Fair Value of Assets and Liabilities | 3 Months Ended | 9 Months Ended |
Mar. 31, 2014 | Sep. 30, 2013 |
Fair Value of Assets and Liabilities [Abstract] | ' | ' |
Fair Value of Assets and Liabilities | ' | ' |
4. FAIR VALUE OF ASSETS AND LIABILITIES | | | | | | | Three Months Ended September 30, 2013 |
| | | | | | | Fixed Maturities Available For Sale | | | | | |
Fair Value Measurement – Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative fair value guidance establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows: | | | | | | | Corporate Securities | | Asset-Backed Securities | | Commercial Mortgage-Backed Securities | | Other Trading Account Assets - Equity Securities | | | Equity Securities, Available for Sale |
| | | | (in thousands) |
Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. The Company's Level 1 assets and liabilities primarily include certain cash equivalents, short term investments and equity securities that trade on an active exchange market. | Fair Value, beginning of period assets/(liabilities) | | $ | 18,147 | | $ | 112,114 | | $ | 4,040 | $ | 3,931 | | $ | 485 |
| | Total gains (losses) (realized/unrealized): | | | | | | | | | | | | | | |
Level 2 - Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, and other market observable inputs. The Company's Level 2 assets and liabilities include: fixed maturities (corporate public and private bonds, most government securities, certain asset-backed and mortgage-backed securities, etc.), certain equity securities (mutual funds, which do not actively trade and are priced based on a net asset value), certain short-term investments and certain cash equivalents (primarily commercial paper), and certain over-the-counter derivatives. | | | Included in earnings: | | | | | | | | | | | | | | |
| | | | Realized investment gains (losses), net | | | 1,319 | | | - | | | - | | - | | | -427 |
Level 3 - Fair value is based on at least one or more significant unobservable inputs for the asset or liability. The assets and liabilities in this category may require significant judgment or estimation in determining the fair value. The Company's Level 3 assets and liabilities primarily include: certain private fixed maturities and equity securities, certain manually priced public equity securities and fixed maturities, certain highly structured over-the-counter derivative contracts, certain consolidated real estate funds for which the Company is the general partner, and embedded derivatives resulting from reinsurance or certain products with guaranteed benefits. | | | | Asset management fees and other income | | | - | | | - | | | - | | -583 | | | - |
| | | Included in other comprehensive income (loss) | | | 1,430 | | | 224 | | | 1 | | - | | | -31 |
Assets and Liabilities by Hierarchy Level - The tables below present the balances of assets and liabilities measured at fair value on a recurring basis, as of the dates indicated. | | Net investment income | | | -61 | | | -163 | | | - | | - | | | - |
| | | | As of March 31, 2014 | | | | | | | | Purchases | | | -5,703 | | | -33,078 | | | 15,554 | | -380 | | | - |
| | | | Level 1 | | Level 2 | | Level 3 | | Netting (1) | | Total | | | | | | | | Sales | | | 935 | | | 1 | | | - | | - | | | 1,483 |
| | | | | | | | | | | | | | | | | | | | | | | | | Issuances | | | - | | | - | | | - | | - | | | - |
| | | | (in thousands) | | | | | | | | Settlements | | | 20,743 | | | 19,187 | | | 3,434 | | 380 | | | - |
Fixed maturities, available for sale: | | | | | | | | | | | | | | | | | | | | | | | Transfers into Level 3 (2) | | | - | | | 29,407 | | | - | | - | | | - |
U.S. Treasury securities and obligations of U.S. government authorities and agencies | | $ | - | | $ | 95,023 | | $ | - | | $ | - | | $ | 95,023 | | | | | | | | Transfers out of Level 3 (2) | | | 5,109 | | | 3,686 | | | 5,047 | | - | | | - |
Obligations of U.S. states and their political subdivisions | | | - | | | 108,754 | | | - | | | - | | | 108,754 | | | | | | | | Other (4) | | | - | | | 2,496 | | | - | | - | | | - |
Foreign government bonds | | | - | | | 23,953 | | | - | | | - | | | 23,953 | | | | | | | Fair Value, end of period assets/(liabilities) | | $ | 41,919 | | $ | 133,874 | | $ | 28,076 | $ | 3,348 | | $ | 1,510 |
Corporate securities | | | - | | | 4,683,827 | | | 23,231 | | | - | | | 4,707,058 | | | | | | | | | | | | | | | | | | | | | | | | | |
Asset-backed securities | | | - | | | 132,005 | | | 106,081 | | | - | | | 238,086 | | | | | | | Unrealized gains (losses) for the period relating to those | | | | | | | | | | | | | | |
Commercial mortgage-backed securities | | | - | | | 571,836 | | | 28,076 | | | - | | | 599,912 | | | | | | | | Level 3 assets that were still held at the end of the period (3): | | | | | | | | | | | | | | |
Residential mortgage-backed securities | | | - | | | 160,786 | | | - | | | - | | | 160,786 | | | | | | | | | Included in earnings: | | | | | | | | | | | | | | |
Sub-total | | | - | | | 5,776,184 | | | 157,388 | | | - | | | 5,933,572 | | | | | | | | | | Realized investment gains (losses), net | | $ | - | | $ | - | | $ | - | $ | - | | $ | - |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Asset management fees and other income | | $ | - | | $ | - | | $ | - | $ | 71 | | $ | - |
Trading account assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate securities | | | - | | | 23,814 | | | - | | | - | | | 23,814 | | | | | | | | | | | | | Three Months Ended September 30, 2013 |
Asset-backed securities | | | - | | | 1,983 | | | - | | | - | | | 1,983 | | | | | | | | | | | | | | Other Long-term Investments | | | Receivables from Parents and Affiliates | | Separate Account Assets (1) | | Future Policy Benefits | | Reinsurance Recoverables |
Commercial mortgage-backed securities | | | - | | | - | | | - | | | - | | | - | | | | | | | | | (in thousands) |
Equity securities | | | - | | | - | | | 2,802 | | | - | | | 2,802 | | | | | | | Fair Value, beginning of period assets/(liabilities) | | $ | 1,145 | | $ | 6,112 | | $ | 261,679 | $ | -586,930 | | $ | 479,818 |
Sub-total | | | - | | | 25,797 | | | 2,802 | | | - | | | 28,599 | | | | | | | | Total gains (losses) (realized/unrealized): | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Included in earnings: | | | | | | | | | | | | | | |
Equity securities, available for sale | | | 123 | | | 10,423 | | | 590 | | | - | | | 11,136 | | | | | | | | | | Realized investment gains (losses), net | | | 232 | | | - | | | 355 | | -2,462,699 | | | 2,454,237 |
Short-term investments | | | 3,978 | | | 52,963 | | | 18 | | | - | | | 56,959 | | | | | | | | | | Asset management fees and other income | | | -143 | | | - | | | - | | - | | | - |
Cash equivalents | | | 64,746 | | | 143,078 | | | - | | | - | | | 207,824 | | | | | | | | | | Interest credited to policyholders' account balances | | | - | | | - | | | -5,546 | | - | | | - |
Other long-term investments | | | - | | | 123,084 | | | 1,247 | | | -122,291 | | | 2,040 | | | | | | | | | Included in other comprehensive income (loss) | | | - | | | 31 | | | - | | - | | | - |
Reinsurance recoverables | | | - | | | - | | | 1,018,443 | | | - | | | 1,018,443 | | | | | | | | Net investment income | | | -167 | | | -4 | | | - | | - | | | - |
Receivables from parents and affiliates | | | - | | | 168,099 | | | 5,124 | | | - | | | 173,223 | | | | | | | | Purchases | | | - | | | -5,147 | | | -23,597 | | - | | | -251,587 |
Sub-total excluding separate account assets | | | 68,847 | | | 6,299,628 | | | 1,185,612 | | | -122,291 | | | 7,431,796 | | | | | | | | Sales | | | - | | | 3,495 | | | 14,160 | | - | | | - |
| | | | | | | | | | | | | | | | | | | | | | | | | Issuances | | | - | | | - | | | - | | 268,584 | | | - |
Separate account assets (2) | | | 959,698 | | | 101,521,906 | | | 278,638 | | | - | | | 102,760,242 | | | | | | | | Settlements | | | - | | | - | | | - | | - | | | - |
Total assets | | $ | 1,028,545 | | $ | 107,821,534 | | $ | 1,464,250 | | $ | -122,291 | | $ | 110,192,038 | | | | | | | | Transfers into Level 3 (2) | | | - | | | - | | | - | | - | | | - |
Future policy benefits (4) | | $ | - | | $ | - | | $ | 1,014,755 | | $ | - | | $ | 1,014,755 | | | | | | | | Transfers out of Level 3 (2) | | | - | | | -979 | | | - | | - | | | - |
Payables to parent and affiliates | | | - | | | 170,645 | | | - | | | -122,789 | | | 47,856 | | | | | | | | Other (4) | | | - | | | -2,496 | | | - | | - | | | - |
Total liabilities | | $ | - | | $ | 170,645 | | $ | 1,014,755 | | $ | -122,789 | | $ | 1,062,611 | | | | | | | Fair Value, end of period assets/(liabilities) | | $ | 1,067 | | $ | 1,012 | | $ | 247,051 | $ | -2,781,045 | | $ | 2,682,468 |
