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Fair Value Measurements Level 1 (Notes) | 9 Months Ended
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Sep. 30, 2016
Fair Value Disclosures [Abstract] |
Fair Value Disclosures [Text Block] | Fair value is determined based on the "exit price" notion which is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Financial instruments carried at fair value in the Company's Condensed Consolidated Financial Statements include fixed maturity and equity securities, available-for-sale ("AFS"); fixed maturities and equity securities at fair value using the fair value option ("FVO"); short-term investments; freestanding and embedded derivatives; certain limited partnerships and other alternative investments; separate account assets and certain other liabilities. The Company's estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The Company categorizes its assets and liabilities measured at estimated fair value based on whether the significant inputs into the valuation are observable. The fair value hierarchy categorizes the inputs in the valuation techniques used to measure fair value into three broad Levels (Level 1, 2 or 3).
Level 1 | Unadjusted quoted prices for identical assets, or liabilities, in active markets that the Company has the ability to access at the measurement date.
Level 2 | Observable inputs, other than quoted prices included in Level 1, for the asset or liability, or prices for similar assets and liabilities.
Level 3 | Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk). Because Level 3 fair values, by their nature, contain one or more significant unobservable inputs, as there is little or no observable market for these assets and liabilities, considerable judgment is used to determine the Level 3 fair values. Level 3 fair values represent the Company’s best estimate of an amount that could be realized in a current market exchange absent actual market exchanges.
In many situations, inputs used to measure the fair value of an asset or liability position may fall into different levels of the fair value hierarchy. In these situations, the Company will determine the level in which the fair value falls based upon the lowest level input that is significant to the determination of the fair value. In most cases, both observable (e.g., changes in interest rates) and unobservable (e.g., changes in risk assumptions) inputs are used in the determination of fair values that the Company has classified within Level 3. Consequently, these values and the related gains and losses are based upon both observable and unobservable inputs. The Company’s fixed maturities included in Level 3 are classified as such because these securities are primarily within illiquid markets and/or priced by independent brokers. The following tables present assets and (liabilities) carried at fair value by hierarchy level. Upon implementation of the new disclosure guidance effective in 2016, certain NAV-based fair values are no longer included in the fair value level disclosures; however, these amounts are included in the total fair value disclosed. As a result, prior period values for limited partnerships and other alternative investments and certain separate account assets have been removed from Level 2 and Level 3.
| September 30, 2016
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3)
Assets accounted for at fair value on a recurring basis |  |  |  |
Fixed maturities, AFS |  |  |  |
Asset-backed-securities ("ABS") | $ | 2,685 |  | $ | — |  | $ | 2,654 |  | $ | 31 |
Collateralized debt obligations ("CDOs") | 2,573 |  | — |  | 2,104 |  | 469 |
Commercial mortgage-backed securities ("CMBS") | 5,268 |  | — |  | 5,191 |  | 77 |
Corporate | 26,904 |  | — |  | 25,810 |  | 1,094 |
Foreign government/government agencies | 1,186 |  | — |  | 1,112 |  | 74 |
Municipal | 12,594 |  | — |  | 12,468 |  | 126 |
Residential mortgage-backed securities ("RMBS") | 4,936 |  | — |  | 2,881 |  | 2,055 |
U.S. Treasuries | 4,079 |  | 348 |  | 3,731 |  | — |
Total fixed maturities | 60,225 |  | 348 |  | 55,951 |  | 3,926 |
Fixed maturities, FVO | 360 |  | — |  | 351 |  | 9 |
Equity securities, trading [1] | 11 |  | 11 |  | — |  | — |
Equity securities, AFS | 875 |  | 645 |  | 130 |  | 100 |
Derivative assets |  |  |  |
Credit derivatives | 8 |  | — |  | 8 |  | — |
Foreign exchange derivatives | 2 |  | — |  | 2 |  | — |
Interest rate derivatives | 104 |  | — |  | 104 |  | — |
Guaranteed minimum withdrawal benefit ("GMWB") hedging instruments | 66 |  | — |  | (15 | ) | 81 |
Macro hedge program | 96 |  | — |  | — |  | 96 |
Other derivative contracts | 2 |  | — |  | — |  | 2 |
Total derivative assets [2] | 278 |  | — |  | 99 |  | 179 |
Short-term investments | 2,219 |  | 494 |  | 1,725 |  | — |
Limited partnerships and other alternative investments [3] | — |  | — |  | — |  | — |
Reinsurance recoverable for GMWB | 98 |  | — |  | — |  | 98 |
Modified coinsurance reinsurance contracts | 31 |  | — |  | 31 |  | — |
Separate account assets [4] | 116,163 |  | 74,870 |  | 40,028 |  | 325 |
Total assets accounted for at fair value on a recurring basis | $ | 180,260 |  | $ | 76,368 |  | $ | 98,315 |  | $ | 4,637 |
Liabilities accounted for at fair value on a recurring basis |  |  |  |
Other policyholder funds and benefits payable |  |  |  |
GMWB | $ | (348 | ) | $ | — |  | $ | — |  | $ | (348 | )
Equity linked notes | (31 | ) | — |  | — |  | (31 | )
Total other policyholder funds and benefits payable | (379 | ) | — |  | — |  | (379 | )
Derivative liabilities |  |  |  |
Credit derivatives | (10 | ) | — |  | (10 | ) | — |
Equity derivatives | 30 |  | — |  | 30 |  | — |
Foreign exchange derivatives | (257 | ) | — |  | (257 | ) | — |
Interest rate derivatives | (961 | ) | — |  | (929 | ) | (32 | )
GMWB hedging instruments | 103 |  | — |  | 53 |  | 50 |
Macro hedge program | 40 |  | — |  | (32 | ) | 72 |
Total derivative liabilities [5] | (1,055 | ) | — |  | (1,145 | ) | 90 |
Contingent consideration [6] | 23 |  | — |  | — |  | 23 |
Total liabilities accounted for at fair value on a recurring basis | $ | (1,411 | ) | $ | — |  | $ | (1,145 | ) | $ | (266 | )
| December 31, 2015
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3)
Assets accounted for at fair value on a recurring basis |  |  |  |
Fixed maturities, AFS |  |  |  |
ABS | $ | 2,499 |  | $ | — |  | $ | 2,462 |  | $ | 37 |
CDOs | 3,038 |  | — |  | 2,497 |  | 541 |
CMBS | 4,717 |  | — |  | 4,567 |  | 150 |
Corporate | 26,802 |  | — |  | 25,948 |  | 854 |
Foreign government/government agencies | 1,308 |  | — |  | 1,248 |  | 60 |
Municipal | 12,121 |  | — |  | 12,072 |  | 49 |
RMBS | 4,046 |  | — |  | 2,424 |  | 1,622 |
U.S. Treasuries | 4,665 |  | 740 |  | 3,925 |  | — |
Total fixed maturities | 59,196 |  | 740 |  | 55,143 |  | 3,313 |
Fixed maturities, FVO | 503 |  | 2 |  | 485 |  | 16 |
Equity securities, trading [1] | 11 |  | 11 |  | — |  | — |
Equity securities, AFS | 1,121 |  | 874 |  | 154 |  | 93 |
Derivative assets |  |  |  |
Credit derivatives | 21 |  | — |  | 21 |  | — |
Foreign exchange derivatives | 15 |  | — |  | 15 |  | — |
Interest rate derivatives | (227 | ) | — |  | (227 | ) | — |
GMWB hedging instruments | 111 |  | — |  | 27 |  | 84 |
Macro hedge program | 74 |  | — |  | — |  | 74 |
Other derivative contracts | 7 |  | — |  | — |  | 7 |
Total derivative assets [2] | 1 |  | — |  | (164 | ) | 165 |
Short-term investments | 1,843 |  | 333 |  | 1,510 |  | — |
Limited partnerships and other alternative investments [3] | 622 |  | — |  | — |  | — |
Reinsurance recoverable for GMWB | 83 |  | — |  | — |  | 83 |
Modified coinsurance reinsurance contracts | 79 |  | — |  | 79 |  | — |
Separate account assets [4] | 118,174 |  | 78,110 |  | 38,700 |  | 140 |
Total assets accounted for at fair value on a recurring basis | $ | 181,633 |  | $ | 80,070 |  | $ | 95,907 |  | $ | 3,810 |
Liabilities accounted for at fair value on a recurring basis |  |  |  |
Other policyholder funds and benefits payable |  |  |  |
GMWB | $ | (262 | ) | $ | — |  | $ | — |  | $ | (262 | )
Equity linked notes | (26 | ) | — |  | — |  | (26 | )
Total other policyholder funds and benefits payable | (288 | ) | — |  | — |  | (288 | )
Derivative liabilities |  |  |  |
Credit derivatives | (16 | ) | — |  | (16 | ) | — |
Equity derivatives | 41 |  | — |  | 41 |  | — |
Foreign exchange derivatives | (374 | ) | — |  | (374 | ) | — |
Interest rate derivatives | (569 | ) | — |  | (547 | ) | (22 | )
GMWB hedging instruments | 47 |  | — |  | (4 | ) | 51 |
Macro hedge program | 73 |  | — |  | — |  | 73 |
Total derivative liabilities [5] | (798 | ) | — |  | (900 | ) | 102 |
Total liabilities accounted for at fair value on a recurring basis | $ | (1,086 | ) | $ | — |  | $ | (900 | ) | $ | (186 | )
[1] | Included in other investments on the Condensed Consolidated Balance Sheets.
