20. FAIR VALUE OF ASSETS AND LIABILITIES
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:
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 and short term investments, equity securities and derivative contracts that trade on an active exchange market.
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 commercial mortgage loans, short-term investments and certain cash equivalents (primarily commercial paper), and certain over-the-counter derivatives.
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 commercial mortgage loans, certain consolidated real estate funds for which the Company is the general partner, and embedded derivatives resulting from certain products with guaranteed benefits.
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.
As of December 31, 2013 | |||||||||||||||||
Level 1 | Level 2 | Level 3 | Netting (1) | Total | |||||||||||||
(in millions) | |||||||||||||||||
Fixed maturities, available-for-sale: | |||||||||||||||||
U.S. Treasury securities and obligations of U.S. government | |||||||||||||||||
authorities and agencies | $ | 0 | $ | 15,400 | $ | 0 | $ | $ | 15,400 | ||||||||
Obligations of U.S. states and their political subdivisions | 0 | 3,735 | 0 | 3,735 | |||||||||||||
Foreign government bonds | 0 | 82,787 | 1 | 82,788 | |||||||||||||
Corporate securities | 0 | 152,449 | 1,329 | 153,778 | |||||||||||||
Asset-backed securities | 0 | 7,147 | 3,442 | 10,589 | |||||||||||||
Commercial mortgage-backed securities | 0 | 13,708 | 165 | 13,873 | |||||||||||||
Residential mortgage-backed securities | 0 | 6,695 | 8 | 6,703 | |||||||||||||
Subtotal | 0 | 281,921 | 4,945 | 286,866 | |||||||||||||
Trading account assets: (2) | |||||||||||||||||
U.S. Treasury securities and obligations of U.S. government | |||||||||||||||||
authorities and agencies | 0 | 266 | 0 | 266 | |||||||||||||
Obligations of U.S. states and their political subdivisions | 0 | 190 | 0 | 190 | |||||||||||||
Foreign government bonds | 0 | 643 | 0 | 643 | |||||||||||||
Corporate securities | 0 | 16,865 | 115 | 16,980 | |||||||||||||
Asset-backed securities | 0 | 876 | 403 | 1,279 | |||||||||||||
Commercial mortgage-backed securities | 0 | 2,466 | 0 | 2,466 | |||||||||||||
Residential mortgage-backed securities | 0 | 1,828 | 2 | 1,830 | |||||||||||||
Equity securities | 1,309 | 225 | 842 | 2,376 | |||||||||||||
All other (3) | 591 | 7,899 | 6 | (7,246) | 1,250 | ||||||||||||
Subtotal | 1,900 | 31,258 | 1,368 | (7,246) | 27,280 | ||||||||||||
Equity securities, available-for-sale | 6,938 | 2,668 | 304 | 9,910 | |||||||||||||
Commercial mortgage and other loans | 0 | 158 | 0 | 158 | |||||||||||||
Other long-term investments | 19 | 109 | 1,396 | 5 | 1,529 | ||||||||||||
Short-term investments | 6,139 | 1,046 | 0 | 7,185 | |||||||||||||
Cash equivalents | 2,461 | 4,521 | 0 | 6,982 | |||||||||||||
Other assets | 3 | 209 | 4 | 216 | |||||||||||||
Subtotal excluding separate account assets | 17,460 | 321,890 | 8,017 | (7,241) | 340,126 | ||||||||||||
Separate account assets (4) | 49,182 | 213,275 | 22,603 | 285,060 | |||||||||||||
Total assets | $ | 66,642 | $ | 535,165 | $ | 30,620 | $ | (7,241) | $ | 625,186 | |||||||
Future policy benefits (5) | $ | 0 | $ | 0 | $ | 441 | $ | $ | 441 | ||||||||
Other liabilities | 1 | 9,458 | 5 | (7,257) | 2,207 | ||||||||||||
Notes of consolidated VIEs | 0 | 0 | 3,254 | 3,254 | |||||||||||||
Total liabilities | $ | 1 | $ | 9,458 | $ | 3,700 | $ | (7,257) | $ | 5,902 |
As of December 31, 2012 | |||||||||||||||||
Level 1 | Level 2 | Level 3 | Netting (1) | Total | |||||||||||||
(in millions) | |||||||||||||||||
Fixed maturities, available-for-sale: | |||||||||||||||||
U.S. Treasury securities and obligations of U.S. government | |||||||||||||||||
authorities and agencies | $ | 0 | $ | 17,386 | $ | 0 | $ | $ | 17,386 | ||||||||
Obligations of U.S. states and their political subdivisions | 0 | 3,452 | 0 | 3,452 | |||||||||||||
Foreign government bonds | 0 | 88,290 | 0 | 88,290 | |||||||||||||
Corporate securities | 0 | 157,701 | 1,630 | 159,331 | |||||||||||||
Asset-backed securities | 0 | 7,633 | 3,703 | 11,336 | |||||||||||||
Commercial mortgage-backed securities | 0 | 11,813 | 124 | 11,937 | |||||||||||||
Residential mortgage-backed securities | 0 | 9,593 | 11 | 9,604 | |||||||||||||
Subtotal | 0 | 295,868 | 5,468 | 301,336 | |||||||||||||
Trading account assets: (2) | |||||||||||||||||
U.S. Treasury securities and obligations of U.S. government | |||||||||||||||||
authorities and agencies | 0 | 287 | 0 | 287 | |||||||||||||
Obligations of U.S. states and their political subdivisions | 0 | 259 | 0 | 259 | |||||||||||||
Foreign government bonds | 2 | 767 | 0 | 769 | |||||||||||||
Corporate securities | 0 | 13,609 | 134 | 13,743 | |||||||||||||
Asset-backed securities | 0 | 923 | 431 | 1,354 | |||||||||||||
Commercial mortgage-backed securities | 0 | 2,298 | 8 | 2,306 | |||||||||||||
Residential mortgage-backed securities | 0 | 2,024 | 2 | 2,026 | |||||||||||||
Equity securities | 1,198 | 181 | 1,098 | 2,477 | |||||||||||||
All other (3) | 664 | 13,371 | 25 | (10,363) | 3,697 | ||||||||||||
Subtotal | 1,864 | 33,719 | 1,698 | (10,363) | 26,918 | ||||||||||||
Equity securities, available-for-sale | 5,518 | 2,429 | 330 | 8,277 | |||||||||||||
Commercial mortgage and other loans | 0 | 114 | 48 | 162 | |||||||||||||
Other long-term investments | (57) | 141 | 1,053 | 246 | 1,383 | ||||||||||||
Short-term investments | 3,519 | 2,871 | 0 | 6,390 | |||||||||||||
Cash equivalents | 3,105 | 10,495 | 0 | 13,600 | |||||||||||||
Other assets | 78 | 109 | 8 | 195 | |||||||||||||
Subtotal excluding separate account assets | 14,027 | 345,746 | 8,605 | (10,117) | 358,261 | ||||||||||||
Separate account assets (4) | 39,362 | 192,760 | 21,132 | 253,254 | |||||||||||||
Total assets | $ | 53,389 | $ | 538,506 | $ | 29,737 | $ | (10,117) | $ | 611,515 | |||||||
Future policy benefits (5) | $ | 0 | $ | 0 | $ | 3,348 | $ | $ | 3,348 | ||||||||
Other liabilities | 0 | 8,121 | 0 | (8,031) | 90 | ||||||||||||
Notes of consolidated VIEs | 0 | 0 | 1,406 | 1,406 | |||||||||||||
Total liabilities | $ | 0 | $ | 8,121 | $ | 4,754 | $ | (8,031) | $ | 4,844 |
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.
