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Fair Value Measurements Level 1 (Notes) | 6 Months Ended
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Jun. 30, 2017
Fair Value Disclosures [Abstract] |
Fair Value Disclosures [Text Block] | The Company carries certain financial assets and liabilities at estimated fair value. Fair value 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 in an orderly transaction between market participants. Our fair value framework includes a hierarchy that gives the highest priority to the use of quoted prices in active markets, followed by the use of market observable inputs, followed by the use of unobservable inputs. The fair value hierarchy levels are as follows:
Level 1 | Fair values based primarily on 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 | Fair values primarily based on observable inputs, other than quoted prices included in Level 1, or based on prices for similar assets and liabilities.
Level 3 | Fair values derived when one or more of the significant inputs are unobservable (including assumptions about risk). With little or no observable market, the determination of fair values uses considerable judgment and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability. Also included are securities that are traded within illiquid markets and/or priced by independent brokers.
The Company will classify the financial asset or liability by level based upon the lowest level input that is significant to the determination of the fair value. In most cases, both observable inputs (e.g., changes in interest rates) and unobservable inputs (e.g., changes in risk assumptions) are used to determine fair values that the Company has classified within Level 3.
Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of June 30, 2017
| 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") | $ | 2,354 |  | $ | — |  | $ | 2,258 |  | $ | 96 |
Collateralized debt obligations ("CDOs") | 2,457 |  | — |  | 2,118 |  | 339 |
Commercial mortgage-backed securities ("CMBS") | 5,173 |  | — |  | 5,075 |  | 98 |
Corporate | 26,044 |  | — |  | 24,908 |  | 1,136 |
Foreign government/government agencies | 1,297 |  | — |  | 1,268 |  | 29 |
Bonds of municipalities and political subdivisions ("municipal bonds") | 12,284 |  | — |  | 12,198 |  | 86 |
Residential mortgage-backed securities ("RMBS") | 4,219 |  | — |  | 2,208 |  | 2,011 |
U.S. Treasuries | 4,006 |  | 463 |  | 3,543 |  | — |
Total fixed maturities | 57,834 |  | 463 |  | 53,576 |  | 3,795 |
Fixed maturities, FVO | 146 |  | — |  | 146 |  | — |
Equity securities, trading [1] | 11 |  | 11 |  | — |  | — |
Equity securities, AFS | 1,055 |  | 789 |  | 168 |  | 98 |
Derivative assets |  |  |  |
Credit derivatives | 8 |  | — |  | 8 |  | — |
Equity derivatives | 2 |  | — |  | 1 |  | 1 |
Interest rate derivatives | 2 |  | — |  | 2 |  | — |
GMWB hedging instruments | 45 |  | — |  | — |  | 45 |
Macro hedge program | 94 |  | — |  | 8 |  | 86 |
Total derivative assets [2] | 151 |  | — |  | 19 |  | 132 |
Short-term investments | 4,716 |  | 1,916 |  | 2,800 |  | — |
Reinsurance recoverable for GMWB | 57 |  | — |  | — |  | 57 |
Modified coinsurance reinsurance contracts | 58 |  | — |  | 58 |  | — |
Separate account assets [3] | 112,559 |  | 73,019 |  | 38,466 |  | 192 |
Total assets accounted for at fair value on a recurring basis | $ | 176,587 |  | $ | 76,198 |  | $ | 95,233 |  | $ | 4,274 |
Liabilities accounted for at fair value on a recurring basis |  |  |  |
Other policyholder funds and benefits payable |  |  |  |
GMWB embedded derivative | $ | (134 | ) | $ | — |  | $ | — |  | $ | (134 | )
Equity linked notes | (37 | ) | — |  | — |  | (37 | )
Total other policyholder funds and benefits payable | (171 | ) | — |  | — |  | (171 | )
Derivative liabilities |  |  |  |
Credit derivatives | (6 | ) | — |  | (6 | ) | — |
Equity derivatives | 38 |  | — |  | 37 |  | 1 |
Foreign exchange derivatives | (267 | ) | — |  | (267 | ) | — |
Interest rate derivatives | (488 | ) | — |  | (462 | ) | (26 | )
GMWB hedging instruments | 40 |  | — |  | 45 |  | (5 | )
Macro hedge program | 74 |  | — |  | — |  | 74 |
Total derivative liabilities [4] | (609 | ) | — |  | (653 | ) | 44 |
Contingent consideration [5] | (27 | ) | — |  | — |  | (27 | )
Total liabilities accounted for at fair value on a recurring basis | $ | (807 | ) | $ | — |  | $ | (653 | ) | $ | (154 | )
Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 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 |  |  |  |
ABS | $ | 2,382 |  | $ | — |  | $ | 2,300 |  | $ | 82 |
CDOs | 1,916 |  | — |  | 1,502 |  | 414 |
CMBS | 4,936 |  | — |  | 4,856 |  | 80 |
Corporate | 25,666 |  | — |  | 24,586 |  | 1,080 |
Foreign government/government agencies | 1,171 |  | — |  | 1,107 |  | 64 |
Municipal bonds | 11,486 |  | — |  | 11,368 |  | 118 |
RMBS | 4,767 |  | — |  | 2,795 |  | 1,972 |
U.S. Treasuries | 3,679 |  | 620 |  | 3,059 |  | — |
Total fixed maturities | 56,003 |  | 620 |  | 51,573 |  | 3,810 |
Fixed maturities, FVO | 293 |  | 1 |  | 281 |  | 11 |
Equity securities, trading [1] | 11 |  | 11 |  | — |  | — |
Equity securities, AFS | 1,097 |  | 821 |  | 177 |  | 99 |
Derivative assets |  |  |  |
Credit derivatives | 17 |  | — |  | 17 |  | — |
Foreign exchange derivatives | 27 |  | — |  | 27 |  | — |
Interest rate derivatives | (427 | ) | — |  | (427 | ) | — |
GMWB hedging instruments | 74 |  | — |  | 14 |  | 60 |
Macro hedge program | 128 |  | — |  | 8 |  | 120 |
Other derivative contracts | 1 |  | — |  | — |  | 1 |
Total derivative assets [2] | (180 | ) | — |  | (361 | ) | 181 |
Short-term investments | 3,244 |  | 878 |  | 2,366 |  | — |
Reinsurance recoverable for GMWB | 73 |  | — |  | — |  | 73 |
Modified coinsurance reinsurance contracts | 68 |  | — |  | 68 |  | — |
Separate account assets [3] | 111,634 |  | 71,606 |  | 38,856 |  | 201 |
Total assets accounted for at fair value on a recurring basis | $ | 172,243 |  | $ | 73,937 |  | $ | 92,960 |  | $ | 4,375 |
Liabilities accounted for at fair value on a recurring basis |  |  |  |
Other policyholder funds and benefits payable |  |  |  |
GMWB embedded derivative | $ | (241 | ) | $ | — |  | $ | — |  | $ | (241 | )
Equity linked notes | (33 | ) | — |  | — |  | (33 | )
Total other policyholder funds and benefits payable | (274 | ) | — |  | — |  | (274 | )
Derivative liabilities |  |  |  |
Credit derivatives | (13 | ) | — |  | (13 | ) | — |
Equity derivatives | 33 |  | — |  | 33 |  | — |
Foreign exchange derivatives | (237 | ) | — |  | (237 | ) | — |
Interest rate derivatives | (542 | ) | — |  | (521 | ) | (21 | )
GMWB hedging instruments | 20 |  | — |  | (1 | ) | 21 |
Macro hedge program | 50 |  | — |  | 3 |  | 47 |
Total derivative liabilities [4] | (689 | ) | — |  | (736 | ) | 47 |
Contingent consideration [5] | (25 | ) | — |  | — |  | (25 | )
Total liabilities accounted for at fair value on a recurring basis | $ | (988 | ) | $ | — |  | $ | (736 | ) | $ | (252 | )
[1] | Included in other investments on the Condensed Consolidated Balance Sheets.