[2] | Includes over-the-counter ("OTC") and OTC-cleared derivative instruments in a net positive fair value position after consideration of the accrued interest and impact of collateral posting requirements which may be imposed by agreements, clearing house rules and applicable law. See the following footnote 5 for derivative liabilities.
[3] | Represents hedge funds where investment company accounting was applied to a wholly-owned fund of funds measured at fair value. During 2016, the Company liquidated this fund of funds.
[4] | Approximately $2.5 billion and $1.8 billion of investment sales receivable, as of September 30, 2016, and December 31, 2015, respectively, are excluded from this disclosure requirement because they are trade receivables in the ordinary course of business where the carrying amount approximates fair value. Included in the total fair value amount are $0.9 billion and $1.2 billion of investments, as of September 30, 2016 and December 31, 2015, for which the fair value is estimated using the net asset value per unit as a practical expedient and which are excluded from the disclosure requirement to classify amounts in the fair value hierarchy in connection with the retrospective adoption of ASU 2015-07, Disclosure for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent), on January 1, 2016.
[5] | Includes OTC and OTC-cleared derivative instruments in a net negative fair value position (derivative liability) after consideration of the accrued interest and impact of collateral posting requirements, which may be imposed by agreements, clearing house rules and applicable law.
[6] | For additional information on the Lattice acquisition, see Note 2 - Business Acquisitions and Dispositions of Notes to Condensed Consolidated Financial Statements.
Valuation Techniques, Procedures and Controls The Company determines the fair values of certain financial assets and liabilities based on quoted market prices where available, and where prices represent a reasonable estimate of fair value. The Company also determines fair value based on future cash flows discounted at the appropriate current market rate. Fair values reflect adjustments for counterparty credit quality, the Company’s default spreads, liquidity, and where appropriate, risk margins on unobservable parameters. The fair value process is monitored by the Valuation Committee, which is a cross-functional group of senior management within the Company that meets at least quarterly. The Valuation Committee is co-chaired by the Heads of Investment Operations and Accounting, and has representation from various investment sector professionals, accounting, operations, legal, compliance, and risk management. The purpose of the committee is to oversee the pricing policy and procedures by ensuring objective and reliable valuation practices and pricing of financial instruments as well as addressing valuation issues and approving changes to valuation methodologies and pricing sources. There are also two working groups under the Valuation Committee, a Securities Fair Value Working Group (“Securities Working Group”) and a Derivatives Fair Value Working Group ("Derivatives Working Group"), which include various investment, operations, accounting and risk management professionals that meet monthly to review market data trends, pricing and trading statistics and results, and any proposed pricing methodology changes. The Company also has an enterprise-wide Operational Risk Management function, led by the Chief Operational Risk Officer, which is responsible for establishing, maintaining and communicating the framework, principles and guidelines of the Company's operational risk management program. This includes model risk management which provides an independent review of the suitability, characteristics and reliability of model inputs as well as an analysis of significant changes to current models. Fixed Maturities, Equity Securities, and Short-term Investments The fair value of fixed maturities, equity securities, and short-term investments in an active and orderly market (e.g., not distressed or forced liquidation) are determined by management using a "waterfall" approach after considering the following pricing sources: quoted prices for identical assets or liabilities, prices from third-party pricing services, independent broker quotations, or internal matrix pricing processes. Typical inputs used by these pricing sources include, but are not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and/or estimated cash flows, prepayment speeds, and default rates. Most fixed maturities do not trade daily. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, third-party pricing services utilize matrix pricing to derive security prices. Matrix pricing relies on securities' relationships to other benchmark quoted securities, which trade more frequently. Pricing services utilize recently reported trades of identical or similar securities making adjustments through the reporting date based on the preceding outlined available market observable information. If there are no recently reported trades, the third-party pricing services may develop a security price using expected future cash flows based upon collateral performance and discounted at an estimated market rate. Both matrix pricing and discounted cash flow techniques develop prices by factoring in the time value for cash flows and risk, including liquidity and credit. Prices from third-party pricing services may be unavailable for securities that are rarely traded or are traded only in privately negotiated transactions. As a result, certain securities are priced via independent broker quotations which utilize inputs that may be difficult to corroborate with observable market based data. Additionally, the majority of these independent broker quotations are non-binding. The Company utilizes an internally developed matrix pricing process for private placement securities for which the Company is unable to obtain a price from a third-party pricing service. The Company's process is similar to the third-party pricing services. The Company develops credit spreads each month using market based data for public securities adjusted for credit spread differentials between public and private securities which are obtained from a survey of multiple private placement brokers. The credit spreads determined through this survey approach are based upon the issuer’s financial strength and term to maturity, utilizing independent public security index and trade information and adjusting for the non-public nature of the securities. Credit spreads combined with risk-free rates are applied to contractual cash flows to develop a price. The Securities Working Group performs ongoing analyses of the prices and credit spreads received from third parties to ensure that the prices represent a reasonable estimate of the fair value. This process involves quantitative and qualitative analysis and is overseen by investment and accounting professionals. As a part of these analyses, the Company considers trading volume, new issuance activity and other factors to determine whether the market activity is significantly different than normal activity in an active market, and if so, whether transactions may not be orderly considering the weight of available evidence. If the available evidence indicates that pricing is based upon transactions that are stale or not orderly, the Company places little, if any, weight on the transaction price and will estimate fair value utilizing an internal pricing model. In addition, the Company ensures that prices received from independent brokers represent a reasonable estimate of fair value through the use of internal and external cash flow models utilizing spreads, and when available, market indices. As a result of this analysis, if the Company determines that there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly and approved by the Valuation Committee. The Company conducts other specific monitoring controls around pricing. Daily analyses identify price changes over 3% for fixed maturities and 5% for equity securities and trade prices for both debt and equity securities that differ over 3% to the current day's price. Weekly analyses identify prices that differ more than 5% from published bond prices of a corporate bond index. Monthly analyses identify price changes over 3%, prices that have not changed, and missing prices. Also on a monthly basis, a second source validation is performed on most sectors. Analyses are conducted by a dedicated pricing unit that follows up with trading and investment sector professionals and challenges prices with vendors when the estimated assumptions used differ from what the Company feels a market participant would use. Examples of other procedures performed include, but are not limited to, initial and on-going review of third-party pricing services’ methodologies, review of pricing statistics and trends, and back testing recent trades. The Company has analyzed the third-party pricing services’ valuation methodologies and related inputs, and has also evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Most prices provided by third-party pricing services are classified into Level 2 because the inputs used in pricing the securities are observable. Due to the lack of transparency in the process that brokers use to develop prices, most valuations that are based on brokers’ prices are classified as Level 3. Some valuations may be classified as Level 2 if the price can be corroborated with observable market data. Derivative