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Fair Value of Assets and Liabilities | 9 Months Ended
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Sep. 30, 2017
Fair Value Disclosures [Abstract] |
Fair Value of Assets and Liabilities | 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 Condensed 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. The first is where 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. The second situation where the Company classifies securities in Level 3 is where 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, cost method limited partnership interests, 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 condensed 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 valuation techniques for assets and liabilities measured at fair value on a recurring basis Level 1 measurements
• | Fixed income securities: Comprise certain U.S. Treasury fixed income securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
• | Equity securities: Comprise actively traded, exchange-listed equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
• | Short-term: Comprise U.S. Treasury bills valued based on unadjusted quoted prices for identical assets in active markets that the Company can access and 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 are obtained daily from the fund managers.
Level 2 measurements
• | Fixed income securities:
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 - public: 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: 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. ABS - collateralized debt obligations (“CDO”) and ABS - consumer and other: 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. Certain ABS - CDO and ABS - consumer and other are valued based on non-binding broker quotes whose inputs have been corroborated to be market observable. 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. Redeemable preferred stock: 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, underlying stock prices and credit spreads.
• | 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. For certain short-term investments, amortized cost is used as the best estimate of fair value.
• | 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, 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, 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 Corporate - privately placed: Primarily valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable. Other inputs 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. ABS - CDO, ABS - consumer and other, RMBS and CMBS: Valued based on non-binding broker quotes received from brokers who are familiar with the investments and where the inputs have not been corroborated to be market observable.
• | 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.
• | 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.
Assets and liabilities measured at fair value on a non-recurring basis Mortgage loans written-down to fair value in connection with recognizing impairments are valued based on the fair value of the underlying collateral less costs to sell. Limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments are generally valued using net asset values. The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2017.
($ 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 |  | Balance as of September 30, 2017
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and agencies | $ | 3,190 |  |  | $ | 710 |  |  | $ | — |  |  |  |  |  | $ | 3,900 |
Municipal | — |  |  | 7,687 |  |  | 107 |  |  |  |  |  | 7,794 |
Corporate - public | — |  |  | 32,269 |  |  | 104 |  |  |  |  |  | 32,373 |
Corporate - privately placed | — |  |  | 11,923 |  |  | 250 |  |  |  |  | 12,173 |
Foreign government | — |  |  | 1,093 |  |  | — |  |  |  |  |  | 1,093 |
ABS - CDO | — |  |  | 545 |  |  | 19 |  |  |  |  |  | 564 |
ABS - consumer and other | — |  |  | 640 |  |  | 66 |  |  |  |  | 706 |
RMBS | — |  |  | 611 |  |  | — |  |  |  |  |  | 611 |
CMBS | — |  |  | 127 |  |  | 26 |  |  |  |  |  | 153 |
Redeemable preferred stock | — |  |  | 24 |  |  | — |  |  |  |  |  | 24 |
Total fixed income securities | 3,190 |  |  | 55,629 |  |  | 572 |  |  |  |  |  | 59,391 |
Equity securities | 5,938 |  |  | 328 |  |  | 168 |  |  |  |  |  | 6,434 |
Short-term investments | 380 |  |  | 1,818 |  |  | — |  |  |  |  |  | 2,198 |
Other investments: Free-standing derivatives | — |  |  | 109 |  |  | 1 |  |  | $ | (9 | ) |  | 101 |
Separate account assets | 3,422 |  |  | — |  |  | — |  |  |  |  |  | 3,422 |
Other assets | 1 |  |  | — |  |  | — |  |  |  |  |  | 1 |
Total recurring basis assets | 12,931 |  |  | 57,884 |  |  | 741 |  |  | (9 | ) |  | 71,547 |
Non-recurring basis (1) | — |  |  | — |  |  | 24 |  |  |  |  |  | 24 |
Total assets at fair value | $ | 12,931 |  |  | $ | 57,884 |  |  | $ | 765 |  |  | $ | (9 | ) |  | $ | 71,571 |
% of total assets at fair value | 18.0 | % |  | 80.9 | % |  | 1.1 | % |  | — | % |  | 100 | %
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts | $ | — |  |  | $ | — |  |  | $ | (292 | ) |  |  |  |  | $ | (292 | )
Other liabilities: Free-standing derivatives | (1 | ) |  | (69 | ) |  | — |  |  | $ | 21 |  |  | (49 | )
Total liabilities at fair value | $ | (1 | ) |  | $ | (69 | ) |  | $ | (292 | ) |  | $ | 21 |  |  | $ | (341 | )
% of total liabilities at fair value | 0.3 | % |  | 20.2 | % |  | 85.6 | % |  | (6.1 | )% |  | 100 | %
_______________
(1) | Includes $14 million of limited partnership interests and $10 million of mortgage loans written-down to fair value in connection with recognizing other-than-temporary impairments.