[2] | Includes 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 footnote 4 to this table for derivative liabilities.
[3] | Approximately $4.2 billion and $4.0 billion of investment sales receivable, as of June 30, 2017, and December 31, 2016, 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 $882 and $1.0 billion of investments, as of June 30, 2017 and December 31, 2016, for which the fair value is estimated using the net asset value per unit as a practical expedient which are excluded from the disclosure requirement to classify amounts in the fair value hierarchy.
[4] | 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.
[5] | For additional information see the Contingent Consideration section below.
Fixed Maturities, Equity Securities, Short-term Investments, and Free-standing Derivatives Valuation Techniques The Company generally determines fair values using valuation techniques that use prices, rates, and other relevant information evident from market transactions involving identical or similar instruments. Valuation techniques also include, where appropriate, estimates of future cash flows that are converted into a single discounted amount using current market expectations. The Company uses a "waterfall" approach comprised of the following pricing sources and techniques, which are listed in priority order:
• | Quoted prices, unadjusted, for identical assets or liabilities in active markets, which are classified as Level 1.
• | Prices from third-party pricing services, which primarily utilize a combination of techniques. These services utilize recently reported trades of identical, similar, or benchmark securities making adjustments for market observable inputs available through the reporting date. If there are no recently reported trades, they may use a discounted cash flow technique to develop a price using expected cash flows based upon the anticipated future performance of the underlying collateral discounted at an estimated market rate. Both techniques develop prices that consider the time value of future cash flows and provide a margin for risk, including liquidity and credit risk. Most prices provided by third-party pricing services are classified as Level 2 because the inputs used in pricing the securities are observable. However, some securities that are less liquid or trade less actively are classified as Level 3. Additionally, certain long-dated securities, including certain municipal securities, foreign government/government agency securities, and bank loans, include benchmark interest rate or credit spread assumptions that are not observable in the marketplace and are thus classified as Level 3.
• | Internal matrix pricing, which is a valuation process internally developed for private placement securities for which the Company is unable to obtain a price from a third-party pricing service. Internal pricing matrices determine credit spreads that, when combined with risk-free rates, are applied to contractual cash flows to develop a price. The Company develops credit spreads 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 market-based reference credit spread considers the issuer’s financial strength and term to maturity, using an independent public security index and trade information, while the credit spread differential considers the non-public nature of the security. Securities priced using internal matrix pricing are classified as Level 2 because the inputs are observable or can be corroborated with observable data.
• | Independent broker quotes, which are typically non-binding and use inputs that can be difficult to corroborate with observable market based data. Brokers may use present value techniques using assumptions specific to the security types, or they may use recent transactions of similar securities. Due to the lack of transparency in the process that brokers use to develop prices, valuations that are based on independent broker quotes are classified as Level 3.
The fair value of free-standing derivative instruments are determined primarily using a discounted cash flow model or option model technique and incorporate counterparty credit risk. In some cases, quoted market prices for exchange-traded and OTC-cleared derivatives may be used and in other cases independent broker quotes may be used. The pricing valuation models primarily use inputs that are observable in the market or can be corroborated by observable market data. The valuation of certain derivatives may include significant inputs that are unobservable, such as volatility levels, and reflect the Company’s view of what other market participants would use when pricing such instruments. Unobservable market data is used in the valuation of customized derivatives that are used to hedge certain GMWB variable annuity riders. See the section “GMWB Embedded, Customized, and Reinsurance Derivatives” below for further discussion of the valuation model used to value these customized derivatives. Valuation Controls The fair value process for investments is monitored by the Valuation Committee, which is a cross-functional group of senior management within the Company that meets at least quarterly. The purpose of the committee is to oversee the pricing policy and procedures, as well as approving changes to valuation methodologies and pricing sources. Controls and procedures used to assess third-party pricing services are reviewed by the Valuation Committee, including the results of annual due-diligence reviews. 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"). The working groups, which include various investment, operations, accounting and risk management professionals, meet monthly to review market data trends, pricing and trading statistics and results, and any proposed pricing methodology changes. The Securities Working Group reviews prices received from third parties to ensure that the prices represent a reasonable estimate of the fair value. The group considers trading volume, new issuance activity, market trends, new regulatory rulings and other factors to determine whether the market activity is significantly different than normal activity in an active market. A dedicated pricing unit follows up with trading and investment sector professionals and challenges prices of third-party pricing services when the estimated assumptions used differ from what the unit believes a market participant would use. If the available evidence indicates that pricing from third-party pricing services or broker quotes is based upon transactions that are stale or not from trades made in an orderly market, the Company places little, if any, weight on the third party service’s transaction price and will estimate fair value using an internal process, such as a pricing matrix. The Derivatives Working Group reviews the inputs, assumptions and methodologies used to ensure that the prices represent a reasonable estimate of the fair value. A dedicated pricing team works directly with investment sector professionals to investigate the impacts of changes in the market environment on prices or valuations of derivatives. New models and any changes to current models are required to have detailed documentation and are validated to a second source. The model validation documentation and results of validation are presented to the Valuation Committee for approval. The Company conducts other monitoring controls around securities and derivatives pricing including, but not limited to, the following:
• | Review of daily price changes over specific thresholds and new trade comparison to third-party pricing services.
