| Fair Value | 5. Fair Value Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. We determine fair value based on the following fair value hierarchy: Level 1 – Unadjusted quoted prices for identical assets or liabilities in an active market. Level 2 – Quoted prices for inactive markets or valuation techniques that require observable direct or indirect inputs for substantially the full term of the asset or liability. Level 2 inputs include the following: • Quoted prices for similar assets or liabilities in active markets, • Observable inputs other than quoted market prices, and • Observable inputs derived principally from market data through correlation or other means. Level 3 – Prices or valuation techniques with unobservable inputs significant to the overall fair value estimate. These valuations use critical assumptions not readily available to market participants. Level 3 valuations are based on market standard valuation methodologies, including discounted cash flows, matrix pricing or other similar techniques. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the instrument's fair value measurement. We use a number of valuation sources to determine fair values. Valuation sources can include quoted market prices; third-party commercial pricing services; third-party brokers; industry-standard, vendor modeling software that uses market observable inputs; and other internal modeling techniques based on projected cash flows. We periodically review the assumptions and inputs of third-party commercial pricing services through internal valuation price variance reviews, comparisons to internal pricing models, back testing to recent trades, or monitoring trading volumes. The following represents the hierarchy for our assets and liabilities measured at fair value on a recurring basis: September 30, 2017 (In millions) Total NAV 1 Level 1 Level 2 Level 3 Assets AFS securities Fixed maturity securities U.S. government and agencies $ 58 $ — $ 26 $ 32 $ — U.S. state, municipal and political subdivisions 1,145 — — 1,145 — Foreign governments 2,589 — — 2,589 — Corporate 34,458 — — 33,989 469 CLO 4,996 — — 4,800 196 ABS 3,900 — — 2,521 1,379 CMBS 1,890 — — 1,803 87 RMBS 9,480 — — 9,158 322 Total AFS fixed maturity securities 58,516 — 26 56,037 2,453 Equity securities 318 — 114 199 5 Total AFS securities 58,834 — 140 56,236 2,458 Trading securities Fixed maturity securities U.S. government and agencies 3 — 3 — — U.S. state, municipal and political subdivisions 137 — — 120 17 Corporate 1,475 — — 1,475 — CLO 29 — — 8 21 ABS 90 — — 90 — CMBS 59 — — 59 — RMBS 418 — — 317 101 Total trading fixed maturity securities 2,211 — 3 2,069 139 Equity securities 498 — — 498 — Total trading securities 2,709 — 3 2,567 139 Mortgage loans 42 — — — 42 Investment funds 127 127 — — — Funds withheld at interest – embedded derivative 303 — — — 303 Derivative assets 1,982 — 8 1,974 — Short-term investments 108 — 39 69 — Cash and cash equivalents 3,607 — 3,607 — — Restricted cash 100 — 100 — — Investments in related parties AFS, fixed maturity securities CLO 356 — — 346 10 ABS 53 — — 53 — Total AFS securities – related party 409 — — 399 10 Trading securities, CLO 140 — — 49 91 Investment funds 27 27 — — — Short-term investments 8 — — — 8 Reinsurance recoverable 1,783 — — — 1,783 Total assets measured at fair value $ 70,179 $ 154 $ 3,897 $ 61,294 $ 4,834 (Continued) September 30, 2017 (In millions) Total NAV 1 Level 1 Level 2 Level 3 Liabilities Interest sensitive contract liabilities Embedded derivative $ 6,652 $ — $ — $ — $ 6,652 Universal life benefits 957 — — — 957 Unit-linked contracts 472 — — 472 — Future policy benefits AmerUs Closed Block 1,616 — — — 1,616 ILICO Closed Block and life benefits 811 — — — 811 Derivative liabilities 92 — 1 85 6 Funds withheld liability – embedded derivative 18 — — 18 — Total liabilities measured at fair value $ 10,618 $ — $ 1 $ 575 $ 10,042 1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. (Concluded) December 31, 2016 (In millions) Total NAV 1 Level 1 Level 2 Level 3 Assets AFS securities Fixed maturity securities U.S. government and agencies $ 60 $ — $ 29 $ 31 $ — U.S. state, municipal and political subdivisions 1,140 — — 1,135 5 Foreign governments 2,235 — — 2,221 14 Corporate 30,020 — — 29,650 370 CLO 4,822 — — 4,664 158 ABS 2,936 — — 1,776 1,160 CMBS 1,847 — — 1,695 152 RMBS 8,973 — — 8,956 17 Total AFS fixed maturity securities 52,033 — 29 50,128 1,876 Equity securities 353 — 79 269 5 Total AFS securities 52,386 — 108 50,397 1,881 Trading securities Fixed maturity securities U.S. government and agencies 3 — 3 — — U.S. state, municipal and political subdivisions 137 — — 120 17 Corporate 1,423 — — 1,423 — CLO 43 — — — 43 ABS 82 — — 82 — CMBS 81 — — 81 — RMBS 387 — — 291 96 Total trading fixed maturity securities 2,156 — 3 1,997 156 Equity securities 425 — — 425 — Total trading securities 2,581 — 3 2,422 156 (Continued) December 31, 2016 (In millions) Total NAV 1 Level 1 Level 2 Level 3 Mortgage loans 44 — — — 44 Investment funds 99 99 — — — Funds withheld at interest – embedded derivative 140 — — — 140 Derivative assets 1,370 — 9 1,361 — Short-term investments 189 — 19 170 — Cash and cash equivalents 2,445 — 2,445 — — Restricted cash 57 — 57 — — Investments in related parties AFS, fixed maturity securities CLO 279 — — 279 — ABS 56 — — — 56 Total AFS fixed maturity securities 335 — — 279 56 AFS, equity securities 20 — 20 — — Total AFS securities – related party 355 — 20 279 56 Trading securities, CLO 195 — — — 195 Reinsurance recoverable 1,692 — — — 1,692 Total assets measured at fair value $ 61,553 $ 99 $ 2,661 $ 54,629 $ 4,164 Liabilities Interest sensitive contract liabilities Embedded derivative $ 5,283 $ — $ — $ — $ 5,283 Universal life benefits 883 — — — 883 Unit-linked contracts 408 — — 408 — Future policy benefits AmerUs Closed Block 1,606 — — — 1,606 ILICO Closed Block and life benefits 794 — — — 794 Derivative liabilities 40 — — 33 7 Funds withheld liability – embedded derivative 6 — — 6 — Total liabilities measured at fair value $ 9,020 $ — $ — $ 447 $ 8,573 1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. (Concluded) Refer to Note 4 – Variable Interest Entities for fair value disclosures associated with consolidated VIEs. Fair Value Valuation Methods —We used the following valuation methods and assumptions to estimate fair value: AFS and trading securities Fixed maturity – We obtain the fair value for most marketable securities without an active market from several commercial pricing services. These are classified as Level 2 assets. The pricing services incorporate a variety of market observable information in their valuation techniques, including benchmark yields, trading activity, credit quality, issuer spreads, bids, offers and other reference data. This category typically includes U.S. and non-U.S. corporate bonds, U.S. agency and government guaranteed securities, ABS, CMBS and RMBS. We value privately placed fixed maturity securities based on the credit quality and duration of comparable marketable securities, which may be securities of another issuer with similar characteristics. In some instances, we use a matrix-based pricing model. These models consider the current level of risk-free interest rates, corporate spreads, credit quality of the issuer and cash flow characteristics of the security. We also consider additional factors such as net worth of the borrower, value of collateral, capital structure of the borrower, presence of guarantees and our evaluation of the borrower's ability to compete in its relevant market. Privately placed fixed maturity securities are classified as Level 2 or 3. Equity securities – Fair values of publicly traded equity securities are based on quoted market prices and classified as Level 1. Other