Fair Value of Assets and Liabilities

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

Fair Value of Assets and Liabilities

Note 6 Fair Value of Assets and Liabilities

Fair value is defined as 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 hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the Consolidated Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:

Level 1:    Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.

Level 2:    Assets and liabilities whose values are based on the following:

(a) Quoted prices for similar assets or liabilities in active markets;

(b) Quoted prices for identical or similar assets or liabilities in markets that are not active; or

(c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

Level 3:    Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.

The availability of observable inputs varies by instrument. In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment. The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3. In many instances, valuation inputs used to measure fair value fall into different levels of the fair value hierarchy. The category level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.

The Company is responsible for the determination of fair value and the supporting assumptions and methodologies. The Company gains assurance that assets and liabilities are appropriately valued through

the execution of various processes and controls designed to ensure the overall reasonableness and consistent application of valuation methodologies, including inputs and assumptions, and compliance with accounting standards. For fair values received from third parties or internally estimated, the Company’s processes and controls are designed to ensure that the valuation methodologies are appropriate and consistently applied, the inputs and assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded. For example, on a continuing basis, the Company assesses the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from valuation service providers or brokers or derived from internal models. The Company performs procedures to understand and assess the methodologies, processes and controls of valuation service providers. In addition, the Company may validate the reasonableness of fair values by comparing information obtained from valuation service providers or brokers to other third-party valuation sources for selected securities. The Company performs ongoing price validation procedures such as back-testing of actual sales, which corroborate the various inputs used in internal models to market observable data. When fair value determinations are expected to be more variable, the Company validates them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investment transactions.

The Company has two types of situations where investments are classified as Level 3 in the fair value hierarchy:

(1) Specific inputs significant to the fair value estimation models are not market observable. This primarily occurs in the Company’s use of broker quotes to value certain securities where the inputs have not been corroborated to be market observable, and the use of valuation models that use significant non-market observable inputs.

(2) Quotes continue to be received from independent third-party valuation service providers and all significant inputs are market observable; however, there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity such that the degree of market observability has declined to a point where categorization as a Level 3 measurement is considered appropriate. The indicators considered in determining whether a significant decrease in the volume and level of activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, the level of credit spreads over historical levels, applicable bid-ask spreads, and price consensus among market participants and other pricing sources.

Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans, bank loans, agent loans and policy loans. Accordingly, such investments are only included

in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after initial recognition and the resulting remeasurement is reflected in the consolidated financial statements.

In determining fair value, the Company principally uses the market approach which generally utilizes market transaction data for the same or similar instruments. To a lesser extent, the Company uses the income approach which involves determining fair values from discounted cash flow methodologies. For the majority of Level 2 and Level 3 valuations, a combination of the market and income approaches is used.

Summary of significant inputs and valuation techniques for Level 2 and Level 3 assets and liabilities measured at fair value on a recurring basis

Level 2 measurements

• Fixed income securities:

U.S. government and agencies, municipal, corporate - public and foreign government:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.

Corporate - privately placed: Privately placed are valued using a discounted cash flow model that is widely accepted in the financial services industry and uses market observable inputs and inputs derived principally from, or corroborated by, observable market data. The primary inputs to the discounted cash flow model include an interest rate yield curve, as well as published credit spreads for similar assets in markets that are not active that incorporate the credit quality and industry sector of the issuer.

Corporate - privately placed also includes redeemable preferred stock that are valued using quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, underlying stock prices and credit spreads.

ABS and MBS:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, collateral performance, and credit spreads. Certain ABS are valued based on non-binding broker quotes whose inputs have been corroborated to be market observable. Residential MBS include prepayment speeds as a primary input for valuation.

• Equity securities:  The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that are not active.

• Short-term: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.

• Other investments:  Free-standing exchange listed derivatives that are not actively traded are valued based on quoted prices for identical instruments in markets that are not active.

Over-the-counter (“OTC”) derivatives, including interest rate swaps, foreign currency swaps, total return swaps, foreign exchange forward contracts, certain options and certain credit default swaps, are valued using models that rely on inputs such as interest rate yield curves, implied volatilities, index price levels, currency rates, and credit spreads that are observable for substantially the full term of the contract. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.

Level 3 measurements

• Fixed income securities:

Municipal:  Comprise municipal bonds that are not rated by third-party credit rating agencies. The primary inputs to the valuation of these municipal bonds include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields and credit spreads. Also included are municipal bonds valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable and municipal bonds in default valued based on the present value of expected cash flows.

Corporate - public and privately placed, ABS and MBS:  Primarily valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable. Other inputs for corporate fixed income securities include an interest rate yield curve, as well as published credit spreads for similar assets that incorporate the credit quality and industry sector of the issuer.

• Equity securities:  The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements.

