Fair Value of Assets and Liabilities

Fair Value Measurement

General accounting principles for Fair Value Measurements and Disclosures define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. These principles also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and describes three levels of inputs that may be used to measure fair value:

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets and liabilities are traded in active exchange markets.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or market standard valuation techniques and assumptions that use significant inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the related assets or liabilities. Prices are determined using valuation methodologies such as discounted cash flow models and other similar techniques that require management’s judgment or estimation in developing inputs that are consistent with what other market participants would use when pricing similar assets and liabilities. Additionally, the Company’s embedded derivatives, all of which are associated with reinsurance treaties and longevity and mortality swaps, are classified in Level 3 since their values include significant unobservable inputs.

For a discussion of the Company’s valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 6 in the Notes to Consolidated Financial Statements included in the Company’s 2017 Annual Report.

Assets and Liabilities by Hierarchy Level

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 are summarized below (dollars in thousands):



March 31, 2018:				Fair Value Measurements Using:
	Total			Level 1		Level 2			Level 3
Assets:
Fixed maturity securities – available-for-sale:
Corporate	$	23,520,469		$	—	$	22,221,205		$	1,299,264
Canadian government	4,097,854			—		3,525,107			572,747
RMBS	1,787,148			—		1,666,534			120,614
ABS	1,734,722			—		1,604,016			130,706
CMBS	1,281,933			—		1,280,049			1,884
U.S. government	1,436,114			1,313,806		101,255			21,053
State and political subdivisions	713,513			—		671,637			41,876
Other foreign government	3,373,507			—		3,368,503			5,004
Total fixed maturity securities – available-for-sale	37,945,260			1,313,806		34,438,306			2,193,148
Equity securities	103,983			67,831		—			36,152
Funds withheld at interest – embedded derivatives	135,805			—		—			135,805
Cash equivalents	538,761			538,761		—			—
Short-term investments	58,499			67		55,215			3,217
Other invested assets:
Derivatives:
Interest rate swaps	40,812			—		40,812			—
Foreign currency forwards	6,932			—		6,932			—
CPI swaps	(99		)	—		(99		)	—
Credit default swaps	5,465			—		5,465			—
Equity options	27,140			—		27,140			—
Foreign currency swaps	51,945			—		51,945			—
FVO contractholder-directed unit-linked investments	221,512			221,043		469			—
Total other invested assets	353,707			221,043		132,664			—
Other assets - longevity swaps	44,011			—		—			44,011
Total	$	39,180,026		$	2,141,508	$	34,626,185		$	2,412,333
Liabilities:
Interest sensitive contract liabilities – embedded derivatives	$	964,795		$	—	$	—		$	964,795
Other liabilities:
Derivatives:
Interest rate swaps	11,752			—		11,752			—
Foreign currency forwards	(345		)	—		(345		)	—
CPI swaps	201			—		201			—
Credit default swaps	(756		)	—		(756		)	—
Equity options	(6,818		)	—		(6,818		)	—
Foreign currency swaps	1,003			—		1,003			—
Mortality swaps	1,683			—		—			1,683
Total	$	971,515		$	—	$	5,037		$	966,478



December 31, 2017:				Fair Value Measurements Using:
	Total			Level 1		Level 2			Level 3
Assets:
Fixed maturity securities – available-for-sale:
Corporate	$	23,210,968		$	—	$	21,873,696		$	1,337,272
Canadian government	4,220,076			—		3,626,134			593,942
RMBS	1,719,880			—		1,611,998			107,882
ABS	1,648,362			—		1,524,888			123,474
CMBS	1,303,387			—		1,300,153			3,234
U.S. government	1,943,592			1,818,006		103,075			22,511
State and political subdivisions	703,428			—		662,225			41,203
Other foreign government	3,401,127			—		3,396,035			5,092
Total fixed maturity securities – available-for-sale	38,150,820			1,818,006		34,098,204			2,234,610
Equity securities:
Non-redeemable preferred stock	39,806			39,806		—			—
Other equity securities	60,346			60,346		—			—
Funds withheld at interest – embedded derivatives	122,194			—		—			122,194
Cash equivalents	356,788			354,071		2,717			—
Short-term investments	50,746			—		47,650			3,096
Other invested assets:
Derivatives:
Interest rate swaps	51,359			—		51,359			—
Foreign currency forwards	730			—		730			—
CPI swaps	(221		)	—		(221		)	—
Credit default swaps	5,908			—		5,908			—
Equity options	16,932			—		16,932			—
Foreign currency swaps	62,905			—		62,905			—
FVO contractholder-directed unit-linked investments	218,541			217,618		923			—
Total other invested assets	356,154			217,618		138,536			—
Other assets - longevity swaps	40,659			—		—			40,659
Total	$	39,177,513		$	2,489,847	$	34,287,107		$	2,400,559
Liabilities:
Interest sensitive contract liabilities – embedded derivatives	$	1,014,228		$	—	$	—		$	1,014,228
Other liabilities:
Derivatives:
Interest rate swaps	14,311			—		14,311			—
Foreign currency forwards	7,213			—		7,213			—
CPI swaps	1,939			—		1,939			—
Credit default swaps	(760		)	—		(760		)	—
Equity options	(6,339		)	—		(6,339		)	—
Foreign currency swaps	6,194			—		6,194			—
Mortality swaps	1,683			—		—			1,683
Total	$	1,038,469		$	—	$	22,558		$	1,015,911