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.
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 December 31, 2013 and December 31, 2012, 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.
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.
Trading Account Assets—Trading account assets consist primarily of fixed maturity securities, equity securities and derivatives whose fair values are determined consistent with similar instruments described above under “Fixed Maturity Securities” and below under “Equity Securities” and “Derivative Instruments.”
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.
Commercial Mortgage and Other Loans—The fair value of commercial mortgage loans held for investment and accounted for using the fair value option are determined based on the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate, adjusted for the current market spread for similar quality loans. The quality ratings for these loans, a primary determinant of the appropriate credit spread and a significant component of the pricing input, are based on internally-developed estimates. As a result, these loans are included in Level 3 in the fair value hierarchy.
The fair value of other loans held and accounted for using the fair value option is determined utilizing pricing indicators from the whole loan market, where investors are committed to purchase these loans at a pre-determined price, which is considered the principal exit market for these loans. The Company has evaluated the valuation inputs used for these assets, including the existence of pre-determined exit prices, the terms of the loans, prevailing interest rates and credit risk, and deemed that the primary pricing inputs are Level 2 inputs in the fair value hierarchy.
Other Long-Term Investments—Other long-term investments include limited partnerships which are consolidated because the Company is either deemed to exercise control or considered the primary beneficiary of a variable interest entity. These entities are considered investment companies and follow specialized industry accounting whereby their assets are carried at fair value. The investments held by these entities include various feeder fund investments in underlying master funds (whose underlying holdings generally include public fixed maturities, equity securities and mutual funds), as well as wholly-owned real estate held within other investment funds. The fair value is determined by reference to the underlying direct investments, with publicly traded equity securities based on quoted prices in active markets reflected in Level 1, and public fixed maturities and mutual funds priced via quotes from pricing services or observable data reflected in Level 2. The fair value of investments in funds that are subject to significant liquidity restrictions are reflected in Level 3.
The fair value of real estate held in consolidated investment funds is determined through an independent appraisal process. The appraisals generally utilize a discounted cash flow model, supplemented with replacement cost estimates and comparable recent sales data when available. These appraisals and the related assumptions are updated at least annually. Since many of the assumptions utilized are unobservable and are considered to be significant inputs to the valuation, the real estate investments within other long-term investments have been reflected within Level 3 in the fair value hierarchy.
The fair value of fund investments, where the fair value option has been elected, is primarily determined by the fund managers. Since the valuations may be based on unobservable market inputs and cannot be validated by the Company, these investments have been included within Level 3 in the fair value hierarchy.
Derivative Instruments—Derivatives are recorded at fair value either as assets, within “Other trading account assets,” or “Other long-term investments,” or as liabilities, within “Other liabilities,” 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, commodity prices, credit spreads, market volatility, expected returns, non-performance risk, 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.
The Company's exchange-traded futures and options include Treasury futures, Eurodollar futures, commodity futures, Eurodollar options and commodity options. Exchange-traded futures and options are valued using quoted prices in active markets and are classified within Level 1 in the fair value hierarchy.
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 and cross currency swaps, currency forward contracts, commodity swaps, commodity forward contracts, single name credit default swaps, loan commitments held for sale and to-be-announced (or TBA) forward contracts on highly rated mortgage-backed securities issued by U.S. government sponsored entities 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.
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.
The vast majority of the Company's derivative agreements are with highly rated major international financial institutions. 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 look-back equity options and other 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.
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.”
Notes of Consolidated VIEs—The fair values of these notes are based on broker quotes and classified within Level 3. See Note 5 and the Fair Value Option section below for additional information.
Other Liabilities—Other liabilities include certain derivative instruments, the fair values of which are determined consistent with similar derivative instruments described above under “Derivative Instruments.”
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 customers less the present value of assessed rider fees attributable to the embedded derivative 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 (“NPR”), 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.
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.
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, such as available industry studies or market transactions such as acquisitions and reinsurance transactions. 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.
Transfers between Levels 1 and 2—Periodically there are transfers between Level 1 and Level 2 for assets held in the Company's Separate Account. The fair value of foreign common stock held in the Company's Separate Account may reflect differences in market levels between the close of foreign trading markets and the close of U.S. trading markets for the respective day. Dependent on the existence of such a timing difference, the assets may move between Level 1 and Level 2. In addition, 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 year ended December 31, 2013, $4.0 billion were transferred from Level 1 to Level 2 and $5.0 billion were transferred from Level 2 to Level 1. During the year ended December 31, 2012, $5.0 billion were transferred from Level 1 to Level 2 and $2.1 billion were transferred from Level 2 to Level 1.
Level 3 Assets and Liabilities by Price Source—The table below presents the balances of Level 3 assets and liabilities measured at fair value with their corresponding pricing sources.