• | Daily comparison of OTC derivative market valuations to counterparty valuations.
• | Review of weekly price changes compared to published bond prices of a corporate bond index.
• | Monthly reviews of price changes over thresholds, stale prices, missing prices, and zero prices.
• | Monthly validation of prices to a second source for securities in most sectors and for certain derivatives.
In addition, the Company’s enterprise-wide Operational Risk Management function, led by the Chief Risk Officer, is responsible for model risk management and provides an independent review of the suitability and reliability of model inputs, as well as an analysis of significant changes to current models. Valuation Inputs Quoted prices for identical assets in active markets are considered Level 1 and consist 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.
Valuation Inputs Used in Levels 2 and 3 Measurements for Securities and Freestanding Derivatives
Level 2 Primary Observable Inputs | Level 3 Primary Unobservable Inputs
Fixed Maturity Investments
Structured securities (includes ABS, CDOs CMBS and RMBS)
| • Benchmark yields and spreads • Monthly payment information • Collateral performance, which varies by vintage year and includes delinquency rates, loss severity rates and refinancing assumptions • Credit default swap indices Other inputs for ABS and RMBS: • Estimate of future principal prepayments, derived based on the characteristics of the underlying structure • Prepayment speeds previously experienced at the interest rate levels projected for the collateral |  | • Independent broker quotes • Credit spreads beyond observable curve • Interest rates beyond observable curve Other inputs for less liquid securities or those that trade less actively, including subprime RMBS: • Estimated cash flows • Credit spreads, which include illiquidity premium • Constant prepayment rates • Constant default rates • Loss severity
Corporates
| • Benchmark yields and spreads • Reported trades, bids, offers of the same or similar securities • Issuer spreads and credit default swap curves Other inputs for investment grade privately placed securities that utilize internal matrix pricing: • Credit spreads for public securities of similar quality, maturity, and sector, adjusted for non-public nature |  | • Independent broker quotes • Credit spreads beyond observable curve • Interest rates beyond observable curve Other inputs for below investment grade privately placed securities: • Independent broker quotes • Credit spreads for public securities of similar quality, maturity, and sector, adjusted for non-public nature
U.S Treasuries, Municipals, and Foreign government/government agencies
| • Benchmark yields and spreads • Issuer credit default swap curves • Political events in emerging market economies • Municipal Securities Rulemaking Board reported trades and material event notices • Issuer financial statements |  | • Independent broker quotes • Credit spreads beyond observable curve • Interest rates beyond observable curve
Equity Securities
| • Quoted prices in markets that are not active |  | • For privately traded equity securities, internal discounted cash flow models utilizing earnings multiples or other cash flow assumptions that are not observable; or they may be held at cost
Short Term Investments
| • Benchmark yields and spreads • Reported trades, bids, offers • Issuer spreads and credit default swap curves • Material event notices and new issue money market rates |  | Not applicable
Derivatives
Credit derivatives
| • Swap yield curve • Credit default swap curves |  | • Independent broker quotes • Yield curves beyond observable limits
Equity derivatives
| • Equity index levels • Swap yield curve |  | • Independent broker quotes • Equity volatility
Foreign exchange derivatives
| • Swap yield curve • Currency spot and forward rates • Cross currency basis curves |  | • Independent broker quotes
Interest rate derivatives
| • Swap yield curve |  | • Independent broker quotes • Interest rate volatility
Significant Unobservable Inputs for Level 3 - Securities
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]
As of June 30, 2017
CMBS [3] | $ | 51 |  | Discounted cash flows | Spread (encompasses prepayment, default risk and loss severity) | 9 bps | 1,816 bps | 466 bps | Decrease
Corporate [4] | 489 |  | Discounted cash flows | Spread | 108 bps | 944 bps | 303 bps | Decrease
Municipal [3] | 70 |  | Discounted cash flows | Spread | 166 bps | 222 bps | 183 bps | Decrease
RMBS [3] | 2,002 |  | Discounted cash flows | Spread | 40 bps | 624 bps | 126 bps | Decrease
|  |  | Constant prepayment rate | —% | 14% | 5% | Decrease [5]
|  |  | Constant default rate | 2% | 10% | 5% | Decrease
|  |  | Loss severity | —% | 100% | 71% | Decrease
As of December 31, 2016
CMBS [3] | $ | 52 |  | Discounted cash flows | Spread (encompasses prepayment, default risk and loss severity) | 10 bps | 1,273 bps | 366 bps | Decrease
Corporate [4] | 510 |  | Discounted cash flows | Spread | 122 bps | 1,302 bps | 359 bps | Decrease
Municipal [3] | 101 |  | Discounted cash flows | Spread | 135 bps | 286 bps | 221 bps | Decrease
RMBS [3] | 1,963 |  | Discounted cash flows | Spread | 16 bps | 1,830 bps | 192 bps | Decrease
|  |  | Constant prepayment rate | —% | 20% | 4% | Decrease [5]
|  |  | Constant default rate | —% | 11% | 5% | Decrease
|  |  | Loss severity | —% | 100% | 75% | 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 based fair value on broker quotations.
[4] | 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.
[5] | Decrease for above market rate coupons and increase for below market rate coupons.
Significant Unobservable Inputs for Level 3 - Freestanding Derivatives
| Fair Value | Predominant Valuation Technique | Significant Unobservable Input | Minimum | Maximum | Impact of Increase in Input on Fair Value [1]
As of June 30, 2017
Interest rate derivatives |  |  |  |  |  |
Interest rate swaps | $ | (29 | ) | Discounted cash flows | Swap curve beyond 30 years | 3 | % | 3 | % | Decrease
Interest rate swaptions [2] | 3 |  | Option model | Interest rate volatility | 2 | % | 2 | % | Increase
GMWB hedging instruments |  |  |  |  |  |
Equity variance swaps | (39 | ) | Option model | Equity volatility | 16 | % | 20 | % | Increase
Equity options | 6 |  | Option model | Equity volatility | 26 | % | 28 | % | Increase
Customized swaps | 73 |  | Discounted cash flows | Equity volatility | 9 | % | 30 | % | Increase
Macro hedge program [3] |  |  |  |  |  |
Equity options | 171 |  | Option model | Equity volatility | 15 | % | 26 | % | Increase
As of December 31, 2016
Interest rate derivatives |  |  |  |  |  |
Interest rate swaps | $ | (29 | ) | Discounted cash flows | Swap curve beyond 30 years | 3 | % | 3 | % | Decrease
Interest rate swaptions [2] | 8 |  | Option model | Interest rate volatility | 2 | % | 2 | % | Increase
GMWB hedging instruments |  |  |  |  |  |
Equity variance swaps | (36 | ) | Option model | Equity volatility | 20 | % | 23 | % | Increase
Equity options | 17 |  | Option model | Equity volatility | 27 | % | 30 | % | Increase
Customized swaps | 100 |  | Discounted cash flows | Equity volatility | 12 | % | 30 | % | Increase
Macro hedge program [3] |  |  |  |  |  |
Equity options | 188 |  | Option model | Equity volatility | 17 | % | 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.