Instruments, including Embedded Derivatives within Investments Derivative instruments are fair valued using pricing valuation models for OTC derivatives that utilize independent market data inputs, quoted market prices for exchange-traded and OTC-cleared derivatives, or independent broker quotations. Excluding embedded and reinsurance related derivatives, as of September 30, 2016 and December 31, 2015, 97% and 96%, respectively, of derivatives, based upon notional values, were priced by valuation models, including discounted cash flow models and option-pricing models that utilize present value techniques, or quoted market prices. The remaining derivatives were priced by broker quotations. The Derivatives Working Group performs ongoing analyses of the valuations, assumptions and methodologies used to ensure that the prices represent a reasonable estimate of the fair value. The Company performs various controls on derivative valuations which include both quantitative and qualitative analyses. Analyses are conducted by a dedicated derivative pricing team that works directly with investment sector professionals to analyze impacts of changes in the market environment and investigate variances. On a daily basis, market valuations are compared to counterparty valuations for OTC derivatives. There are monthly analyses to identify market value changes greater than pre-defined thresholds, stale prices, missing prices, and zero prices. Also on a monthly basis, a second source validation, typically to broker quotations, is performed for certain of the more complex derivatives and all new deals during the month. A model validation review is performed on any new models, which typically includes detailed documentation and validation to a second source. The model validation documentation and results of validation are presented to the Valuation Committee for approval. The Company utilizes derivative instruments to manage the risk associated with certain assets and liabilities. However, the derivative instrument may not be classified with the same fair value hierarchy level as the associated assets and liabilities. Therefore, the realized and unrealized gains and losses on derivatives reported in the Level 3 rollforward may be offset by realized and unrealized gains and losses of the associated assets and liabilities in other line items of the financial statements. Limited Partnerships and Other Alternative Investments The portion of limited partnerships and other alternative investments recorded at fair value represents hedge funds for which investment company accounting has been applied to a wholly-owned fund of funds measured at fair value. During 2016, the Company liquidated this wholly-owned hedge fund of funds. Fair value was determined for these funds using the fund’s NAV, as a practical expedient, calculated on a monthly basis, and is the amount at which a unit or shareholder may have redeemed their investment, if redemption was allowed. Valuation Inputs for Investments For Level 1 investments, which are comprised of on-the-run U.S. Treasuries, money market funds, exchange-traded equity securities, open-ended mutual funds, short-term investments, and exchange traded futures and option contracts, valuations are based on quoted prices for identical assets in active markets that the Company has the ability to access at the measurement date. For the Company’s Level 2 and 3 debt securities, typical inputs used by pricing techniques include, but are not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and/or estimated cash flows, prepayment speeds, and default rates. Derivative instruments are valued using mid-market inputs that are predominantly observable in the market. A description of additional inputs used in the Company’s Level 2 and Level 3 measurements is included in the following discussion:
Level 2 | The fair values of most of the Company’s Level 2 investments are determined by management after considering prices received from third party pricing services. These investments include most fixed maturities and preferred stocks, including those reported in separate account assets as well as certain derivative instruments.
• | ABS, CDOs, CMBS and RMBS – Primary inputs also include monthly payment information, collateral performance, which varies by vintage year and includes delinquency rates, collateral valuation loss severity rates, collateral refinancing assumptions, and credit default swap indices. ABS and RMBS prices also include estimates of the rate of future principal prepayments over the remaining life of the securities. These estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral.
• | Corporates, including investment grade private placements – Primary inputs also include observations of credit default swap curves related to the issuer.
• | Foreign government/government agencies — Primary inputs also include observations of credit default swap curves related to the issuer and political events in emerging market economies.
• | Municipals – Primary inputs also include Municipal Securities Rulemaking Board reported trades and material event notices, and issuer financial statements.
• | Short-term investments – Primary inputs also include material event notices and new issue money market rates.
• | Credit derivatives – Primary inputs include the swap yield curve and credit default swap curves.
• | Equity derivatives – Primary inputs include equity index levels.
• | Foreign exchange derivatives – Primary inputs include the swap yield curve, currency spot and forward rates, and cross currency basis curves.
• | Interest rate derivatives – Primary input is the swap yield curve.
Level 3 | Most of the Company's securities classified as Level 3 include less liquid securities such as lower quality ABS, CMBS, commercial real estate ("CRE") CDOs and RMBS primarily backed by sub-prime loans. Also included in Level 3 are securities valued based on broker prices or broker spreads, without adjustments. Primary inputs for non-broker priced investments, including structured securities, are consistent with the typical inputs used in the preceding noted Level 2 measurements, but are Level 3 due to their less liquid markets. Additionally, certain long-dated securities are priced based on third party pricing services, including certain municipal securities, foreign government/government agency securities, and bank loans, which are included with corporate fixed maturities. Primary inputs for these long-dated securities are consistent with the typical inputs used in the preceding noted Level 1 and Level 2 measurements, but include benchmark interest rate or credit spread assumptions that are not observable in the marketplace. Significant inputs for Level 3 derivative contracts primarily include the typical inputs used in the preceding noted Level 1 and Level 2 measurements, but also include equity and interest rate volatility and swap yield curves beyond observable limits.
Transfers between Levels Transfers of securities among the levels occur at the beginning of the reporting period. The amount of transfers from Level 1 to Level 2 was $508 and $1,316, for the three and nine months ended September 30, 2016 and $471 and $995 for the three and nine months ended September 30, 2015, respectively, which represented previously on-the-run U.S. Treasury securities that are now off-the-run. For the three and nine months ended September 30, 2016 and 2015, there were no transfers from Level 2 to Level 1. See the fair value roll-forward tables for the three and nine months ended September 30, 2016 and 2015, for the transfers into and out of Level 3. Significant Unobservable Inputs for Level 3 Assets Measured at Fair Value The following tables present information about significant unobservable inputs used in Level 3 assets measured at fair value. The tables exclude ABS, CRE CDOs, certain CMBS, corporate and municipal securities as well as index options for which fair values are based on broker quotations.
Securities | Unobservable Inputs
| As of September 30, 2016
Assets Accounted for at Fair Value on a Recurring Basis | Fair Value | Predominant Valuation Technique | Significant Unobservable Input | Minimum | Maximum | Weighted Average [1] | Impact of Increase in Input on Fair Value [2]
CMBS [3] | $ | 53 |  | Discounted cash flows | Spread (encompasses prepayment, default risk and loss severity) | 11 bps | 1,274 bps | 331 bps | Decrease
Corporate [3] | 508 |  | Discounted cash flows | Spread | 87 bps | 1,364 bps | 421 bps | Decrease
Municipal [3] | 109 |  | Discounted cash flows | Spread | 195 bps | 326 bps | 252 bps | Decrease
RMBS | 2,055 |  | Discounted cash flows | Spread | 43 bps | 1,736 bps | 194 bps | Decrease
|  |  | Constant prepayment rate | —% | 20% | 3% | Decrease [4]
|  |  | Constant default rate | —% | 11% | 6% | Decrease
|  |  | Loss severity | —% | 100% | 79% | Decrease
| As of December 31, 2015
CMBS [3] | $ | 122 |  | Discounted cash flows | Spread (encompasses prepayment, default risk and loss severity) | 31 bps | 1,505 bps | 266 bps | Decrease
Corporate [3] | 339 |  | Discounted cash flows | Spread | 63 bps | 800 bps | 306 bps | Decrease
Municipal [3] | 31 |  | Discounted cash flows | Spread | 193 bps | 193 bps | 193 bps | Decrease
RMBS | 1,622 |  | Discounted cash flows | Spread | 30 bps | 1,696 bps | 178 bps | Decrease
|  |  | Constant prepayment rate | —% | 20% | 2% | Decrease [4]
|  |  | Constant default rate | 1% | 10% | 6% | Decrease
|  |  | Loss severity | —% | 100% | 78% | Decrease
[1] | The weighted average is determined based on the fair value of the securities.