equity securities, typically private equities or equity securities not traded on an exchange, we value based on other sources, such as commercial pricing services or brokers and are classified as Level 2 or 3. Mortgage loans – Mortgage loans for which we have elected the fair value option or those held for sale are carried at fair value. We estimate fair value on a monthly basis using discounted cash flow analysis and rates being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. The discounted cash flow model uses unobservable inputs, including estimates of discount rates and loan prepayments. Mortgage loans are classified as Level 3. Funds withheld (embedded derivative) – We estimate the fair value of the embedded derivative based on the change in the fair value of the assets supporting the funds withheld payable under the combined coinsurance, modco and coinsurance funds withheld reinsurance agreements. As a result, the fair value of the embedded derivative is classified as Level 2 or 3 based on the valuation methods used for the assets held in trust supporting the reinsurance agreements. Derivatives – Derivative contracts can be exchange traded or over-the-counter. Exchange-traded derivatives typically fall within Level 1 of the fair value hierarchy depending on trading activity. Over-the-counter derivatives are valued using valuation models or an income approach using third-party broker valuations. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlation of the inputs. We consider and incorporate counterparty credit risk in the valuation process through counterparty credit rating requirements and monitoring of overall exposure. We also evaluate and include our own nonperformance risk in valuing derivatives. The majority of our derivatives trade in liquid markets; therefore, we can verify model inputs and model selection does not involve significant management judgment. These are typically classified within Level 2 of the fair value hierarchy. Cash and cash equivalents – The carrying amount for cash equals fair value. We estimate the fair value for cash equivalents based on quoted market prices. These assets are classified as Level 1. Interest sensitive contract liabilities (embedded derivative) – Embedded derivatives related to interest sensitive contract liabilities with fixed indexed annuity products are classified as Level 3. The valuations include significant unobservable inputs associated with economic assumptions and actuarial assumptions for policyholder behavior. Unit-linked contracts – Unit-linked contracts are valued based on the fair value of the investments supporting the contract. The underlying investments are trading securities comprised primarily of mutual funds. The valuations of these are based on quoted market prices for similar assets and are classified as Level 2, resulting in a corresponding classification for the unit-linked contracts. AmerUs Closed Block – We elected the fair value option for the future policy benefits liability in the AmerUs Closed Block. Our valuation technique is to set the fair value of policyholder liabilities equal to the fair value of assets. There is an additional component which captures the fair value of the open block's cost to hold capital in excess of existing liabilities on the closed block. This component uses a present value of future cash flows, which includes investment earnings and policyholder liability movements. Unobservable inputs include estimates for these items. The target surplus as a percentage of statutory reserves is 3.85% based on the statutory risk-based capital ratio applicable to this block of business. The AmerUs Closed Block policyholder liabilities and any corresponding reinsurance recoverable are classified as Level 3. ILICO Closed Block – We elected the fair value option for the ILICO Closed Block. Our valuation technique is to set the fair