The tables above exclude the portion of ABS, index options and certain corporate securities for which fair values are predominately based on independent broker quotes. While the Company does not have access to the significant unobservable inputs that independent brokers may use in their pricing process, the Company believes brokers likely use inputs similar to those used by the Company and third-party pricing services to price similar instruments. As such, in their pricing models, brokers likely use estimated loss severity rates, prepayment rates, constant default rates and credit spreads. Therefore, similar to non-broker priced securities, increases in these inputs would generally cause fair values to decrease. For the three and six months ended June 30, 2017, no significant adjustments were made by the Company to broker prices received. 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 $692 and $1.3 billion for the three and six months ended June 30, 2017 and $67 and $808 for three and six months ended June 30, 2016, respectively, which represented previously on-the-run U.S. Treasury securities that are now off-the-run. For the three and six months ended June 30, 2017 and 2016, there were no transfers from Level 2 to Level 1. See the fair value roll-forward tables for the three and six months ended June 30, 2017 and 2016, for the transfers into and out of Level 3. GMWB Embedded, Customized and Reinsurance Derivatives
GMWB Embedded Derivatives | The Company formerly offered certain variable annuity products with GMWB riders that provide 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 a 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. When payments of the GRB are not life-contingent, the GMWB represents an embedded derivative carried at fair value reported in other policyholder funds and benefits payable in the Condensed Consolidated Balance Sheets with changes in fair value reported in net realized capital gains and losses.
Free-standing Customized Derivatives | The Company holds free-standing customized derivative contracts to provide protection from certain capital markets risks for the remaining term of specified blocks of non-reinsured GMWB riders. These customized derivatives are based on policyholder behavior assumptions specified at the inception of the derivative contracts. The Company retains the risk for differences between assumed and actual policyholder behavior and between the performance of the actively managed funds underlying the separate accounts and their respective indices. These derivatives are reported in the Condensed Consolidated Balance Sheets within other investments or other liabilities, as appropriate, after considering the impact of master netting agreements.
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 carried at fair value and reported in reinsurance recoverables in the Condensed Consolidated Balance Sheets. Changes in the fair value of the reinsurance agreements are reported in net realized capital gains and losses.
Valuation Techniques Fair values for GMWB embedded derivatives, free-standing customized derivatives and reinsurance derivatives are classified as Level 3 in the fair value hierarchy and are calculated using internally developed models that utilize significant unobservable inputs because active, observable markets do not exist for these items. In valuing the GMWB embedded derivative, the Company attributes to the derivative a portion of the expected fees to be collected over the expected life of the contract from the contract holder equal to the present value of future GMWB claims. The excess of fees collected from the contract holder in the current period over the portion of fees attributed to the embedded derivative in the current period are associated with the host variable annuity contract and reported in fee income. Valuation Controls Oversight of the Company's valuation policies and processes for GMWB embedded, reinsurance, and customized 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. Valuation Inputs The fair value for each of the non-life contingent GMWBs, the free-standing customized derivatives and the GMWB reinsurance derivative is calculated as an aggregation of the following components: Best Estimate Claim Payments; Credit Standing Adjustment; and Margins. The Company believes the aggregation of these components results in an amount that a market participant in an active liquid market would require, if such a market existed, to assume the risks associated with the guaranteed minimum benefits and the related reinsurance and customized derivatives. Each component described in the following discussion is unobservable in the marketplace and requires subjectivity by the Company in determining its value. 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 unobservable inputs including expectations concerning policyholder behavior. These assumptions are input into a stochastic risk neutral scenario process that is used to determine the valuation and involves numerous estimates and subjective judgments regarding a number of variables. The Company monitors various aspects of policyholder behavior and may modify certain of its assumptions, including living benefit lapses and withdrawal rates, if credible emerging data indicates that changes are warranted. In addition, the Company will continue to evaluate policyholder behavior assumptions should we implement initiatives to reduce the size of the variable annuity business. At a minimum, all policyholder behavior assumptions are reviewed and updated at least annually as part of the Company’s annual fourth-quarter comprehensive study to refine its estimate of future gross profits. In addition, the Company recognizes non-market-based updates driven by the relative outperformance (underperformance) of the underlying actively managed funds as compared to their respective indices. Credit Standing Adjustment The credit standing adjustment is an estimate of the additional amount that market participants would require in determining fair value to reflect the risk that GMWB 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. 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.
Valuation Inputs Used in Levels 2 and 3 Measurements for GMWB Embedded, Customized and Reinsurance Derivatives
Level 2 Primary Observable Inputs | Level 3 Primary Unobservable Inputs
| • Risk-free rates as represented by the Eurodollar futures, LIBOR deposits and swap rates to derive forward curve rates • Correlations of 10 years of observed historical returns across underlying well-known market indices • Correlations of historical index returns compared to separate account fund returns • Equity index levels |  | • Market implied equity volatility assumptions Assumptions about policyholder behavior, including: • Withdrawal utilization • Withdrawal rates • Lapse rates • Reset elections
Significant Unobservable Inputs for Level 3 GMWB Embedded Customized and Reinsurance Derivatives
As of June 30, 2017
Significant Unobservable Input | Unobservable Inputs (Minimum) | Unobservable Inputs (Maximum) | Impact of Increase in Input on Fair Value Measurement [1]
Withdrawal Utilization [2] | 15% | 100% | Increase
Withdrawal Rates [3] | —% | 8% | Increase
Lapse Rates [4] | —% | 40% | Decrease
Reset Elections [5] | 20% | 75% | Increase
Equity Volatility [6] | 9% | 30% | Increase
As of December 31, 2016
Significant Unobservable Input | Unobservable Inputs (Minimum) | Unobservable Inputs (Maximum) | Impact of Increase in Input on Fair Value Measurement [1]
Withdrawal Utilization [2] | 15% | 100% | Increase
Withdrawal Rates [3] | —% | 8% | Increase
Lapse Rates [4] | —% | 40% | Decrease
Reset Elections [5] | 20% | 75% | Increase
Equity Volatility [6] | 12% | 30% | 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.
