XML 69 R12.htm IDEA: XBRL DOCUMENT v3.10.0.1
Fair Value Measurements
 12 Months Ended
Dec. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements 5. FAIR VALUE MEASUREMENTS
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 inclu
des 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 December 31, 2018
 
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")
$
1,276

$
—

$
1,266

$
10

Collateralized loan obligations ("CLOs")
1,437

—

1,337

100

Commercial mortgage-backed securities ("CMBS")
3,552

—

3,540

12

Corporate
13,398

—

12,878

520

Foreign government/government agencies
847

—

844

3

Municipal
10,346

—

10,346

—

Residential mortgage-backed securities ("RMBS")
3,279

—

2,359

920

U.S. Treasuries
1,517

330

1,187

—

Total fixed maturities
35,652

330

33,757

1,565

Fixed maturities, FVO
22

—

22

—

Equity securities, at fair value
1,214

1,093

44

77

Derivative assets
 
 
 
 
Credit derivatives
5

—

5

—

Equity derivatives
3

—

—

3

Foreign exchange derivatives
(2
)
—

(2
)
—

Interest rate derivatives
1

—

1

—

Total derivative assets [1]
7

—

4

3

Short-term investments
4,283

1,039

3,244

—

Total assets accounted for at fair value on a recurring basis
$
41,178

$
2,462

$
37,071

$
1,645

Liabilities accounted for at fair value on a recurring basis
 

 

 

 

Derivative liabilities
 

 

 

 

Credit derivatives
(2
)
—

(2
)
—

Equity derivatives
1

—

1

—

Foreign exchange derivatives
(5
)
—

(5
)
—

Interest rate derivatives
(62
)
—

(63
)
1

Total derivative liabilities [2]
(68
)
—

(69
)
1

Contingent consideration [3]
(35
)
—

—

(35
)
Total liabilities accounted for at fair value on a recurring basis
$
(103
)
$
—

$
(69
)
$
(34
)

[1]
Includes 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 and applicable law. See footnote 2 to this table for derivative liabilities.
[2]
Includes 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 and applicable law.
[3]
For additional information see the Contingent Consideration section below.
Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 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")
$
1,126

$
—

$
1,107

$
19

Collateralized loan obligations ("CLOs")
1,260

—

1,165

95

Commercial mortgage-backed securities ("CMBS")
3,336

—

3,267

69

Corporate
12,804

—

12,284

520

Foreign government/government agencies
1,110

—

1,108

2

Municipal
12,485

—

12,468

17

Residential mortgage-backed securities ("RMBS")
3,044

—

1,814

1,230

U.S. Treasuries
1,799

333

1,466

—

Total fixed maturities
36,964

333

34,679

1,952

Fixed maturities, FVO
41

—

41

—

Equity securities, AFS
1,012

887

49

76

Derivative assets
 
 
 
 
Credit derivatives
9

—

9

—

Foreign exchange derivatives
(1
)
—

(1
)
—

Equity derivatives
1

—

—

1

Interest rate derivatives
1

—

1

—

Total derivative assets [1]
10

—

9

1

Short-term investments
2,270

1,098

1,172

—

Total assets accounted for at fair value on a recurring basis
$
40,297

$
2,318

$
35,950

$
2,029

Liabilities accounted for at fair value on a recurring basis
 
 
 
 
Derivative liabilities
 
 
 
 
Credit derivatives
(3
)
—

(3
)
—

Foreign exchange derivatives
(13
)
—

(13
)
—

Interest rate derivatives
(84
)
—

(85
)
1

Total derivative liabilities [2]
(100
)
—

(101
)
1

Contingent consideration [3]
(29
)
—

—

(29
)
Total liabilities accounted for at fair value on a recurring basis
$
(129
)
$
—

$
(101
)
$
(28
)

[1]
Includes 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 and applicable law. See footnote 2 to this table for derivative liabilities.
[2]
Includes 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 and applicable law.
[3]
For additional information see the Contingent Consideration section below.
Fixed Maturities, Equity Securities, Short-term Investments, and 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, such as municipal 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, 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 derivative instruments is 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.
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 to approve 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, certain short-term investments, and exchange traded futures and option contracts.
Valuation Inputs Used in Levels 2 and 3 Measurements for Securities and Derivatives
 