Transfers between Levels 1 and 2

Transfers between Levels 1 and 2 are made to reflect changes in observability of inputs and market activity. There were no transfers between Level 1 and Level 2 for the quarter ended March 31, 2018. The Company recognizes transfers of assets and liabilities into and out of levels within the fair value hierarchy at the beginning of the quarter in which the actual event or change in circumstances that caused the transfer occurs. The following tables present the transfers between Level 1 and Level 2 during the three months ended March 31, 2017 (dollars in thousands):



	2017
	Transfers from Level 1 to Level 2		Transfers from Level 2 to Level 1
Fixed maturity securities - available-for-sale:
Corporate	$	—	$	38,675

Quantitative Information Regarding Internally - Priced Level 3 Assets and Liabilities

The following table presents quantitative information about significant unobservable inputs used in Level 3 fair value measurements that are developed internally by the Company as of March 31, 2018 and December 31, 2017 (dollars in thousands):



	Estimated Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
	March 31, 2018	December 31, 2017	Valuation Technique	Unobservable Inputs	March 31, 2018		December 31, 2017
Assets:
Corporate	$183,680	$173,579	Market comparable securities	Liquidity premium	0-2% (1%)		0-2% (1%)
				EBITDA Multiple	5.9X - 7.5X (6.6X)		—
U.S. government	21,053	22,511	Market comparable securities	Liquidity premium	0-1% (1%)		0-1% (1%)
State and political subdivisions	4,452	4,616	Market comparable securities	Liquidity premium	1	%	1	%
Equity securities	25,987	—	Market comparable securities	Liquidity premium	3%		—
				EBITDA Multiple	6.9X - 13.1X (8.0X)		—
Funds withheld at interest- embedded derivatives	135,805	122,194	Total return swap	Mortality	0-100% (2%)		0-100% (2%)
				Lapse	0-35% (9%)		0-35% (9%)
				Withdrawal	0-5% (3%)		0-5% (3%)
				CVA	0-5% (1%)		0-5% (1%)
				Crediting rate	2-4% (2%)		2-4% (2%)
Longevity swaps	44,011	40,659	Discounted cash flow	Mortality	0-100% (2%)		0-100% (2%)
				Mortality improvement	(10%)-10% (3%)		(10%)-10% (3%)
Liabilities:
Interest sensitive contract liabilities- embedded derivatives- indexed annuities	827,109	861,758	Discounted cash flow	Mortality	0-100% (2%)		0-100% (2%)
				Lapse	0-35% (9%)		0-35% (9%)
				Withdrawal	0-5% (3%)		0-5% (3%)
				Option budget projection	2-4% (2%)		2-4% (2%)
Interest sensitive contract liabilities- embedded derivatives- variable annuities	137,686	152,470	Discounted cash flow	Mortality	0-100% (1%)		0-100% (1%)
				Lapse	0-25% (5%)		0-25% (5%)
				Withdrawal	0-7% (4%)		0-7% (3%)
				CVA	0-5% (1%)		0-5% (1%)
				Long-term volatility	0-27% (13%)		0-27% (8%)
Mortality swaps	1,683	1,683	Discounted cash flow	Mortality	0-100% (1%)		0-100% (1%)

Changes in Level 3 Assets and Liabilities

Assets and liabilities transferred into Level 3 are due to a lack of observable market transactions and price information. Assets and liabilities are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data. This may be due to a significant increase in market activity for the asset or liability, a specific event, one or more significant input(s) becoming observable. Transfers out of Level 3 were primarily the result of the Company obtaining observable pricing information or a third party pricing quotation that appropriately reflects the fair value of those assets and liabilities. In addition, certain transfers out of Level 3 were also due to ratings upgrades on mortgage-backed securities that had previously had below investment-grade ratings. The Company also transferred equity securities with a fair value of approximately $38.9 million into Level 3 as a result of the adoption of the new accounting guidance for the recognition and measurement of equity securities.