| | | | As of December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Level 1 | | Level 2 | | Level 3 | | Netting (1) | | Total | | | | | | | Unrealized gains (losses) for the period relating to those | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Level 3 assets that were still held at the end of the period (3): | | | | | | | | | | | | | | |
| | | | (in thousands) | | | | | | | | | Included in earnings: | | | | | | | | | | | | | | |
Fixed maturities, available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | Realized investment gains (losses), net | | $ | - | | $ | - | | $ | - | $ | -1,517,648 | | $ | 1,398,947 |
U.S. Treasury securities and obligations of U.S. government authorities and agencies | | $ | - | | $ | 93,525 | | $ | - | | $ | - | | $ | 93,525 | | | | | | | | | | Asset management fees and other income | | $ | - | | $ | - | | $ | - | $ | - | | $ | - |
Obligations of U.S. states and their political subdivisions | | | - | | | 78,951 | | | - | | | - | | | 78,951 | | | | | | | | | | Interest credited to policyholders' account balances | | $ | - | | $ | - | | $ | -5,546 | $ | - | | $ | - |
Foreign government bonds | | | - | | | 23,997 | | | - | | | - | | | 23,997 | | | | | | | |
Corporate securities | | | - | | | 4,523,076 | | | 18,293 | | | - | | | 4,541,369 | | | | | | | |
Asset-backed securities | | | - | | | 141,157 | | | 80,934 | | | - | | | 222,091 | | | | | | | |
Commercial mortgage-backed securities | | | - | | | 522,008 | | | - | | | - | | | 522,008 | | | | | | | |
Residential mortgage-backed securities | | | - | | | 169,460 | | | - | | | - | | | 169,460 | | | | | | | |
Sub-total | | | - | | | 5,552,174 | | | 99,227 | | | - | | | 5,651,401 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Trading account assets: | | | | | | | | | | | | | | | | | | | | | | |
Corporate securities | | | - | | | 14,183 | | | - | | | - | | | 14,183 | | | | | | | |
Asset-backed securities | | | - | | | 1,978 | | | - | | | - | | | 1,978 | | | | | | | |
Commercial mortgage-backed securities | | | - | | | - | | | - | | | - | | | - | | | | | | | |
Equity securities | | | - | | | - | | | 2,731 | | | - | | | 2,731 | | | | | | | |
Sub-total | | | - | | | 16,161 | | | 2,731 | | | - | | | 18,892 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Equity securities, available for sale | | | 112 | | | 90 | | | 569 | | | - | | | 771 | | | | | | | |
Short-term investments | | | 9,216 | | | 6,768 | | | 18 | | | - | | | 16,002 | | | | | | | |
Cash equivalents | | | 5,962 | | | 199,825 | | | - | | | - | | | 205,787 | | | | | | | |
Other long term investments | | | - | | | 73,647 | | | 1,168 | | | -73,219 | | | 1,596 | | | | | | | |
Reinsurance recoverables | | | - | | | - | | | 11,400 | | | - | | | 11,400 | | | | | | | |
Receivables from parents and affiliates | | | - | | | 170,761 | | | 4,121 | | | - | | | 174,882 | | | | | | | |
Sub-total excluding separate account assets | | | 15,290 | | | 6,019,426 | | | 119,234 | | | -73,219 | | | 6,080,731 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Separate account assets (2) | | | 973,192 | | | 99,149,315 | | | 279,842 | | | - | | | 100,402,349 | | | | | | | |
Total assets | | $ | 988,482 | | $ | 105,168,741 | | $ | 399,076 | | $ | -73,219 | | $ | 106,483,080 | | | | | | | |
Future policy benefits (4) | | $ | - | | $ | - | | $ | -348,399 | | $ | - | | $ | -348,399 | | | | | | | |
Payables to parents and affiliates | | | - | | | 218,467 | | | - | | | -73,051 | | | 145,416 | | | | | | | |
Other liabilities (3) | | | - | | | - | | | 388,268 | | | - | | | 388,268 | | | | | | | |
Total liabilities | | $ | - | | $ | 218,467 | | $ | 39,869 | | $ | -73,051 | | $ | 185,285 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(1) "Netting" amounts represents swap variation margin of $0.5 million and $0.2 million as of March 31, 2014 and December 31, 2013, respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting arrangements. | | | | | | | |
(2) Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account assets classified as Level 3 consist primarily of real estate and real estate investment funds. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Unaudited Interim Consolidated Statements of Financial Position. | | | | | | | |
(3) Reinsurance of variable annuity living benefit features that were classified as "Other Liabilities" at December 31, 2013 were reclassified to "Reinsurance Recoverables" at March 31, 2014 as they were in a net asset position. | | | | | | | |
(4) As of March 31, 2014, the net embedded derivative liability position of $1,015 million includes $909 million of embedded derivatives in an asset position and $1,924 million of embedded derivatives in a liability position. As of December 31, 2013, the net embedded derivative asset position of $348 million includes $1,228 million of embedded derivatives in an asset position and $880 million of embedded derivatives in a liability position. | | | | | | | |
The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair value on a recurring basis are summarized below. | |
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Fixed Maturity Securities - The fair values of the Company's public fixed maturity securities are generally based on prices obtained from independent pricing services. Prices for each security are generally sourced from multiple pricing vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. The Company ultimately uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type. The pricing hierarchy is updated for new financial products and recent pricing experience. Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. If the pricing information received from third party pricing services is not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process with the pricing service. If the pricing service updates the price to be more consistent with the presented market observations, the security remains within Level 2. | |
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Internally-developed valuations or indicative broker quotes are also used to determine fair value in circumstances where vendor pricing is not available, or where the Company ultimately concludes that pricing information received from the independent pricing service is not reflective of market activity. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may over-ride the information with an internally-developed valuation. As of March 31, 2014 and December 31, 2013, over-rides on a net basis were not material. Pricing service over-rides, internally-developed valuations and indicative broker quotes are generally included in Level 3 in the fair value hierarchy. | |
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The fair value of private fixed maturities, which are comprised of investments in private placement securities, originated by internal private asset managers, are primarily determined using a discounted cash flow model. If the fair value is determined using pricing inputs that are observable in the market, the securities have been reflected within Level 2; otherwise a Level 3 classification is used. | |
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Trading Account Assets - Trading account assets consist primarily of asset-backed securities, perpetual preferred stock and commercial mortgage-backed securities whose fair values are determined consistent with similar instruments described above under “Fixed Maturity Securities” and below under “Equity Securities.” | |
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Equity Securities - Equity securities consist principally of investments in common and preferred stock of publicly traded companies, perpetual preferred stock, privately traded securities, as well as mutual fund shares. The fair values of most publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. Estimated fair values for most privately traded equity securities are determined using discounted cash flow, earnings multiple and other valuation models that require a substantial level of judgment around inputs and therefore are classified within Level 3. The fair values of mutual fund shares that transact regularly (but do not trade in active markets because they are not publicly available) are based on transaction prices of identical fund shares and are classified within Level 2 in the fair value hierarchy. The fair values of perpetual preferred stock are based on inputs obtained from independent pricing services that are primarily based on indicative broker quotes. As a result, the fair values of perpetual preferred stock are classified as Level 3. | |