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, 43% and 39% were subject to significant liquidation restrictions as of June 30, 2017 and December 31, 2016, respectively. Total limited partnerships that do not allow any form of redemption were 13% and 11% as of June 30, 2017 and December 31, 2016, respectively. Separate account assets classified as Level 3 primarily include subprime RMBS and commercial mortgage loans. Contingent Consideration The acquisition of Lattice Strategies LLC ("Lattice") in 2016 requires the Company to make payments to former owners of Lattice of up to $60 contingent upon growth in exchange-traded products ("ETP") AUM over a four-year period beginning on the date of acquisition. The contingent consideration is measured at fair value on a quarterly basis by projecting future eligible ETP AUM over the contingency period to estimate the amount of expected payout. The future expected payout is discounted back to the valuation date using a risk-adjusted discount rate of 18.8%. The risk-adjusted discount rate is an internally generated and significant unobservable input to fair value. Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs The Company uses 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 asset or liability. Therefore, the realized and unrealized gains and losses on derivatives reported in the Level 3 roll-forward may be offset by realized and unrealized gains and losses of the associated assets and liabilities in other line items of the financial statements.
Fair Value Roll-forwards for Financial Instruments Classified as Level 3 for the Three Months Ended June 30, 2017
| Total realized/unrealized gains (losses) |  |  |  |  |  |
|  | Fair value as of March 31, 2017 | Included in net income [1] [2] [6] | Included in OCI [3] | Purchases [8] | Settlements | Sales | Transfers into Level 3 [4] | Transfers out of Level 3 [4] | Fair value as of June 30, 2017
Assets |  |  |  |  |  |  |  |  |
Fixed Maturities, AFS |  |  |  |  |  |  |  |  |
| ABS | $ | 125 |  | $ | — |  | $ | — |  | $ | 25 |  | $ | (1 | ) | $ | — |  | $ | — |  | $ | (53 | ) | $ | 96 |
| CDOs | 319 |  | — |  | (5 | ) | 300 |  | (207 | ) | — |  | — |  | (68 | ) | 339 |
| CMBS | 117 |  | — |  | 1 |  | 19 |  | (3 | ) | — |  | — |  | (36 | ) | 98 |
| Corporate | 1,078 |  | (12 | ) | 14 |  | 46 |  | (4 | ) | (30 | ) | 52 |  | (8 | ) | 1,136 |
| Foreign Govt./Govt. Agencies | 66 |  | — |  | — |  | 6 |  | (1 | ) | (2 | ) | — |  | (40 | ) | 29 |
| Municipal | 117 |  | 4 |  | (1 | ) | — |  | — |  | (34 | ) | — |  | — |  | 86 |
| RMBS | 2,048 |  | — |  | 27 |  | 50 |  | (114 | ) | — |  | — |  | — |  | 2,011 |
Total Fixed Maturities, AFS | 3,870 |  | (8 | ) | 36 |  | 446 |  | (330 | ) | (66 | ) | 52 |  | (205 | ) | 3,795 |
Equity Securities, AFS | 99 |  | — |  | (1 | ) | — |  | — |  | — |  | — |  | — |  | 98 |
Freestanding Derivatives, net [5] |  |  |  |  |  |  |  |  |
| Equity | 4 |  | (2 | ) | — |  | — |  | — |  | — |  | — |  | — |  | 2 |
| Interest rate | (24 | ) | (2 | ) | — |  | — |  | — |  | — |  | — |  | — |  | (26 | )
| GMWB hedging instruments | 46 |  | (6 | ) | — |  | — |  | — |  | — |  | — |  | — |  | 40 |
| Macro hedge program | 159 |  | 1 |  | — |  | — |  | — |  | — |  | — |  | — |  | 160 |
| Other contracts | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Total Freestanding Derivatives, net [5] | 185 |  | (9 | ) | — |  | — |  | — |  | — |  | — |  | — |  | 176 |
Reinsurance Recoverable for GMWB | 60 |  | (7 | ) | — |  | — |  | 4 |  | — |  | — |  | — |  | 57 |
Separate Accounts | 277 |  | 2 |  | — |  | 13 |  | (2 | ) | (34 | ) | 7 |  | (71 | ) | 192 |
Total Assets | $ | 4,491 |  | $ | (22 | ) | $ | 35 |  | $ | 459 |  | $ | (328 | ) | $ | (100 | ) | $ | 59 |  | $ | (276 | ) | $ | 4,318 |
Liabilities |  |  |  |  |  |  |  |  |
Other Policyholder Funds and Benefits Payable |  |  |  |  |  |  |  |  |
| Guaranteed Withdrawal Benefits | $ | (157 | ) | $ | 40 |  | $ | — |  | $ | — |  | $ | (17 | ) | $ | — |  | $ | — |  | $ | — |  | $ | (134 | )
| Equity Linked Notes | (36 | ) | (1 | ) | — |  | — |  | — |  | — |  | — |  | — |  | (37 | )
Total Other Policyholder Funds and Benefits Payable | (193 | ) | 39 |  | — |  | — |  | (17 | ) | — |  | — |  | — |  | (171 | )
Contingent Consideration [7] | (26 | ) | (1 | ) | — |  | — |  | — |  | — |  | — |  | — |  | (27 | )
Total Liabilities | $ | (219 | ) | $ | 38 |  | $ | — |  | $ | — |  | $ | (17 | ) | $ | — |  | $ | — |  | $ | — |  | $ | (198 | )
Fair Value Roll-forwards for Financial Instruments Classified as Level 3 for the Six Months Ended June 30, 2017