Level 2
Primary Observable Inputs
Level 3
Primary Unobservable Inputs
Fixed Maturity Investments
 
Structured securities (includes ABS, CLOs 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 from 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
• 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
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
Not applicable
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
Not applicable
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 December 31, 2018
CMBS [3]
$
2

Discounted cash flows
Spread (encompasses prepayment, default risk and loss severity)
9 bps
1,040 bps
182 bps
Decrease
Corporate [4]
274

Discounted cash flows
Spread
145 bps
1,175 bps
263 bps
Decrease
RMBS [3]
815

Discounted cash flows
Spread [6]
12 bps
215 bps
86 bps
Decrease
 
 
 
Constant prepayment rate [6]
1%
15%
6%
 Decrease [5]
 
 
 
Constant default rate [6]
1%
8%
3%
Decrease
 
 
 
Loss severity [6]
—%
100%
61%
Decrease
As of December 31, 2017
CMBS [3]
$
56

Discounted cash flows
Spread (encompasses prepayment, default risk and loss severity)
9
 bps
1,040
 bps
400
 bps
Decrease
Corporate [4]
251

Discounted cash flows
Spread
103
 bps
1,000
 bps
242
 bps
Decrease
Municipal
17

Discounted cash flows
Spread
192
 bps
250
 bps
219
 bps
Decrease
RMBS [3]
1,215

Discounted cash flows
Spread [6]
24
 bps
351
 bps
74
 bps
Decrease
 
 
 
Constant prepayment rate [6]
1%
25%
6%
Decrease [5]
 
 
 
Constant default rate [6]
—%
9%
4%
Decrease
 
 
 
Loss severity [6]
—%
100%
66%
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.
[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.
[6]
Generally, a change in the assumption used for the constant default rate would have been accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for constant prepayment rate and would have resulted in wider spreads.
Significant Unobservable Inputs for Level 3 - Derivatives
  
Fair
Value
Predominant Valuation
Technique
Significant
Unobservable Input
Minimum
Maximum
Weighted Average [1]
Impact of Increase in Input on Fair Value [2]
As of December 31, 2018
Interest rate swaptions [3]
1

Option model
Interest rate volatility
3
%
3
%
3
%
Increase
Equity options
3

Option model
Equity volatility
19
%
21
%
20
%
Increase
As of December 31, 2017
Interest rate swaptions [3]
1

Option model
Interest rate volatility
2
%
2
%
2
%
Increase
Equity options
1

Option model
Equity volatility
18
%
22
%
20
%
Increase
[1]
The weighted average is determined based on the fair value of the derivatives.
[2]
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.
[3]
The swaptions presented are purchased options that have the right to enter into a pay-fixed swap.
The tables above exclude 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 year ended December 31, 2018, no significant adjustments were made by the Company to broker prices received.Contingent Consideration
The acquisition of Lattice Strategies LLC ("Lattice") on July 29, 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 period of four years 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 16.6%. The risk-adjusted discount rate is an internally generated and significant unobservable input to fair value.
The contingency period for ETP AUM growth ends July 29, 2020 and management adjusts the fair value of the contingent consideration when it revises its projection of ETP AUM for the acquired business. Before discounting to fair value, the Company has accrued consideration payable of $40 assuming ETP AUM for the acquired business grows to approximately $4 billion over the contingency period. This contingent consideration payable included $10 payable in the first quarter of 2019 given that ETP AUM reached $1 billion in the fourth quarter of 2018.
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 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.
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the Year Ended December 31, 2018
 
Total realized/unrealized gains (losses)
 
 
 
 
 
 
 
 
Fair value as of January 1, 2018
Included in net income [1]
Included in OCI [2]
Purchases
Settlements
Sales
Transfers into Level 3 [3]
Transfers out of Level 3 [3]
Fair value as of December 31, 2018
Assets
 
 
 
 
 
 
 
 
 
Fixed Maturities, AFS
 
 
 
 
 
 
 
 
 