• Short-term:  For certain short-term investments, amortized cost is used as the best estimate of fair value.

• Other investments:  Certain OTC derivatives, such as interest rate caps, certain credit default swaps and certain options (including swaptions), are valued using models that are widely accepted in the financial services industry. These are categorized as Level 3 as a result of the significance of non-market observable inputs such as volatility. Other primary inputs include interest rate yield curves and credit spreads.

• Contractholder funds:  Derivatives embedded in certain life and annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for the embedded derivatives within a block of contractholder liabilities. The models primarily use stochastically determined cash flows based on the contractual elements of embedded derivatives, projected option cost and applicable market data, such as interest rate yield curves and equity index volatility assumptions. These are categorized as Level 3 as a result of the significance of non-market observable inputs.

Investments excluded from the fair value hierarchy

Limited partnerships carried at fair value, which do not have readily determinable fair values, use NAV provided by the investees and are excluded from the fair value hierarchy. These investments are generally not redeemable by the investees and generally cannot be sold without approval of the general partner. The Company receives distributions of income and proceeds from the liquidation of the underlying assets of the investees, which usually takes place in years 4-9 of the typical contractual life of 10-12 years. As of December 31, 2019, the Company has commitments to invest $492 million in these limited partnership interests.

Assets and liabilities measured at fair value
	As of December 31, 2019
($ in millions)	Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Counterparty and cash collateral netting			Total
Assets
Fixed income securities:
U.S. government and agencies	$	4,689		$	397		$	—					$	5,086
Municipal	—			8,558			62						8,620
Corporate - public	—			30,819			61						30,880
Corporate - privately placed	—			12,084			114						12,198
Foreign government	—			979			—						979
ABS	—			797			65						862
MBS	—			379			40						419
Total fixed income securities	4,689			54,013			342						59,044
Equity securities	7,407			384			371						8,162
Short-term investments	1,940			2,291			25						4,256
Other investments: Free-standing derivatives	—			180			—			(40		)	140
Separate account assets	3,044			—			—						3,044
Other assets	1			—			—						1
Total recurring basis assets	17,081			56,868			738			(40		)	74,647
Total assets at fair value	$	17,081		$	56,868		$	738		$	(40	)	$	74,647
% of total assets at fair value	22.9		%	76.2		%	1.0		%	(0.1		)%	100.0		%
Investments reported at NAV													1,814
Total													$	76,461
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—		$	—		$	(462	)				$	(462	)
Other liabilities: Free-standing derivatives	—			(84		)	—			$	12		(72		)
Total recurring basis liabilities	$	—		$	(84	)	$	(462	)	$	12		$	(534	)
% of total liabilities at fair value	—		%	15.7		%	86.5		%	(2.2		)%	100.0		%

Assets and liabilities measured at fair value
	As of December 31, 2018
($ in millions)	Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Counterparty and cash collateral netting			Total
Assets
Fixed income securities:
U.S. government and agencies	$	5,085		$	432		$	—					$	5,517
Municipal	—			9,099			70						9,169
Corporate - public	—			29,200			70						29,270
Corporate - privately placed	—			10,798			90						10,888
Foreign government	—			747			—						747
ABS	—			976			69						1,045
MBS	—			508			26						534
Total fixed income securities	5,085			51,760			325						57,170
Equity securities	4,364			331			341						5,036
Short-term investments	1,338			1,659			30						3,027
Other investments: Free-standing derivatives	—			139			1			$	(23	)	117
Separate account assets	2,805			—			—						2,805
Other assets	2			—			—						2
Total recurring basis assets	$	13,594		$	53,889		$	697		$	(23	)	$	68,157
% of total assets at fair value	19.9		%	79.1		%	1.0		%	—		%	100.0		%
Investments reported at NAV													1,779
Total													$	69,936
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—		$	—		$	(224	)				$	(224	)
Other liabilities: Free-standing derivatives	(1		)	(62		)	—			$	6		(57		)
Total recurring basis liabilities	$	(1	)	$	(62	)	$	(224	)	$	6		$	(281	)
% of total liabilities at fair value	0.3		%	22.1		%	79.7		%	(2.1		)%	100.0		%

Quantitative information about the significant unobservable inputs used in Level 3 fair value measurements
($ in millions)	Fair value			Valuation technique	Unobservable input	Range	Weighted average
December 31, 2019
Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options	$	(430	)	Stochastic cash flow model	Projected option cost	1.0 - 4.2%	2.67%
December 31, 2018
Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options	$	(185	)	Stochastic cash flow model	Projected option cost	1.0 - 2.2%	1.74%

The embedded derivatives are equity-indexed and forward starting options in certain life and annuity products that provide customers with interest crediting rates based on the performance of the S&P 500. If the projected option cost increased (decreased), it would result in a higher (lower) liability fair value.