value of policyholder liabilities equal to the fair value of assets. There is an additional component which captures the fair value of the open block's obligations to the closed block business. This component uses the present value of future cash flows. The cash flows include commissions, administrative expenses, reinsurance premiums and benefits, and an explicit cost of capital. Unobservable inputs include estimates for these items. The explicit cost of capital assumption is 9% of required capital, post tax. A margin of 8.94% is included in the discount rates to reflect the business risk. An additional 0.25% is included to reflect non-performance risk. The ILICO Closed Block policyholder liabilities and corresponding reinsurance recoverable are classified as Level 3. Universal life liabilities and other life benefits – We elected the fair value option for certain blocks of universal and other life business ceded to Global Atlantic Financial Group Limited (together with its subsidiaries, Global Atlantic). We use a present value of liability cash flows. Unobservable inputs include estimates of mortality, persistency, expenses, premium payments and a risk margin used in the discount rates that reflects the riskiness of the business. The risk margin was 0.09% . These universal life policyholder liabilities and corresponding reinsurance recoverable are classified as Level 3. Fair Value Option — The following represents the gains (losses) recorded for instruments for which we have elected the fair value option: Three months ended September 30, Nine months ended September 30, (In millions) 2017 2016 2017 2016 Trading securities $ (1 ) $ 28 $ 45 $ 93 Mortgage loans (1 ) (1 ) (1 ) (1 ) Investment funds 5 4 19 4 Future policy benefits 5 (28 ) (10 ) (129 ) Total gains (losses) $ 8 $ 3 $ 53 $ (33 ) Gains and losses on trading securities are recorded in investment related gains (losses) on the condensed consolidated statements of income. For fair valu e option mortgage loans, we record interest income in net investment income and subsequent changes in fair value in investment related gains (losses) on the condensed consolidated statements of income. Gains and losses related to investment funds, including related party investment funds, are recorded in net investment income on the condensed consolidated statements of income. We record the change in fair value of future policy benefits to future policy and other policy benefits on the condensed consolidated statements of income. The following summarizes information for fair value option mortgage loans: (In millions) September 30, 2017 December 31, 2016 Unpaid principal balance $ 40 $ 42 Mark to fair value 2 2 Fair value $ 42 $ 44 There were no fair value option mortgage loans 90 days or more past due as of September 30, 2017 and December 31, 2016 . Transfers Between Levels —Transfers into Level 3 generally represent securities that were valued using pricing sources which, due to changing market conditions, were less observable than in prior periods as indicated by the increased volatility, which was reflected in vendor prices obtained for individual securities. Additionally, changes in pricing sources also led to securities transferring into Level 3. Transfers out of Level 3 generally represent securities that were valued using pricing sources which, due to changing market conditions, were more observable than in prior periods as indicated by decreased volatility, which was reflected in vendor prices obtained for individual securities. Additionally, changes in pricing sources also led to securities transferring into Level 2. Transfers into or out of any level are assumed to occur at the end of the period. For the three and nine months ended September 30, 2017 and 2016 , there were no transfers between Level 1 and Level 2. Level 3 Financial Instruments — The following is a reconciliation for all