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2016.
($ 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 |  | Balance as of December 31, 2016
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and agencies | $ | 2,918 |  |  | $ | 719 |  |  | $ | — |  |  |  |  |  | $ | 3,637 |
Municipal | — |  |  | 7,208 |  |  | 125 |  |  |  |  |  | 7,333 |
Corporate - public | — |  |  | 31,414 |  |  | 78 |  |  |  |  |  | 31,492 |
Corporate - privately placed | — |  |  | 11,846 |  |  | 263 |  |  |  |  | 12,109 |
Foreign government | — |  |  | 1,075 |  |  | — |  |  |  |  |  | 1,075 |
ABS - CDO | — |  |  | 650 |  |  | 27 |  |  |  |  |  | 677 |
ABS - consumer and other | — |  |  | 452 |  |  | 42 |  |  |  |  | 494 |
RMBS | — |  |  | 727 |  |  | 1 |  |  |  |  |  | 728 |
CMBS | — |  |  | 248 |  |  | 22 |  |  |  |  |  | 270 |
Redeemable preferred stock | — |  |  | 24 |  |  | — |  |  |  |  |  | 24 |
Total fixed income securities | 2,918 |  |  | 54,363 |  |  | 558 |  |  |  |  |  | 57,839 |
Equity securities | 5,247 |  |  | 256 |  |  | 163 |  |  |  |  |  | 5,666 |
Short-term investments | 850 |  |  | 3,423 |  |  | 15 |  |  |  |  |  | 4,288 |
Other investments: Free-standing derivatives | — |  |  | 119 |  |  | 1 |  |  | $ | (9 | ) |  | 111 |
Separate account assets | 3,393 |  |  | — |  |  | — |  |  |  |  |  | 3,393 |
Other assets | — |  |  | — |  |  | 1 |  |  |  |  |  | 1 |
Total recurring basis assets | 12,408 |  |  | 58,161 |  |  | 738 |  |  | (9 | ) |  | 71,298 |
Non-recurring basis (1) | — |  |  | — |  |  | 24 |  |  |  |  |  | 24 |
Total assets at fair value | $ | 12,408 |  |  | $ | 58,161 |  |  | $ | 762 |  |  | $ | (9 | ) |  | $ | 71,322 |
% of total assets at fair value | 17.4 | % |  | 81.5 | % |  | 1.1 | % |  | — | % |  | 100 | %
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts | $ | — |  |  | $ | — |  |  | $ | (290 | ) |  |  |  |  | $ | (290 | )
Other liabilities: Free-standing derivatives | (1 | ) |  | (68 | ) |  | (3 | ) |  | $ | 28 |  |  | (44 | )
Total liabilities at fair value | $ | (1 | ) |  | $ | (68 | ) |  | $ | (293 | ) |  | $ | 28 |  |  | $ | (334 | )
% of total liabilities at fair value | 0.3 | % |  | 20.4 | % |  | 87.7 | % |  | (8.4 | )% |  | 100 | %
_______________
(1) | Includes $24 million of limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments.
The following table summarizes quantitative information about the significant unobservable inputs used in Level 3 fair value measurements.