As of December 31, 2019 and 2018, Level 3 fair value measurements of fixed income securities total $342 million and $325 million, respectively, and include $50 million and $105 million, respectively, of securities valued based on non-binding broker quotes where the inputs have not been corroborated to be market

observable and $36 million and $44 million, respectively, of municipal fixed income securities that are not rated by third-party credit rating agencies. As the Company does not develop the Level 3 fair value unobservable inputs for these fixed income securities, they are not included in the table above. However, an increase (decrease) in credit spreads for fixed income securities valued based on non-binding broker quotes would result in a lower (higher) fair value, and an increase (decrease) in the credit rating of municipal bonds that are not rated by third-party credit rating agencies would result in a higher (lower) fair value.

Rollforward of Level 3 assets and liabilities held at fair value during the year ended December 31, 2019
	Balance as of December 31, 2018			Total gains (losses) included in:						Transfers																	Balance as of December 31, 2019
($ in millions)				Net income			OCI			Into Level 3			Out of Level 3			Purchases		Sales			Issues			Settlements
Assets
Fixed income securities:
Municipal	$	70		$	1		$	4		$	—		$	(5	)	$	—	$	(5	)	$	—		$	(3	)	$	62
Corporate - public	70			—			3			30			(113		)	86		(11		)	—			(4		)	61
Corporate - privately placed	90			(1		)	2			43			(2		)	4		(13		)	—			(9		)	114
ABS	69			1			(1		)	76			(210		)	159		(22		)	—			(7		)	65
MBS	26			—			(2		)	9			—			9		—			—			(2		)	40
Total fixed income securities	325			1			6			158			(330		)	258		(51		)	—			(25		)	342
Equity securities	341			30			—			—			—			82		(82		)	—			—			371
Short-term investments	30			—			—			—			—			35		(40		)	—			—			25
Free-standing derivatives, net	1			(1		)	—			—			—			—		—			—			—			—
Total recurring Level 3 assets	697			30			6			158			(330		)	375		(173		)	—			(25		)	738
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	(224		)	(61		)	—			(175		)	—			—		—			(16		)	14			(462		)
Total recurring Level 3 liabilities	$	(224	)	$	(61	)	$	—		$	(175	)	$	—		$	—	$	—		$	(16	)	$	14		$	(462	)

Total Level 3 gains (losses) included in net income for the year ended December 31, 2019
($ in millions)	Net investment income			Realized capital gains and losses		Life contract benefits		Interest credited to contractholder funds			Total
Components of net income	$	(2	)	$	32	$	7	$	(68	)	$	(31	)

Rollforward of Level 3 assets and liabilities held at fair value during the year ended December 31, 2018
	Balance as of December 31, 2017			Total gains (losses) included in:						Transfers																Balance as of December 31, 2018
($ in millions)				Net income			OCI			Into Level 3		Out of Level 3			Purchases		Sales			Issues			Settlements
Assets
Fixed income securities:
Municipal	$	101		$	1		$	(2	)	$	—	$	(26	)	$	10	$	(8	)	$	—		$	(6	)	$	70
Corporate - public	108			—			(3		)	17		(21		)	10		(38		)	—			(3		)	70
Corporate - privately placed	224			(1		)	(3		)	20		(119		)	22		(5		)	—			(48		)	90
ABS	147			—			2			42		(159		)	160		(97		)	—			(26		)	69
MBS	26			—			—			—		—			1		—			—			(1		)	26
Total fixed income securities	606			—			(6		)	79		(325		)	203		(148		)	—			(84		)	325
Equity securities	210			37			—			—		—			109		(15		)	—			—			341
Short-term investments	20			—			—			—		—			55		(45		)	—			—			30
Free-standing derivatives, net	1			—			—			—		—			—		—			—			—			1
Total recurring Level 3 assets	$	837		$	37		$	(6	)	$	79	$	(325	)	$	367	$	(208	)	$	—		$	(84	)	$	697
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	(286	)	$	58		$	—		$	—	$	—		$	—	$	—		$	(2	)	$	6		$	(224	)
Total recurring Level 3 liabilities	$	(286	)	$	58		$	—		$	—	$	—		$	—	$	—		$	(2	)	$	6		$	(224	)

Total Level 3 gains (losses) included in net income for the year ended December 31, 2018
($ in millions)	Net investment income		Realized capital gains and losses		Life contract benefits			Interest credited to contractholder funds		Total
Components of net income	$	—	$	37	$	(5	)	$	63	$	95