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Derivative Instruments – Derivatives are recorded at fair value either as assets, within “Other long-term investments,” or as liabilities, within “Payables to parent and affiliates,” except for embedded derivatives which are recorded with the associated host contract. The fair values of derivative contracts can be affected by changes in interest rates, foreign exchange rates, credit spreads, market volatility, expected returns, non-performance risk (“NPR”), liquidity and other factors. Liquidity valuation adjustments are made to reflect the cost of exiting significant risk positions, and consider the bid-ask spread, maturity, complexity, and other specific attributes of the underlying derivative position. | |
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The majority of the Company's derivative positions are traded in the over-the-counter (“OTC”) derivative market and are classified within Level 2 in the fair value hierarchy. OTC derivatives classified within Level 2 are valued using models that utilize actively quoted or observable market input values from external market data providers, third-party pricing vendors and/or recent trading activity. The Company's policy is to use mid-market pricing in determining its best estimate of fair value. The fair values of most OTC derivatives, including interest rate, cross currency swaps, currency forward contracts and single name credit default swaps are determined using discounted cash flow models. The fair values of European style option contracts are determined using Black Scholes option pricing models. These models' key inputs include the contractual terms of the respective contract, along with significant observable inputs, including interest rates, currency rates, credit spreads, equity prices, index dividend yields, non-performance risk, volatility and other factors. | |
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The Company's cleared interest rate swaps and credit derivatives linked to an index are valued using models that utilize actively quoted or observable market inputs, including overnight indexed swap discount rates, obtained from external market data providers, third-party pricing vendors and/or recent trading activity. These derivatives are classified as Level 2 in the fair value hierarchy. | |
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To reflect the market's perception of its own and the counterparty's non-performance risk, the Company incorporates additional spreads over LIBOR into the discount rate used in determining the fair value of OTC derivative assets and liabilities that are not otherwise collateralized. | |
Derivatives classified as Level 3 include structured products. These derivatives are valued based upon models such as Monte Carlo simulation models and other techniques that utilize significant unobservable inputs. Level 3 methodologies are validated through periodic comparison of the Company's fair values to external broker-dealer values. As of March 31, 2014 and December 31, 2013, there were no internally valued derivatives with the fair value classified within Level 3, and all other derivatives were classified within Level 2. See Note 5 for more details on the fair value of derivative instruments by primary underlying. | |
Cash Equivalents and Short-Term Investments - Cash equivalents and short-term investments include money market instruments, commercial paper and other highly liquid debt instruments. Certain money market instruments are valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. The remaining instruments in this category are generally fair valued based on market observable inputs and, these investments have primarily been classified within Level 2. | |
Separate Account Assets - Separate Account Assets include fixed maturity securities, treasuries, equity securities and real estate investments for which values are determined consistent with similar instruments described above under "Fixed Maturity Securities,” “Equity Securities” and “Other Long-Term Investments.” | |
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Receivables from Parent and Affiliates – Receivables from parent and affiliates carried at fair value include affiliated bonds within our legal entity whose fair value are determined consistent with similar securities described above under “Fixed Maturity Securities” managed by affiliated asset managers. | |
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Reinsurance Recoverables – Reinsurance recoverables carried at fair value include the reinsurance of our living benefit guarantees on certain of our variable annuities. These guarantees are accounted for as embedded derivatives and are recorded in “Reinsurance Recoverables” or “Other Liabilities” when fair value is in an asset or liability position, respectively. The methods and assumption used to estimate the fair value are consistent with those described below in "Future Policy Benefits." The reinsurance agreements covering these guarantees are derivatives with fair value determined in the same manner as the living benefit guarantee. | |
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The Company also has an agreement with UPARC, an affiliated captive reinsurance company, to reinsure risks associated with the no-lapse guarantee provision available on a portion of certain universal life products (See Note 7). Under this agreement, the Company pays a premium to UPARC to reinsure the risk of uncollectible policy charges and fees associated with the no-lapse guarantee provision. Reinsurance of this risk is accounted for as an embedded derivative which is included in “Reinsurance recoverables”. The fair value of this embedded derivative is the present value of expected reimbursement from UPARC for cost of insurance charges the Company is unable to collect from policyholders, less the present value of reinsurance premiums that is attributable to the embedded derivative feature. This methodology could result in either an asset or liability, given changes in capital market conditions and various policyholder behavior assumptions. Significant inputs to the valuation model for this embedded derivative include capital market assumptions, such as interest rates, estimated non-performance risk of the counterparty, and various assumptions that are actuarially determined, including lapse rates, premium payment patterns, and mortality rates. This embedded derivative had a value of $149.1 million and $11.4 million at March 31, 2014 and December 31, 2013, respectively. The increase in embedded derivative as of March 31, 2014, is primarily driven by decreases in interest rates and NPR Spreads. | |
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Future Policy Benefits - The liability for future policy benefits primarily includes general account liabilities for the optional living benefit features of the Company's variable annuity contracts, including guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum income and withdrawal benefits (“GMIWB”), accounted for as embedded derivatives. The fair values of the GMAB, GMWB, and GMIWB liabilities are calculated as the present value of future expected benefit payments to contractholders less the present value of assessed rider fees attributable to the optional living benefit feature. This methodology could result in either a liability or contra-liability balance, given changing capital market conditions and various actuarial assumptions. Since there is no observable active market for the transfer of these obligations, the valuations are calculated using internally developed models with option pricing techniques. The models are based on a risk neutral valuation framework and incorporate premiums for risks inherent in valuation techniques, inputs, and the general uncertainty around the timing and amount of future cash flows. The determination of these risk premiums requires the use of management judgment. | |
The significant inputs to the valuation models for these embedded derivatives include capital market assumptions, such as interest rate levels and volatility assumptions, the Company's market-perceived risk of its own non-performance, as well as actuarially determined assumptions, including contractholder behavior, such as lapse rates, benefit utilization rates, withdrawal rates, and mortality rates. Since many of these assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 in the fair value hierarchy. | |