As of December 31, 2013 | |||||||||||
Internal (1) | External (2) | Total | |||||||||
(in millions) | |||||||||||
Foreign government bonds | $ | 0 | $ | 1 | $ | 1 | |||||
Corporate securities | 660 | 784 | 1,444 | ||||||||
Asset-backed securities | 283 | 3,562 | 3,845 | ||||||||
Commercial mortgage-backed securities | 14 | 151 | 165 | ||||||||
Residential mortgage-backed securities | 3 | 7 | 10 | ||||||||
Equity securities | 141 | 1,005 | 1,146 | ||||||||
Other long-term investments | 9 | 1,387 | 1,396 | ||||||||
Other assets | 10 | 0 | 10 | ||||||||
Subtotal excluding separate account assets (3) | 1,120 | 6,897 | 8,017 | ||||||||
Separate account assets | 21,665 | 938 | 22,603 | ||||||||
Total assets | $ | 22,785 | $ | 7,835 | $ | 30,620 | |||||
Future policy benefits | $ | 441 | $ | 0 | $ | 441 | |||||
Other liabilities | 5 | 0 | 5 | ||||||||
Notes of consolidated VIEs | 0 | 3,254 | 3,254 | ||||||||
Total liabilities | $ | 446 | $ | 3,254 | $ | 3,700 |
As of December 31, 2012 | |||||||||||
Internal (1) | External (2) | Total | |||||||||
(in millions) | |||||||||||
Corporate securities | $ | 889 | $ | 875 | $ | 1,764 | |||||
Asset-backed securities | 338 | 3,796 | 4,134 | ||||||||
Commercial mortgage-backed securities | 68 | 64 | 132 | ||||||||
Residential mortgage-backed securities | 3 | 10 | 13 | ||||||||
Equity securities | 101 | 1,327 | 1,428 | ||||||||
Commercial mortgage and other loans | 48 | 0 | 48 | ||||||||
Other long-term investments | 9 | 1,044 | 1,053 | ||||||||
Other assets | 33 | 0 | 33 | ||||||||
Subtotal excluding separate account assets (3) | 1,489 | 7,116 | 8,605 | ||||||||
Separate account assets | 20,422 | 710 | 21,132 | ||||||||
Total assets | $ | 21,911 | $ | 7,826 | $ | 29,737 | |||||
Future policy benefits | $ | 3,348 | $ | 0 | $ | 3,348 | |||||
Notes of consolidated VIEs | 0 | 1,406 | 1,406 | ||||||||
Total liabilities | $ | 3,348 | $ | 1,406 | $ | 4,754 |
Quantitative Information Regarding Internally-Priced Level 3 Assets and Liabilities – The table below represents quantitative information on significant internally-priced Level 3 assets and liabilities.
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 millions) | ||||||||||||||||
Assets: | ||||||||||||||||
Corporate securities | $ | 660 | Discounted cash flow | Discount rate | 1.25% | - | 15% | 8.52% | Decrease | |||||||
Market comparables | EBITDA multiples (2) | 5.0X | - | 8.0X | 6.0X | Increase | ||||||||||
Liquidation | Liquidation value | 11.61% | - | 100.0% | 59.17% | Increase | ||||||||||
Asset-backed securities | $ | 283 | Discounted cash flow | Prepayment rate (3) | 2.82% | - | 27.41% | 10.23% | Increase | |||||||
Default rate (3) | 0.49% | - | 31.85% | 2.62% | Decrease | |||||||||||
Loss severity (3) | 15.06% | - | 45.00% | 33.00% | Decrease | |||||||||||
Liquidity premium | 1.00% | - | 2.00% | 1.90% | Decrease | |||||||||||
Average life (years) | 0.16 | - | 14.76 | 5.05 | Increase | |||||||||||
Comparable spreads | 0.19% | - | 45.19% | 3.65% | Decrease | |||||||||||
Comparable security yields | 0.61% | - | 10.00% | 6.52% | Decrease | |||||||||||
Liabilities: | ||||||||||||||||
Future policy | ||||||||||||||||
benefits(4) | $ | 441 | Discounted cash flow | Lapse rate (5) | 0% | - | 11% | Decrease | ||||||||
NPR spread (6) | 0.08% | - | 1.09% | Decrease | ||||||||||||
Utilization rate (7) | 70% | - | 94% | Increase | ||||||||||||
Withdrawal rate (8) | 86% | - | 100% | Increase | ||||||||||||
Mortality rate (9) | 0% | - | 13% | Decrease | ||||||||||||
Equity volatility curve | 15% | - | 28% | Increase |
As of December 31, 2012 | ||||||||||||||||
Fair Value | Valuation Techniques | Unobservable Inputs | Minimum | Maximum | Weighted Average | Impact of Increase in Input on Fair Value (1) | ||||||||||
(in millions) | ||||||||||||||||
Assets: | ||||||||||||||||
Corporate securities | $ | 889 | Discounted cash flow | Discount rate | 1.7% | - | 17.5% | 9.92% | Decrease | |||||||
Market comparables | EBITDA multiples (2) | 5.0X | - | 8.5X | 6.2X | Increase | ||||||||||
Cap at call price | Call price | 100% | - | 101% | 100.24% | Increase | ||||||||||
Liquidation | Liquidation value | 49% | - | 100.0% | 83.06% | Increase | ||||||||||
Asset-backed securities | $ | 338 | Discounted cash flow | Prepayment rate (3) | 2.8% | - | 29.0% | 9.84% | Increase | |||||||
Default rate (3) | 0.5% | - | 2.52% | 0.84% | Decrease | |||||||||||
Loss severity (3) | 35% | - | 43.88% | 35.76% | Decrease | |||||||||||
Liquidity premium | 1.0% | - | 2.50% | 1.83% | Decrease | |||||||||||
Average life (years) | 0.1 | - | 15 | 5.61 | Increase | |||||||||||
Comparable spreads | 0.1% | - | 20% | 2.81% | Decrease | |||||||||||
Comparable security yields | 0.4% | - | 15% | 7.59% | Decrease | |||||||||||
Liabilities: | ||||||||||||||||
Future policy | ||||||||||||||||
benefits(4) | $ | 3,348 | Discounted cash flow | Lapse rate (5) | 0% | - | 14% | Decrease | ||||||||
NPR spread (6) | 0.20% | - | 1.60% | Decrease | ||||||||||||
Utilization rate (7) | 70% | - | 94% | Increase | ||||||||||||
Withdrawal rate (8) | 85% | - | 100% | Increase | ||||||||||||
Mortality rate (9) | 0% | - | 13% | Decrease | ||||||||||||
Equity volatility curve | 19% | - | 34% | Increase |
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.
Asset-Backed Securities—Interrelationships may exist between the prepayment rate, the default rate and/or loss severity, depending on specific market conditions. In stronger business cycles, prepayment rates are generally driven by overall market interest rates, and accompanied by lower default rates and loss severity. During weaker cycles, prepayments may decline, as default rates and loss severity increase. Additionally, the impact of these factors on average life varies with the structure and subordination.