For further information on the Company’s valuation processes, see Note 6 in the Notes to Consolidated Financial Statements included in the Company’s 2017 Annual Report.

The reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows (dollars in thousands):



For the three months ended March 31, 2018:	Fixed maturity securities - available-for-sale
	Corporate			Canadian government			RMBS			ABS
Fair value, beginning of period	$	1,337,272		$	593,942		$	107,882		$	123,474
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related expenses	(361		)	3,444			(92		)	106
Investment related gains (losses), net	—			—			—			2
Included in other comprehensive income	(32,852		)	(24,639		)	(1,110		)	853
Purchases⁽¹⁾	100,170			—			20,916			11,000
Sales⁽¹⁾	(6,180		)	—			—			—
Settlements⁽¹⁾	(75,146		)	—			(2,963		)	(2,739		)
Transfers into Level 3	7,166			—			—			—
Transfers out of Level 3	(30,805		)	—			(4,019		)	(1,990		)
Fair value, end of period	$	1,299,264		$	572,747		$	120,614		$	130,706
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
Included in earnings, net:
Investment income, net of related expenses	$	(361	)	$	3,444		$	(92	)	$	106



For the three months ended March 31, 2018 (continued):	Fixed maturity securities - available-for-sale
	CMBS			U.S. government			State and political subdivisions			Other foreign government
Fair value, beginning of period	$	3,234		$	22,511		$	41,203		$	5,092
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related expenses	—			(110		)	8			—
Included in other comprehensive income	(47		)	(340		)	700			(88		)
Purchases⁽¹⁾	—			96			—			—
Settlements⁽¹⁾	(1		)	(1,104		)	(35		)	—
Transfers out of Level 3	(1,302		)	—			—			—
Fair value, end of period	$	1,884		$	21,053		$	41,876		$	5,004
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
Included in earnings, net:
Investment income, net of related expenses	$	—		$	(110	)	$	8		$	—



For the three months ended March 31, 2018 (continued):	Equity securities			Funds withheld at interest- embedded derivatives		Short-term Investments			Other assets - longevity swaps		Interest sensitive contract liabilities embedded derivatives			Other liabilities - mortality swaps
Fair value, beginning of period	$	—		$	122,194	$	3,096		$	40,659	$	(1,014,229	)	$	(1,683	)
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment related gains (losses), net	(2,677		)	13,611		—			—		14,785			—
Interest credited	—			—		—			—		25,351			—
Included in other comprehensive income	—			—		(25		)	1,085		—			—
Other revenues	—			—		—			2,267		—			—
Purchases⁽¹⁾	—			—		146			—		(8,508		)	—
Sales⁽¹⁾	(28		)	—		—			—		—			—
Settlements⁽¹⁾	(48		)	—		—			—		17,807			—
Transfers into Level 3	38,905			—		—			—		—			—
Fair value, end of period	$	36,152		$	135,805	$	3,217		$	44,011	$	(964,794	)	$	(1,683	)
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
Included in earnings, net:
Investment income, net of related expenses	$	—		$	—	$	—		$	—	$	—		$	—
Investment related gains (losses), net	(2,705		)	13,611		—			—		12,901			—
Other revenues	—			—		—			2,267		—			—
Interest credited	—			—		—			—		7,544			—



For the three months ended March 31, 2017:	Fixed maturity securities - available-for-sale
	Corporate			Canadian governments		RMBS			ABS			CMBS			U.S. government
Fair value, beginning of period	$	1,272,253		$	475,965	$	160,291		$	219,280		$	21,145		$	24,488
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related expenses	(423		)	3,070		(245		)	1,018			709			(117		)
Investment related gains (losses), net	(1,231		)	—		365			—			(595		)	—
Included in other comprehensive income	4,948			4,525		650			5,767			(83		)	52
Purchases⁽¹⁾	45,914			—		16,499			10,849			—			104
Sales⁽¹⁾	—			—		(10,604		)	—			(3,720		)	—
Settlements⁽¹⁾	(71,470		)	—		(6,784		)	(18,154		)	(5,401		)	(1,053		)
Transfers into Level 3	13,934			—		77			35,258			—			—
Transfers out of Level 3	—			—		(16,819		)	(45,582		)	(10,132		)	—
Fair value, end of period	$	1,263,925		$	483,560	$	143,430		$	208,436		$	1,923		$	23,474
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
Included in earnings, net:
Investment income, net of related expenses	$	(423	)	$	3,070	$	(91	)	$	161		$	—		$	(117	)
Investment related gains (losses), net	(1,293		)	—		(346		)	—			—			—