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Capital market inputs and actual policyholders' account values are updated each quarter based on capital market conditions as of the end of the quarter, including interest rates, equity markets, and volatility. In the risk neutral valuation, the initial swap curve drives the total return used to grow the policyholders' account values. The Company's discount rate assumption is based on the LIBOR swap curve adjusted for an additional spread relative to LIBOR to reflect NPR. | |
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Actuarial assumptions, including contractholder behavior and mortality, are reviewed at least annually, and updated based upon emerging experience, future expectations and other data, including any observable market data. These assumptions are generally updated in the third quarter of each year unless a material change that the Company feels is indicative of a long term trend is observed in an interim period. | |
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Transfers between Levels 1 and 2 – Transfers between levels are generally reported at the values as of the beginning of the period in which the transfers occur. Periodically there are transfers between Level 1 and Level 2 for assets held in the Company's Separate Account. The classification of Separate Account funds may vary dependent on the availability of information to the public. Should a fund's net asset value become publicly observable, the fund would be transferred from Level 2 to Level 1. During the three months ended March 31, 2014, $1.9 million was transferred from Level 1 to Level 2. During the three months ended March 31, 2013, there were no transfers between Level 1 and Level 2. | |
Level 3 Assets and Liabilities by Price Source - The tables below present the balances of Level 3 assets and liabilities measured at fair value with their corresponding pricing sources. | |
| | | | As of March 31, 2014 | | | | | | | | | | | | | |
| | | | Internal (1) | | External (2) | | Total | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | (in thousands) | | | | | | | | | | | | | |
Corporate securities | | $ | 16,758 | | $ | 6,473 | | $ | 23,231 | | | | | | | | | | | | | |
Asset-backed securities | | | 337 | | | 105,744 | | | 106,081 | | | | | | | | | | | | | |
Commercial mortgage-backed securities | | | 7,053 | | | 21,023 | | | 28,076 | | | | | | | | | | | | | |
Short-term investments | | | 18 | | | - | | | 18 | | | | | | | | | | | | | |
Equity securities | | | 590 | | | 2,802 | | | 3,392 | | | | | | | | | | | | | |
Other long-term investments | | | - | | | 1,247 | | | 1,247 | | | | | | | | | | | | | |
Reinsurance recoverables | | | 1,018,443 | | | - | | | 1,018,443 | | | | | | | | | | | | | |
Receivables from parents and affiliates | | | - | | | 5,124 | | | 5,124 | | | | | | | | | | | | | |
Subtotal excluding separate account assets | | | 1,043,199 | | | 142,413 | | | 1,185,612 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Separate account assets | | | 81,621 | | | 197,017 | | | 278,638 | | | | | | | | | | | | | |
Total assets | | $ | 1,124,820 | | $ | 339,430 | | $ | 1,464,250 | | | | | | | | | | | | | |
Future policy benefits | | $ | 1,014,755 | | $ | - | | $ | 1,014,755 | | | | | | | | | | | | | |
Total liabilities | | $ | 1,014,755 | | $ | - | | $ | 1,014,755 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, 2013 | | | | | | | | | | | | | |
| | | | Internal (1) | | External (2) | | Total | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | (in thousands) | | | | | | | | | | | | | |
Corporate securities | | $ | 15,100 | | $ | 3,193 | | $ | 18,293 | | | | | | | | | | | | | |
Asset-backed securities | | | 355 | | | 80,579 | | | 80,934 | | | | | | | | | | | | | |
Short-term investments | | | 18 | | | - | | | 18 | | | | | | | | | | | | | |
Equity securities | | | 569 | | | 2,731 | | | 3,300 | | | | | | | | | | | | | |
Other long-term investments | | | - | | | 1,168 | | | 1,168 | | | | | | | | | | | | | |
Reinsurance recoverables | | | 11,400 | | | - | | | 11,400 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Receivables from parents and affiliates | | | - | | | 4,121 | | | 4,121 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Subtotal excluding separate account assets | | | 27,442 | | | 91,792 | | | 119,234 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Separate account assets | | | 81,795 | | | 198,047 | | | 279,842 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 109,237 | | $ | 289,839 | | $ | 399,076 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Future policy benefits | | $ | -348,399 | | $ | - | | $ | -348,399 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other liabilities | | | 388,268 | | | - | | | 388,268 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities | | $ | 39,869 | | $ | - | | $ | 39,869 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) Represents valuations which could incorporate internally-derived and market inputs. See below for additional information related to internally developed valuation for significant items in the above table. | | | | | | | | | | | | | | | | | | | |
(2) Represents unadjusted prices from independent pricing services and independent non-binding broker quotes where pricing inputs are not readily available. | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Quantitative Information Regarding Internally Priced Level 3 Assets and Liabilities – The tables below present quantitative information on significant internally-priced Level 3 assets and liabilities (see narrative below for quantitative information for separate account assets). | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value | Valuation Techniques | Unobservable Inputs | | Minimum | Maximum | | Weighted Average | | Impact of Increase in Input on Fair Value (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate securities | $ | 16,758 | | Discounted cash flow | | Discount rate | | 8.76% | | 15.00% | | 10.73% | | Decrease | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Market Comparables | | EBITDA Multiples (2) | | 5.0X | | 7.0X | | 5.82X | | Increase | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reinsurance recoverables - Living Benefits | $ | 869,343 | | Fair values are determined in the same manner as future policy benefits. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reinsurance recoverables - No Lapse Guarantee | $ | 149,100 | | Discounted cash flow | | Lapse rate (3) | | 0% | | 13% | | | | Decrease | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | NPR spread (4) | | 0.05% | | 1.01% | | | | Decrease | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Mortality rate (5) | | 0% | | 22% | | | | Decrease | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Premium Payment (6) | | 1X | | 3.75X | | | | Decrease | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Future policy benefits (7) | $ | 1,014,755 | | Discounted cash flow | | Lapse rate (8) | | 0% | | 11% | | | | Decrease | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | NPR spread (4) | | 0.05% | | 1.01% | | | | Decrease | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Utilization rate (9) | | 70% | | 98% | | | | Increase | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Withdrawal rate (10) | | 86% | | 100% | | | | Increase | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Mortality rate (11) | | 0% | | 13% | | | | Decrease | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Equity Volatility curve | | 15% | | 28% | | | | Increase | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value | Valuation Techniques | Unobservable Inputs | | Minimum | Maximum | | Weighted Average | | Impact of Increase in Input on Fair Value (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate securities | $ | 15,100 | | Discounted cash flow | | Discount rate | | 8.28% | | 15.00% | | 10.61% | | Decrease | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Market Comparable | | EBITDA Multiples (2) | | 5.0X | | 7.0X | | 5.91X | | Increase | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Liquidation | | Liquidation value | | 11.61% | | 38.49% | | 31.83% | | Increase | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reinsurance recoverables | $ | 11,400 | | See the Reinsurance Recoverable section above for an explanation of the fair value determination. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Future policy benefits (7) | $ | -348,399 | | Discounted cash flow | | Lapse rate (8) | | 0% | | 11% | | | | Decrease | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | NPR spread (4) | | 0.08% | | 1.09% | | | | Decrease | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Utilization rate (9) | | 70% | | 94% | | | | Increase | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Withdrawal rate (10) | | 86% | | 100% | | | | Increase | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Mortality rate (11) | | 0% | | 13% | | | | Decrease | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Equity Volatility curve | | 15% | | 28% | | | | Increase | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other Liabilities | $ | 388,268 | | Represents reinsurance of variable annuity living benefits in a liability position. Fair values are determined in the same manner as future policy benefits. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Conversely, the impact of a decrease in input would have the opposite impact for the fair value as that presented in the table. | | | | | | | | | | | | | | | | | | | |