[2] | Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table.
[3] | Excludes securities for which the Company bases fair value on broker quotations; however, included are broker priced lower-rated private placement securities for which the Company receives spread and yield information to corroborate the fair value.
[4] | Decrease for above market rate coupons and increase for below market rate coupons.
Freestanding Derivatives | Unobservable Inputs
| As of September 30, 2016
| Fair Value | Predominant Valuation Technique | Significant Unobservable Input | Minimum | Maximum | Impact of Increase in Input on Fair Value [1]
Interest rate derivative |  |  |  |  |  |
Interest rate swaps | $ | (34 | ) | Discounted cash flows | Swap curve beyond 30 years | 2 | % | 2 | % | Decrease
Interest rate swaptions [2] | 2 |  | Option model | Interest rate volatility | 1 | % | 1 | % | Increase
GMWB hedging instruments |  |  |  |  |  |
Equity variance swaps | (36 | ) | Option model | Equity volatility | 20 | % | 23 | % | Increase
Equity options | 25 |  | Option model | Equity volatility | 27 | % | 29 | % | Increase
Customized swaps | 142 |  | Discounted cash flows | Equity volatility | 12 | % | 30 | % | Increase
Macro hedge program [3] |  |  |  |  |  |
Equity options | 195 |  | Option model | Equity volatility | 15 | % | 27 | % | Increase
| As of December 31, 2015
Interest rate derivative |  |  |  |  |  |
Interest rate swaps | $ | (30 | ) | Discounted cash flows | Swap curve beyond 30 years | 3 | % | 3 | % | Decrease
Interest rate swaptions [2] | 8 |  | Option model | Interest rate volatility | 1 | % | 2 | % | Increase
GMWB hedging instruments |  |  |  |  |  |
Equity variance swaps | (31 | ) | Option model | Equity volatility | 19 | % | 21 | % | Increase
Equity options | 35 |  | Option model | Equity volatility | 27 | % | 29 | % | Increase
Customized swaps | 131 |  | Discounted cash flows | Equity volatility | 10 | % | 40 | % | Increase
Macro hedge program [3] |  |  |  |  |  |
Equity options | 179 |  | Option model | Equity volatility | 14 | % | 28 | % | Increase
[1] | Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table. Changes are based on long positions, unless otherwise noted. Changes in fair value will be inversely impacted for short positions.
[2] | The swaptions presented are purchased options that have the right to enter into a pay-fixed swap.
[3] | Excludes derivatives for which the Company bases fair value on broker quotations as noted in the following discussion.
Securities and derivatives for which the Company bases fair value on broker quotations include ABS, CDOs, CMBS, corporate, and index options. Due to the lack of transparency in the process brokers use to develop prices for these investments, the Company does not have access to the significant unobservable inputs brokers use to price these securities and derivatives. The Company believes however, the types of inputs brokers may use would likely be similar to those used to price securities and derivatives for which inputs are available to the Company, and therefore may include but not be limited to, loss severity rates, constant prepayment rates, constant default rates and credit spreads. Therefore, similar to non broker priced securities and derivatives, generally, increases in these inputs would cause fair values to decrease. For the three and nine months ended September 30, 2016, no significant adjustments were made by the Company to broker prices received. Product Derivatives The Company formerly offered certain variable annuity products with GMWB riders. The GMWB provides the policyholder with a guaranteed remaining balance (“GRB”) which is generally equal to premiums less withdrawals. If the policyholder’s account value is reduced to the specified level through a combination of market declines and withdrawals but the GRB still has value, the Company is obligated to continue to make annuity payments to the policyholder until the GRB is exhausted. Certain contract provisions can increase the GRB at contractholder election or after the passage of time. GMWB payments that are not life-contingent represent an embedded derivative in the variable annuity contract. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host for measurement purposes. The embedded derivative is carried at fair value, with changes in fair value reported in net realized capital gains and losses. The Company’s GMWB liability, excluding life-contingent benefits, is carried at fair value and reported in other policyholder funds and benefits payable in the Condensed Consolidated Balance Sheets. The notional value of the embedded derivative is the GRB. In valuing the embedded derivative, the Company attributes to the derivative a portion of the fees collected from the contract holder equal to the present value of future GMWB claims (the “Attributed Fees”) as determined at contract issuance. All changes in the fair value of the embedded derivative are recorded in net realized capital gains and losses. The excess of fees collected from the contract holder over the Attributed Fees are associated with the host variable annuity contract and are reported in fee income. GMWB Reinsurance Derivative The Company has reinsurance arrangements in place to transfer a portion of its risk of loss due to GMWB. These arrangements are recognized as derivatives and carried at fair value in reinsurance recoverables. Changes in the fair value of the reinsurance agreements are reported in net realized capital gains and losses. The fair value of the GMWB reinsurance derivative is calculated as an aggregation of the components described in the following Living Benefits Required to be Fair Valued discussion and is modeled using significant unobservable policyholder behavior inputs, identical to those used in calculating the underlying liability, such as lapses, fund selection, resets and withdrawal utilization and risk margins. Living Benefits Required to be Fair Valued (in Other Policyholder Funds and Benefits Payable) Fair values for GMWBs classified as embedded derivatives are calculated using the income approach based upon internally developed models because active, observable markets do not exist for those items. The fair value of these GMWBs and the related reinsurance and customized freestanding derivatives are calculated as an aggregation of the following components: Best Estimate Claim Payments; Credit Standing Adjustment; and Margins. The resulting aggregation is reconciled or calibrated, if necessary, to market information that is, or may be, available to the Company, but may not be observable by other market participants, including reinsurance discussions and transactions. The Company believes the aggregation of these components, as necessary and as reconciled or calibrated to the market information available to the Company, results in an amount that the Company would be required to transfer to or receive from market participants in an active liquid market, if one existed, for those market participants to assume the risks associated with the guaranteed minimum benefits and the related reinsurance and customized derivatives. The fair value is likely to materially diverge from the ultimate settlement of the liability as the Company believes settlement will be based on our best estimate assumptions rather than those best estimate assumptions plus risk margins. In the absence of any transfer of the guaranteed benefit liability to a third party, the release of risk margins is likely to be reflected as realized gains in future periods’ net income. Each component described in the following discussion is unobservable in the marketplace and requires subjectivity by the Company in determining its value. Oversight of the Company's valuation policies and processes for product and GMWB reinsurance derivatives is performed by a multidisciplinary group comprised of finance, actuarial and risk management professionals. This multidisciplinary group reviews and approves changes and enhancements to the Company's valuation model as well as associated controls. Best Estimate Claim Payments The Best Estimate Claim Payments are calculated based on actuarial and capital market assumptions related to projected cash flows, including the present value of benefits and related contract charges, over the lives of the contracts, incorporating expectations concerning policyholder behavior such as lapses, fund selection, resets and withdrawal utilization. For the customized derivatives, policyholder behavior is prescribed in the derivative contract. Because of the dynamic and complex nature of these cash flows, best estimate assumptions and a Monte Carlo stochastic process are used in valuation. The Monte Carlo stochastic process involves the generation of thousands of scenarios that assume risk neutral returns consistent with swap rates and a blend of observable implied index volatility levels. Estimating these cash flows involves numerous estimates and subjective judgments regarding a number of variables. These variables include expected market rates of return, market volatility, correlations of market index returns to funds, fund performance, discount rates and assumptions about policyholder behavior which emerge over time. At each valuation date, the Company assumes expected returns based on:
• | risk-free rates as represented by the Eurodollar futures, LIBOR deposits and swap rates to derive forward curve rates;
• | market implied volatility assumptions for each underlying index based primarily on a blend of observed market “implied volatility” data;
• | correlations of historical returns across underlying well known market indices based on actual observed returns over the ten years preceding the valuation date; and
• | three years of history for fund indexes compared to separate account fund regression.