For the three months ended March 31, 2017 (continued):	Fixed maturity securities available-for-sale
	State and political subdivisions			Other foreign government			Funds withheld at interest- embedded derivatives			Short-term Investments			Other assets - longevity swaps		Interest sensitive contract liabilities embedded derivatives			Other liabilities - mortality swaps
Fair value, beginning of period	$	41,666		$	12,869		$	(22,529	)	$	3,346		$	26,958	$	(990,308	)	$	(2,462	)
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related expenses	(88		)	—			—			—			—		—			—
Investment related gains (losses), net	—			—			68,702			—			—		22,362			—
Interest credited	—			—			—			—			—		(16,402		)	—
Included in other comprehensive income	(843		)	(191		)	—			33			347		—			—
Other revenues	—			—			—			—			1,865		—			(395		)
Purchases⁽¹⁾	—			—			—			32			—		(6,393		)	—
Settlements⁽¹⁾	(33		)	(334		)	—			(135		)	—		17,811			—
Transfers out of Level 3	(6,844		)	—			—			—			—		—			—
Fair value, end of period	$	33,858		$	12,344		$	46,173		$	3,276		$	29,170	$	(972,930	)	$	(2,857	)
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
Included in earnings, net:
Investment income, net of related expenses	$	(88	)	$	—		$	—		$	—		$	—	$	—		$	—
Investment related gains (losses), net	—			—			68,702			—			—		20,300			—
Other revenues	—			—			—			—			1,865		—			(395		)
Interest credited	—			—			—			—			—		(34,214		)	—


(1)	The amount reported within purchases, sales and settlements is the purchase price (for purchases) and the sales/settlement proceeds (for sales and settlements) based upon the actual date purchased or sold/settled. Items purchased and sold/settled in the same period are excluded from the rollforward. The Company had no issuances during the period.

Nonrecurring Fair Value Measurements

During the three months ended March 31, 2018 and March 31, 2017, the Company did not have any adjustments to its assets or liabilities measured at fair value on a nonrecurring basis that are still held at the reporting date.

Fair Value of Financial Instruments

The Company is required by general accounting principles for Fair Value Measurements and Disclosures to disclose the fair value of certain financial instruments including those that are not carried at fair value. The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments, which were not measured at fair value on a recurring basis, as of March 31, 2018 and December 31, 2017 (dollars in thousands). For additional information regarding the methods and significant assumptions used by the Company to estimate these fair values, see Note 6 in the Notes to Consolidated Financial Statements included in the Company’s 2017 Annual Report. This table excludes any payables or receivables for collateral under repurchase agreements and other transactions. The estimated fair value of the excluded amount approximates carrying value as they equal the amount of cash collateral received/paid.



March 31, 2018:	Carrying Value ⁽¹⁾		Estimated Fair Value		Fair Value Measurement Using:
March 31, 2018:	Carrying Value ⁽¹⁾		Estimated Fair Value		Level 1		Level 2		Level 3		NAV
Assets:
Mortgage loans on real estate	$	4,437,994	$	4,411,472	$	—	$	—	$	4,411,472	$	—
Policy loans	1,346,930		1,346,930		—		1,346,930		—		—
Funds withheld at interest	5,865,791		6,098,479		—		—		6,098,479		—
Cash and cash equivalents	971,646		971,646		971,646		—		—		—
Short-term investments	71,931		71,931		71,931		—		—		—
Other invested assets	690,200		710,009		10,165		68,903		283,205		347,736
Accrued investment income	408,338		408,338		—		408,338		—		—
Liabilities:
Interest-sensitive contract liabilities	$	13,169,951	$	13,151,162	$	—	$	—	$	13,151,162	$	—
Long-term debt	2,788,240		2,916,200		—		—		2,916,200		—
Collateral finance and securitization notes	753,393		692,696		—		—		692,696		—

December 31, 2017:
Assets:
Mortgage loans on real estate	$	4,400,533	$	4,477,654	$	—	$	—	$	4,477,654	$	—
Policy loans	1,357,624		1,357,624		—		1,357,624		—		—
Funds withheld at interest	5,955,092		6,275,623		—		—		6,275,623		—
Cash and cash equivalents	946,736		946,736		946,736		—		—		—
Short-term investments	42,558		42,558		42,558		—		—		—
Other invested assets	651,792		679,377		28,540		67,778		247,934		335,125
Accrued investment income	392,721		392,721		—		392,721		—		—
Liabilities:
Interest-sensitive contract liabilities	$	12,683,872	$	12,917,243	$	—	$	—	$	12,917,243	$	—
Long-term debt	2,788,365		2,959,912		—		—		2,959,912		—
Collateral finance and securitization notes	783,938		722,145		—		—		722,145		—


(1)	Carrying values presented herein may differ from those in the Company’s condensed consolidated balance sheets because certain items within the respective financial statement captions may be measured at fair value on a recurring basis.