EBITDA multiples represent multiples of earnings before interest, taxes, depreciation and amortization, and are amounts used when the reporting entity has determined that market participants would use such multiples when pricing the investments. | | | | | | | | | | | | | | | | | | | |
For universal life, lapse rates vary based on funding level and other factors. Rates are set to zero when the no lapse guarantee is fully funded and the cash value is zero. | | | | | | | | | | | | | | | | | | | |
To reflect NPR, the Company incorporates an additional spread over LIBOR into the discount rate used in the valuation of individual living benefit contracts in a liability position and generally not to those in a contra-liability position. The NPR spread reflects the financial strength ratings of the Company as these are insurance liabilities and senior to debt. The additional spread over LIBOR is determined by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium. | | | | | | | | | | | | | | | | | | | |
Universal life mortality rates are adjusted based on underwriting information. A mortality improvement assumption is also incorporated into the projection. | | | | | | | | | | | | | | | | | | | |
For universal life, premium payment assumptions vary by funding level. Some policies are assumed to pay the minimum premium required to maintain the no lapse guarantee. Other policies are assumed to pay a multiple of commissionable target premium levels (shown above and indicated as “X”). Policyholders are assumed to stop premium payments once the no lapse guarantee is fully funded. | | | | | | | | | | | | | | | | | | | |
Future policy benefits primarily represent general account liabilities for the optional living benefit features of the Company's variable annuity contracts which are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation. | | | | | | | | | | | | | | | | | | | |
Base lapse rates are adjusted at the contract level based on a comparison of the benefit amount and the policyholder account value and reflect other factors, such as the applicability of any surrender charges. A dynamic lapse adjustment reduces the base lapse rate when the benefit amount is greater than the account value, as in-the-money contracts are less likely to lapse. Lapse rates are also generally assumed to be lower for the period where surrender charges apply. | | | | | | | | | | | | | | | | | | | |
The utilization rate assumption estimates the percentage of contracts that will utilize the benefit during the contract duration, and begin lifetime withdrawals at various time intervals from contract inception. The remaining contractholders are assumed to either begin lifetime withdrawals immediately or never utilize the benefit. These assumptions vary based on the product type, the age of the contractholder and the age of the contract. The impact of changes in these assumptions is highly dependent on the contract type and age of the contractholder at the time of the sale and the timing of the first lifetime income withdrawal. | | | | | | | | | | | | | | | | | | | |
The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. The fair value of the liability will generally increase the closer the withdrawal rate is to 100%. | | | | | | | | | | | | | | | | | | | |
Range reflects the mortality rate for the vast majority of business with living benefits, with policyholders ranging from 35 to 90 years old. While the majority of living benefits have a minimum age requirement, certain benefits do not have an age restriction. This results in contractholders for certain benefits with mortality rates approaching 0%. Based on historical experience, the Company applies a set of age and duration specific mortality rate adjustments compared to standard industry tables. A mortality improvement assumption is also incorporated into the overall mortality table. | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Interrelationships Between Unobservable Inputs—In addition to the sensitivities of fair value measurements to changes in each unobservable input in isolation, as reflected in the table above, interrelationships between these inputs may also exist, such that a change in one unobservable input may give rise to a change in another, or multiple, inputs. Examples of such interrelationships for significant internally-priced Level 3 assets and liabilities are as follows: | | | | | | | | | | | | | | | | | | | |
Corporate Securities—The rate used to discount future cash flows reflects current risk free rates plus credit and liquidity spread requirements that market participants would use to value an asset. The discount rate may be influenced by many factors, including market cycles, expectations of default, collateral, term, and asset complexity. Each of these factors can influence discount rates, either in isolation, or in response to other factors. | | | | | | | | | | | | | | | | | | | |
Future Policy Benefits—The unobservable contractholder behavior inputs related to the liability for the optional living benefit features of the Company's variable annuity contracts included in future policy benefits are generally based on emerging experience, future expectations and other data. While experience for these products is still emerging, the Company expects benefit utilization and withdrawal rates to generally be correlated with lapse rates. However, behavior is generally highly dependent on the facts and circumstances surrounding the individual contractholder, such as their liquidity needs or tax situation, which could drive lapse behavior independent of other contractholder behavior assumptions. The dynamic lapse adjustment assumes lower lapses when the benefit amount is greater than the account value, as in-the-money contracts are less likely to lapse. Therefore, to the extent more efficient contractholder behavior results in greater in-the-moneyness at the contract level, the dynamic lapse function will reduce lapse rates for those contracts. Similarly, to the extent that increases in equity volatility are correlated with overall declines in the capital markets, the dynamic lapse function will lower overall lapse rates as contracts become more in-the-money. | | | | | | | | | | | | | | | | | | | |
Separate Account Assets – In addition to the significant internally-priced Level 3 assets and liabilities presented and described above, the Company also has internally-priced separate account assets reported within Level 3. Changes in the fair value of separate account assets are borne by customers and thus are offset by changes in separate account liabilities on the Company's Unaudited Interim Consolidated Statement of Financial Position. As a result, changes in value associated with these investments do not impact the Company's Unaudited Interim Consolidated Statement of Operations. In addition, fees earned by the Company related to the management of most separate account assets classified as Level 3 do not change due to changes in the fair value of these investments. Quantitative information about significant internally-priced Level 3 separate account assets is as follows: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Real Estate and Other Invested Assets – Separate account assets include $81.6 million and $81.8 million of investments in real estate as of March 31, 2014 and December 31, 2013, respectively, that are classified as Level 3 and reported at fair value which is determined by the Company's equity in net assets of the entities. Fair value estimates of real estate are based on property appraisal reports prepared by independent real estate appraisers. Key inputs and assumptions to the appraisal process include rental income and expense amounts, related growth rates, discount rates and capitalization rates. Because of the subjective nature of inputs and the judgment involved in the appraisal process, real estate investments are typically included in the Level 3 Classification. Key unobservable inputs to real estate valuation include capitalization rates, which ranged from 5.00% to 10.00% (6.29% weighted average) as of March 31, 2014 and 5.00% to 10.00% (6.82% weighted average) as of December 31, 2013 and discount rates which ranged from 6.75% to 10.50% (7.24% weighted average) as of March 31, 2014 and 6.75% to 11.00% (7.90% weighted average) as of December 31, 2013. | | | | | | | | | | | | | | | | | | | |
