5.	Fair Value

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 Balance Sheets (Successor) 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.

Successor

There are no assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2015 or December 31, 2014. The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 and December 31, 2014.


December 31, 2015
Description for Each Class of Asset or Liability ($ in thousands)	Level 1			Level 2			Level 3			Total
Assets at fair value
Fixed maturities
U.S Treasury Securities and Obligations of U.S. Government Authority and Agencies	$	10,621		$	157,957		$	—		$	168,578
Obligations of U.S. States and Political Subdivisions		—			720,757			—			720,757
Foreign government		—			61,643			—			61,643
All Other Corporate Securities		—			5,727,155			11,520			5,738,675
ABS		—			522,531			14,260			536,791
CMBS		—			506,699			—			506,699
RMBS		—			212,799			—			212,799
Short term investments		166,358			18,462			—			184,820
Other invested assets
Equity Options		17,627			—			—			17,627
Futures		108			—			—			108
Separate accounts assets		1,395,141			—			—			1,395,141

Total assets at fair value	$	1,589,855		$	7,928,003		$	25,780		$	9,543,638

Liabilities at fair value
Policyholders’ account balances
Equity indexed annuity contracts	$	—		$	—		$	(64,138	)	$	(64,138	)
Equity indexed life contracts		—			(11,701	)		—			(11,701	)
Guaranteed minimum accumulation benefits		—			—			(7,499	)		(7,499	)
Guaranteed minimum withdrawal benefits		—			—			(315	)		(315	)
Separate accounts liabilities		(1,395,141	)		—			—			(1,395,141	)

Total liabilities at fair value	$	(1,395,141	)	$	(11,701	)	$	(71,952	)	$	(1,478,794	)


December 31, 2014
Description for Each Class of Asset or Liability ($ in thousands)	Level 1			Level 2			Level 3			Total
Assets at fair value
Fixed maturities
U.S. Treasury Securities and Obligations of U.S. Government Authority and Agencies	$	12,408		$	295,544		$	—		$	307,952
Obligations of U.S. States and Political Subdivisions		—			543,735			—			543,735
Foreign government		—			255,208			—			255,208
All Other Corporate Securities		—			7,370,409			7,336			7,377,745
ABS		—			377,393			5,250			382,643
CMBS		—			330,790			2,693			333,483
RMBS		—			189,881			—			189,881
Short term investments		191,979			145,677			23,713			361,369
Other invested assets
Equity Options		25,672			—			—			25,672
Futures		329			—			—			329
Separate accounts assets		1,573,865			—			—			1,573,865

Total assets at fair value	$	1,804,253		$	9,508,637		$	38,992		$	11,351,882

Liabilities at fair value
Policyholders’ account balances
Equity indexed annuity contracts	$	—		$	—		$	(63,660	)	$	(63,660	)
Equity indexed life contracts		—			(18,720	)		—			(18,720	)
Guaranteed minimum accumulation benefits		—			—			(6,367	)		(6,367	)
Guaranteed minimum withdrawal benefits		—			—			(366	)		(366	)
Separate accounts liabilities		(1,573,865	)		—			—			(1,573,865	)

Total liabilities at fair value	$	(1,573,865	)	$	(18,720	)	$	(70,393	)	$	(1,662,978	)

There were no transfers between Level 1 and Level 2 during the period from April 1, 2014 through December 31, 2014. In 2015, U.S. Treasury securities were transferred to Level 1 as those securities are traded in an active market. The prior year presentation has been updated to conform to the current year presentation.

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

Fixed Maturities

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. U.S. Treasury securities are included within Level 1 due to the market activity. 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.

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 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. Pricing service overrides, internally-developed valuations and indicative broker quotes are generally included in Level 3 in the fair value hierarchy.

The fair value of private fixed maturities, which are comprised of investments in private placement securities 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. No private placement securities were classified as Level 3 as of December 31, 2015 or December 31, 2014.

Short-term Investments

Short-term investments include money market instruments, highly liquid debt instruments and certain other investments. 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 generally fair valued based on market observable inputs and these investments have primarily been classified within Level 2. Short-term investments classified within Level 3 primarily consist of commercial mortgage loans. The fair value of the 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.

Other Invested Assets

The estimated fair value of derivatives is determined through the use of quoted market prices for exchange-traded derivatives.

Separate Account Assets and Liabilities

Separate account assets and liabilities consist principally of investments in mutual fund shares. The fair values are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy.

Policyholders’ Account Balances

The liabilities for guarantees primarily associated with the optional living benefit features of certain variable annuity contracts and equity indexed annuity contracts are calculated as the present value of future expected benefit payments to contractholders less the present value of assessed 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 judgment.

The significant inputs to the valuation models for these embedded derivatives include capital market assumptions, such as interest rate levels and volatility assumptions, 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.

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.

