| 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: June 30, 2018 (In millions) Total NAV 1 Level 1 Level 2 Level 3 Assets Fixed maturity securities AFS securities U.S. government and agencies $ 142 $ — $ 140 $ 2 $ — U.S. state, municipal and political subdivisions 1,271 — — 1,271 — Foreign governments 199 — — 199 — Corporate 36,854 — — 35,892 962 CLO 5,352 — — 5,071 281 ABS 4,716 — — 3,265 1,451 CMBS 2,324 — — 2,127 197 RMBS 8,904 — — 8,897 7 Total AFS securities 59,762 — 140 56,724 2,898 Trading securities U.S. government and agencies 5 — 3 2 — U.S. state, municipal and political subdivisions 127 — — 110 17 Corporate 1,338 — — 1,334 4 CLO 26 — — — 26 ABS 89 — — — 89 CMBS 49 — — 49 — RMBS 419 — — 115 304 Total trading securities 2,053 — 3 1,610 440 Equity securities 216 — 20 194 2 Mortgage loans 38 — — — 38 Investment funds 126 95 — — 31 Funds withheld at interest – embedded derivative 150 — — — 150 Derivative assets 1,929 — 3 1,926 — Short-term investments 289 — 58 231 — Other investments 50 — — 50 — Cash and cash equivalents 3,608 — 3,608 — — Restricted cash 178 — 178 — — Investments in related parties Fixed maturity securities AFS securities CLO 472 — — 433 39 ABS 484 — — 438 46 Total AFS securities – related party 956 — — 871 85 Trading securities CLO 114 — — — 114 ABS 164 — — — 164 Total trading securities – related party 278 — — — 278 Investment funds 198 93 — — 105 Funds withheld at interest – embedded derivative 162 — — — 162 Short-term investments 172 — — 162 10 Reinsurance recoverable 1,717 — — — 1,717 Total assets measured at fair value $ 71,882 $ 188 $ 4,010 $ 61,768 $ 5,916 (Continued) June 30, 2018 (In millions) Total NAV 1 Level 1 Level 2 Level 3 Liabilities Interest sensitive contract liabilities Embedded derivative $ 8,065 $ — $ — $ — $ 8,065 Universal life benefits 943 — — — 943 Future policy benefits AmerUs Closed Block 1,490 — — — 1,490 ILICO Closed Block and life benefits 759 — — — 759 Derivative liabilities 137 — — 132 5 Funds withheld liability – embedded derivative 4 — — 4 — Total liabilities measured at fair value $ 11,398 $ — $ — $ 136 $ 11,262 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, 2017 (In millions) Total NAV 1 Level 1 Level 2 Level 3 Assets Fixed maturity securities AFS securities U.S. government and agencies $ 62 $ — $ 26 $ 36 $ — U.S. state, municipal and political subdivisions 1,165 — — 1,165 — Foreign governments 2,683 — — 2,683 — Corporate 36,660 — — 36,082 578 CLO 5,084 — — 5,020 64 ABS 3,971 — — 2,510 1,461 CMBS 2,021 — — 1,884 137 RMBS 9,366 — — 9,065 301 Total AFS securities 61,012 — 26 58,445 2,541 Trading securities U.S. government and agencies 3 — 3 — — U.S. state, municipal and political subdivisions 138 — — 121 17 Corporate 1,475 — — 1,475 — CLO 27 — — 10 17 ABS 94 — — 17 77 CMBS 51 — — 51 — RMBS 408 — — 66 342 Total trading securities 2,196 — 3 1,740 453 (Continued) December 31, 2017 (In millions) Total NAV 1 Level 1 Level 2 Level 3 Equity securities 790 — 18 764 8 Mortgage loans 41 — — — 41 Investment funds 145 104 — — 41 Funds withheld at interest – embedded derivative 312 — — — 312 Derivative assets 2,551 — 7 2,544 — Short-term investments 201 — 40 161 — Cash and cash equivalents 4,888 — 4,888 — — Restricted cash 105 — 105 — — Investments in related parties Fixed maturity securities AFS securities CLO 360 — — 360 — ABS 46 — — 46 — Total AFS securities – related party 406 — — 406 — Trading securities CLO 132 — — 27 105 ABS 175 — — 175 — Total trading securities – related party 307 — — 202 105 Investment funds 30 30 — — — Short-term investments 52 — — 52 — Reinsurance recoverable 1,824 — — — 1,824 Total assets measured at fair value $ 74,860 $ 134 $ 5,087 $ 64,314 $ 5,325 Liabilities Interest sensitive contract liabilities Embedded derivative $ 7,436 $ — $ — $ — $ 7,436 Universal life benefits 1,005 — — — 1,005 Unit-linked contracts 488 — — 488 — Future