Valuation Process for Fair Value Measurements Categorized within Level 3 – The Company has established an internal control infrastructure over the valuation of financial instruments that requires ongoing oversight by its various Business Groups. These management control functions are segregated from the trading and investing functions. For invested assets, the Company has established oversight teams, often in the form of Pricing Committees within each asset management group. The teams, which typically include representation from investment, accounting, operations, legal and other disciplines are responsible for overseeing and monitoring the pricing of the Company's investments and performing periodic due diligence reviews of independent pricing services. An actuarial valuation team oversees the valuation of optional living benefit features of the Company's variable annuity contracts. | | | | | | | | | | | | | | | | | | | |
The Company has also established policies and guidelines that require the establishment of valuation methodologies and consistent application of such methodologies. These policies and guidelines govern the use of inputs and price source hierarchies and provide controls around the valuation processes. These controls include appropriate review and analysis of investment prices against market activity or indicators of reasonableness, approval of price source changes, price overrides, methodology changes and classification of fair value hierarchy levels. For optional living benefit features of the Company's variable annuity products, the actuarial valuation unit periodically performs baseline testing of contract input data and actuarial assumptions are reviewed at least annually, and updated based upon emerging experience, future expectations and other data, including any observable market data, such as available industry studies. The valuation policies and guidelines are reviewed and updated as appropriate. | | | | | | | | | | | | | | | | | | | |
Within the trading and investing functions, the Company has established policies and procedures that relate to the approval of all new transaction types, transaction pricing sources and fair value hierarchy coding within the financial reporting system. For variable annuity product changes or new launches of optional living benefit features, the actuarial valuation unit validates input logic and new product features and agrees new input data directly to source documents. | | | | | | | | | | | | | | | | | | | |
Changes in Level 3 assets and liabilities - The following tables provide summaries of the changes in fair values of Level 3 assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods. | | | | | | | | | | | | | | | | | | | |
| | | | | | Three Months Ended March 31, 2014 | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fixed Maturities Available For Sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Corporate Securities | | Asset- Backed Securities | | | Commercial Mortgage-Backed Securities | | | Trading Account Assets - Equity Securities | | | Equity Securities, Available for Sale | | Short Term Investments | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | | | | | | | | | | | | | | | | | | | | |
Fair Value, beginning of period assets/(liabilities) | | $ | 18,293 | | $ | 80,934 | | $ | - | | $ | 2,731 | | $ | 569 | | $ | 18 | | | | | | | | | | | | | | | | | | | | |
| Total gains (losses) (realized/unrealized): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Included in earnings: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Realized investment gains (losses), net | | | -2 | | | - | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | |
| | | Asset management fees and other income | | | - | | | - | | | - | | | 71 | | | - | | | - | | | | | | | | | | | | | | | | | | | | |
| | Included in other comprehensive income (loss) | | | 337 | | | 135 | | | -2 | | | - | | | 21 | | | - | | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | 10 | | | 56 | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | |
| Purchases | | | 7,971 | | | - | | | 28,078 | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | |
| Sales | | | -1,391 | | | - | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | |
| Issuances | | | - | | | - | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | |
| Settlements | | | -803 | | | -3,137 | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | |
| Transfers into Level 3 (2) | | | - | | | 29,407 | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | |
| Transfers out of Level 3 (2) | | | -1,184 | | | -1,314 | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | |
| Other (4) | | | - | | | - | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | |
Fair Value, end of period assets/(liabilities) | | $ | 23,231 | | $ | 106,081 | | $ | 28,076 | | $ | 2,802 | | $ | 590 | | $ | 18 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gains (losses) for the period relating to those | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 3 assets that were still held at the end of the period (3): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Included in earnings: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Realized investment gains (losses), net | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | | | | | | | | | | | | | | | | | | | |
| | | Asset management fees and other income | | $ | - | | $ | - | | $ | - | | $ | 71 | | $ | - | | $ | - | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Three Months Ended March 31, 2014 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Other Long-term Investments | | Receivables from Parents and Affiliates | | Separate Account Assets (1) | | Reinsurance Recoverables (4) | | | Future Policy Benefits | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | | | | | | | | | | | | | | | | | | | | |
Fair Value, beginning of period assets/(liabilities) | | $ | 1,168 | | $ | 4,121 | | $ | 279,842 | | $ | -376,868 | | $ | 348,399 | | | | | | | | | | | | | | | | | | | | | | | |
| Total gains (losses) (realized/unrealized): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Included in earnings: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Realized investment gains (losses), net | | | - | | | - | | | 2,269 | | | 1,252,368 | | | -1,207,282 | | | | | | | | | | | | | | | | | | | | | | | |
| | | Asset management fees and other income | | | -22 | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| | | Interest credited to policyholders' account balances | | | - | | | - | | | 2,676 | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| | Included in other comprehensive income (loss) | | | - | | | -3 | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | - | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Purchases | | | 101 | | | - | | | 34,578 | | | 142,943 | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Sales | | | - | | | - | | | -40,727 | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Issuances | | | - | | | - | | | - | | | - | | | -155,872 | | | | | | | | | | | | | | | | | | | | | | | |
| Settlements | | | - | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Transfers into Level 3 (2) | | | - | | | 1,985 | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Transfers out of Level 3 (2) | | | - | | | -979 | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
Fair Value, end of period assets/(liabilities) | | $ | 1,247 | | $ | 5,124 | | $ | 278,638 | | $ | 1,018,443 | | $ | -1,014,755 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gains (losses) for the period relating to those | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 3 assets that were still held at the end of the period (3): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Included in earnings: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Realized investment gains (losses), net | | $ | - | | $ | - | | $ | - | | $ | 1,398,947 | | $ | -1,517,648 | | | | | | | | | | | | | | | | | | | | | | | |
| | | Asset management fees and other income | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | | | | | | | | | | | | | | | | | | | | | | |