Rollforward of Level 3 assets and liabilities held at fair value during the year ended December 31, 2017
	Balance as of December 31, 2016			Total gains (losses) included in:						Transfers																Balance as of December 31, 2017
($ in millions)				Net income			OCI			Into Level 3		Out of Level 3			Purchases		Sales			Issues			Settlements
Assets
Fixed income securities:
Municipal	$	125		$	(1	)	$	7		$	—	$	(6	)	$	8	$	(29	)	$	—		$	(3	)	$	101
Corporate - public	78			—			—			4		(30		)	60		—			—			(4		)	108
Corporate - privately placed	263			8			(2		)	30		(49		)	44		(30		)	—			(40		)	224
ABS	69			—			6			60		(280		)	322		—			—			(30		)	147
MBS	23			—			—			—		—			6		—			—			(3		)	26
Total fixed income securities	558			7			11			94		(365		)	440		(59		)	—			(80		)	606
Equity securities	163			13			4			—		(4		)	48		(14		)	—			—			210
Short-term investments	15			—			—			—		—			45		(40		)	—			—			20
Free-standing derivatives, net	(2		)	3			—			—		—			—		—			—			—			1
Other assets	1			(1		)	—			—		—			—		—			—			—			—
Total recurring Level 3 assets	$	735		$	22		$	15		$	94	$	(369	)	$	533	$	(113	)	$	—		$	(80	)	$	837
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	(290	)	$	—		$	—		$	—	$	—		$	—	$	—		$	(2	)	$	6		$	(286	)
Total recurring Level 3 liabilities	$	(290	)	$	—		$	—		$	—	$	—		$	—	$	—		$	(2	)	$	6		$	(286	)

Total Level 3 gains (losses) included in net income for the year ended December 31, 2017
($ in millions)	Net investment income		Realized capital gains and losses		Life contract benefits		Interest credited to contractholder funds			Total
Components of net income	$	19	$	4	$	9	$	(10	)	$	22

Transfers between level categorizations may occur due to changes in the availability of market observable inputs, which generally are caused by changes in market conditions such as liquidity, trading volume or bid-ask spreads. Transfers between level categorizations may also occur due to changes in the valuation source, including situations where a fair value quote is not provided by the Company’s independent third-party valuation service provider resulting in the price becoming stale or replaced with a broker quote whose inputs have not been corroborated to be market observable. This situation will result in the transfer of a security into Level 3. Transfers in and out of level categorizations are reported as having occurred at the beginning of the quarter in which the transfer occurred. Therefore, for all transfers into Level 3, all realized and changes in unrealized gains and losses in the quarter of transfer are reflected in the Level 3 rollforward table.

There were no transfers between Level 1 and Level 2 during 2019, 2018 or 2017.

Transfers into Level 3 during 2019, 2018 and 2017 included situations where a quote was not provided by

the Company’s independent third-party valuation service provider and as a result the price was stale or had been replaced with a broker quote where the inputs had not been corroborated to be market observable resulting in the security being classified as Level 3. Transfers into Level 3 during 2019 also included derivatives embedded in equity-indexed universal life contracts due to refinements in the valuation modeling resulting in an increase in significance of non-market observable inputs.

Transfers out of Level 3 during 2019, 2018 and 2017 included situations where a broker quote was used in the prior period and a quote became available from the Company’s independent third-party valuation service provider in the current period. A quote utilizing the new pricing source was not available as of the prior period, and any gains or losses related to the change in valuation source for individual securities were not significant.

Valuation changes included in net income for Level 3 assets and liabilities held as of
	December 31,
($ in millions)	2019			2018			2017
Assets
Fixed income securities:
Municipal	$	1		$	—		$	(3	)
Corporate	—			—			1
Total fixed income securities	1			—			(2		)
Equity securities	6			36			13
Free-standing derivatives, net	(1		)	—			—
Other assets	—			—			(1		)
Total recurring Level 3 assets	$	6		$	36		$	10
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	(61	)	$	58		$	—
Total recurring Level 3 liabilities	(61		)	58			—
Total included in net income	$	(55	)	$	94		$	10
Components of net income
Net investment income	$	(2	)	$	—		$	19
Realized capital gains and losses	8			36			(8		)
Life contract benefits	7			(5		)	9
Interest credited to contractholder funds	(68		)	63			(10		)
Total included in net income	$	(55	)	$	94		$	10

Carrying values and fair value estimates of financial instruments not carried at fair value
($ in millions)		December 31, 2019				December 31, 2018
Financial assets	Fair value level	Carrying value		Fair value		Carrying value		Fair value
Mortgage loans	Level 3	$	4,817	$	5,012	$	4,670	$	4,703
Bank loans	Level 3	1,204		1,185		1,350		1,298
Agent loans	Level 3	666		664		620		617
Financial liabilities
Contractholder funds on investment contracts	Level 3	8,438		9,158		9,250		9,665
Long-term debt	Level 2	6,631		7,738		6,451		6,708
Liability for collateral	Level 2	$	1,829	$	1,829	$	1,458	$	1,458