 
ABS
$
19

$
—

$
—

$
90

$
(5
)
$
(4
)
$
12

$
(102
)
$
10

 
CLOs
95

—

—

330

—

(13
)
—

(312
)
100

 
CMBS
69

(1
)
—

25

(14
)
(8
)
—

(59
)
12

 
Corporate
520

1

(18
)
197

(36
)
(52
)
31

(123
)
520

 
Foreign Govt./Govt. Agencies
2

—

—

1

—

—

—

—

3

 
Municipal
17

—

(1
)
—

—

(1
)
—

(15
)
—

 
RMBS
1,230

—

(16
)
273

(319
)
(52
)
4

(200
)
920

Total Fixed Maturities, AFS
1,952

—

(35
)
916

(374
)
(130
)
47

(811
)
1,565

Equity Securities, at fair value
76

29

—

12

—

(40
)
—

—

77

Derivatives, net [4]
 
 
 
 
 
 
 
 
 
 
Equity
1

3

—

1

—

(2
)
—

—

3

 
Interest rate
1

—

—

—

—

—

—

—

1

Total Derivatives, net [4]
2

3

—

1

—

(2
)
—

—

4

Total Assets
2,030

32

(35
)
929

(374
)
(172
)
47

(811
)
1,646

Liabilities
 
 
 
 
 
 
 
 
 
Contingent Consideration [5]
(29
)
(6
)
—

—

—

—

—

—

(35
)
Total Liabilities
$
(29
)
$
(6
)
$
—

$
—

$
—

$
—

$
—

$
—

$
(35
)

[1]
Amounts in these columns are generally reported in net realized capital gains (losses). All amounts are before income taxes.
[2]
All amounts are before income taxes.
[3]
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.
[4]
Derivative instruments are reported in this table on a net basis for asset (liability) positions and reported in the Consolidated Balance Sheets in other investments and other liabilities.
[5]
For additional information, see Note 2 - Business Acquisitions of Notes to Consolidated Financial Statement for discussion of the contingent consideration in connection with the acquisition of Lattice. Includes both market and non-market impacts in deriving realized and unrealized gains (losses).
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the Year Ended December 31, 2017
 
Total realized/unrealized gains (losses)
 
 
 
 
 
 
 
 
Fair value as of January 1, 2017
Included in net income [1]
Included in OCI [2]
Purchases
Settlements
Sales
Transfers into Level 3 [3]
Transfers out of Level 3 [3]
Fair value as of December 31, 2017
Assets
 
 
 
 
 
 
 
 
 
Fixed Maturities, AFS
 
 
 
 
 
 
 
 
 
 
ABS
$
45

$
—

$
—

$
56

$
(6
)
$
(6
)
$
27

$
(97
)
$
19

 
CLOs
154

18

(13
)
214

(101
)
(24
)
—

(153
)
95

 
CMBS
59

(2
)
—

76

(9
)
(10
)
—

(45
)
69

 
Corporate
514

1

19

232

(76
)
(157
)
71

(84
)
520

 
Foreign Govt./Govt. Agencies
47

—

3

12

(1
)
(2
)
—

(57
)
2

 
Municipal
46

4

1

1

—

(35
)
—

—

17

 
RMBS
1,261

—

36

209

(268
)
(7
)
—

(1
)
1,230

Total Fixed Maturities, AFS
2,126

21

46

800

(461
)
(241
)
98

(437
)
1,952

Fixed Maturities, FVO
11

—

—

4

(2
)
(13
)
—

—

—

Equity Securities, AFS
55

—

(3
)
24

—

—

—

—

76

Derivatives, net [4]
 
 
 
 
 
 
 
 
 
 
Equity
—

(4
)
—

5

—

—

—

—

1

 
Interest rate
9

(8
)
—

—

—

—

—

—

1

 
Other contracts
1

(1
)
—

—

—

—

—

—

—

Total Derivatives, net [4]
10

(13
)
—

5

—

—

—

—

2

Total Assets
2,202

8

43

833

(463
)
(254
)
98

(437
)
2,030

Liabilities
 
 
 
 
 
 
 
 
 