| Total realized/unrealized gains (losses) |  |  |  |  |  |
|  | Fair value as of January 1, 2017 | Included in net income [1] [2] [6] | Included in OCI [3] | Purchases [8] | Settlements | Sales | Transfers into Level 3 [4] | Transfers out of Level 3 [4] | Fair value as of June 30, 2017
Assets |  |  |  |  |  |  |  |  |
Fixed Maturities, AFS |  |  |  |  |  |  |  |  |
| ABS | $ | 82 |  | $ | — |  | $ | — |  | $ | 70 |  | $ | (6 | ) | $ | — |  | $ | 26 |  | $ | (76 | ) | $ | 96 |
| CDOs | 414 |  | — |  | (1 | ) | 300 |  | (208 | ) | — |  | — |  | (166 | ) | 339 |
| CMBS | 80 |  | (1 | ) | 1 |  | 75 |  | (6 | ) | — |  | — |  | (51 | ) | 98 |
| Corporate | 1,080 |  | (6 | ) | 30 |  | 215 |  | (40 | ) | (190 | ) | 92 |  | (45 | ) | 1,136 |
| Foreign Govt./Govt. Agencies | 64 |  | — |  | 3 |  | 6 |  | (2 | ) | (2 | ) | — |  | (40 | ) | 29 |
| Municipal | 118 |  | 4 |  | 4 |  | — |  | — |  | (40 | ) | — |  | — |  | 86 |
| RMBS | 1,972 |  | — |  | 33 |  | 223 |  | (210 | ) | (7 | ) | — |  | — |  | 2,011 |
Total Fixed Maturities, AFS | 3,810 |  | (3 | ) | 70 |  | 889 |  | (472 | ) | (239 | ) | 118 |  | (378 | ) | 3,795 |
Fixed Maturities, FVO | 11 |  | — |  | — |  | 4 |  | (2 | ) | (13 | ) | — |  | — |  | — |
Equity Securities, AFS | 99 |  | — |  | (5 | ) | 4 |  | — |  | — |  | — |  | — |  | 98 |
Freestanding Derivatives, net [5] |  |  |  |  |  |  |  |  |
| Equity | — |  | (3 | ) | — |  | 5 |  | — |  | — |  | — |  | — |  | 2 |
| Interest rate | (21 | ) | (5 | ) | — |  | — |  | — |  | — |  | — |  | — |  | (26 | )
| GMWB hedging instruments | 81 |  | (41 | ) | — |  | — |  | — |  | — |  | — |  | — |  | 40 |
| Macro hedge program | 167 |  | (7 | ) | — |  | — |  | — |  | — |  | — |  | — |  | 160 |
| Other contracts | 1 |  | (1 | ) | — |  | — |  | — |  | — |  | — |  | — |  | — |
Total Freestanding Derivatives, net [5] | 228 |  | (57 | ) | — |  | 5 |  | — |  | — |  | — |  | — |  | 176 |
Reinsurance Recoverable for GMWB | 73 |  | (23 | ) | — |  | — |  | 7 |  | — |  | — |  | — |  | 57 |
Separate Accounts | 201 |  | 3 |  | 2 |  | 111 |  | (7 | ) | (42 | ) | 10 |  | (86 | ) | 192 |
Total Assets | $ | 4,422 |  | $ | (80 | ) | $ | 67 |  | $ | 1,013 |  | $ | (474 | ) | $ | (294 | ) | $ | 128 |  | $ | (464 | ) | $ | 4,318 |
Liabilities |  |  |  |  |  |  |  |  |
Other Policyholder Funds and Benefits Payable |  |  |  |  |  |  |  |  |
| Guaranteed Withdrawal Benefits | $ | (241 | ) | $ | 140 |  | $ | — |  | $ | — |  | $ | (33 | ) | $ | — |  | $ | — |  | $ | — |  | $ | (134 | )
| Equity Linked Notes | (33 | ) | (4 | ) | — |  | — |  | — |  | — |  | — |  | — |  | (37 | )
Total Other Policyholder Funds and Benefits Payable | (274 | ) | 136 |  | — |  | — |  | (33 | ) | — |  | — |  | — |  | (171 | )
Contingent Consideration [7] | (25 | ) | (2 | ) | — |  | — |  | — |  | — |  | — |  | — |  | (27 | )
Total Liabilities | $ | (299 | ) | $ | 134 |  | $ | — |  | $ | — |  | $ | (33 | ) | $ | — |  | $ | — |  | $ | — |  | $ | (198 | )
Fair Value Roll-forwards for Financial Instruments Classified as Level 3 for the Three Months Ended June 30, 2016
| Total realized/unrealized gains (losses) |  |  |  |  |  |
|  | Fair value as of March 31, 2016 | Included in net income [1] [2] [6] | Included in OCI [3] | Purchases [8] | Settlements | Sales | Transfers into Level 3 [4] | Transfers out of Level 3 [4] | Fair value as of June 30, 2016
Assets |  |  |  |  |  |  |  |  |
Fixed Maturities, AFS |  |  |  |  |  |  |  |  |
| ABS | $ | 32 |  | $ | — |  | $ | — |  | $ | — |  | $ | (4 | ) | $ | — |  | $ | 13 |  | $ | — |  | $ | 41 |
| CDOs | 542 |  | (1 | ) | (2 | ) | — |  | (61 | ) | — |  | — |  | — |  | 478 |
| CMBS | 134 |  | — |  | 5 |  | 10 |  | (9 | ) | (3 | ) | 1 |  | (59 | ) | 79 |
| Corporate | 834 |  | (1 | ) | 19 |  | 37 |  | (50 | ) | (66 | ) | 455 |  | (92 | ) | 1,136 |
| Foreign Govt./Govt. Agencies | 76 |  | 1 |  | 4 |  | 1 |  | (1 | ) | (9 | ) | — |  | — |  | 72 |
| Municipal | 50 |  | — |  | 4 |  | 20 |  | — |  | — |  | 16 |  | — |  | 90 |
| RMBS | 1,886 |  | — |  | 10 |  | 97 |  | (101 | ) | — |  | 3 |  | (22 | ) | 1,873 |
Total Fixed Maturities, AFS | 3,554 |  | (1 | ) | 40 |  | 165 |  | (226 | ) | (78 | ) | 488 |  | (173 | ) | 3,769 |
Fixed Maturities, FVO | 14 |  | 1 |  | — |  | 1 |  | (1 | ) | (3 | ) | — |  | (6 | ) | 6 |
Equity Securities, AFS | 92 |  | 1 |  | 5 |  | 2 |  | — |  | (3 | ) | — |  | — |  | 97 |
Freestanding Derivatives, net [5] |  |  |  |  |  |  |  |  |
| Equity | 5 |  | (4 | ) | — |  | — |  | — |  | — |  | — |  | — |  | 1 |
| Interest rate | (28 | ) | (4 | ) | — |  | — |  | — |  | — |  | — |  | — |  | (32 | )