($ in millions) | Fair value |  | Valuation technique |  | Unobservable input |  | Range |  | Weighted average
September 30, 2017 |  |  |  |  |  |  |  |  |  |
Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options | $ | (253 | ) |  | Stochastic cash flow model |  | Projected option cost |  | 1.0 - 2.2% |  | 1.74%
December 31, 2016 |  |  |  |  |  |  |  |  |  |
Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options | $ | (247 | ) |  | Stochastic cash flow model |  | Projected option cost |  | 1.0 - 2.2% |  | 1.75%
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 September 30, 2017 and December 31, 2016, Level 3 fair value measurements of fixed income securities total $572 million and $558 million, respectively, and include $304 million and $307 million, respectively, of securities valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable and $62 million and $80 million, respectively, of municipal fixed income securities that are not rated by third party credit rating agencies. The Company does not develop the unobservable inputs used in measuring fair value; therefore, these are not included in the table above. However, an increase (decrease) in credit spreads for fixed income securities valued based on non-binding broker quotes would result in a lower (higher) fair value, and an increase (decrease) in the credit rating of municipal bonds that are not rated by third party credit rating agencies would result in a higher (lower) fair value. The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the three months ended September 30, 2017.
($ in millions) |  |  |  | Total gains (losses) included in: |  |  |  |  |  |  |
| Balance as of June 30, 2017 |  | Net income (1) |  | OCI |  | Transfers into Level 3 |  | Transfers out of Level 3 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal | $ | 114 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (4 | ) |
Corporate - public | 60 |  |  | — |  |  | — |  |  | — |  |  | (4 | ) |
Corporate - privately placed | 266 |  |  | 1 |  |  | 2 |  |  | — |  |  | (34 | ) |
ABS - CDO | 91 |  |  | — |  |  | 1 |  |  | — |  |  | (68 | ) |
ABS - consumer and other | 120 |  |  | — |  |  | — |  |  | — |  |  | (62 | ) |
CMBS | 24 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total fixed income securities | 675 |  |  | 1 |  |  | 3 |  |  | — |  |  | (172 | ) |
Equity securities | 166 |  |  | 2 |  |  | 1 |  |  | — |  |  | (1 | ) |
Free-standing derivatives, net | 1 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total recurring Level 3 assets | $ | 842 |  |  | $ | 3 |  |  | $ | 4 |  |  | $ | — |  |  | $ | (173 | ) |
Liabilities |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts | $ | (285 | ) |  | $ | (9 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |
Total recurring Level 3 liabilities | $ | (285 | ) |  | $ | (9 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |
| Purchases |  | Sales |  | Issues |  | Settlements |  | Balance as of September 30, 2017 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal | $ | 1 |  |  | $ | (3 | ) |  | $ | — |  |  | $ | (1 | ) |  | $ | 107 |  |
Corporate - public | 51 |  |  | (1 | ) |  | — |  |  | (2 | ) |  | 104 |  |
Corporate - privately placed | 18 |  |  | (1 | ) |  | — |  |  | (2 | ) |  | 250 |  |
ABS - CDO | — |  |  | — |  |  | — |  |  | (5 | ) |  | 19 |  |
ABS - consumer and other | 10 |  |  | — |  |  | — |  |  | (2 | ) |  | 66 |  |
CMBS | 3 |  |  | — |  |  | — |  |  | (1 | ) |  | 26 |  |
Total fixed income securities | 83 |  |  | (5 | ) |  | — |  |  | (13 | ) |  | 572 |  |
Equity securities | — |  |  | — |  |  | — |  |  | — |  |  | 168 |  |
Free-standing derivatives, net | — |  |  | — |  |  | — |  |  | — |  |  | 1 |  | (2)
Total recurring Level 3 assets | $ | 83 |  |  | $ | (5 | ) |  | $ | — |  |  | $ | (13 | ) |  | $ | 741 |  |
Liabilities |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 2 |  |  | $ | (292 | ) |
Total recurring Level 3 liabilities | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 2 |  |  | $ | (292 | ) |
_____________
(1) | The effect to net income totals $(6) million and is reported in the Condensed Consolidated Statements of Operations as follows: $3 million in net investment income, $(5) million in interest credited to contractholder funds and $(4) million in life and annuity contract benefits.
(2) | Comprises $1 million of assets.
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the nine months ended September 30, 2017.