Level 3 assets and liabilities measured at fair value on a recurring basis: Three months ended September 30, 2017 Total realized and unrealized gains (losses) Transfers (In millions) Beginning Balance Included in income Included in OCI Purchases, issuances, sales and settlements, net In (Out) Ending Balance Total gains (losses) included in earnings 1 Assets AFS securities Fixed maturity Foreign governments $ 14 $ — $ — $ — $ — $ (14 ) $ — $ — Corporate 452 5 — (13 ) 37 (12 ) 469 — CLO 81 — 1 47 86 (19 ) 196 — ABS 1,093 3 1 240 83 (41 ) 1,379 — CMBS 122 1 (1 ) (18 ) 26 (43 ) 87 — RMBS 312 1 13 (11 ) 14 (7 ) 322 — Equity securities 6 (1) — — — — 5 — Trading securities Fixed maturity U.S. state, municipal and political subdivisions 17 — — — — — 17 — CLO 22 (4 ) — — 11 (8 ) 21 (3 ) RMBS 100 (2 ) — 4 15 (16 ) 101 3 Mortgage loans 43 (1 ) — — — — 42 (1 ) Funds withheld at interest – embedded derivative 279 24 — — — — 303 — Investments in related parties AFS securities, fixed maturity, CLO — — — 10 — — 10 — Trading securities, CLO 123 3 — (24 ) 19 (30 ) 91 2 Short-term investments 28 — — (20 ) — — 8 — Reinsurance recoverable 1,782 1 — — — — 1,783 — Total Level 3 assets $ 4,474 $ 30 $ 14 $ 215 $ 291 $ (190 ) $ 4,834 $ 1 Liabilities Interest sensitive contract liabilities Embedded derivative $ (6,207 ) $ (344 ) $ — $ (101 ) $ — $ — $ (6,652 ) $ — Universal life benefits (954 ) (3 ) — — — — (957 ) — Future policy benefits AmerUs Closed Block (1,621 ) 5 — — — — (1,616 ) — ILICO Closed Block and life benefits (812 ) 1 — — — — (811 ) — Derivative liabilities (6 ) — — — — — (6 ) — Total Level 3 liabilities $ (9,600 ) $ (341 ) $ — $ (101 ) $ — $ — $ (10,042 ) $ — 1 Related to instruments held at end of period. Three months ended September 30, 2016 Total realized and unrealized gains (losses) Transfers (In millions) Beginning balance Included in income Included in OCI Purchases, issuances, sales and settlements, net In Out Ending balance Total gains (losses) included in earnings 1 Assets AFS securities Fixed maturity U.S. state, municipal and political subdivisions $ — $ — $ — $ — $ 5 $ — $ 5 $ — Foreign governments 16 — — (1 ) — — 15 — Corporate 402 1 1 24 3 (89 ) 342 — CLO 285 1 15 4 11 (193 ) 123 — ABS 1,238 3 11 30 — (188 ) 1,094 — CMBS 80 — 3 4 — — 87 — RMBS — — — — — — — — Equity securities 10 — (1) (4 ) — — 5 — Trading securities Fixed maturity U.S. state, municipal and political subdivisions 17 — — — — — 17 — Corporate 1 — — — — (1 ) — — CLO 104 (1 ) — (44 ) — — 59 4 ABS 89 (2 ) — — — — 87 — RMBS 122 (4 ) — 16 — (6 ) 128 (1 ) Mortgage loans 45 — — — — — 45 — Funds withheld at interest – embedded derivative 122 83 — — — — 205 — Investments in related parties AFS securities Fixed maturity CLO — — — — — — — — ABS 58 — — (1 ) — — 57 — Trading securities, CLO 211 — — — — (22 ) 189 7 Reinsurance recoverable 1,898 (20 ) — — — — 1,878 — Total Level 3 assets $ 4,698 $ 61 $ 29 $ 28 $ 19 $ (499 ) $ 4,336 $ 10 Liabilities Interest sensitive contract liabilities Embedded derivative $ (4,807 ) $ (243 ) $ — $ (209 ) $ — $ — $ (5,259 ) $ — Universal life benefits (1,059 ) 9 — — — — (1,050 ) — Future policy benefits AmerUs Closed Block (1,682 ) (28 ) — — — — (1,710 ) — ILICO Closed Block and life benefits (823 ) 11 — — — — (812 ) — Derivative liabilities (8 ) — — — — — (8 ) — Total Level 3 liabilities $ (8,379 ) $ (251 ) $ — $ (209 ) $ — $ — $ (8,839 ) $ — 1 Related to instruments held at end of period. Nine months ended September 30, 2017 Total realized and unrealized gains (losses) Transfers (In millions) Beginning Balance Included in income Included in OCI Purchases, issuances, sales and settlements, net In (Out) Ending Balance Total gains (losses) included in earnings 1 Assets AFS securities Fixed maturity U.S. state, municipal and political subdivisions $ 5 $ 17 $ (1 ) $ (21 ) $ — $ — $ — $ — Foreign governments 14 — — — — (14 ) — — Corporate 370 10 