The Company updates capital market assumptions used in the GMWB liability model such as interest rates, equity indices and the blend of implied equity index volatilities on a daily basis. The Company monitors various aspects of policyholder behavior and may modify certain of its assumptions, including policyholder lapses and withdrawal rates, if credible emerging data indicates that changes are warranted. In addition, the Company will continue to evaluate policyholder behavior assumptions as we implement initiatives to reduce the size of the variable annuity business. At a minimum, all policyholder behavior assumptions are reviewed and updated, as appropriate, in conjunction with the completion of the Company’s annual comprehensive study in the fourth quarter of each year to refine the estimate of future gross profits. Credit Standing Adjustment This assumption makes an adjustment that market participants would make, in determining fair value, to reflect the risk that guaranteed benefit obligations, or the GMWB reinsurance recoverables will not be fulfilled. The Company incorporates a blend of observable Company and reinsurer credit default spreads from capital markets, adjusted for market recoverability. The credit standing adjustment assumption, net of reinsurance, resulted in pre-tax realized gains (losses) of $0 and $0, for the three months ended September 30, 2016 and 2015, respectively and $(1) and $(1) for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016 and December 31, 2015 the credit standing adjustment was $(1) and $0, respectively. Margins The behavior risk margin adds a margin that market participants would require, in determining fair value, for the risk that the Company’s assumptions about policyholder behavior could differ from actual experience. The behavior risk margin is calculated by taking the difference between adverse policyholder behavior assumptions and best estimate assumptions. There were no policyholder assumption updates related to the behavior risk margin for the three and nine months ended September 30, 2016 and 2015. As of September 30, 2016 and December 31, 2015 the behavior risk margin was $42 and $45. In addition to the non-market-based update described in the preceding discussion, the Company recognized non-market-based updates driven by the relative outperformance (underperformance) of the underlying actively managed funds as compared to their respective indices resulting in pre-tax realized gains (losses) of approximately $11 and $(21), for the three months ended September 30, 2016 and 2015, respectively and $24 and $(10) for the nine months ended September 30, 2016 and 2015, respectively. The following table provides quantitative information about the significant unobservable inputs and is applicable to the GMWB embedded derivative and the GMWB reinsurance derivative.
| As of September 30, 2016
Significant Unobservable Input | Unobservable Inputs (Minimum) | Unobservable Inputs (Maximum) | Impact of Increase in Input on Fair Value Measurement [1]
Withdrawal Utilization [2] | 20% | 100% | Increase
Withdrawal Rates [3] | —% | 8% | Increase
Lapse Rates [4] | —% | 75% | Decrease
Reset Elections [5] | 20% | 75% | Increase
Equity Volatility [6] | 12% | 30% | Increase
| As of December 31, 2015
Significant Unobservable Input | Unobservable Inputs (Minimum) | Unobservable Inputs (Maximum) | Impact of Increase in Input on Fair Value Measurement [1]
Withdrawal Utilization [2] | 20% | 100% | Increase
Withdrawal Rates [3] | —% | 8% | Increase
Lapse Rates [4] | —% | 75% | Decrease
Reset Elections [5] | 20% | 75% | Increase
Equity Volatility [6] | 10% | 40% | Increase
[1] | Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table.
[2] | Range represents assumed cumulative percentages of policyholders taking withdrawals.
[3] | Range represents assumed cumulative annual amount withdrawn by policyholders.
[4] | Range represents assumed annual percentages of full surrender of the underlying variable annuity contracts across all policy durations for in force business.
[5] | Range represents assumed cumulative percentages of policyholders that would elect to reset their guaranteed benefit base.
[6] | Range represents implied market volatilities for equity indices based on multiple pricing sources.
Generally, a change in withdrawal utilization assumptions would be accompanied by a directionally opposite change in lapse rate assumptions, as the behavior of policyholders that utilize GMWB riders is typically different from policyholders that do not utilize these riders. Separate Account Assets Separate account assets are primarily invested in mutual funds. Other separate account assets include fixed maturities, limited partnerships, equity securities, short-term investments and derivatives that are valued in the same manner, and using the same pricing sources and inputs, as those investments held by the Company. For limited partnerships in which fair value represents the separate account's share of the NAV, 39% and 28% were subject to significant liquidation restrictions due to lock-up or gating provisions as of September 30, 2016 and December 31, 2015, respectively. Limited partnerships where redemptions are not allowed consisted of 19% and 4% as of September 30, 2016 and December 31, 2015, respectively. Separate account assets classified as Level 3 primarily include long-dated bank loans, subprime RMBS, and commercial mortgage loans. Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) The following tables provide fair value roll-forwards for the three and nine months ended September 30, 2016 and 2015, for the financial instruments classified as Level 3. For the three months ended September 30, 2016
| Fixed Maturities, AFS |
Assets | ABS | CDOs | CMBS | Corporate | Foreign Govt./Govt. Agencies | Municipal | RMBS | Total Fixed Maturities, AFS | Fixed Maturities, FVO
Fair value as of June 30, 2016 | $ | 41 |  | $ | 478 |  | $ | 79 |  | $ | 1,136 |  | $ | 72 |  | $ | 90 |  | $ | 1,873 |  | $ | 3,769 |  | $ | 6 |
Total realized/unrealized gains (losses) |  |  |  |  |  |  |  |  |
Included in net income [1] [2] [6] | — |  | — |  | (1 | ) | (12 | ) | — |  | — |  | — |  | (13 | ) | — |
Included in OCI [3] | — |  | (3 | ) | — |  | 27 |  | 2 |  | 2 |  | 15 |  | 43 |  | — |
Purchases | 18 |  | 1 |  | 15 |  | 69 |  | 9 |  | 34 |  | 253 |  | 399 |  | 5 |
Settlements | — |  | (7 | ) | (6 | ) | 3 |  | (1 | ) | — |  | (78 | ) | (89 | ) | (1 | )
Sales | (2 | ) | — |  | — |  | (52 | ) | (8 | ) | — |  | (8 | ) | (70 | ) | (1 | )
Transfers into Level 3 [4] | — |  | — |  | — |  | 115 |  | — |  | — |  | — |  | 115 |  | — |
Transfers out of Level 3 [4] | (26 | ) | — |  | (10 | ) | (192 | ) | — |  | — |  | — |  | (228 | ) | — |
Fair value as of September 30, 2016 | $ | 31 |  | $ | 469 |  | $ | 77 |  | $ | 1,094 |  | $ | 74 |  | $ | 126 |  | $ | 2,055 |  | $ | 3,926 |  | $ | 9 |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2016 [2] [7] | $ | — |  | $ | — |  | $ | — |  | $ | (13 | ) | $ | — |  | $ | — |  | $ | — |  | $ | (13 | ) | $ | — |
|  | Freestanding Derivatives [5]
Assets (Liabilities) | Equity Securities, AFS | Equity | Interest Rate | GMWB Hedging | Macro Hedge Program | Other Contracts | Total Free- Standing Derivatives [5]