($ in millions) |  |  |  | Total gains (losses) included in: |  |  |  |  |  |  |
| Balance as of December 31, 2016 |  | Net income (1) |  | OCI |  | Transfers into Level 3 |  | Transfers out of Level 3 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal | $ | 125 |  |  | $ | (1 | ) |  | $ | 6 |  |  | $ | — |  |  | $ | (5 | ) |
Corporate - public | 78 |  |  | — |  |  | — |  |  | — |  |  | (20 | ) |
Corporate - privately placed | 263 |  |  | 7 |  |  | — |  |  | 30 |  |  | (34 | ) |
ABS - CDO | 27 |  |  | — |  |  | 3 |  |  | 30 |  |  | (190 | ) |
ABS - consumer and other | 42 |  |  | — |  |  | — |  |  | — |  |  | (69 | ) |
RMBS | 1 |  |  | — |  |  | — |  |  | — |  |  | — |  |
CMBS | 22 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total fixed income securities | 558 |  |  | 6 |  |  | 9 |  |  | 60 |  |  | (318 | ) |
Equity securities | 163 |  |  | 15 |  |  | 4 |  |  | — |  |  | (4 | ) |
Short-term investments | 15 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Free-standing derivatives, net | (2 | ) |  | 3 |  |  | — |  |  | — |  |  | — |  |
Other assets | 1 |  |  | (1 | ) |  | — |  |  | — |  |  | — |  |
Total recurring Level 3 assets | $ | 735 |  |  | $ | 23 |  |  | $ | 13 |  |  | $ | 60 |  |  | $ | (322 | ) |
Liabilities |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts | $ | (290 | ) |  | $ | (6 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |
Total recurring Level 3 liabilities | $ | (290 | ) |  | $ | (6 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |
| Purchases |  | Sales |  | Issues |  | Settlements |  | Balance as of September 30, 2017 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal | $ | 6 |  |  | $ | (23 | ) |  | $ | — |  |  | $ | (1 | ) |  | $ | 107 |  |
Corporate - public | 50 |  |  | — |  |  | — |  |  | (4 | ) |  | 104 |  |
Corporate - privately placed | 22 |  |  | (30 | ) |  | — |  |  | (8 | ) |  | 250 |  |
ABS - CDO | 160 |  |  | — |  |  | — |  |  | (11 | ) |  | 19 |  |
ABS - consumer and other | 99 |  |  | — |  |  | — |  |  | (6 | ) |  | 66 |  |
RMBS | — |  |  | — |  |  | — |  |  | (1 | ) |  | — |  |
CMBS | 6 |  |  | — |  |  | — |  |  | (2 | ) |  | 26 |  |
Total fixed income securities | 343 |  |  | (53 | ) |  | — |  |  | (33 | ) |  | 572 |  |
Equity securities | 3 |  |  | (13 | ) |  | — |  |  | — |  |  | 168 |  |
Short-term investments | 25 |  |  | (40 | ) |  | — |  |  | — |  |  | — |  |
Free-standing derivatives, net | — |  |  | — |  |  | — |  |  | — |  |  | 1 |  | (2)
Other assets | — |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total recurring Level 3 assets | $ | 371 |  |  | $ | (106 | ) |  | $ | — |  |  | $ | (33 | ) |  | $ | 741 |  |
Liabilities |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts | $ | — |  |  | $ | — |  |  | $ | (1 | ) |  | $ | 5 |  |  | $ | (292 | ) |
Total recurring Level 3 liabilities | $ | — |  |  | $ | — |  |  | $ | (1 | ) |  | $ | 5 |  |  | $ | (292 | ) |
_____________
(1) | The effect to net income totals $17 million and is reported in the Condensed Consolidated Statements of Operations as follows: $7 million in realized capital gains and losses, $17 million in net investment income, $(11) million in interest credited to contractholder funds and $4 million in life and annuity contract benefits.
(2) | Comprises $1 million of assets.
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the three months ended September 30, 2016.