Level 3 Fair Value Measurements

The following table summarizes quantitative information about the significant unobservable inputs used in Level 3 fair value measurements:

($ in thousands)

Fair
Value

Valuation
Technique

Unobservable
Input

Range

Weighted
Average

Equity indexed annuity contracts

(64,138

)

Option Pricing Technique

Projected Option Cost

1.40% - 2.11%

1.70%

Excluded from the table above at December 31, 2015 and December 31, 2014 are approximately $26 million and $15 million, respectively, Level 3 fair value measurements of investments for which the underlying quantitative inputs are not developed by the Company and are not reasonably available. These investments primarily consist of certain public debt securities with limited trading activity, including asset-backed instruments, and their fair values generally reflect unadjusted prices obtained from independent valuation service providers and indicative, non-binding quotes obtained from third-party broker-dealers recognized as market participants. Significant increases or decreases in the fair value amounts received from these pricing sources may result in the Company’s reporting significantly higher or lower fair value measurements for these Level 3 investments.

The table above also excludes underlying quantitative inputs related to liabilities held for the Company’s guaranteed minimum accumulation benefits and guaranteed withdrawal benefits. These liabilities are not developed by the Company as they are 100% ceded to external reinsurers. The development of these liabilities generally involve actuarially determined models and could result in the Company reporting significantly higher or lower fair value measurements for these Level 3 investments.

The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis for the year ended December 31, 2015 and for the period from April 1, 2014 through December 31, 2014:


($ in thousands)	Balance as of January 1, 2015			Net income (loss)			OCI			Transfers to Level 3		Transfers out of Level 3			Purchases		Sales			Issues		Settlements			Balance, December 31, 2015
Assets
Fixed income securities
All other corporate securities	$	7,336		$	(282	)	$	30		$	13,255	$	(2,386	)	$	—	$	—		$	—	$	(6,433	)	$	11,520
ABS		5,250			134			(2,338	)		17,191		—			—		(5,000	)		—		(977	)		14,260
CMBS		2,693			23,506			314			—		—			—		(20,192	)		—		(6,321	)		—
Short-term investments		23,713			14			—			—		—			—		—			—		(23,727	)		—
Liabilities
Equity indexed annuity contracts		(63,660	)		(478	)		—			—		—			—		—			—		—			(64,138	)
Guaranteed minimum accumulation benefits and guaranteed minimum withdrawal benefits⁽¹⁾		(6,733	)		(1,081	)		—			—		—			—		—			—		—			(7,814	)

($ in thousands)	Balance as of April 1, 2014			Net income (loss)			OCI			Transfers to Level 3		Transfers out of Level 3			Purchases		Sales			Issues		Settlements			Balance, December 31, 2014
Assets
Fixed income securities
All other corporate securities	$	396,694		$	4,514		$	(7,472	)	$	—	$	(289,172	)	$	—	$	(97,228	)	$	—	$	—		$	7,336
ABS		436			—			(55	)		—		—			4,930		—			—		(61	)		5,250
CMBS		3,397			2,179			(314	)		—		—			—		—			—		(2,569	)		2,693
Short-term investments		24,095			29			—			—		—			—		(411	)		—		—			23,713
Liabilities
Equity indexed annuity contracts		(58,038	)		(5,622	)		—			—		—			—		—			—		—			(63,660	)
Guaranteed minimum accumulation benefits and guaranteed minimum withdrawal benefits⁽¹⁾		(8,499	)		1,766			—			—		—			—		—			—		—			(6,733	)

(1)	These amount are 100% ceded in accordance with the Company’s reinsurance agreements.

Transfers into Level 3 are generally the result of unobservable inputs utilized within the 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.

The following table 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 Consolidated Balance Sheet; however, in some cases, as described below, the carrying amount equals or approximates fair value as of December 31, 2015 and December 31, 2014:


December 31, 2015 ($ in thousands)
December 31, 2015 ($ in thousands)	Level 1		Level 2		Level 3		Total
Assets
Commercial mortgage loans	$	—	$	—	$	1,536,638	$	1,536,638
Policy loans		—		—		186,827		186,827
Cash		49,121		—		—		49,121
Vehicle note		—		—		638,270		638,270

Total assets at fair value	$	49,121	$	—	$	2,361,735	$	2,410,856

Liabilities at fair value
Policyholders’ account balances — investment contracts	$	—	$	—	$	5,967,973	$	5,967,973
Other long-term debt		—		—		638,270		638,270

	$	—	$	—	$	6,606,243	$	6,606,243

December 31, 2014 ($ in thousands)
December 31, 2014 ($ in thousands)	Level 1		Level 2		Level 3		Total
Assets
Commercial mortgage loans	$	—	$	—	$	1,150,510	$	1,150,510
Policy loans		—		—		194,385		194,385
Cash		49,730		—		—		49,730
Vehicle note		—		—		551,600		551,600

Total assets at fair value	$	49,730	$	—	$	1,896,495	$	1,946,225

Liabilities at fair value
Policyholders’ account balances — investment contracts	$	—	$	—	$	6,609,253	$	6,609,253
Other long-term debt		—		—		551,600		551,600

	$	—	$	—	$	7,160,853	$	7,160,853

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 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.