Fair value as of June 30, 2016 | $ | 97 |  | $ | 1 |  | $ | (32 | ) | $ | 165 |  | $ | 141 |  | $ | 4 |  | $ | 279 |
Total realized/unrealized gains (losses) |  |  |  |  |  |  |
Included in net income [1] [2] [6] | (1 | ) | (1 | ) | — |  | (34 | ) | (32 | ) | (2 | ) | (69 | )
Included in OCI [3] | — |  | — |  | — |  | — |  | — |  | — |  | — |
Purchases | 4 |  | — |  | — |  | — |  | 63 |  | — |  | 63 |
Settlements | — |  | — |  | — |  | — |  | (4 | ) | — |  | (4 | )
Sales | — |  | — |  | — |  | — |  | — |  | — |  | — |
Transfers into Level 3 [4] | — |  | — |  | — |  | — |  | — |  | — |  | — |
Transfers out of Level 3 [4] | — |  | — |  | — |  | — |  | — |  | — |  | — |
Fair value as of September 30, 2016 | $ | 100 |  | $ | — |  | $ | (32 | ) | $ | 131 |  | $ | 168 |  | $ | 2 |  | $ | 269 |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2016 [2] [7] | $ | (1 | ) | $ | — |  | $ | — |  | $ | (34 | ) | $ | (34 | ) | $ | (2 | ) | $ | (70 | )
Assets | Reinsurance Recoverable for GMWB | Separate Accounts
Fair value as of June 30, 2016 | $ | 106 |  | $ | 171 |
Total realized/unrealized gains (losses) |  |
Included in net income [1] [2] [6] | (12 | ) | 1 |
Included in OCI [3] | — |  | (1 | )
Purchases | — |  | 165 |
Settlements | 4 |  | (3 | )
Sales | — |  | (11 | )
Transfers into Level 3 [4] | — |  | 10 |
Transfers out of Level 3 [4] | — |  | (7 | )
Fair value as of September 30, 2016 | $ | 98 |  | $ | 325 |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2016 [2] [7] | $ | (12 | ) | $ | — |
| Other Policyholder Funds and Benefits Payable |
Liabilities | Guaranteed Withdrawal Benefits | Equity Linked Notes | Total Other Policyholder Funds and Benefits Payable | Contingent Consideration [8]
Fair value as of June 30, 2016 | $ | (412 | ) | $ | (28 | ) | $ | (440 | ) | $ | — |
Issuance | — |  | — |  | — |  | 23 |
Total realized/unrealized gains (losses) |  |  |  |  |  |
Included in net income [1] [2] [6] | 81 |  | (3 | ) | 78 |  | — |
Insurance operating costs and other expenses | — |  | — |  | — |  | — |
Settlements | (17 | ) | — |  | (17 | ) | — |
Fair value as of September 30, 2016 | $ | (348 | ) | $ | (31 | ) | $ | (379 | ) | $ | 23 |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2016 [2] [7] | $ | 81 |  | $ | (3 | ) | $ | 78 |  | $ | — |
For the nine months ended September 30, 2016
| Fixed Maturities, AFS |
Assets | ABS | CDOs | CMBS | Corporate | Foreign Govt./Govt. Agencies | Municipal | RMBS | Total Fixed Maturities, AFS | Fixed Maturities, FVO
Fair value as of January 1, 2016 | $ | 37 |  | $ | 541 |  | $ | 150 |  | $ | 854 |  | $ | 60 |  | $ | 49 |  | $ | 1,622 |  | $ | 3,313 |  | $ | 16 |
Total realized/unrealized gains (losses) |  |  |  |  |  |  |  |  |
Included in net income [1] [2] [6] | — |  | (1 | ) | (2 | ) | (26 | ) | 1 |  | — |  | — |  | (28 | ) | (1 | )
Included in OCI [3] | — |  | (5 | ) | (3 | ) | 39 |  | 11 |  | 7 |  | 11 |  | 60 |  | — |
Purchases | 18 |  | 1 |  | 65 |  | 136 |  | 24 |  | 54 |  | 683 |  | 981 |  | 11 |
Settlements | (7 | ) | (67 | ) | (24 | ) | (52 | ) | (3 | ) | — |  | (236 | ) | (389 | ) | (3 | )
Sales | (2 | ) | — |  | (3 | ) | (143 | ) | (19 | ) | — |  | (8 | ) | (175 | ) | (4 | )
Transfers into Level 3 [4] | 18 |  | — |  | 1 |  | 628 |  | — |  | 16 |  | 5 |  | 668 |  | — |
Transfers out of Level 3 [4] | (33 | ) | — |  | (107 | ) | (342 | ) | — |  | — |  | (22 | ) | (504 | ) | (10 | )
Fair value as of September 30, 2016 | $ | 31 |  | $ | 469 |  | $ | 77 |  | $ | 1,094 |  | $ | 74 |  | $ | 126 |  | $ | 2,055 |  | $ | 3,926 |  | $ | 9 |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2016 [2] [7] | $ | — |  | $ | — |  | $ | (1 | ) | $ | (14 | ) | $ | — |  | $ | — |  | $ | — |  | $ | (15 | ) | $ | — |
|  | Freestanding Derivatives [5]
Assets (Liabilities) | Equity Securities, AFS | Equity | Interest Rate | GMWB Hedging | Macro Hedge Program | Other Contracts | Total Free-Standing Derivatives [5]
Fair value as of January 1, 2016 | $ | 93 |  | $ | — |  | $ | (22 | ) | $ | 135 |  | $ | 147 |  | $ | 7 |  | $ | 267 |
Total realized/unrealized gains (losses) |  |  |  |  |  |  |
Included in net income [1] [2] [6] | (1 | ) | (16 | ) | (10 | ) | (10 | ) | (36 | ) | (5 | ) | (77 | )
Included in OCI [3] | 7 |  | — |  | — |  | — |  | — |  | — |  | — |
Purchases | 6 |  | 16 |  | — |  | — |  | 63 |  | — |  | 79 |
Settlements | — |  | — |  | — |  | — |  | (6 | ) | — |  | (6 | )
Sales | (5 | ) | — |  | — |  | — |  | — |  | — |  | — |
Transfers into Level 3 [4] | — |  | — |  | — |  | — |  | — |  | — |  | — |
Transfers out of Level 3 [4] | — |  | — |  | — |  | 6 |  | — |  | — |  | 6 |
Fair value as of September 30, 2016 | $ | 100 |  | $ | — |  | $ | (32 | ) | $ | 131 |  | $ | 168 |  | $ | 2 |  | $ | 269 |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2016 [2] [7] | $ | (1 | ) | $ | — |  | $ | (10 | ) | $ | (2 | ) | $ | (31 | ) | $ | (5 | ) | $ | (48 | )
Assets | Reinsurance Recoverable for GMWB | Separate Accounts
Fair value as of January 1, 2016 | $ | 83 |  | $ | 139 |
Total realized/unrealized gains (losses) |  |
Included in net income [1] [2] [6] | 4 |  | 1 |
Included in OCI [3] | — |  | 5 |
Purchases | — |  | 226 |
Settlements | 11 |  | (12 | )
Sales | — |  | (27 | )
Transfers into Level 3 [4] | — |  | 16 |
Transfers out of Level 3 [4] | — |  | (23 | )
Fair value as of September 30, 2016 | $ | 98 |  | $ | 325 |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2016 [2] [7] | $ | 4 |  | $ | — |
| Other Policyholder Funds and Benefits Payable |
Liabilities | Guaranteed Withdrawal Benefits | Equity Linked Notes | Total Other Policyholder Funds and Benefits Payable | Contingent Consideration [8]
Fair value as of January 1, 2016 | $ | (262 | ) | $ | (26 | ) | $ | (288 | ) | $ | — |
Issuance | — |  | — |  | — |  | 23 |
Total realized/unrealized gains (losses) |  |  |  |  |  |
Included in net income [1] [2] [6] | (36 | ) | (5 | ) | (41 | ) | — |
Included in OCI [3] | — |  | — |  | — |  | — |
Insurance operating costs and other expenses | — |  | — |  | — |  | — |
Settlements | (50 | ) | — |  | (50 | ) | — |
Fair value as of September 30, 2016 | $ | (348 | ) | $ | (31 | ) | $ | (379 | ) | $ | 23 |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2016 [2] [7] | $ | (36 | ) | $ | (5 | ) | $ | (41 | ) | $ | — |
For the three months ended September 30, 2015
| Fixed Maturities, AFS |
Assets | ABS | CDOs | CMBS | Corporate | Foreign Govt./Govt. Agencies | Municipal | RMBS | Total Fixed Maturities, AFS | Fixed Maturities, FVO
Fair value as of June 30, 2015 | $ | 53 |  | $ | 564 |  | $ | 214 |  | $ | 931 |  | $ | 40 |  | $ | 49 |  | $ | 1,540 |  | $ | 3,391 |  | $ | 86 |
Total realized/unrealized gains (losses) |  |  |  |  |  |  |  |  |
Included in net income [1] [2] [6] | — |  | (1 | ) | 1 |  | (9 | ) | — |  | — |  | — |  | (9 | ) | — |
Included in OCI [3] | — |  | (9 | ) | (5 | ) | 1 |  | (1 | ) | 1 |  | (6 | ) | (19 | ) | — |
Purchases | 8 |  | — |  | 6 |  | 38 |  | 3 |  | — |  | 71 |  | 126 |  | 2 |
Settlements | (2 | ) | (9 | ) | (26 | ) | (22 | ) | (1 | ) | — |  | (56 | ) | (116 | ) | (24 | )
Sales | (3 | ) | — |  | — |  | (47 | ) | (2 | ) | — |  | (57 | ) | (109 | ) | (1 | )
Transfers into Level 3 [4] | — |  | — |  | 2 |  | 51 |  | 11 |  | — |  | — |  | 64 |  | — |
Transfers out of Level 3 [4] | (29 | ) | — |  | (23 | ) | (38 | ) | — |  | — |  | — |  | (90 | ) | (2 | )