10 107 23 (51 ) 469 — CLO 158 1 9 40 53 (65 ) 196 — ABS 1,160 11 18 237 6 (53 ) 1,379 — CMBS 152 1 (4 ) 28 — (90 ) 87 — RMBS 17 1 1 12 300 (9 ) 322 — Equity securities 5 (1) 1 — — — 5 — Trading securities Fixed maturity U.S. state, municipal and political subdivisions 17 — — — — — 17 — CLO 43 (2 ) — (12 ) — (8 ) 21 1 RMBS 96 (11 ) — 26 7 (17 ) 101 2 Mortgage loans 44 (1 ) — (1 ) — — 42 (1 ) Funds withheld at interest – embedded derivative 140 163 — — — — 303 — Investments in related parties AFS securities Fixed maturity CLO — — — 10 — — 10 — ABS 56 — 2 (5 ) — (53 ) — — Trading securities, CLO 195 (3 ) — (52 ) — (49 ) 91 (1 ) Short-term investments — — — 8 — — 8 — Reinsurance recoverable 1,692 91 — — — — 1,783 — Total Level 3 assets $ 4,164 $ 277 $ 36 $ 377 $ 389 $ (409 ) $ 4,834 $ 1 Liabilities Interest sensitive contract liabilities Embedded derivative $ (5,283 ) $ (1,077 ) $ — $ (292 ) $ — $ — $ (6,652 ) $ — Universal life benefits (883 ) (74 ) — — — — (957 ) — Future policy benefits AmerUs Closed Block (1,606 ) (10 ) — — — — (1,616 ) — ILICO Closed Block and life benefits (794 ) (17 ) — — — — (811 ) — Derivative liabilities (7 ) 1 — — — — (6 ) 1 Total Level 3 liabilities $ (8,573 ) $ (1,177 ) $ — $ (292 ) $ — $ — $ (10,042 ) $ 1 1 Related to instruments held at end of period. Nine months ended September 30, 2016 Total realized and unrealized gains (losses) Transfers (In millions) Beginning balance Included in income Included in OCI Purchases, issuances, sales and settlements, net In Out Ending balance Total gains (losses) included in earnings 1 Assets AFS securities Fixed maturity U.S. state, municipal and political subdivisions $ — $ — $ — $ — $ 5 $ — $ 5 $ — Foreign governments 17 1 (1 ) (2 ) — — 15 — Corporate 636 4 27 (71 ) 4 (258 ) 342 — CLO 517 3 38 7 10 (452 ) 123 — ABS 1,813 78 (7 ) (755 ) 103 (138 ) 1,094 — CMBS 67 1 3 10 53 (47 ) 87 — RMBS 758 3 16 (249 ) — (528 ) — — Equity securities 9 — — (4 ) — — 5 — Trading securities Fixed maturity U.S. state, municipal and political subdivisions 17 — — — — — 17 — Corporate 16 — — (4 ) — (12 ) — 5 CLO 108 (4 ) — (45 ) — — 59 8 ABS 98 (11 ) — — — — 87 — RMBS 29 (7 ) — 111 — (5 ) 128 1 Mortgage loans 48 — — (3 ) — — 45 — Funds withheld at interest – embedded derivative 36 169 — — — — 205 — Investments in related parties AFS securities Fixed maturity CLO 7 — — — — (7 ) — — ABS 60 — — (3 ) — — 57 — Trading securities, CLO 191 (23 ) — 17 26 (22 ) 189 21 Reinsurance recoverable 2,377 (499 ) — — — — 1,878 — Total Level 3 assets $ 6,804 $ (285 ) $ 76 $ (991 ) $ 201 $ (1,469 ) $ 4,336 $ 35 Liabilities Interest sensitive contract liabilities Embedded derivative $ (4,464 ) $ (390 ) $ — $ (405 ) $ — $ — $ (5,259 ) $ — Universal life benefits (1,464 ) 414 — — — — (1,050 ) — Future policy benefits AmerUs Closed Block (1,581 ) (129 ) — — — — (1,710 ) — ILICO Closed Block and life benefits (897 ) 85 — — — — (812 ) — Derivative liabilities (7 ) (1 ) — — — — (8 ) — Total Level 3 liabilities $ (8,413 ) $ (21 ) $ — $ (405 ) $ — $ — $ (8,839 ) $ — 1 Related to instruments held at end of period. The following represents the gross components of purchases, issuances, sales and settlements, net, shown above: Three months ended September 30, 2017 (In millions) Purchases Issuances Sales Settlements Purchases, issuances, sales and settlements, net Assets AFS securities Fixed maturity Corporate $ 27 $ — $ (36 ) $ (4 ) $ (13 ) CLO 72 — — (25 ) 47 ABS 275 — — (35 ) 240 CMBS — — (18 ) — (18 ) RMBS — — — (11 ) (11 ) Trading securities, fixed maturity, RMBS 4 — — — 4 Investments in related parties AFS securities, fixed maturity, CLO 10 — — — 10 Trading securities, CLO — — (24 ) — (24 ) Short-term investments 8 — — (28 ) (20 ) Total Level 3 assets $ 396 $ — $ (78 ) $ (103 ) $ 215 Liabilities Interest sensitive contract liabilities Embedded derivative $ — $ (142 ) $ — $ 41 $ (101 ) Total Level 3 liabilities $ — $ (142 ) $ — $ 41 $ (101 ) Three months ended September 30, 2016 (In millions) Purchases Issuances Sales Settlements Purchases, issuances, sales and settlements, net Assets AFS securities Fixed maturity Foreign governments $ — $ — $ — $ (1 ) $ (1 ) Corporate 25 — — (1 ) 24 CLO 12 — — (8 ) 4 ABS 60 — — (30 ) 30 CMBS 4 — — — 4 Equity securities — — (4 ) — (4 ) Trading securities Fixed maturity CLO — — (44 ) — (44 ) RMBS 16 — — — 16 Investments in related parties AFS securities, fixed maturity, ABS — — — (1 ) (1 ) Total Level 3 assets $ 117 $ — $ (48 ) $ (41 ) $ 28 Liabilities Interest sensitive contract liabilities Embedded derivative $ — $ (244 ) $ — $ 35 $ (209 ) Total Level 3 liabilities $ — $ (244 ) $ — $ 35 $ (209 ) Nine months ended September 30, 2017 (In millions) Purchases Issuances Sales Settlements Purchases, issuances, sales and settlements, net Assets AFS securities Fixed maturity U.S. state, municipal and political subdivisions $ — $ — $ — $ (21 ) $ (21 ) Corporate 152 — (37 ) (8 ) 107 CLO 83 — (2 ) (41 ) 40 ABS 495 — — (258 ) 237 CMBS 29 — — (1 ) 28 RMBS 14 — — (2 ) 12 Trading securities Fixed maturity CLO 4 — (16 ) — (12 ) RMBS 26 — — — 26 Mortgage loans — — — (1 ) (1 ) Investments in related parties AFS securities Fixed maturity CLO 10 — — — 10 ABS 5 — — (10 ) (5 ) Trading securities, CLO — — (52 ) — (52 ) Short-term investments 37 — — (29 ) 8 Total Level 3 assets $ 855 $ — $ (107 ) $ (371 ) $ 377 Liabilities Interest sensitive contract liabilities Embedded derivative $ — $ (412 ) $ — $ 120 $ (292 ) Total Level 3 liabilities $ — $ (412 ) $ — $ 120 $ (292 ) Nine months ended September 30, 2016 (In millions) Purchases Issuances Sales Settlements Purchases, issuances, sales and settlements, net Assets AFS securities Fixed maturity Foreign governments $ — $ — $ — $ (2 ) $ (2 ) Corporate 47 — (55 ) (63 ) (71 ) CLO 24 — (9 ) (8 ) 7 ABS 102 — — (857 ) (755 ) CMBS 10 — — — 10 RMBS — — — (249 ) (249 ) Equity securities — — (4 ) — (4 ) Trading securities Fixed maturity Corporate — — (4 ) — (4 ) CLO — — (45 ) — (45 ) RMBS 111 — — — 111 Mortgage loans — — — (3 ) (3 ) Investments in related parties AFS securities, fixed maturity, ABS — — — (3 ) (3 ) Trading securities, CLO 33 — (16 ) — 17 Total Level 3 assets $ 327 $ — $ (133 ) $ (1,185 ) $ (991 ) Liabilities Interest sensitive contract liabilities Embedded derivative $ — $ (517 ) $ — $ 112 $ (405 ) Total Level 3 liabilities $ — $ (517 ) $ — $ 112 $ (405 ) Significant Unobservable Inputs — Significant unobservable inputs occur when we could not obtain or corroborate the quantitative detail of the inputs. This applies to AFS securities, trading securities, mortgage loans and certain derivatives, as well as embedded derivatives in liabilities. Additional significant unobservable inputs are described below. Fixed maturity securities – For certain fixed maturity securities, internal models are used to calculate the fair value. We use a discounted cash flow approach. The discount rate is the significant unobservable input due to the determined credit spread being internally developed, illiquid, or as a result of other adjustments made to the base rate. The base rate represents a market comparable rate for securities with similar characteristics. As of September 30, 2017 , discounts ranged from 2% to 6% . This excludes assets for which significant unobservable inputs are not developed internally, primarily consisting of broker quotes. Interest sensitive contract liabilities – embedded derivative – Significant unobservable inputs we use in the fixed indexed annuities embedded derivative of the interest sensitive contract liabilities valuation include: 1. Non-performance risk – For contracts we issue, we use the credit spread from the U.S. treasury curve based on our public credit rating as of the valuation date. This represents our credit risk for use in the estimate of the fair value of embedded derivatives. For contracts reinsured through funds withheld reinsurance, the cedant company holds collateral against its exposure; therefore, immaterial non-performance risk is ascribed to these contracts. 