policy benefits AmerUs Closed Block 1,625 — — — 1,625 ILICO Closed Block and life benefits 803 — — — 803 Derivative liabilities 134 — — 129 5 Funds withheld liability – embedded derivative 22 — — 22 — Total liabilities measured at fair value $ 11,513 $ — $ — $ 639 $ 10,874 1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. (Concluded) See 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: Fixed maturity – AFS and trading securities – 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, CLO, 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 – including restricted cash – 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 obligations to the closed block business. This component is the present value of the projected release of required capital and future earnings before income taxes on required capital supporting the AmerUs Closed Block, discounted at a rate which represents a market participant’s required rate of return, less the initial required capital. Unobservable inputs include estimates for these items. 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 which include commissions, administrative expenses, reinsurance premiums and benefits, and an explicit cost of capital. The discount rate includes a margin to reflect the business and non-performance risk. Unobservable inputs include estimates for these items. 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. 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 June 30, Six months ended June 30, (In millions) 2018 2017 2018 2017 Trading securities $ (76 ) $ 41 $ (165 ) $ 27 Investment funds, including related party investment funds 10 7 6 14 Future policy benefits 51 (19 ) 135 (15 ) Total gains (losses) $ (15 ) $ 29 $ (24 ) $ 26 Gains and losses on trading and equity securities are recorded in investment related gains (losses) on the condensed consolidated statements of income. Prior period unrealized gains and losses on equity securities designated as AFS were recorded in OCI. 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) June 30, 2018 December 31, 2017 Unpaid principal balance $ 37 $ 40 Mark to fair value 1 1 Fair value $ 38 $ 41 There were no fair value option mortgage loans 90 days or more past due as of June 30, 2018 and December 31, 2017 . 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 six months ended June 30, 2018 and 2017 , 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 June 30, 2018 Total realized and unrealized gains (losses) Transfers (In millions) Beginning Balance Included in income Included in OCI Net purchases, issuances, sales and settlements In (Out) Ending Balance Total gains (losses) included in earnings 1 Assets Fixed maturity securities AFS securities Corporate $ 681 $ (8 ) $ (5 ) $ 290 $ 28 $ (24 ) $ 962 $ — CLO 167 — — 211 32 (129 ) 281 — ABS 1,294 3 (9 ) 273 — (110 ) 1,451 — CMBS 63 — 1 152 — (19 ) 197 — RMBS 38 — — — — (31 ) 7 — Trading securities U.S. state, municipal and political subdivisions 17 — — — — — 17 — Corporate — — — 4 — — 4 — CLO 1 — — — 26 (1 ) 26 — ABS — — — — 89 — 89 — RMBS 321 (17 ) — — — — 304 3 Equity securities — 1 — 1 — — 2 1 Mortgage loans 41 — — (3 ) — — 38 — Investment funds 25 6 — — — — 31 6 Funds withheld at interest – embedded derivative 207 (57 ) — — — — 150 — Investments in related parties Fixed maturity securities AFS securities CLO 62 — — 38 — (61 ) 39 — ABS — — — 46 — — 46 — Trading securities CLO 91 (1 ) — — 24 — 114 1 ABS 171 (7 ) — — — — 164 (7 ) Equity securities — — — — — — — — Investment funds 111 (6 ) — — — — 105 (6 ) Funds withheld at interest – embedded derivative — 162 — — — — 162 — Short-term investments — — — 10 — — 10 — Reinsurance recoverable 1,713 4 — — — — 1,717 — Total Level 3 assets $ 5,003 $ 80 $ (13 ) $ 1,022 $ 199 $ (375 ) $ 5,916 $ (2 ) Liabilities Interest sensitive contract liabilities Embedded derivative $ (7,254 ) $ (54 ) $ — $ (757 ) $ — $ — $ (8,065 ) $ — Universal life benefits (934 ) (9 ) — — — — (943 ) — Future policy benefits AmerUs Closed Block (1,541 ) 51 — — — — (1,490 ) — ILICO Closed Block and life benefits (764 ) 5 — — — — (759 ) — Derivative liabilities (5 ) — — — — — (5 ) — Total Level 3 liabilities $ (10,498 ) $ (7 ) $ — $ (757 ) $ — $ — $ (11,262 ) $ — 1 Related to instruments held at end of period. Three months ended June 30, 2017 Total realized and unrealized gains (losses) Transfers (In millions) Beginning Balance Included in income Included in OCI Net purchases, issuances, sales and settlements In (Out) Ending Balance Total gains (losses) included in earnings 1 Assets Fixed maturity securities AFS Securities Foreign governments $ 13 $ 1 $ — $ — $ — $ — $ 14 $ — Corporate 490 3 4 28 — (73 ) 452 — CLO 100 — 4 17 11 (51 ) 81 — ABS 1,222 5 3 11 — (148 ) 1,093 — CMBS 147 1 — 13 48 (87 ) 122 — RMBS 60 1 2 6 243 — 312 — Trading Securities U.S. state, municipal and political subdivisions 17 — — — — — 17 — CLO 27 — — — — (5 ) 22 1 RMBS 82 (4 ) — 22 — — 100 — Equity securities 5 — — 1 — — 6 — Mortgage loans 44 — — (1 ) — — 43 — Funds withheld at interest – embedded derivative 212 67 — — — — 279 — Investments in related parties Fixed maturity securities Trading securities, CLO 131 5 — (12 ) 31 (32 ) 123 5 Short-term investments 20 — — 8 — — 28 — Reinsurance recoverable 1,738 44 — — — — 1,782 — Total Level 3 assets $ 4,308 $ 123 $ 13 $ 93 $ 333 $ (396 ) $ 4,474 $ 6 Liabilities Interest sensitive contract liabilities Embedded derivative $ (5,793 ) $ (302 ) $ — $ (112 ) $ — $ — $ (6,207 ) $ — Universal life benefits (910 ) (44 ) — — — — (954 ) — Future policy benefits AmerUs Closed Block (1,602 ) (19 ) — — — — (1,621 ) — ILICO Closed Block and life benefits (813 ) 1 — — — — (812 ) — Derivative liabilities (7 ) 1 — — — — (6 ) — Total Level 3 liabilities $ (9,125 ) $ (363 ) $ — $ (112 ) $ — $ — $ (9,600 ) $ — 1 Related to instruments held at end of period. Six months ended June 30, 2018 Total realized and unrealized gains (losses) Transfers (In millions) Beginning Balance Included in income Included in OCI Net purchases, issuances, sales and settlements In (Out) Ending Balance Total gains (losses) included in earnings 1 Assets Fixed maturity securities AFS securities Corporate $ 578 $ (3 ) $ (9 ) $ 340 $ 64 $ (8 ) $ 962 $ — CLO 64 — 2 226 17 (28 ) 281 — ABS 1,461 5 (17 ) 157 — (155 ) 1,451 — CMBS 137 1 (3 ) 152 — (90 ) 197 — RMBS 301 3 (8 ) (19 ) 7 (277 ) 7 — Trading securities U.S. state, municipal and political subdivisions 17 — — — — — 17 — Corporate — — — 4 — — 4 — CLO 17 (1 ) — — 10 — 26 — ABS 77 (4 ) — — 16 — 89 (3 ) RMBS 342 (38 ) — — — — 304 2 Equity securities 8 1 — (7) — — 2 — Mortgage loans 41 — — (3 ) — — 38 — Investment funds 41 (3 ) — (7 ) — — 31 (3 ) Funds withheld at interest – embedded derivative 312 (162 ) — — — — 150 — Investments in related parties Fixed maturity securities AFS securities CLO — — — 39 — — 39 — ABS — — — 46 — — 46 — Trading securities CLO 105 (2 ) — (18 ) 29 — 114 1 ABS — — — — 164 — 164 — Investment funds — (3 ) — 108 — — 105 (3 ) Funds withheld at interest – embedded derivative — 162 — — — — 162 — Short-term investments — — — 10 — — 10 — Reinsurance recoverable 1,824 (107 ) — — — — 1,717 — Total Level 3 assets $ 5,325 $ (151 ) $ (35 ) $ 1,028 $ 307 $ (558 ) $ 5,916 $ (6 ) Liabilities Interest sensitive contract liabilities Embedded derivative $ (7,436 ) $ 184 $ — $ (813 ) $ — $ — $ (8,065 ) $ — Universal life benefits (1,005 ) 62 — — — — (943 ) — Future policy benefits AmerUs Closed Block (1,625 ) 135 — — — — (1,490 ) — ILICO Closed Block and life benefits (803 ) 44 — — — — (759 ) — Derivative liabilities (5 ) — — — — — (5 ) — Total Level 3 liabilities $ (10,874 ) $ 425 $ — $ (813 ) $ — $ — $ (11,262 ) $ — 1 Related to instruments held at end of period. Six months ended June 30, 2017 Total realized and