Fair value as of September 30, 2015 | $ | 27 |  | $ | 545 |  | $ | 169 |  | $ | 905 |  | $ | 50 |  | $ | 50 |  | $ | 1,492 |  | $ | 3,238 |  | $ | 61 |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2015 [2] [7] | $ | — |  | $ | — |  | $ | (1 | ) | $ | (11 | ) | $ | — |  | $ | — |  | $ | — |  | $ | (12 | ) | $ | — |
|  | Freestanding Derivatives [5]
Assets (Liabilities) | Equity Securities, AFS | Credit | Commodity | Equity | Interest Rate | GMWB Hedging | Macro Hedge Program | Other Contracts | Total Free-Standing Derivatives [5]
Fair value as of June 30, 2015 | $ | 97 |  | $ | — |  | $ | 3 |  | $ | 3 |  | $ | (14 | ) | $ | 125 |  | $ | 165 |  | $ | 9 |  | $ | 291 |
Total realized/unrealized gains (losses) |  |  |  |  |  |  |  |  |
Included in net income [1] [2] [6] | (6 | ) | — |  | 4 |  | (3 | ) | (6 | ) | 46 |  | 18 |  | (1 | ) | 58 |
Included in OCI [3] | 5 |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Purchases | 4 |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Settlements | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Sales | (1 | ) | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Transfers into Level 3 [4] | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Transfers out of Level 3 [4] | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Fair value as of September 30, 2015 | $ | 99 |  | $ | — |  | $ | 7 |  | $ | — |  | $ | (20 | ) | $ | 171 |  | $ | 183 |  | $ | 8 |  | $ | 349 |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2015 [2] [7] | $ | (6 | ) | $ | — |  | $ | 4 |  | $ | — |  | $ | (5 | ) | $ | 48 |  | $ | 12 |  | $ | (1 | ) | $ | 58 |
Assets | Reinsurance Recoverable for GMWB | Separate Accounts
Fair value as of June 30, 2015 | $ | 50 |  | $ | 285 |
Total realized/unrealized gains (losses) |  |
Included in net income [1] [2] [6] | 46 |  | 28 |
Included in OCI [3] | — |  | (2 | )
Purchases | — |  | 57 |
Settlements | (23 | ) | (6 | )
Sales | — |  | (200 | )
Transfers into Level 3 [4] | — |  | 1 |
Transfers out of Level 3 [4] | — |  | 1 |
Fair value as of September 30, 2015 | $ | 73 |  | $ | 164 |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2015 [2] [7] | $ | 46 |  | $ | 31 |
| Other Policyholder Funds and Benefits Payable |
Liabilities | Guaranteed Withdrawal Benefits | Equity Linked Notes | Total Other Policyholder Funds and Benefits Payable | Consumer Notes
Fair value as of June 30, 2015 | $ | (112 | ) | $ | (26 | ) | $ | (138 | ) | $ | (3 | )
Total realized/unrealized gains (losses) |  |  |  |  |
Included in net income [1] [2] [6] | (177 | ) | 5 |  | (172 | ) | 3 |
Included in OCI [3] | — |  | — |  | — |  | — |
Settlements | 19 |  | — |  | 19 |  | — |
Fair value as of September 30, 2015 | $ | (270 | ) | $ | (21 | ) | $ | (291 | ) | $ | — |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2015 [2] [7] | $ | (177 | ) | $ | 5 |  | $ | (172 | ) | $ | 3 |
For the nine months ended September 30, 2015
| Fixed Maturities, AFS |
Assets | ABS | CDOs | CMBS | Corporate | Foreign Govt./Govt. Agencies | Municipal | RMBS | Total Fixed Maturities, AFS | Fixed Maturities, FVO
Fair value as of January 1, 2015 | $ | 122 |  | $ | 623 |  | $ | 284 |  | $ | 1,040 |  | $ | 59 |  | $ | 66 |  | $ | 1,281 |  | $ | 3,475 |  | $ | 92 |
Total realized/unrealized gains (losses) |  |  |  |  |  |  |  |  |
Included in net income [1] [2] [6] | 1 |  | (5 | ) | 2 |  | (13 | ) | — |  | 1 |  | (2 | ) | (16 | ) | (7 | )
Included in OCI [3] | (2 | ) | 8 |  | (8 | ) | (41 | ) | (4 | ) | (4 | ) | (6 | ) | (57 | ) | — |
Purchases | 79 |  | — |  | 45 |  | 61 |  | 15 |  | — |  | 516 |  | 716 |  | 21 |
Settlements | (6 | ) | (34 | ) | (64 | ) | (51 | ) | (3 | ) | (13 | ) | (149 | ) | (320 | ) | (24 | )
Sales | (16 | ) | — |  | (6 | ) | (80 | ) | (28 | ) | — |  | (142 | ) | (272 | ) | (8 | )
Transfers into Level 3 [4] | 1 |  | — |  | 7 |  | 202 |  | 11 |  | — |  | 47 |  | 268 |  | — |
Transfers out of Level 3 [4] | (152 | ) | (47 | ) | (91 | ) | (213 | ) | — |  | — |  | (53 | ) | (556 | ) | (13 | )
Fair value as of September 30, 2015 | $ | 27 |  | $ | 545 |  | $ | 169 |  | $ | 905 |  | $ | 50 |  | $ | 50 |  | $ | 1,492 |  | $ | 3,238 |  | $ | 61 |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2015 [2] [7] | $ | 1 |  | $ | (1 | ) | $ | (2 | ) | $ | (11 | ) | $ | — |  | $ | — |  | $ | — |  | $ | (13 | ) | $ | (2 | )
|  | Freestanding Derivatives [5]
Assets (Liabilities) | Equity Securities, AFS | Credit | Commodity | Equity | Interest Rate | GMWB Hedging | Macro Hedge Program | Other Contracts | Total Free-Standing Derivatives [5]
Fair value as of January 1, 2015 | $ | 98 |  | $ | (9 | ) | $ | — |  | $ | 6 |  | $ | (7 | ) | $ | 170 |  | $ | 141 |  | $ | 12 |  | $ | 313 |
Total realized/unrealized gains (losses) |  |  |  |  |  |  |  |  |
Included in net income [1] [2] [6] | 6 |  | (1 | ) | (3 | ) | 9 |  | (8 | ) | 21 |  | (5 | ) | (4 | ) | 9 |
Included in OCI [3] | 1 |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Purchases | 16 |  | (13 | ) | — |  | — |  | — |  | — |  | 47 |  | — |  | 34 |
Settlements | — |  | — |  | — |  | (15 | ) | (5 | ) | (20 | ) | — |  | — |  | (40 | )
Sales | (17 | ) | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Transfers into Level 3 [4] | — |  | — |  | 10 |  | — |  | — |  | — |  | — |  | — |  | 10 |
Transfers out of Level 3 [4] | (5 | ) | 23 |  | — |  | — |  | — |  | — |  | — |  | — |  | 23 |
Fair value as of September 30, 2015 | $ | 99 |  | $ | — |  | $ | 7 |  | $ | — |  | $ | (20 | ) | $ | 171 |  | $ | 183 |  | $ | 8 |  | $ | 349 |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2015 [2] [7] | $ | (6 | ) | $ | 2 |  | $ | (4 | ) | $ | 3 |  | $ | (17 | ) | $ | 32 |  | $ | (3 | ) | $ | (5 | ) | $ | 8 |
Assets | Reinsurance Recoverable for GMWB | Separate Accounts
Fair value as of January 1, 2015 | $ | 56 |  | $ | 112 |
Total realized/unrealized gains (losses) |  |
Included in net income [1] [2] [6] | 31 |  | 29 |
Included in OCI [3] | — |  | (3 | )
Purchases | — |  | 317 |
Settlements | (14 | ) | (16 | )
Sales | — |  | (226 | )
Transfers into Level 3 [4] | — |  | 7 |
Transfers out of Level 3 [4] | — |  | (56 | )
Fair value as of September 30, 2015 | $ | 73 |  | $ | 164 |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2015 [2] [7] | $ | 31 |  | $ | 32 |
| Other Policyholder Funds and Benefits Payable |
Liabilities | Guaranteed Withdrawal Benefits | Equity Linked Notes | Total Other Policyholder Funds and Benefits Payable | Consumer Notes
Fair value as of January 1, 2015 | $ | (139 | ) | $ | (26 | ) | $ | (165 | ) | $ | (3 | )
Total realized/unrealized gains (losses) |  |  |  |  |
Included in net income [1] [2] [6] | (118 | ) | 5 |  | (113 | ) | 3 |
Settlements | (13 | ) | — |  | (13 | ) | — |
Fair value as of September 30, 2015 | $ | (270 | ) | $ | (21 | ) | $ | (291 | ) | $ | — |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2015 [2] [7] | $ | (118 | ) | $ | 5 |  | $ | (113 | ) | $ | 3 |
[1] | The Company classifies realized and unrealized gains (losses) on GMWB reinsurance derivatives and GMWB embedded derivatives as unrealized gains (losses) for purposes of disclosure in this table because it is impracticable to track on a contract-by-contract basis the realized gains (losses) for these derivatives and embedded derivatives.