| GMWB hedging instruments | 144 |  | 15 |  | — |  | — |  | — |  | — |  | — |  | 6 |  | 165 |
| Macro hedge program | 145 |  | (4 | ) | — |  | — |  | — |  | — |  | — |  | — |  | 141 |
| Other contracts | 5 |  | (1 | ) | — |  | — |  | — |  | — |  | — |  | — |  | 4 |
Total Freestanding Derivatives, net [5] | 271 |  | 2 |  | — |  | — |  | — |  | — |  | — |  | 6 |  | 279 |
Reinsurance Recoverable for GMWB | 99 |  | 3 |  | — |  | — |  | 4 |  | — |  | — |  | — |  | 106 |
Separate Accounts | 154 |  | — |  | 3 |  | 22 |  | (3 | ) | (6 | ) | 3 |  | (2 | ) | 171 |
Total Assets | $ | 4,184 |  | $ | 6 |  | $ | 48 |  | $ | 190 |  | $ | (226 | ) | $ | (90 | ) | $ | 491 |  | $ | (175 | ) | $ | 4,428 |
Liabilities |  |  |  |  |  |  |  |  |
Other Policyholder Funds and Benefits Payable |  |  |  |  |  |  |  |  |
| Guaranteed Withdrawal Benefits | $ | (361 | ) | $ | (35 | ) | $ | — |  | $ | — |  | $ | (16 | ) | $ | — |  | $ | — |  | $ | — |  | $ | (412 | )
| Equity Linked Notes | (25 | ) | (3 | ) | — |  | — |  | — |  | — |  | — |  | — |  | (28 | )
Total Other Policyholder Funds and Benefits Payable | (386 | ) | (38 | ) | — |  | — |  | (16 | ) | — |  | — |  | — |  | (440 | )
Total Liabilities | $ | (386 | ) | $ | (38 | ) | $ | — |  | $ | — |  | $ | (16 | ) | $ | — |  | $ | — |  | $ | — |  | $ | (440 | )
Fair Value Roll-forwards for Financial Instruments Classified as Level 3 for the Six Months Ended June 30, 2016
| Total realized/unrealized gains (losses) |  |  |  |  |  |
|  | Fair value as of January 1, 2016 | Included in net income [1] [2] [6] | Included in OCI [3] | Purchases [8] | Settlements | Sales | Transfers into Level 3 [4] | Transfers out of Level 3 [4] | Fair value as of June 30, 2016
Assets |  |  |  |  |  |  |  |  |
Fixed Maturities, AFS |  |  |  |  |  |  |  |  |
| ABS | $ | 37 |  | $ | — |  | $ | — |  | $ | — |  | $ | (7 | ) | $ | — |  | $ | 18 |  | $ | (7 | ) | $ | 41 |
| CDOs | 541 |  | (1 | ) | (2 | ) | — |  | (60 | ) | — |  | — |  | — |  | 478 |
| CMBS | 150 |  | (1 | ) | (3 | ) | 50 |  | (18 | ) | (3 | ) | 1 |  | (97 | ) | 79 |
| Corporate | 854 |  | (14 | ) | 12 |  | 67 |  | (55 | ) | (91 | ) | 513 |  | (150 | ) | 1,136 |
| Foreign Govt./Govt. Agencies | 60 |  | 1 |  | 9 |  | 15 |  | (2 | ) | (11 | ) | — |  | — |  | 72 |
| Municipal | 49 |  | — |  | 5 |  | 20 |  | — |  | — |  | 16 |  | — |  | 90 |
| RMBS | 1,622 |  | — |  | (4 | ) | 430 |  | (158 | ) | — |  | 5 |  | (22 | ) | 1,873 |
Total Fixed Maturities, AFS | 3,313 |  | (15 | ) | 17 |  | 582 |  | (300 | ) | (105 | ) | 553 |  | (276 | ) | 3,769 |
Fixed Maturities, FVO | 16 |  | (1 | ) | — |  | 6 |  | (2 | ) | (3 | ) | — |  | (10 | ) | 6 |
Equity Securities, AFS | 93 |  | — |  | 7 |  | 2 |  | — |  | (5 | ) | — |  | — |  | 97 |
Freestanding Derivatives, net [5] |  |  |  |  |  |  |  |  |
| Equity | — |  | (15 | ) | — |  | 16 |  | — |  | — |  | — |  | — |  | 1 |
| Interest rate | (22 | ) | (10 | ) | — |  | — |  | — |  | — |  | — |  | — |  | (32 | )
| GMWB hedging instruments | 135 |  | 24 |  | — |  | — |  | — |  | — |  | — |  | 6 |  | 165 |
| Macro hedge program | 147 |  | (4 | ) | — |  | — |  | (2 | ) | — |  | — |  | — |  | 141 |
| Other contracts | 7 |  | (3 | ) | — |  | — |  | — |  | — |  | — |  | — |  | 4 |
Total Freestanding Derivatives, net [5] | 267 |  | (8 | ) | — |  | 16 |  | (2 | ) | — |  | — |  | 6 |  | 279 |
Reinsurance Recoverable for GMWB | 83 |  | 16 |  | — |  | — |  | 7 |  | — |  | — |  | — |  | 106 |
Separate Accounts | 139 |  | — |  | 7 |  | 61 |  | (9 | ) | (16 | ) | 6 |  | (17 | ) | 171 |
Total Assets | $ | 3,911 |  | $ | (8 | ) | $ | 31 |  | $ | 667 |  | $ | (306 | ) | $ | (129 | ) | $ | 559 |  | $ | (297 | ) | $ | 4,428 |
Liabilities |  |  |  |  |  |  |  |  |
Other Policyholder Funds and Benefits Payable |  |  |  |  |  |  |  |  |
| Guaranteed Withdrawal Benefits | $ | (262 | ) | $ | (117 | ) | $ | — |  | $ | — |  | $ | (33 | ) | $ | — |  | $ | — |  | $ | — |  | $ | (412 | )
| Equity Linked Notes | (26 | ) | (2 | ) | — |  | — |  | — |  | — |  | — |  | — |  | (28 | )
Total Other Policyholder Funds and Benefits Payable | (288 | ) | (119 | ) | — |  | — |  | (33 | ) | — |  | — |  | — |  | (440 | )
Total Liabilities | $ | (288 | ) | $ | (119 | ) | $ | — |  | $ | — |  | $ | (33 | ) | $ | — |  | $ | — |  | $ | — |  | $ | (440 | )
[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] | Amounts in these rows are generally 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] | For additional information, see the Contingent Consideration section of Note 5 - Fair Value Measurements of Notes to Condensed Consolidated Financial Statements.