Contingent Considerations [5]
(25
)
(4
)
—

—

—

—

—

—

(29
)
Total Liabilities
$
(25
)
$
(4
)
$
—

$
—

$
—

$
—

$
—

$
—

$
(29
)

[1]
Amounts in these columns are generally reported in net realized capital gains (losses). All amounts are before income taxes.
[2]
All amounts are before income taxes.
[3]
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.
[4]
Derivative instruments are reported in this table on a net basis for asset (liability) positions and reported in the Consolidated Balance Sheets in other investments and other liabilities.
[5]
For additional information, see Note 2 - Business Acquisitions of Notes to Consolidated Financial Statement for discussion of the contingent consideration in connection with the acquisition of Lattice. Includes both market and non-market impacts in deriving realized and unrealized gains (losses).
Changes in Unrealized Gains (Losses) for Financial Instruments Classified as Level 3 Still Held at Year End
 
 
December 31,
 
 
2018
2017
 
 
Changes in Unrealized Gain/(Loss) included in Net Income [1] [2]
Changes in Unrealized Gain/(Loss) included in OCI [3]
Changes in Unrealized Gain/(Loss) included in Net Income [1] [2]
Assets
 
 
 
Fixed Maturities, AFS
 
 
 
 
ABS
$
—

$
1

$
—

 
CMBS
(1
)
28

(2
)
 
Corporate
—

(42
)
—

 
Municipal
—

24

—

 
RMBS
—

17

—

Total Fixed Maturities, AFS
(1
)
28

(2
)
Derivatives, net
 
 
 
 
Equity
1



(5
)
 
Interest rate
—

—

(7
)
Total Derivatives, net
1

—

(12
)
Total Assets
—

28

(14
)
Liabilities
 
 
 
Contingent Consideration [4]
(6
)


(4
)
Total Liabilities
$
(6
)
$
—

$
(4
)
[1]
All amounts in these rows are reported in net realized capital gains (losses). All amounts are before income taxes.
[2]
Amounts presented are for Level 3 only and therefore may not agree to other disclosures included herein.
[3]
Changes in unrealized gain/(loss) on fixed maturities, AFS are reported in changes in net unrealized gain on securities in the Consolidated Statements of Comprehensive Income. Changes in interest rate derivatives are reported in changes in net gain on cash flow hedging instruments in the Consolidated Statements of Comprehensive Income.
[4]
For additional information, see Note 2 - Business Acquisitions of Notes to Consolidated Financial Statements for discussion of the contingent consideration in connection with the acquisition of Lattice.
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 Consolidated Balance Sheets. The Company reports changes in the fair value of these securities in net realized capital gains and losses.
As of December 31, 2018 and December 31, 2017, the fair value of assets and liabilities using the fair value option was $22 and $41, respectively, within the residential real estate sector.
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 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.
For the year-ended December 31, 2018, the realized capital gains (losses) related to the fair value of assets using the fair value option were $(1) within the residential real estate sector. For the year-ended December 31, 2017, the income earned from FVO and the changes recorded in net realized capital gains (losses) were driven by corporate bond and equity securities of $(1) and $1, respectively. For the year-ended December 31, 2016 the realized capital gains (losses) related to the fair value of assets using the fair value option were $5 and $(1) within the residential real estate and foreign government sectors.
Financial Instruments Not Carried at Fair Value
Financial Assets and Liabilities Not Carried at Fair Value
 
December 31, 2018
 
December 31, 2017
 
Fair Value Hierarchy Level
Carrying Amount
Fair Value
 
Fair Value Hierarchy Level
Carrying Amount
Fair Value
Assets
 
 
 
 
 
 
 
Mortgage loans
Level 3
$
3,704

$
3,746

 
Level 3
$
3,175

$
3,220

Liabilities
 
 
 
 
 
 
 
Other policyholder funds and benefits payable
Level 3
$
774

$
775

 
Level 3
$
825

$
827

Senior notes [1]
Level 2
$
3,589

$
3,887

 
Level 2
$
3,415

$
4,054

Junior subordinated debentures [1]
Level 2
$
1,089

$
1,052

 
Level 2
$
1,583

$
1,699


[1]Included in long-term debt in the Consolidated Balance Sheets, except for current maturities, which are included in short-term debt.