securities	0			712		0			0		0			0
Other invested assets	0			0		0			0		0			0
Short-term investments	(53		)	0		0			0		0			0
Reinsurance recoverables	(41,042		)	0		0			0		(38,617		)	0
Receivables from parent and affiliates	0			0		(106		)	0		0			0
Liabilities:
Future policy benefits	1,828,612			0		0			0		1,745,629			0
Policyholders' account balances	0			0		0			0		0			0
Reinsurance payable	0			0		0			0		(12,317		)	0

(1) Realized investment gains (losses) on future policy benefits and reinsurance recoverables primarily represent the change in the fair value of the Company's living benefit guarantees on certain of its variable annuity contracts.

(2) Other, primarily represents reclassifications of certain assets and liabilities between reporting categories.

(3) 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.

(4) Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities.

(5) Includes asset-backed, commercial mortgage-backed and residential mortgage-backed securities.

(6) Prior period amounts have been updated to conform to current period presentation.

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. In some cases, as described below, the carrying amount equals or approximates fair value.

	March 31, 2019
	Fair Value								Carrying Amount(1)
	Level 1		Level 2		Level 3		Total		Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	0	$	0	$	1,280,080	$	1,280,080	$	1,268,377
Policy loans	0		0		12,664		12,664		12,664
Short-term investments	7,750		0		0		7,750		7,750
Cash and cash equivalents	62,067		1,003,000		0		1,065,067		1,065,067
Accrued investment income	0		96,245		0		96,245		96,245
Reinsurance recoverables	0		0		54,113		54,113		54,113
Receivables from parent and affiliates	0		12,505		0		12,505		12,505
Other assets	0		5,823		0		5,823		5,823
Total assets	$	69,817	$	1,117,573	$	1,346,857	$	2,534,247	$	2,522,544
Liabilities:
Policyholders’ account balances - investment contracts	$	0	$	0	$	752,629	$	752,629	$	753,178
Cash collateral for loaned securities	0		0		0		0		0
Short-term debt	0		140,329		0		140,329		140,569
Long-term debt	0		675,041		0		675,041		653,596
Reinsurance payables	0		0		54,113		54,113		54,113
Payables to parent and affiliates	0		45,018		0		45,018		45,018
Other liabilities	0		142,407		0		142,407		142,407
Separate account liabilities - investment contracts	0		70		0		70		70
Total liabilities	$	0	$	1,002,865	$	806,742	$	1,809,607	$	1,788,951

	December 31, 2018
	Fair Value								Carrying Amount(1)
	Level 1		Level 2		Level 3		Total		Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	0	$	0	$	1,339,707	$	1,339,707	$	1,353,478
Policy loans	0		0		12,805		12,805		12,805
Short-term investments	7,750		0		0		7,750		7,750
Cash and cash equivalents	136,175		675,000		0		811,175		811,175
Accrued investment income	0		90,895		0		90,895		90,895
Reinsurance recoverables	0		0		55,236		55,236		55,236
Receivables from parent and affiliates	0		9,188		0		9,188		9,188
Other assets	0		3,735		0		3,735		3,735
Total assets	$	143,925	$	778,818	$	1,407,748	$	2,330,491	$	2,344,262
Liabilities:
Policyholders’ account balances - investment contracts	$	0	$	0	$	560,548	$	560,548	$	565,903
Cash collateral for loaned securities	0		384		0		384		384
Short-term debt	0		139,843		0		139,843		140,569
Long-term debt	0		791,670		0		791,670		787,596
Reinsurance payables	0		0		55,236		55,236		55,236
Payables to parent and affiliates	0		30,846		0		30,846		30,846
Other liabilities	0		554,162		0		554,162		554,162
Separate account liabilities - investment contracts	0		71		0		71		71
Total liabilities	$	0	$	1,516,976	$	615,784	$	2,132,760	$	2,134,767

(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 are out of scope under authoritative guidance relating to disclosures of the fair value of financial instruments.