[8] | Includes issuance of contingent consideration associated with the Lattice acquisition, see Note 2 - Business Disposition of Notes to Condensed Consolidated Financial Statements for additional discussion.
Changes in Unrealized Gains (Losses) Included in Net Income for Financial Instruments Classified as Level 3 Still Held at End of Period
|  | Three months ended June 30, | Six months ended June 30,
|  | 2017 [1] [2] | 2016 [1] [2] | 2017 [1] [2] | 2016 [1] [2]
Assets |  |  |  |
Fixed Maturities, AFS |  |  |  |
| CMBS | $ | — |  | $ | — |  | $ | (1 | ) | $ | (1 | )
| Corporate | (12 | ) | (1 | ) | (12 | ) | (1 | )
Total Fixed Maturities, AFS | (12 | ) | (1 | ) | (13 | ) | (2 | )
Fixed Maturities, FVO | — |  | — |  | — |  | (1 | )
Freestanding Derivatives, net |  |  |  |
| Equity | (2 | ) | (4 | ) | (2 | ) | (15 | )
| Interest rate | (2 | ) | (4 | ) | (2 | ) | (10 | )
| GMWB hedging instruments | (6 | ) | 15 |  | (42 | ) | 24 |
| Macro hedge program | 2 |  | (4 | ) | (6 | ) | (4 | )
| Other Contracts | — |  | (1 | ) | — |  | (3 | )
Total Freestanding Derivatives, net | (8 | ) | 2 |  | (52 | ) | (8 | )
Reinsurance Recoverable for GMWB | (7 | ) | 3 |  | (23 | ) | 16 |
Separate Accounts | — |  | — |  | 1 |  | — |
Total Assets | $ | (27 | ) | $ | 4 |  | $ | (87 | ) | $ | 5 |
Liabilities |  |  |  |
Other Policyholder Funds and Benefits Payable |  |  |  |
| Guaranteed Withdrawal Benefits | $ | 40 |  | $ | (35 | ) | $ | 140 |  | $ | (117 | )
| Equity Linked Notes | (1 | ) | (3 | ) | (4 | ) | (2 | )
Total Other Policyholder Funds and Benefits Payable | 39 |  | (38 | ) | 136 |  | (119 | )
Contingent Consideration [3] | (1 | ) | — |  | (2 | ) | — |
Total Liabilities | $ | 38 |  | $ | (38 | ) | $ | 134 |  | $ | (119 | )
[1] | 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.
[2] | Amounts presented are for Level 3 only and therefore may not agree to other disclosures included herein.
[3] | For additional information, see the Contingent Consideration section of Note 5 - Fair Value Measurements of Notes to Condensed Consolidated Financial Statements.
Fair Value Option The Company has elected the fair value option for certain securities that contain embedded credit derivatives with underlying credit risk primarily related to residential real estate, and these securities are included within Fixed Maturities, FVO on the Condensed Consolidated Balance Sheets. The Company previously classified the underlying fixed maturities held in certain consolidated investment funds within Fixed Maturities, FVO. The Company reported the underlying fixed maturities of 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 Company also previously elected the fair value option for certain equity securities in order to align the accounting with total return swap contracts that hedged the risk associated with the investments. The swaps did not qualify for hedge accounting and the change in value of both the equity securities and the total return swaps were recorded in net realized capital gains and losses. These equity securities were classified within equity securities, AFS on the Condensed Consolidated Balance Sheets. Income earned from FVO securities was recorded in net investment income and changes in fair value were recorded in net realized capital gains and losses. The Company did not hold any of these equity securities as of June 30, 2017 or December 31, 2016.
Changes in Fair Value of Assets using Fair Value Option
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2017 | 2016 |  | 2017 | 2016
Assets |  |  |  |  |
Fixed maturities, FVO |  |  |  |  |
Corporate | $ | — |  | $ | — |  |  | $ | (1 | ) | $ | — |
Foreign government | — |  | — |  |  | — |  | (1 | )
RMBS | — |  | 4 |  |  | 1 |  | 5 |
Total fixed maturities, FVO | $ | — |  | $ | 4 |  |  | $ | — |  | $ | 4 |
Equity, FVO | 3 |  | — |  |  | 2 |  | (34 | )
Total realized capital gains (losses) | $ | 3 |  | $ | 4 |  |  | $ | 2 |  | $ | (30 | )
Fair Value of Assets and Liabilities using the Fair Value Option
| June 30, 2017 | December 31, 2016
Assets |  |
Fixed maturities, FVO |  |
ABS | $ | — |  | $ | 7 |
CDOs | — |  | 3 |
CMBS | — |  | 8 |
Corporate | — |  | 40 |
U.S government | — |  | 7 |
RMBS | 146 |  | 228 |
Total fixed maturities, FVO | $ | 146 |  | $ | 293 |
Financial Assets and Liabilities Not Carried at Fair Value
| Fair Value Hierarchy Level | Carrying Amount | Fair Value
June 30, 2017
Assets |  |  |
Policy loans | Level 3 | $ | 1,433 |  | $ | 1,433 |
Mortgage loans | Level 3 | 5,796 |  | 5,871 |
Liabilities |  |  |
Other policyholder funds and benefits payable [1] | Level 3 | $ | 6,403 |  | $ | 6,603 |
Senior notes [2] | Level 2 | 3,555 |  | 4,200 |
Junior subordinated debentures [2] | Level 2 | 1,582 |  | 1,756 |
Consumer notes [3] [4] | Level 3 | 10 |  | 10 |
Assumed investment contracts [3] | Level 3 | 514 |  | 541 |
December 31, 2016
Assets |  |  |
Policy loans | Level 3 | $ | 1,444 |  | $ | 1,444 |
Mortgage loans | Level 3 | 5,697 |  | 5,721 |
Liabilities |  |  |
Other policyholder funds and benefits payable [1] | Level 3 | $ | 6,714 |  | $ | 6,906 |
Senior notes [2] | Level 2 | 3,969 |  | 4,487 |
Junior subordinated debentures [2] | Level 2 | 1,083 |  | 1,246 |
Consumer notes [3] [4] | Level 3 | 20 |  | 20 |
Assumed investment contracts [3] | Level 3 | 487 |  | 526 |
[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] | Excludes amounts carried at fair value and included in preceding disclosures.
[4] | 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=66048111&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=73719730&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=73719730&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=73719730&loc=d3e13433-108611 + Details
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