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 efficient 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 Consolidated Statement of Financial Position. As a result, changes in value associated with these investments do not impact the Company's 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 $20,806 million and $19,518 million of investments in real estate as of December 31, 2013 and December 31, 2012, respectively, that are classified as Level 3 and reported at fair value. In general, these fair value estimates 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. In cases where real estate investments are made through indirect investments, fair value is generally determined by the Company's equity in net assets of the entities. The debt associated with real estate, other invested assets and the Company's equity position in entities are externally valued. Because of the subjective nature of inputs and the judgment involved in the appraisal process, real estate investments and their corresponding debt are typically included in the Level 3 classification. Key unobservable inputs to real estate valuation include capitalization rates, which ranged from 4.15% to 11.00% (6.35% weighted average) as of December 31, 2013, and 4.75% to 10.50% (6.49% weighted average) as of December 31, 2012, and discount rates, which ranged from 6.00% to 15.00% (7.71% weighted average) as of December 31, 2013, and 6.25% to 15.00% (7.92% weighted average) as of December 31, 2012. Key unobservable inputs to real estate debt valuation include yield to maturity, which ranged from 1.13% to 6.85% (4.17% weighted average) as of December 31, 2013, and 3.59% to 7.62% (4.74% weighted average) as of December 31, 2012, and market spread over base rate, which ranged from 1.60% to 4.75% (2.87% weighted average) as of December 31, 2013, and 1.67% to 4.48% (3.22% weighted average) as of December 31, 2012.
Commercial Mortgage Loans—Separate account assets include $793 million and $833 million of commercial mortgage loans as of December 31, 2013 and December 31, 2012, respectively, that are classified as Level 3 and reported at fair value. Commercial mortgage loans are primarily valued internally using discounted cash flow techniques, as described further under “Fair Value of Financial Instruments.” The primary unobservable input used is the spread to discount cash flows, which ranged from 1.25% to 1.98% (1.47% weighted average) as of December 31, 2013, and 1.65% to 4.15% (1.87% weighted average) as of December 31, 2012. In isolation, an increase (decrease) in the value of this input would result in a lower (higher) fair value measurement.
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.
Year Ended December 31, 2013 | |||||||||||||||||||||||||
Fixed Maturities Available-For-Sale | |||||||||||||||||||||||||
U.S. Government | U.S. States | Foreign Government | Corporate | Asset-Backed | Commercial Mortgage-Backed | Residential Mortgage-Backed | |||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Fair Value, beginning of period | $ | 0 | $ | 0 | $ | 0 | $ | 1,630 | $ | 3,703 | $ | 124 | $ | 11 | |||||||||||
Total gains (losses) (realized/unrealized): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | 0 | 0 | 0 | (30) | 29 | 37 | 0 | ||||||||||||||||||
Included in other comprehensive income (loss) | 0 | 0 | (1) | (18) | (8) | (19) | 0 | ||||||||||||||||||
Net investment income | 0 | 0 | 0 | (4) | 35 | 0 | 0 | ||||||||||||||||||
Purchases | 0 | 0 | 4 | 477 | 2,412 | 438 | 0 | ||||||||||||||||||
Sales | 0 | 0 | (1) | (126) | (320) | (51) | 0 | ||||||||||||||||||
Issuances | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Settlements | 0 | 0 | (2) | (579) | (1,227) | (41) | (3) | ||||||||||||||||||
Foreign currency translation | 0 | 0 | 0 | (127) | (110) | (9) | 0 | ||||||||||||||||||
Other(1) | 0 | 0 | 0 | 0 | (170) | 0 | 0 | ||||||||||||||||||
Transfers into Level 3(2) | 0 | 0 | 13 | 573 | 10 | 0 | 0 | ||||||||||||||||||
Transfers out of Level 3(2) | 0 | 0 | (12) | (467) | (912) | (314) | 0 | ||||||||||||||||||
Fair Value, end of period | $ | 0 | $ | 0 | $ | 1 | $ | 1,329 | $ | 3,442 | $ | 165 | $ | 8 | |||||||||||
Unrealized gains (losses) for assets still held (3): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | $ | 0 | $ | 0 | $ | 0 | $ | (53) | $ | 13 | $ | 0 | $ | 0 | |||||||||||
Year Ended December 31, 2013 | |||||||||||||||||||||||||
Trading Account Assets | |||||||||||||||||||||||||
U.S Government | Corporate | Asset-Backed | Commercial Mortgage-Backed | Residential Mortgage-Backed | Equity | All Other Activity | |||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Fair Value, beginning of period | $ | 0 | $ | 134 | $ | 431 | $ | 8 | $ | 2 | $ | 1,098 | $ | 25 | |||||||||||
Total gains (losses) (realized/unrealized): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | 0 | 0 | 0 | 0 | 0 | 0 | (16) | ||||||||||||||||||
Asset management fees and other income | 0 | (8) | 8 | 0 | 0 | 63 | 2 | ||||||||||||||||||
Net investment income | 0 | 0 | 5 | 1 | 0 | 0 | 0 | ||||||||||||||||||
Purchases | 0 | 23 | 319 | 75 | 0 | 17 | 0 | ||||||||||||||||||
Sales | 0 | (13) | (3) | (1) | 0 | (140) | 0 | ||||||||||||||||||
Issuances | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Settlements | 0 | (49) | (231) | (2) | 0 | (43) | (5) | ||||||||||||||||||
Foreign currency translation | 0 | 0 | (8) | (1) | 0 | (153) | 0 | ||||||||||||||||||
Other(1) | 0 | 0 | (75) | 0 | 0 | 0 | 0 | ||||||||||||||||||