($ in millions) |  |  | Total gains (losses) included in: |  |  |  |  |
| Balance as of June 30, 2016 |  | Net income (1) |  | OCI |  | Transfers into Level 3 |  | Transfers out of Level 3 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal | $ | 149 |  |  | $ | 1 |  |  | $ | (1 | ) |  | $ | — |  |  | $ | — |  |
Corporate - public | 74 |  |  | — |  |  | — |  |  | — |  |  | (6 | ) |
Corporate - privately placed | 585 |  |  | — |  |  | 2 |  |  | — |  |  | (280 | ) |
ABS - CDO | 33 |  |  | — |  |  | 3 |  |  | — |  |  | — |  |
ABS - consumer and other | 45 |  |  | — |  |  | — |  |  | — |  |  | — |  |
RMBS | 1 |  |  | — |  |  | — |  |  | — |  |  | — |  |
CMBS | 20 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total fixed income securities | 907 |  |  | 1 |  |  | 4 |  |  | — |  |  | (286 | ) |
Equity securities | 118 |  |  | (1 | ) |  | — |  |  | — |  |  | — |  |
Free-standing derivatives, net | (7 | ) |  | 4 |  |  | — |  |  | — |  |  | — |  |
Other assets | 1 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total recurring Level 3 assets | $ | 1,019 |  |  | $ | 4 |  |  | $ | 4 |  |  | $ | — |  |  | $ | (286 | ) |
Liabilities |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts | $ | (304 | ) |  | $ | (3 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |
Total recurring Level 3 liabilities | $ | (304 | ) |  | $ | (3 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |
| Purchases |  | Sales |  | Issues |  | Settlements |  | Balance as of September 30, 2016 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal | $ | 22 |  |  | $ | (11 | ) |  | $ | — |  |  | $ | — |  |  | $ | 160 |  |
Corporate - public | 40 |  |  | (10 | ) |  | — |  |  | — |  |  | 98 |  |
Corporate - privately placed | 38 |  |  | — |  |  | — |  |  | (29 | ) |  | 316 |  |
ABS - CDO | 40 |  |  | — |  |  | — |  |  | (2 | ) |  | 74 |  |
ABS - consumer and other | 35 |  |  | — |  |  | — |  |  | (1 | ) |  | 79 |  |
RMBS | — |  |  | — |  |  | — |  |  | — |  |  | 1 |  |
CMBS | 3 |  |  | — |  |  | — |  |  | — |  |  | 23 |  |
Total fixed income securities | 178 |  |  | (21 | ) |  | — |  |  | (32 | ) |  | 751 |  |
Equity securities | 43 |  |  | — |  |  | — |  |  | — |  |  | 160 |  |
Free-standing derivatives, net | — |  |  | — |  |  | — |  |  | — |  |  | (3 | ) | (2)
Other assets | — |  |  | — |  |  | — |  |  | — |  |  | 1 |  |
Total recurring Level 3 assets | $ | 221 |  |  | $ | (21 | ) |  | $ | — |  |  | $ | (32 | ) |  | $ | 909 |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts | $ | — |  |  | $ | — |  |  | $ | (1 | ) |  | $ | 1 |  |  | $ | (307 | ) |
Total recurring Level 3 liabilities | $ | — |  |  | $ | — |  |  | $ | (1 | ) |  | $ | 1 |  |  | $ | (307 | ) |
_____________________
(1) | The effect to net income totals $1 million and is reported in the Condensed Consolidated Statements of Operations as follows: $1 million in realized capital gains and losses, $3 million in net investment income, $(6) million in interest credited to contractholder funds and $3 million in life and annuity contract benefits.
(2) | Comprises $1 million of assets and $4 million of liabilities.
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the nine months ended September 30, 2016.