Policy Loans

The fair value of policy loans was determined by discounting expected cash flows at the current loan coupon rate. As a result, the carrying value of the policy loans approximates the fair value.

Cash

The Company believes that due to the short-term nature of certain assets, the carrying value approximates fair value.

Vehicle Note and Other Long-Term Debt

The fair value of the Vehicle note and Other long-term debt is based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate.

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 fixed deferred annuities fair values are 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 nonperformance risk. 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.

Predecessor

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

Level 1 Measurements

•

Fixed maturities: Comprise certain U.S. Treasuries. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

•

Short-term: Comprise actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access.

•

Separate account assets: Comprise actively traded mutual funds that have daily quoted net asset values for identical assets that the Company can access. Net asset values for the actively traded mutual funds in which the separate account assets are invested and obtained daily from the fund managers.

Level 2 Measurements

•

Fixed maturities

U.S. government and agencies: 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.

Municipal: 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, including privately placed: 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. Also included are privately placed securities 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.

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.

RMBS: 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, prepayment speeds, collateral performance and credit spreads.

CMBS: 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.

•

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

Level 3 Measurements

•

Policyholder account balances — Successor; contractholder funds Predecessor: 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 nonmarket observable inputs.

The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the period from January 1, 2014 through March 31, 2014.


($ in thousands)				Total gains (losses) included in:
($ in thousands)	Balance as of December 31, 2013			Net income⁽¹⁾		OCI			Transfers into Level 3		Transfers out of Level 3
Liabilities
Contractholder funds:
Derivatives embedded in life and annuity contracts	$	(267,859	)	$	18,525	$	—		$	—	$	—

Total recurring Level 3 liabilities	$	(267,859	)	$	18,525	$	—		$	—	$	—


	Purchases			Sales		Issues			Settlements		Balance as of March 31, 2014
Liabilities
Contractholder funds:
Derivatives embedded in life and annuity contracts	$	—		$	—	$	(3,764	)	$	2,612	$	(250,486	)

Total recurring Level 3 liabilities	$	—		$	—	$	(3,764	)	$	2,612	$	(250,486	)

⁽¹⁾	The amount attributable to derivatives embedded in life and annuity contracts was reported as follows: $17.6 million in interest credited to contractholder funds and $946 thousand in contract benefits. These amounts were ceded in accordance with the Company’s reinsurance agreements.

The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the year ended December 31, 2013.


($ in thousands)				Total gains (losses) included in:
($ in thousands)	Balance as of December 31, 2012			Net income⁽¹⁾		OCI		Transfers into Level 3		Transfers out of Level 3
Assets
Fixed maturities:
Corporate	$	312		$	—	$	—	$	—	$	—

Total recurring Level 3 assets	$	312		$	—	$	—	$	—	$	—

Liabilities
Policyholders’ account balances:
Derivatives embedded in life and annuity contracts	$	(314,926	)	$	43,244	$	—	$	—	$	—

Total recurring Level 3 liabilities	$	(314,926	)	$	43,244	$	—	$	—	$	—


	Purchases		Sales		Issues			Settlements			Balance as of December 31, 2013
Assets
Fixed maturities:
Corporate	$	—	$	—	$	—		$	(312	)	$	—

Total recurring Level 3 assets	$	—	$	—	$	—		$	(312	)	$	—

Liabilities
Policyholders’ account balances:
Derivatives embedded in life and annuity contracts	$	—	$	—	$	(6,621	)	$	10,444		$	(267,859	)

Total recurring Level 3 liabilities	$	—	$	—	$	(6,621	)	$	10,444		$	(267,859	)

⁽¹⁾	The amount attributable to derivatives embedded in life and annuity contracts was reported as follows: $33.0 million in interest credited to contractholder funds and $10.2 million in contract benefits. These amounts were ceded in accordance with the Company’s reinsurance agreements.

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. For example, in situations where a fair value quote is not provided by the Company’s independent third-party valuation service provider and as a result the price is stale or has been replaced with a broker quote whose inputs have not been corroborated to be market observable, the security is transferred 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 the period from January 1, 2014 through March 31, 2014 or 2013.

The following table provides the change in unrealized gains and losses included in net income for Level 3 assets and liabilities.


($ in thousands)	Period from January 1, 2014 through March 31, 2014		As of December 31, 2013
Liabilities
Policyholders’ account balances:
Derivatives embedded in life and annuity contracts	$	18,525	$	43,244

Total recurring Level 3 liabilities	$	18,525	$	43,244

The amounts in the table above represent the change in unrealized gains and losses included in net income for the period of time that the asset or liability was determined to be in Level 3. The amount attributable to derivatives embedded in life and annuity contracts is reported as follows: $17.6 million in interest credited to contractholder funds and $946 thousand in contract benefits in the period from January 1, 2014 through March 31, 2014, $33.0 million in interest credited to contractholder funds and $10.2 million in contract benefits in 2013. These amounts are ceded in accordance with the Company’s reinsurance agreements.