Transfers into Level 3(2) | 0 | 52 | 4 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Transfers out of Level 3(2) | 0 | (24) | (47) | (80) | 0 | 0 | 0 | ||||||||||||||||||
Fair Value, end of period | $ | 0 | $ | 115 | $ | 403 | $ | 0 | $ | 2 | $ | 842 | $ | 6 | |||||||||||
Unrealized gains (losses) for assets still held (3): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | (16) | |||||||||||
Asset management fees and other income | $ | 0 | $ | (7) | $ | 7 | $ | 0 | $ | 0 | $ | 50 | $ | 2 | |||||||||||
Year Ended December 31, 2013 | |||||||||||||||||||||||||
Equity Securities Available-For-Sale | Commercial Mortgage and Other Loans | Other Long-term Investments | Other Assets | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Fair Value, beginning of period | $ | 330 | $ | 48 | $ | 1,053 | $ | 8 | |||||||||||||||||
Total gains (losses) (realized/unrealized): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | 13 | 5 | 0 | (4) | |||||||||||||||||||||
Asset management fees and other income | 0 | 0 | 160 | 0 | |||||||||||||||||||||
Included in other comprehensive income (loss) | 58 | 0 | 0 | 0 | |||||||||||||||||||||
Purchases | 37 | 0 | 439 | 0 | |||||||||||||||||||||
Sales | (65) | 0 | 0 | 0 | |||||||||||||||||||||
Issuances | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Settlements | (3) | (53) | (134) | 0 | |||||||||||||||||||||
Foreign currency translation | (53) | 0 | (13) | 0 | |||||||||||||||||||||
Other(1) | (18) | 0 | (109) | 0 | |||||||||||||||||||||
Transfers into Level 3(2) | 6 | 0 | 0 | 0 | |||||||||||||||||||||
Transfers out of Level 3(2) | (1) | 0 | 0 | 0 | |||||||||||||||||||||
Fair Value, end of period | $ | 304 | $ | 0 | $ | 1,396 | $ | 4 | |||||||||||||||||
Unrealized gains (losses) for assets still held (3): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | $ | (5) | $ | 0 | $ | (2) | $ | (3) | |||||||||||||||||
Asset management fees and other income | $ | 0 | $ | 0 | $ | 155 | $ | 0 | |||||||||||||||||
Year Ended December 31, 2013 | |||||||||||||||||||||||||
Separate Account Assets (4) | Future Policy Benefits | Other Liabilities | Notes of consolidated VIEs | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Fair Value, beginning of period | $ | 21,132 | $ | (3,348) | $ | 0 | $ | (1,406) | |||||||||||||||||
Total gains (losses) (realized/unrealized): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | 2 | 3,741 | (3) | 17 | |||||||||||||||||||||
Interest credited to policyholders' account balances | 2,649 | 0 | 0 | 0 | |||||||||||||||||||||
Net investment income | 20 | 0 | 0 | 0 | |||||||||||||||||||||
Purchases | 1,653 | 0 | 0 | 0 | |||||||||||||||||||||
Sales | (832) | 0 | 0 | 0 | |||||||||||||||||||||
Issuances | 0 | (836) | 0 | (1,834) | |||||||||||||||||||||
Settlements | (2,120) | 0 | 0 | (31) | |||||||||||||||||||||
Foreign currency translation | 0 | 2 | 0 | 0 | |||||||||||||||||||||
Other(1) | 140 | 0 | (2) | 0 | |||||||||||||||||||||
Transfers into Level 3(2) | 89 | 0 | 0 | 0 | |||||||||||||||||||||
Transfers out of Level 3(2) | (130) | 0 | 0 | 0 | |||||||||||||||||||||
Fair Value, end of period | $ | 22,603 | $ | (441) | $ | (5) | $ | (3,254) | |||||||||||||||||
Unrealized gains (losses) for assets/liabilities still held (3): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | $ | 0 | $ | 3,647 | $ | (3) | $ | 17 | |||||||||||||||||
Interest credited to policyholders' account | $ | 1,652 | $ | 0 | $ | 0 | $ | 0 |
Year Ended December 31, 2012 | |||||||||||||||||||||||||
Fixed Maturities Available-For-Sale | |||||||||||||||||||||||||
U.S. Government | U.S. States | Foreign Government | Corporate | Asset-Backed | Commercial Mortgage-Backed | Residential Mortgage-Backed | |||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Fair Value, beginning of period | $ | 66 | $ | 0 | $ | 25 | $ | 1,450 | $ | 2,528 | $ | 145 | $ | 16 | |||||||||||
Total gains (losses) (realized/unrealized): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | 0 | 0 | 0 | (35) | 21 | 25 | 0 | ||||||||||||||||||
Included in other comprehensive income (loss) | 0 | 0 | 0 | 195 | 102 | 11 | 0 | ||||||||||||||||||
Net investment income | 0 | 0 | 0 | 8 | 30 | (1) | 1 | ||||||||||||||||||
Purchases | 0 | 10 | 0 | 375 | 2,640 | 44 | 0 | ||||||||||||||||||
Sales | 0 | 0 | 0 | (165) | (426) | (28) | 0 | ||||||||||||||||||
Issuances | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Settlements | (2) | 0 | 0 | (325) | (673) | (14) | (6) | ||||||||||||||||||
Foreign currency translation | 0 | 0 | 0 | (38) | (41) | (5) | 0 | ||||||||||||||||||
Other(1) | (64) | 0 | (8) | 71 | 0 | 0 | 0 | ||||||||||||||||||
Transfers into Level 3(2) | 0 | 0 | 8 | 306 | 60 | 37 | 0 | ||||||||||||||||||
Transfers out of Level 3(2) | 0 | (10) | (25) | (212) | (538) | (90) | 0 | ||||||||||||||||||
Fair Value, end of period | $ | 0 | $ | 0 | $ | 0 | $ | 1,630 | $ | 3,703 | $ | 124 | $ | 11 | |||||||||||
Unrealized gains (losses) for assets still held (3): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | $ | 0 | $ | 0 | $ | 0 | $ | (1) | $ | 9 | $ | 0 | $ | 0 | |||||||||||
Year Ended December 31, 2012 | |||||||||||||||||||||||||
Trading Account Assets | |||||||||||||||||||||||||
U.S. Government | Corporate | Asset-Backed | Commercial Mortgage-Backed | Residential Mortgage-Backed | Equity | All Other Activity | |||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Fair Value, beginning of period | $ | 9 | $ | 148 | $ | 416 | $ | 35 | $ | 4 | $ | 1,296 | $ | 93 | |||||||||||