2. Option budget – We assume future hedge costs in the derivative's fair value estimate. The level of option budgets determines the future costs of the options and impacts future policyholder account value growth. 3. Policyholder behavior – We regularly review the lapse and withdrawal assumptions (surrender rate). These are based on our initial pricing assumptions updated for actual experience. Actual experience may be limited for recently issued products. The following summarizes the unobservable inputs for the embedded derivatives of fixed indexed annuities: September 30, 2017 (In millions, except for percentages) Fair value Valuation technique Unobservable inputs Input/range of Impact of an increase in the input on fair value Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives $ 6,652 Option budget method Non-performance risk 0.3 % – 1.3% Decrease Option budget 0.7 % – 3.7% Increase Surrender rate 0.0 % – 19.6% Decrease December 31, 2016 (In millions, except for percentages) Fair value Valuation technique Unobservable inputs Input/range of Impact of an increase in the input on fair value Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives $ 5,283 Option budget method Non-performance risk 0.7 % – 1.5% Decrease Option budget 0.8 % – 3.8% Increase Surrender rate 0.0 % – 16.3% Decrease Fair Value of Financial Instruments Not Carried at Fair Value — The following represents our financial instruments not carried at fair value on the condensed consolidated balance sheets: September 30, 2017 December 31, 2016 (In millions) Fair Value Level Carrying Value Fair Value Carrying Value Fair Value Assets Mortgage loans 3 $ 6,403 $ 6,568 $ 5,426 $ 5,560 Investment funds NAV 1 620 620 590 590 Policy loans 2 571 571 602 602 Funds withheld at interest 3 6,661 6,661 6,398 6,398 Other investments 3 77 77 81 81 Investments in related parties Investment funds NAV 1 1,303 1,303 1,198 1,198 Other investments 3 238 260 237 262 Total assets not carried at fair value $ 15,873 $ 16,060 $ 14,532 $ 14,691 Liabilities Interest sensitive contract liabilities 3 $ 31,328 $ 30,932 $ 27,628 $ 26,930 Funds withheld liability 2 376 376 374 374 Total liabilities not carried at fair value $ 31,704 $ 31,308 $ 28,002 $ 27,304 1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. We estimate the fair value for financial instruments not carried at fair value using the same methods and assumptions as those we carry at fair value. The financial instruments presented above are reported at carrying value on the condensed consolidated balance sheets; however, in the case of policy loans, funds withheld at interest and liability, and other investments, the carrying amount approximates fair value. Investment in related parties – Other investments – The fair value of related party other investments is determined using a discounted cash flow model using discount rates for similar investments. Interest sensitive contract liabilities – The carrying and fair value of interest sensitive contract liabilities above includes fixed indexed and traditional fixed annuities without mortality or morbidity risks, funding agreements and payout annuities without life contingencies. The embedded derivatives within fixed indexed annuities without mortality or morbidity risks are excluded, as they are carried at fair value. The valuation of these investment contracts is based on discounted cash flow methodologies using significant unobservable inputs. The estimated fair value is determined using current market risk-free interest rates, adding a spread to reflect our nonperformance risk and subtracting a risk margin to reflect uncertainty inherent in the projected cash flows. |