[2] | All amounts in these rows are reported in net realized capital gains (losses). The realized/unrealized gains (losses) included in net income for separate account assets are offset by an equal amount for separate account liabilities, which results in a net zero impact on net income for the Company. All amounts are before income taxes and amortization of DAC.
[3] | All amounts are before income taxes and amortization of DAC.
[4] | Transfers in and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs.
[5] | Derivative instruments are reported in this table on a net basis for asset (liability) positions and reported in the Condensed Consolidated Balance Sheets in other investments and other liabilities.
[6] | Includes both market and non-market impacts in deriving realized and unrealized gains (losses).
[7] | Amounts presented are for Level 3 only and therefore may not agree to other disclosures included herein.
[8] | For additional information, see Note 2 - Business Acquisitions and Dispositions of Notes to Condensed Consolidated Financial Statements for discussion of the contingent consideration in connection with the acquisition of Lattice.
Fair Value Option FVO investments include certain securities that contain embedded credit derivatives with underlying credit risk primarily related to residential and commercial real estate, for which the Company has elected the fair value option. The Company also classifies the underlying fixed maturities held in certain consolidated investment funds within the Fixed Maturities, FVO line on the Condensed Consolidated Balance Sheets. The Company reports these consolidated investment companies at fair value with changes in the fair value of these securities recognized in net realized capital gains and losses, which is consistent with accounting requirements for investment companies. The investment funds hold fixed income securities in multiple sectors and the Company has management and control of the funds as well as a significant ownership interest. The Company also elected the fair value option for certain equity securities in order to align the accounting with total return swap contracts that hedge the risk associated with the investments. The swaps do not qualify for hedge accounting and the change in value of both the equity securities and the total return swaps are recorded in net realized capital gains and losses. These equity securities are classified within equity securities, AFS on the Condensed Consolidated Balance Sheets. As of September 30, 2016, the Company no longer holds these investments. Income earned from FVO securities is recorded in net investment income and changes in fair value are recorded in net realized capital gains and losses. The following table presents the changes in fair value of those assets and liabilities accounted for using the fair value option reported in net realized capital gains and losses in the Company’s Condensed Consolidated Statements of Operations.
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2016 | 2015 |  | 2016 | 2015
Assets |  |  |  |  |
Fixed maturities, FVO |  |  |  |  |
Corporate | $ | 1 |  | $ | (2 | ) |  | $ | 1 |  | $ | (5 | )
CDOs | — |  | 1 |  |  | — |  | 2 |
Foreign government | — |  | (3 | ) |  | (1 | ) | (4 | )
RMBS | 3 |  | — |  |  | 8 |  | — |
Total fixed maturities, FVO | $ | 4 |  | $ | (4 | ) |  | $ | 8 |  | $ | (7 | )
Equity, FVO | — |  | — |  |  | (34 | ) | 3 |
Total realized capital gains (losses) | $ | 4 |  | $ | (4 | ) |  | $ | (26 | ) | $ | (4 | )
The following table presents the fair value of assets and liabilities accounted for using the fair value option included in the Company’s Condensed Consolidated Balance Sheets.
| September 30, 2016 | December 31, 2015
Assets |  |
Fixed maturities, FVO |  |
ABS | $ | 6 |  | $ | 13 |
CDOs | 3 |  | 6 |
CMBS | 8 |  | 24 |
Corporate | 34 |  | 87 |
Foreign government | — |  | 2 |
U.S government | 2 |  | 3 |
RMBS | 307 |  | 368 |
Total fixed maturities, FVO | $ | 360 |  | $ | 503 |
Equity, FVO [1] | $ | — |  | $ | 282 |
[1] | Included in equity securities, AFS on the Condensed Consolidated Balance Sheets. The Company did not hold any equity securities, FVO as of September 30, 2016.
Financial Instruments Not Carried at Fair Value The following table presents carrying amounts and fair values of the Company’s financial instruments not carried at fair value.
|  | September 30, 2016 |  | December 31, 2015
| Fair Value Hierarchy Level | Carrying Amount | Fair Value |  | Carrying Amount | Fair Value
Assets |  |  |  |  |  |
Policy loans | Level 3 | $ | 1,432 |  | $ | 1,432 |  |  | $ | 1,447 |  | $ | 1,447 |
Mortgage loans | Level 3 | 5,611 |  | 5,857 |  |  | 5,624 |  | 5,736 |
Liabilities |  |  |  |  |  |
Other policyholder funds and benefits payable [1] | Level 3 | $ | 6,607 |  | $ | 6,887 |  |  | $ | 6,706 |  | $ | 6,898 |
Senior notes [2] | Level 2 | 4,242 |  | 4,894 |  |  | 4,259 |  | 4,811 |
Junior subordinated debentures [2] | Level 2 | 1,083 |  | 1,299 |  |  | 1,100 |  | 1,304 |
Consumer notes [3] | Level 3 | 24 |  | 24 |  |  | 38 |  | 38 |
Assumed investment contracts [3] | Level 3 | 754 |  | 806 |  |  | 619 |  | 682 |
[1] | Excludes guarantees on variable annuities, group accident and health and universal life insurance contracts, including corporate owned life insurance.
[2] | Included in long-term debt in the Condensed Consolidated Balance Sheets, except for current maturities, which are included in short-term debt.
[3] | Included in other liabilities in the Condensed Consolidated Balance Sheets.
Fair values for policy loans were determined using current loan coupon rates, which reflect the current rates available under the contracts. As a result, the fair value approximates the carrying value of the policy loans. Fair values for mortgage loans were estimated using discounted cash flow calculations based on current lending rates for similar type loans. Current lending rates reflect changes in credit spreads and the remaining terms of the loans. Fair values for other policyholder funds and benefits payable and assumed investment contracts, not carried at fair value, are estimated based on the cash surrender values of the underlying policies or by estimating future cash flows discounted at current interest rates adjusted for credit risk. Fair values for senior notes and junior subordinated debentures are determined using the market approach based on reported trades, benchmark interest rates and issuer spread for the Company which may consider credit default swaps. Fair values for consumer notes were estimated using discounted cash flow calculations using current interest rates adjusted for estimated loan durations.

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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 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13433-108611 + Details
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