unrealized gains (losses) Transfers (In millions) Beginning balance Included in income Included in OCI Net purchases, issuances, sales and settlements In Out Ending balance Total gains (losses) included in earnings 1 Assets Fixed maturity securities AFS Securities U.S. state, municipal and political subdivisions $ 5 $ 16 $ (1 ) $ (20 ) $ — $ — $ — $ — Foreign governments 14 1 — (1 ) — — 14 — Corporate 370 4 10 105 — (37 ) 452 — CLO 158 — 9 7 11 (104 ) 81 — ABS 1,160 9 17 42 — (135 ) 1,093 — CMBS 152 1 (3 ) 13 17 (58 ) 122 — RMBS 17 1 — 6 296 (8 ) 312 — Trading securities U.S. state, municipal and political subdivisions 17 — — — — — 17 — CLO 43 (1 ) — (15 ) — (5 ) 22 2 RMBS 96 (9 ) — 24 — (11 ) 100 (1 ) Equity Securities 5 — — 1 — — 6 — Mortgage loans 44 — — (1 ) — — 43 — Funds withheld at interest – embedded derivative 140 139 — — — — 279 — Investments in related parties Fixed maturity securities AFS Securities ABS 56 — 1 (4 ) — (53 ) — — Trading securities CLO 195 (3 ) — (26 ) — (43 ) 123 (1 ) Short-term investments — — — 28 — — 28 — Reinsurance recoverable 1,692 90 — — — — 1,782 — Total Level 3 assets $ 4,164 $ 248 $ 33 $ 159 $ 324 $ (454 ) $ 4,474 $ — Liabilities Interest sensitive contract liabilities Embedded derivative $ (5,283 ) $ (733 ) $ — $ (191 ) $ — $ — $ (6,207 ) $ — Universal life benefits (883 ) (71 ) — — — — (954 ) — Future policy benefits AmerUs Closed Block (1,606 ) (15 ) — — — — (1,621 ) — ILICO Closed Block and life benefits (794 ) (18 ) — — — — (812 ) — Derivative liabilities (7 ) 1 — — — — (6 ) 1 Total Level 3 liabilities $ (8,573 ) $ (836 ) $ — $ (191 ) $ — $ — $ (9,600 ) $ 1 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 June 30, 2018 (In millions) Purchases Issuances Sales Settlements Net purchases, issuances, sales and settlements Assets Fixed maturity securities AFS securities Corporate $ 300 $ — $ (2 ) $ (8 ) $ 290 CLO 211 — — — 211 ABS 347 — — (74 ) 273 CMBS 152 — — — 152 Trading securities Corporate 4 — — — 4 Equity securities 1 — — — 1 Mortgage loans — — — (3 ) (3 ) Investments in related parties Fixed maturity securities AFS securities CLO 38 — — — 38 ABS 46 — — — 46 Trading securities, CLO 30 — (30 ) — — Short-term investments 10 — — — 10 Total Level 3 assets $ 1,139 $ — $ (32 ) $ (85 ) $ 1,022 Liabilities Interest sensitive contract liabilities Embedded derivative $ — $ (858 ) $ — $ 101 $ (757 ) Total Level 3 liabilities $ — $ (858 ) $ — $ 101 $ (757 ) Three months ended June 30, 2017 (In millions) Purchases Issuances Sales Settlements Net purchases, issuances, sales and settlements Assets Fixed maturity securities AFS securities Corporate $ 30 $ — $ (1 ) $ (1 ) $ 28 CLO 24 — (5 ) (2 ) 17 ABS 99 — — (88 ) 11 CMBS 13 — — — 13 RMBS 7 — — (1 ) 6 Trading securities RMBS 22 — — — 22 Equity securities 1 — — — 1 Mortgage loans — — — (1 ) (1 ) Investments in related parties Fixed maturity securities Trading securities, CLO — — (12 ) — (12 ) Short-term investments 8 — — — 8 Total Level 3 assets $ 204 $ — $ (18 ) $ (93 ) $ 93 Liabilities Interest sensitive contract liabilities Embedded derivative $ — $ (160 ) $ — $ 48 $ (112 ) Total Level 3 liabilities $ — $ (160 ) $ — $ 48 $ (112 ) Six months ended June 30, 2018 (In millions) Purchases Issuances Sales Settlements Net purchases, issuances, sales and settlements Assets Fixed maturity securities AFS securities Corporate $ 358 $ — $ (5 ) $ (13 ) $ 340 CLO 231 — (5 ) — 226 ABS 356 — (21 ) (178 ) 157 CMBS 153 — — (1 ) 152 RMBS — — — (19 ) (19 ) Trading securities Corporate 4 — — — 4 CLO 7 — (7 ) — — Equity securities 1 — (8) — (7 ) Mortgage loans — — — (3 ) (3 ) Investment funds — — — (7 ) (7 ) Investments in related parties Fixed maturity securities AFS securities CLO 39 — — — 39 ABS 46 — — — 46 Trading securities, CLO 30 — (48 ) — (18 ) Investment funds 108 — — — 108 Short-term investments 10 — — — 10 Total Level 3 assets $ 1,343 $ — $ (94 ) $ (221 ) $ 1,028 Liabilities Interest sensitive contract liabilities Embedded derivative $ — $ (984 ) $ — $ 171 $ (813 ) Total Level 3 liabilities $ — $ (984 ) $ — $ 171 $ (813 ) Six months ended June 30, 2017 (In millions) Purchases Issuances Sales Settlements Net purchases, issuances, sales and settlements Assets Fixed maturity securities AFS securities U.S. state, municipal and political subdivisions $ — $ — $ — $ (20 ) $ (20 ) Foreign governments — — — (1 ) (1 ) Corporate 110 — (2 ) (3 ) 105 CLO 24 — (2 ) (15 ) 7 ABS 182 — — (140 ) 42 CMBS 13 — — — 13 RMBS 7 — — (1 ) 6 Trading securities CLO — — (15 ) — (15 ) RMBS 24 — — — 24 Equity securities 1 — — — 1 Mortgage loans — — — (1 ) (1 ) Investments in related parties Fixed maturity securities AFS securities, ABS 5 — — (9 ) (4 ) Trading securities, CLO — — (26 ) — (26 ) Short-term investments 28 — — — 28 Total Level 3 assets $ 394 $ — $ (45 ) $ (190 ) $ 159 Liabilities Interest sensitive contract liabilities Embedded derivative $ — $ (270 ) $ — $ 79 $ (191 ) Total Level 3 liabilities $ — $ (270 ) $ — $ 79 $ (191 ) Significant Unobservable Inputs — Significant unobservable inputs occur when we could not obtain or corroborate the quantitative detail of the inputs. This applies to fixed maturity securities, equity 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 June 30, 2018 , discounts ranged from 6% to 9% , and as of December 31, 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, relative to 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. 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: June 30, 2018 (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 $ 8,065 Option budget method Non-performance risk 0.4 % – 1.4% Decrease Option budget 0.8 % – 3.7% Increase Surrender rate 4.7 % – 11.0% Decrease December 31, 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 $ 7,436 Option budget method Non-performance risk 0.2 % – 1.2% Decrease Option budget 0.7 % – 3.7% Increase Surrender rate 1.5 % – 19.4% 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: June 30, 2018 (In millions) Carrying Value Fair Value NAV 1 Level 1 Level 2 Level 3 Financial Assets Mortgage loans $ 7,571 $ 7,713 $ — $ — $ — $ 7,713 Investment funds 507 507 507 — — — Policy loans 504 504 — — 504 — Funds withheld at interest 7,550 7,550 — — — 7,550 Other investments 73 73 — — — 73 Investments in related parties Investment funds 1,638 1,638 1,638 — — — Funds withheld at interest 14,059 14,059 — — — 14,059 Other investments 388 371 — — — 371 Total financial assets not carried at fair value $ 32,290 $ 32,415 $ 2,145 $ — $ 504 $ 29,766 Financial Liabilities Interest sensitive contract liabilities $ 46,586 $ 43,972 $ — $ — $ — $ 43,972 Short-term debt 183 183 — — 183 — Long-term debt 991 924 — — 924 — Funds withheld liability 385 385 — — 385 — Total financial liabilities not carried at fair value $ 48,145 $ 45,464 $ — $ — $ 1,492 $ 43,972 1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. December 31, 2017 (In millions) Carrying Value Fair Value NAV 1 Level 1 Level 2 Level 3 Financial Assets Mortgage loans $ 6,192 $ 6,342 $ — $ — $ — $ 6,342 Investment funds 554 554 554 — — — Policy loans 530 530 — — 530 — Funds withheld at interest 6,773 6,773 — — — 6,773 Other investments 133 133 — — 58 75 Investments in related parties Investment funds 1,280 1,280 1,280 — — — Other investments 238 259 — — — 259 Total financial assets not carried at fair value $ 15,700 $ 15,871 $ 1,834 $ — $ 588 $ 13,449 Financial Liabilities Interest sensitive contract liabilities $ 31,586 $ 31,656 $ — $ — $ — $ 31,656 Funds withheld liability 385 385 — — 385 — Total financial liabilities not carried at fair value $ 31,971 $ 32,041 $ — $ — $ 385 $ 31,656 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, other investments and short-term debt, 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 val |