($ in millions) |  |  | Total gains (losses) included in: |  |  |  |  |
| Balance as of December 31, 2015 |  | Net income (1) |  | OCI |  | Transfers into Level 3 |  | Transfers out of Level 3 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and agencies | $ | 5 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (4 | ) |
Municipal | 161 |  |  | 11 |  |  | (6 | ) |  | 6 |  |  | — |  |
Corporate - public | 46 |  |  | — |  |  | 1 |  |  | 25 |  |  | (13 | ) |
Corporate - privately placed | 502 |  |  | 4 |  |  | 15 |  |  | 16 |  |  | (363 | ) |
ABS - CDO | 61 |  |  | — |  |  | 5 |  |  | 10 |  |  | (3 | ) |
ABS - consumer and other | 50 |  |  | — |  |  | (2 | ) |  | 3 |  |  | — |  |
RMBS | 1 |  |  | — |  |  | — |  |  | — |  |  | — |  |
CMBS | 20 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total fixed income securities | 846 |  |  | 15 |  |  | 13 |  |  | 60 |  |  | (383 | ) |
Equity securities | 133 |  |  | (33 | ) |  | 8 |  |  | — |  |  | — |  |
Free-standing derivatives, net | (7 | ) |  | 4 |  |  | — |  |  | — |  |  | — |  |
Other assets | 1 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total recurring Level 3 assets | $ | 973 |  |  | $ | (14 | ) |  | $ | 21 |  |  | $ | 60 |  |  | $ | (383 | ) |
Liabilities |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts | $ | (299 | ) |  | $ | (11 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |
Total recurring Level 3 liabilities | $ | (299 | ) |  | $ | (11 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |
| Purchases |  | Sales |  | Issues |  | Settlements |  | Balance as of September 30, 2016 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and agencies | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (1 | ) |  | $ | — |  |
Municipal | 22 |  |  | (33 | ) |  | — |  |  | (1 | ) |  | 160 |  |
Corporate - public | 47 |  |  | (6 | ) |  | — |  |  | (2 | ) |  | 98 |  |
Corporate - privately placed | 181 |  |  | — |  |  | — |  |  | (39 | ) |  | 316 |  |
ABS - CDO | 40 |  |  | (2 | ) |  | — |  |  | (37 | ) |  | 74 |  |
ABS - consumer and other | 35 |  |  | (5 | ) |  | — |  |  | (2 | ) |  | 79 |  |
RMBS | — |  |  | — |  |  | — |  |  | — |  |  | 1 |  |
CMBS | 5 |  |  | — |  |  | — |  |  | (2 | ) |  | 23 |  |
Total fixed income securities | 330 |  |  | (46 | ) |  | — |  |  | (84 | ) |  | 751 |  |
Equity securities | 52 |  |  | — |  |  | — |  |  | — |  |  | 160 |  |
Free-standing derivatives, net | — |  |  | — |  |  | — |  |  | — |  |  | (3 | ) | (2)
Other assets | — |  |  | — |  |  | — |  |  | — |  |  | 1 |  |
Total recurring Level 3 assets | $ | 382 |  |  | $ | (46 | ) |  | $ | — |  |  | $ | (84 | ) |  | $ | 909 |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts | $ | — |  |  | $ | — |  |  | $ | (2 | ) |  | $ | 5 |  |  | $ | (307 | ) |
Total recurring Level 3 liabilities | $ | — |  |  | $ | — |  |  | $ | (2 | ) |  | $ | 5 |  |  | $ | (307 | ) |
_____________________
(1) | The effect to net income totals $(25) million and is reported in the Condensed Consolidated Statements of Operations as follows: $(24) million in realized capital gains and losses, $10 million in net investment income, $(12) million in interest credited to contractholder funds and $1 million in life and annuity contract benefits.
(2) | Comprises $1 million of assets and $4 million of liabilities.
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 three months and nine months ended September 30, 2017 or 2016. Transfers into Level 3 during the nine months ended September 30, 2017 and 2016 included situations where a fair value 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 out of Level 3 during the three months and nine months ended September 30, 2017 and 2016 included situations where a broker quote was used in the prior period and a fair value 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. The following table provides the change in unrealized gains and losses included in net income for Level 3 assets and liabilities held as of September 30.