Total gains (losses) (realized/unrealized): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | 0 | 0 | 0 | 0 | 0 | 0 | (73) | ||||||||||||||||||
Asset management fees and other income | 0 | (7) | 17 | 2 | 1 | 88 | 2 | ||||||||||||||||||
Net investment income | 0 | 0 | 6 | 1 | 0 | 0 | 0 | ||||||||||||||||||
Purchases | 0 | 22 | 182 | 16 | 2 | 21 | 0 | ||||||||||||||||||
Sales | 0 | (12) | (12) | (5) | (3) | (170) | 0 | ||||||||||||||||||
Issuances | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Settlements | (2) | (25) | (112) | (4) | (1) | (89) | 6 | ||||||||||||||||||
Foreign currency translation | 0 | 0 | (4) | (1) | 0 | (70) | 0 | ||||||||||||||||||
Other(1) | (7) | 7 | 1 | 0 | (1) | 3 | (3) | ||||||||||||||||||
Transfers into Level 3(2) | 0 | 5 | 4 | 82 | 0 | 20 | 0 | ||||||||||||||||||
Transfers out of Level 3(2) | 0 | (4) | (67) | (118) | 0 | (1) | 0 | ||||||||||||||||||
Fair Value, end of period | $ | 0 | $ | 134 | $ | 431 | $ | 8 | $ | 2 | $ | 1,098 | $ | 25 | |||||||||||
Unrealized gains (losses) for assets still held (3): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | (1) | $ | (73) | |||||||||||
Asset management fees and other income | $ | 0 | $ | (10) | $ | 14 | $ | 2 | $ | 0 | $ | 78 | $ | 2 | |||||||||||
Year Ended December 31, 2012 | |||||||||||||||||||||||||
Equity Securities Available-For-Sale | Commercial Mortgage and Other Loans | Other Long-term Investments | Short-term Investments | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Fair Value, beginning of period | $ | 360 | $ | 86 | $ | 1,110 | $ | 0 | |||||||||||||||||
Total gains (losses) (realized/unrealized): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | (1) | 2 | 1 | (9) | |||||||||||||||||||||
Asset management fees and other income | 0 | 0 | 126 | 0 | |||||||||||||||||||||
Included in other comprehensive income (loss) | 29 | 0 | 0 | 0 | |||||||||||||||||||||
Net investment income | 0 | 0 | 6 | 0 | |||||||||||||||||||||
Purchases | 69 | 0 | 186 | 9 | |||||||||||||||||||||
Sales | (22) | 0 | (25) | 0 | |||||||||||||||||||||
Issuances | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Settlements | 0 | (40) | (296) | 0 | |||||||||||||||||||||
Foreign currency translation | (18) | 0 | 2 | 0 | |||||||||||||||||||||
Other(1) | 0 | 0 | 7 | 0 | |||||||||||||||||||||
Transfers into Level 3(2) | 5 | 0 | 0 | 0 | |||||||||||||||||||||
Transfers out of Level 3(2) | (92) | 0 | (64) | 0 | |||||||||||||||||||||
Fair Value, end of period | $ | 330 | $ | 48 | $ | 1,053 | $ | 0 | |||||||||||||||||
Unrealized gains (losses) for assets/liabilities still held (3): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | $ | (1) | $ | 1 | $ | 1 | $ | (9) | |||||||||||||||||
Asset management fees and other income | $ | 0 | $ | 0 | $ | 56 | $ | 0 | |||||||||||||||||
Year Ended December 31, 2012 | |||||||||||||||||||||||||
Other Assets | Separate Account Assets (4) | Future Policy Benefits | Other Liabilities | Notes of consolidated VIEs | |||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Fair Value, beginning of period | $ | 9 | $ | 19,358 | $ | (2,886) | $ | (3) | $ | (282) | |||||||||||||||
Total gains (losses) (realized/unrealized): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | 0 | 0 | 231 | (23) | (4) | ||||||||||||||||||||
Asset management fees and other income | 2 | 0 | 0 | 0 | 0 | ||||||||||||||||||||
Interest credited to policyholders' account balances | 0 | 1,932 | 0 | 0 | 0 | ||||||||||||||||||||
Purchases | 0 | 4,230 | 0 | 0 | 0 | ||||||||||||||||||||
Sales | (3) | (1,697) | 0 | 0 | 0 | ||||||||||||||||||||
Issuances | 0 | 0 | (694) | 0 | (1,412) | ||||||||||||||||||||
Settlements | 0 | (2,272) | 0 | 26 | 0 | ||||||||||||||||||||
Foreign currency translation | 0 | 0 | 1 | 0 | 0 | ||||||||||||||||||||
Other(1) | 0 | 0 | 0 | 0 | 292 | ||||||||||||||||||||
Transfers into Level 3(2) | 0 | 326 | 0 | 0 | 0 | ||||||||||||||||||||
Transfers out of Level 3(2) | 0 | (745) | 0 | 0 | 0 | ||||||||||||||||||||
Fair Value, end of period | $ | 8 | $ | 21,132 | $ | (3,348) | $ | 0 | $ | (1,406) | |||||||||||||||
Unrealized gains (losses) for assets/liabilities still held (3): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | $ | 0 | $ | 0 | $ | 146 | $ | (23) | $ | (4) | |||||||||||||||
Asset management fees and other income | $ | 2 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||
Interest credited to policyholders' account | $ | 0 | $ | 1,013 | $ | 0 | $ | 0 | $ | 0 |
Year Ended December 31, 2011 | |||||||||||||||||||||||||
Fixed Maturities Available-For-Sale | |||||||||||||||||||||||||
U.S. Government | Foreign Government | Corporate | Asset-Backed | Commercial Mortgage-Backed | Residential Mortgage-Backed | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Fair Value, beginning of period | $ | 0 | $ | 27 | $ | 1,187 | $ | 1,753 | $ | 130 | $ | 23 | |||||||||||||
Total gains (losses) (realized/unrealized): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | 0 | 0 | (31) | 38 | (41) | 0 | |||||||||||||||||||
Included in other comprehensive income (loss) | 0 | 2 | (139) | (14) | 8 | (1) | |||||||||||||||||||
Net investment income | 0 | 0 | 9 | 24 | (1) | 0 | |||||||||||||||||||
Purchases | 66 | 0 | 556 | 1,473 | 5 | 1 | |||||||||||||||||||
Sales | 0 | (1) | (144) | (558) | (30) | (1) | |||||||||||||||||||
Issuances | 0 | 0 | 33 | 0 | 0 | 0 | |||||||||||||||||||
Settlements | 0 | 0 | (387) | (373) | (36) | (5) | |||||||||||||||||||
Foreign currency translation | 0 | 0 | 7 | 54 | 8 | 0 | |||||||||||||||||||
Other(1) | 0 | 0 | 143 | 502 | 31 | (1) | |||||||||||||||||||