| | | Interest credited to policyholders' account balances | | $ | - | | $ | - | | $ | 2,676 | | $ | - | | $ | - | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Three Months Ended March 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fixed Maturities, Available for Sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Corporate Securities | | | Asset-Backed Securities | | Commercial Mortgage-Backed Securities | | Other Trading Account Assets - Equity Securities | | Equity Securities, Available for Sale | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | | | | | | | | | | | | | | | | | | | | | | | |
Fair Value, beginning of period assets/(liabilities) | | $ | 36,981 | | $ | 108,727 | | $ | - | | $ | 3,277 | | $ | 1,489 | | | | | | | | | | | | | | | | | | | | | | | |
| Total gains (losses) (realized/unrealized): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Included in earnings: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Realized investment gains (losses), net | | | -780 | | | - | | | - | | | - | | | -56 | | | | | | | | | | | | | | | | | | | | | | | |
| | | Asset management fees and other income | | | - | | | - | | | - | | | 460 | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| | Included in other comprehensive income (loss) | | | -84 | | | 319 | | | - | | | - | | | 15 | | | | | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | 39 | | | 88 | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Purchases | | | 10,127 | | | 17,798 | | | 3,434 | | | 380 | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Sales | | | -2,320 | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Issuances | | | - | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Settlements | | | -4,172 | | | -7,879 | | | -3,434 | | | -380 | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Transfers into Level 3 (2) | | | - | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Transfers out of Level 3 (2) | | | - | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
Fair Value, end of period assets/(liabilities) | | $ | 39,791 | | $ | 119,053 | | $ | - | | $ | 3,737 | | $ | 1,448 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gains (losses) for the period relating to those | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 3 assets that were still held at the end of the period (3): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Included in earnings: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Realized investment gains (losses), net | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | | | | | | | | | | | | | | | | | | | | | | |
| | | Asset management fees and other income | | $ | - | | $ | - | | $ | - | | $ | 460 | | $ | - | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Three Months Ended March 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Other Long-term Investments | | | Reinsurance Recoverables | | | Receivables from Parents and Affiliates | | | Separate Account Assets (1) | | Future Policy Benefits | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | | | | | | | | | | | | | | | | | | | | | | | |
Fair Value, beginning of period assets/(liabilities) | | $ | 988 | | $ | 1,287,157 | | $ | 1,995 | | $ | 248,255 | | | -1,417,891 | | | | | | | | | | | | | | | | | | | | | | | |
| Total gains (losses) (realized/unrealized): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Included in earnings: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Realized investment gains (losses), net | | | -223 | | | -907,440 | | | - | | | 748 | | | 976,566 | | | | | | | | | | | | | | | | | | | | | | | |
| | | Asset management fees and other income | | | 77 | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| | | Interest credited to policyholders' account balances | | | - | | | - | | | - | | | 5,790 | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| | Included in other comprehensive income (loss) | | | - | | | - | | | 5 | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | - | | | - | | | 1,000 | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Purchases | | | - | | | 125,080 | | | - | | | 27,981 | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Sales | | | - | | | - | | | - | | | -20,767 | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Issuances | | | - | | | - | | | - | | | - | | | -134,270 | | | | | | | | | | | | | | | | | | | | | | | |
| Settlements | | | - | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Transfers into Level 3 (2) | | | - | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| Transfers out of Level 3 (2) | | | - | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
Fair Value, end of period assets/(liabilities) | | $ | 842 | | | 504,797 | | $ | 3,000 | | $ | 262,007 | | | -575,595 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gains (losses) for the period relating to those | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 3 assets that were still held at the end of the period (3): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Included in earnings: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Realized investment gains (losses), net | | $ | -204 | | | -902,891 | | $ | - | | $ | - | | | 971,479 | | | | | | | | | | | | | | | | | | | | | | | |
| | | Asset management fees and other income | | $ | 78 | | | - | | $ | - | | $ | - | | | - | | | | | | | | | | | | | | | | | | | | | | | |
| | | Interest credited to policyholders' account balances | | $ | - | | | - | | $ | - | | $ | 5,790 | | | - | | | | | | | | | | | | | | | | | | | | | | | |
(1) Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company's Unaudited Interim Consolidated Statement of Financial Position. | | | | | | | | | | | | | | | | | | | |
(2) Transfers into or out of Level 3 are generally reported as the value as of the beginning of the quarter in which the transfer occurs. | | | | | | | | | | | | | | | | | | | |
(3) Unrealized gains or losses related to assets still held at the end of the period do not include amortization or accretion of premiums and discounts. | | | | | | | | | | | | | | | | | | | |
(4) Beginning of period represents “Other Liabilities” from December 31, 2013, since the reinsured variable annuity living benefit was in the liability position and reclassed to “Reinsurance Recoverables” at March 31, 2014 as they were in net asset position. | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Transfers – Transfers into Level 3 are generally the result of unobservable inputs utilized within valuation methodologies and the use of indicative broker quotes for assets that were previously valued using observable inputs. Transfers out of Level 3 are generally due to the use of observable inputs in valuation methodologies as well as the utilization of pricing service information for certain assets that the Company is able to validate. | | | | | | | | | | | | | | | | | | | |
Fair Value of Financial Instruments | | | | | | | | | | | | | | | | | | | |
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The table below presents the carrying amount and fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. However, in some cases, as described below, the carrying amount equals or approximates fair value. | | | | | | | | | | | | | | | | | | | |
| | | | 31-Mar-14 | | | 31-Dec-13 | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value | | Carrying Amount (1) | | | Fair Value | | | Carrying Amount | | | | | | | | | | | | | | | | | | | |
| | | | Level 1 | | Level 2 | | Level 3 | | Total | | Total | | | Total | | | Total | | | | | | | | | | | | | | | | | | | |
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| | (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial mortgage and other loans | | $ | - | | $ | 8,038 | | $ | 1,621,612 | | $ | 1,629,650 | | $ | 1,536,081 | | $ | 1,612,074 | | $ | 1,532,165 | | | | | | | | | | | | | | | | | | | |
| Policy loans | | | - | | | - | | | 1,097,408 | | | 1,097,408 | | | 1,097,408 | | | 1,086,772 | | | 1,086,772 | | | | | | | | | | | | | | | | | | | |
| Other long term investments | | | - | | | - | | | 5,069 | | | 5,069 | | | 4,392 | | | 4,751 | | | 4,268 | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | | 86,929 | | | 73,543 | | | - | | | 160,472 | | | 160,472 | | | 101,456 | | | 101,456 | | | | | | | | | | | | | | | | | | | |
| Accrued investment income | | | - | | | 87,901 | | | - | | | 87,901 | | | 87,901 | | | 89,465 | | | 89,465 | | | | | | | | | | | | | | | | | | | |
| Receivables from parents and affiliates | | | - | | | 99,075 | | | - | | | 99,075 | | | 98,728 | | | 87,849 | | | 87,481 | | | | | | | | | | | | | | | | | | | |
| Other assets | | | - | | | 29,206 | | | - | | | 29,206 | | | 29,206 | | | 34,060 | | | 34,060 | | | | | | | | | | | | | | | | | | | |