($ in millions) | Three months ended September 30, |  | Nine months ended September 30,
| 2017 |  | 2016 |  | 2017 |  | 2016
Assets |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |
Municipal | $ | — |  |  | $ | 1 |  |  | $ | (3 | ) |  | $ | 2 |
Corporate | 1 |  |  | — |  |  | 1 |  |  | 1 |
Total fixed income securities | 1 |  |  | 1 |  |  | (2 | ) |  | 3 |
Equity securities | 2 |  |  | (1 | ) |  | 16 |  |  | (33 | )
Free-standing derivatives, net | (3 | ) |  | 4 |  |  | — |  |  | 4 |
Other assets | — |  |  | — |  |  | (1 | ) |  | — |
Total recurring Level 3 assets | $ | — |  |  | $ | 4 |  |  | $ | 13 |  |  | $ | (26 | )
Liabilities |  |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts | $ | (9 | ) |  | $ | (3 | ) |  | $ | (6 | ) |  | $ | (11 | )
Total recurring Level 3 liabilities | $ | (9 | ) |  | $ | (3 | ) |  | $ | (6 | ) |  | $ | (11 | )
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. These gains and losses total $(9) million for the three months ended September 30, 2017 and are reported as follows: $(3) million in realized capital gains and losses, $3 million in net investment income, $(5) million in interest credited to contractholder funds and $(4) million in life and annuity contract benefits. These gains and losses total $1 million for the three months ended September 30, 2016 and are reported as follows: $1 million in realized capital gains and losses, $3 million in net investment income, $(6) million in interest credited to contractholder funds and $3 million in life and annuity contract benefits. These gains and losses total $7 million for the nine months ended September 30, 2017 and are reported as follows: $(3) million in realized capital gains and losses, $17 million in net investment income, $(11) million in interest credited to contractholder funds and $4 million in life and annuity contract benefits. These gains and losses total $(37) million for the nine months ended September 30, 2016 and are reported as follows: $(37) million in realized capital gains and losses, $11 million in net investment income, $(12) million in interest credited to contractholder funds and $1 million in life and annuity contract benefits. Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value. Financial assets
($ in millions) | September 30, 2017 |  | December 31, 2016
| Carrying value |  | Fair value |  | Carrying value |  | Fair value
Mortgage loans | $ | 4,322 |  |  | $ | 4,535 |  |  | $ | 4,486 |  |  | $ | 4,514 |
Cost method limited partnerships | 1,339 |  |  | 1,579 |  |  | 1,282 |  |  | 1,493 |
Bank loans | 1,731 |  |  | 1,734 |  |  | 1,669 |  |  | 1,677 |
Agent loans | 523 |  |  | 520 |  |  | 467 |  |  | 467 |
The fair value of mortgage loans is based on discounted contractual cash flows or, if the loans are impaired due to credit reasons, the fair value of collateral less costs to sell. Risk adjusted discount rates are selected using current rates at which similar loans would be made to borrowers with similar characteristics, using similar types of properties as collateral. The fair value of cost method limited partnerships is determined using reported net asset values. The fair value of bank loans, which are reported in other investments, is based on broker quotes from brokers familiar with the loans and current market conditions. The fair value of agent loans, which are reported in other investments, is based on discounted cash flow calculations. Risk adjusted discount rates are selected using current rates at which similar loans would be made to borrowers with similar characteristics. The fair value measurements for mortgage loans, cost method limited partnerships, bank loans and agent loans are categorized as Level 3. Financial liabilities
($ in millions) | September 30, 2017 |  | December 31, 2016
| Carrying value |  | Fair value |  | Carrying value |  | Fair value
Contractholder funds on investment contracts | $ | 10,618 |  |  | $ | 11,203 |  |  | $ | 11,313 |  |  | $ | 12,009 |
Long-term debt | 6,349 |  |  | 7,161 |  |  | 6,347 |  |  | 6,920 |
Liability for collateral | 1,156 |  |  | 1,156 |  |  | 1,129 |  |  | 1,129 |
The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts incorporating current market-based crediting rates for similar contracts that reflect the Company’s own credit risk. Deferred annuities classified in contractholder funds are valued based on discounted cash flow models that incorporate current market based margins and reflect the Company’s own credit risk. Immediate annuities without life contingencies are valued based on discounted cash flow models that incorporate current market-based implied interest rates and reflect the Company’s own credit risk. The fair value measurement for contractholder funds on investment contracts is categorized as Level 3. The fair value of long-term debt is based on market observable data (such as the fair value of the debt when traded as an asset) or is determined using discounted cash flow calculations based on current interest rates for instruments with comparable terms and considers the Company’s own credit risk. The liability for collateral is valued at carrying value due to its short-term nature. The fair value measurements for long-term debt and liability for collateral are categorized as Level 2.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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