Transfers into Level 3(2) | 0 | 0 | 893 | 252 | 76 | 0 | |||||||||||||||||||
Transfers out of Level 3(2) | 0 | (3) | (677) | (623) | (5) | 0 | |||||||||||||||||||
Fair Value, end of period | $ | 66 | $ | 25 | $ | 1,450 | $ | 2,528 | $ | 145 | $ | 16 | |||||||||||||
Unrealized gains (losses) for assets still held (3): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | $ | 0 | $ | 0 | $ | (39) | $ | 7 | $ | (55) | $ | 0 | |||||||||||||
Year Ended December 31, 2011 | |||||||||||||||||||||||||
Trading Account Assets | |||||||||||||||||||||||||
U.S. Government | Corporate | Asset-Backed | Commercial Mortgage-Backed | Residential Mortgage-Backed | Equity Securities | All Other Activity | |||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Fair Value, beginning of period | $ | 0 | $ | 117 | $ | 280 | $ | 24 | $ | 36 | $ | 30 | $ | 134 | |||||||||||
Total gains (losses) (realized/unrealized): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | 0 | 0 | 0 | 0 | 0 | 0 | (31) | ||||||||||||||||||
Asset management fees and other income | 0 | 7 | (3) | 2 | 0 | (69) | 3 | ||||||||||||||||||
Net investment income | 0 | 0 | 5 | 2 | 0 | 0 | 0 | ||||||||||||||||||
Purchases | 9 | 82 | 305 | 10 | 0 | 39 | 0 | ||||||||||||||||||
Sales | 0 | (18) | (41) | (13) | (2) | (107) | 0 | ||||||||||||||||||
Issuances | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Settlements | 0 | (39) | (106) | (5) | (2) | (126) | (18) | ||||||||||||||||||
Foreign currency translation | 0 | 0 | 5 | 1 | 1 | 25 | 0 | ||||||||||||||||||
Other(1) | 0 | (1) | 17 | 13 | (29) | 1,302 | 0 | ||||||||||||||||||
Transfers into Level 3(2) | 0 | 44 | 39 | 24 | 0 | 202 | 5 | ||||||||||||||||||
Transfers out of Level 3(2) | 0 | (44) | (85) | (23) | 0 | 0 | 0 | ||||||||||||||||||
Fair Value, end of period | $ | 9 | $ | 148 | $ | 416 | $ | 35 | $ | 4 | $ | 1,296 | $ | 93 | |||||||||||
Unrealized gains (losses) for assets still held (3): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | (31) | |||||||||||
Asset management fees and other income | $ | 0 | $ | 5 | $ | (7) | $ | (1) | $ | 0 | $ | (80) | $ | 3 | |||||||||||
Year Ended December 31, 2011 | |||||||||||||||||||||||||
Equity Securities Available-For-Sale | Commercial Mortgage and Other Loans | Other Long-term Investments | Other Assets | Separate Account Assets (4) | Future Policy Benefits | Other Liabilities and notes of consolidated VIEs (5) | |||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Fair Value, beginning of period | $ | 355 | $ | 212 | $ | 768 | $ | 9 | $ | 15,792 | $ | 204 | $ | (3) | |||||||||||
Total gains (losses) (realized/unrealized): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | (16) | 15 | 2 | 0 | 0 | (2,554) | (16) | ||||||||||||||||||
Asset management fees and other income | 0 | 0 | (1) | 0 | 0 | 0 | 0 | ||||||||||||||||||
Interest credited to policyholders' account balance | 0 | 0 | 0 | 0 | 2,868 | 0 | 0 | ||||||||||||||||||
Included in other comprehensive income (loss) | 27 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Net investment income | 0 | 0 | (27) | 0 | 0 | 0 | 0 | ||||||||||||||||||
Purchases | 63 | 0 | 280 | 0 | 3,111 | 0 | 0 | ||||||||||||||||||
Sales | (66) | 0 | (25) | 0 | (1,462) | 0 | 0 | ||||||||||||||||||
Issuances | 0 | 0 | 0 | 0 | 3 | (506) | (284) | ||||||||||||||||||
Settlements | (46) | (141) | (168) | 0 | (1,156) | (1) | 18 | ||||||||||||||||||
Foreign currency translation | 75 | 0 | 14 | 0 | 0 | 1 | 0 | ||||||||||||||||||
Other(1) | (853) | 0 | 267 | 0 | 0 | (30) | 0 | ||||||||||||||||||
Transfers into Level 3(2) | 823 | 0 | 0 | 0 | 864 | 0 | 0 | ||||||||||||||||||
Transfers out of Level 3(2) | (2) | 0 | 0 | 0 | (662) | 0 | 0 | ||||||||||||||||||
Fair Value, end of period | $ | 360 | $ | 86 | $ | 1,110 | $ | 9 | $ | 19,358 | $ | (2,886) | $ | (285) | |||||||||||
Unrealized gains (losses) for assets still held (3): | |||||||||||||||||||||||||
Included in earnings: | |||||||||||||||||||||||||
Realized investment gains (losses), net | $ | (25) | $ | 15 | $ | 2 | $ | 0 | $ | 0 | $ | (2,566) | $ | (17) | |||||||||||
Asset management fees and other income | $ | 0 | $ | 0 | $ | 24 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||
Interest credited to policyholders' account balances | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 1,823 | $ | 0 | $ | 0 |
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.
For the year ended December 31, 2012, the majority of the Equity Securities Available-for-Sale transfers out of Level 3 were due to the determination that the pricing inputs for certain equity securities did not have a material liquidity discount and therefore, should be classified as Level 1, not Level 3.
For the year ended December 31, 2011, the majority of Equity Securities Available-for-Sale and Trading Account Assets – Equity Securities 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.
Derivative Fair Value Information
The following tables present the balance of derivative assets and liabilities measured at fair value on a recurring basis, as of the date indicated, by primary underlying. These tables exclude embedded derivatives which are typically recorded with the associated host contract. The derivative assets and liabilities shown below are included in “Other trading account assets,” “Other long-term investments” or “Other liabilities” in the tables presented previously in this note, under the headings “Assets and Liabilities by Hierarchy Level” and “Changes in Level 3 Assets and Liabilities.”