| | Total assets | | $ | 86,929 | | $ | 297,763 | | $ | 2,724,089 | | $ | 3,108,781 | | $ | 3,014,188 | | $ | 3,016,427 | | $ | 2,935,667 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Policyholders' Account Balances - Investment Contracts | | $ | - | | $ | 880,403 | | $ | 39,839 | | $ | 920,242 | | $ | 929,988 | | $ | 892,058 | | $ | 901,860 | | | | | | | | | | | | | | | | | | | |
| Cash collateral for loaned securities | | | - | | | 98,610 | | | - | | | 98,610 | | | 98,610 | | | 84,867 | | | 84,867 | | | | | | | | | | | | | | | | | | | |
| Short-term debt | | | - | | | 272,569 | | | - | | | 272,569 | | | 272,000 | | | 275,268 | | | 274,900 | | | | | | | | | | | | | | | | | | | |
| Long-term debt | | | - | | | 1,635,765 | | | - | | | 1,635,765 | | | 1,592,000 | | | 1,644,827 | | | 1,592,000 | | | | | | | | | | | | | | | | | | | |
| Payables to parent and affiliates | | | - | | | 52,847 | | | - | | | 52,847 | | | 52,847 | | | 45,649 | | | 45,649 | | | | | | | | | | | | | | | | | | | |
| Other liabilities | | | - | | | 278,709 | | | - | | | 278,709 | | | 278,709 | | | 270,339 | | | 270,339 | | | | | | | | | | | | | | | | | | | |
| | Total liabilities | | $ | - | | $ | 3,218,903 | | $ | 39,839 | | $ | 3,258,742 | | $ | 3,224,154 | | $ | 3,213,008 | | $ | 3,169,615 | | | | | | | | | | | | | | | | | | | |
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Carrying values presented herein differ from those in the Company's Unaudited Interim Consolidated Statement of Financial Position because certain items within the respective financial statement captions are not considered financial instruments or out of scope under authoritative guidance relating to disclosures of the fair value of financial instruments. Financial statement captions excluded from the above table are not considered financial instruments. | | | | | | | | | | | | | | | | | | | |
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The fair values presented above have been determined by using available market information and by applying market valuation methodologies, as described in more detail below. | | | | | | | | | | | | | | | | | | | |
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Commercial Mortgage and Other Loans | | | | | | | | | | | | | | | | | | | |
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The fair value of most commercial mortgage loans is based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate plus an appropriate credit spread for similar quality loans. The quality ratings for these loans, a primary determinant of the credit spreads and a significant component of the pricing process, are based on an internally-developed methodology. | | | | | | | | | | | | | | | | | | | |
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Policy Loans | | | | | | | | | | | | | | | | | | | |
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During the fourth quarter of 2013, the Company changed the valuation technique used to fair value policy loans. For the period ended December 31, 2013, the fair value of policy loans was determined by discounting expected cash flows at the current loan coupon rate. As a result the carrying value of the policy loans approximates the fair value for the year ended December 31, 2013. Prior to this change, the fair value of U.S. insurance policy loans was calculated by discounting expected cash flows based upon current U.S. Treasury rates and historical loan repayment patterns. | | | | | | | | | | | | | | | | | | | |
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Other Long-term Investments | | | | | | | | | | | | | | | | | | | |
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Other long-term investments include investments in joint ventures and limited partnerships. The estimated fair values of these cost method investments are generally based on the Company's share of the net asset value (“NAV”) as provided in the financial statements of the investees. In certain circumstances, management may adjust the NAV by a premium or discount when it has sufficient evidence to support applying such adjustments. No such adjustments were made as of March 31, 2014 and December 31, 2013. | | | | | | | | | | | | | | | | | | | |
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Cash and Cash Equivalents, Accrued Investment Income, Receivables from Parent and Affiliates and Other Assets | | | | | | | | | | | | | | | | | | | |
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The Company believes that due to the short-term nature of certain assets, the carrying value approximates fair value. These assets include: cash and cash equivalents instruments, accrued investment income, and other assets that meet the definition of financial instruments, including receivables, such as unsettled trades and accounts receivable. Also included in receivables from parents and affiliates is an affiliated note whose fair value is determined in the same manner as the underlying debt described below under “Short-Term and Long-Term Debt”. | | | | | | | | | | | | | | | | | | | |
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Policyholders' Account Balances - Investment Contracts | | | | | | | | | | | | | | | | | | | |
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Only the portion of policyholders' account balances related to products that are investment contracts (those without significant mortality or morbidity risk) are reflected in the table above. For fixed deferred annuities, payout annuities and other similar contracts without life contingencies, fair values are derived using discounted projected cash flows based on interest rates that are representative of the Company's financial strength ratings, and hence reflect the Company's own non-performance risk. For those balances that can be withdrawn by the customer at any time without prior notice or penalty, the fair value is the amount estimated to be payable to the customer as of the reporting date, which is generally the carrying value. | | | | | | | | | | | | | | | | | | | |
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Cash Collateral for Loaned Securities | | | | | | | | | | | | | | | | | | | |
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This represents the collateral received or paid in connection with loaning or borrowing securities, similar to the securities sold under agreement to repurchase below. For these transactions, the carrying value of the related asset/liability approximates fair value as they equal the amount of cash collateral received or paid. | | | | | | | | | | | | | | | | | | | |
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Short-Term and Long-Term Debt | | | | | | | | | | | | | | | | | | | |
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The fair value of short−term and long−term debt is generally determined by either prices obtained from independent pricing services, which are validated by the Company, or discounted cash flow models. These fair values consider the Company's own non−performance risk. Discounted cash flow models predominately use market observable inputs such as the borrowing rates currently available to the Company for debt and financial instruments with similar terms and remaining maturities. For commercial paper issuances and other debt with a maturity of less than 90 days, the carrying value approximates fair value. | | | | | | | | | | | | | | | | | | | |
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Other Liabilities and Payables to Parent and Affiliates | | | | | | | | | | | | | | | | | | | |
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Other liabilities and payables to parent and affiliates are primarily payables, such as unsettled trades, drafts, escrow deposits and accrued expense payables. Due to the short term until settlement of most of these liabilities, the Company believes that carrying value approximates fair value. | | | | | | | | | | | | | | | | | | | |
For the year ended December 31, 2012 the majority of the Equity Securities Available for Sale transfers into Level 3 were due to the determination that the pricing inputs for perpetual preferred stocks provided by third party pricing services were primarily based on indicative broker quotes which could not always be verified against directly observable market information. Perpetual preferred stocks were included in Equity Securities Available for Sale and subsequently transferred to Trading Account Assets. During the same period, the pricing and valuation methodology related to an affiliated bond reported in Other Assets totaled $24.7 million was re-evaluated and subsequently updated to utilize observable inputs and transferred out of Level 3. | | | | | | | | | | | | | | | | | | | |
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