As of December 31, 2013 | |||||||||||||||||
Level 1 | Level 2 | Level 3 | Netting (1) | Total | |||||||||||||
(in millions) | |||||||||||||||||
Derivative assets: | |||||||||||||||||
Interest Rate | $ | 10 | $ | 6,122 | $ | 8 | $ | 0 | $ | 6,140 | |||||||
Currency | 0 | 593 | 0 | 0 | 593 | ||||||||||||
Credit | 0 | 3 | 0 | 0 | 3 | ||||||||||||
Currency/Interest Rate | 0 | 647 | 0 | 0 | 647 | ||||||||||||
Equity | 14 | 376 | 0 | 0 | 390 | ||||||||||||
Commodity | 1 | 0 | 0 | 0 | 1 | ||||||||||||
Netting (1) | 0 | 0 | 0 | (7,241) | (7,241) | ||||||||||||
Total derivative assets | $ | 25 | $ | 7,741 | $ | 8 | $ | (7,241) | $ | 533 | |||||||
Derivative liabilities: | |||||||||||||||||
Interest Rate | $ | 5 | $ | 7,597 | $ | 5 | $ | 0 | $ | 7,607 | |||||||
Currency | 0 | 425 | 0 | 0 | 425 | ||||||||||||
Credit | 0 | 49 | 0 | 0 | 49 | ||||||||||||
Currency/Interest Rate | 0 | 857 | 0 | 0 | 857 | ||||||||||||
Equity | 1 | 474 | 0 | 0 | 475 | ||||||||||||
Commodity | 0 | 0 | 0 | 0 | 0 | ||||||||||||
Netting (1) | 0 | 0 | 0 | (7,257) | (7,257) | ||||||||||||
Total derivative liabilities | $ | 6 | $ | 9,402 | $ | 5 | $ | (7,257) | $ | 2,156 | |||||||
As of December 31, 2012 | |||||||||||||||||
Level 1 | Level 2 | Level 3 | Netting (1) | Total | |||||||||||||
(in millions) | |||||||||||||||||
Derivative assets: | |||||||||||||||||
Interest Rate | $ | 11 | $ | 11,675 | $ | 5 | $ | 0 | $ | 11,691 | |||||||
Currency | 0 | 432 | 0 | 0 | 432 | ||||||||||||
Credit | 0 | 19 | 0 | 0 | 19 | ||||||||||||
Currency/Interest Rate | 0 | 450 | 0 | 0 | 450 | ||||||||||||
Equity | 63 | 518 | 19 | 0 | 600 | ||||||||||||
Commodity | 0 | 0 | 0 | 0 | 0 | ||||||||||||
Netting (1) | 0 | 0 | 0 | (10,117) | (10,117) | ||||||||||||
Total derivative assets | $ | 74 | $ | 13,094 | $ | 24 | $ | (10,117) | $ | 3,075 | |||||||
Derivative liabilities: | |||||||||||||||||
Interest Rate | $ | 11 | $ | 6,783 | $ | 2 | $ | 0 | $ | 6,796 | |||||||
Currency | 0 | 517 | 0 | 0 | 517 | ||||||||||||
Credit | 0 | 84 | 0 | 0 | 84 | ||||||||||||
Currency/Interest Rate | 0 | 578 | 0 | 0 | 578 | ||||||||||||
Equity | 165 | 198 | 0 | 0 | 363 | ||||||||||||
Commodity | 0 | 0 | 0 | 0 | 0 | ||||||||||||
Netting (1) | 0 | 0 | 0 | (8,031) | (8,031) | ||||||||||||
Total derivative liabilities | $ | 176 | $ | 8,160 | $ | 2 | $ | (8,031) | $ | 307 |
Changes in Level 3 derivative assets and liabilities - The following tables provide a summary of the changes in fair value of Level 3 derivative assets and liabilities for the year ended December 31, 2013, as well as the portion of gains or losses included in income for the year ended December 31, 2013, attributable to unrealized gains or losses related to those assets and liabilities still held at December 31, 2013.
Year Ended December 31, 2013 | |||||||||||||
Derivative | Derivative | Derivative | |||||||||||
Assets - | Assets - | Assets - | |||||||||||
Equity | Credit | Interest Rate | |||||||||||
(in millions) | |||||||||||||
Fair Value, beginning of period | $ | 19 | $ | 0 | $ | 3 | |||||||
Total gains or (losses) (realized/unrealized): | |||||||||||||
Included in earnings: | |||||||||||||
Realized investment gains (losses), net | (15) | 0 | 0 | ||||||||||
Asset management fees and other income | 0 | 0 | 0 | ||||||||||
Purchases | 0 | 0 | 0 | ||||||||||
Sales | 0 | 0 | 0 | ||||||||||
Issuances | 0 | 0 | 0 | ||||||||||
Settlements | (4) | 0 | 0 | ||||||||||
Transfers into Level 3(1) | 0 | 0 | 0 | ||||||||||
Transfers out of Level 3(1) | 0 | 0 | 0 | ||||||||||
Fair Value, end of period | $ | 0 | $ | 0 | $ | 3 | |||||||
Unrealized gains (losses) for the period relating to those level 3 | |||||||||||||
assets that were still held at the end of the period: | |||||||||||||
Included in earnings: | |||||||||||||
Realized investment gains (losses), net | $ | (15) | $ | 0 | $ | 0 | |||||||
Asset management fees and other income | $ | 0 | $ | 0 | $ | 0 | |||||||
Year Ended December 31, 2012 | |||||||||||||
Derivative | Derivative | Derivative | |||||||||||
Assets - | Assets - | Assets - | |||||||||||
Equity | Credit | Interest Rate | |||||||||||
(in millions) | |||||||||||||
Fair Value, beginning of period | $ | 83 | $ | 1 | $ | (1) | |||||||
Total gains or (losses) (realized/unrealized): | |||||||||||||
Included in earnings: | |||||||||||||
Realized investment gains (losses), net | (70) | (1) | 4 | ||||||||||
Asset management fees and other income | 0 | 0 | 0 | ||||||||||
Purchases | 6 | 0 | 0 | ||||||||||
Sales | 0 | 0 | 0 | ||||||||||
Issuances | 0 | 0 | 0 | ||||||||||
Settlements | 0 | 0 | 0 | ||||||||||
Transfers into Level 3(1) | 0 | 0 | 0 | ||||||||||
Transfers out of Level 3(1) | 0 | 0 | 0 | ||||||||||
Fair Value, end of period | $ | 19 | $ | 0 | $ | 3 | |||||||
Unrealized gains (losses) for the period relating to those level 3 | |||||||||||||
assets that were still held at the end of the period: | |||||||||||||
Included in earnings: | |||||||||||||
Realized investment gains (losses), net | $ | (70) | $ | (1) | $ | 4 | |||||||
Asset management fees and other income | $ | 0 | $ | 0 | $ | 0 |
Nonrecurring Fair Value Measurements - Certain assets and liabilities are measured at fair value on a nonrecurring basis. Nonrecurring fair value reserve adjustments resulted in a net loss of $9 million for the year ended December 31, 2013 on certain commercial mortgage loans. The carrying value of these loans as of December 31, 2013 was $27 million. Valuation reserve adjustments on certain commercial mortgage loans for the year ended December 31, 2012 resulted in a net gain of $2 million and a net loss of $7 million for the year ended December 31, 2011. The adjustments were based on discounted cash flows utilizing market rates or the fair value of the underlying real estate collateral and the underlying assets were classified as Level 3 in the hierarchy.
There were no intangible asset impairments recorded for the years ended December 31, 2013 and 2011. Impairments of $46 million were recorded related to the write off of intangible assets for the year ended December 31, 2012. The impairments were primarily based on discounted cash flow models, using assumptions and inputs specific to the Company, and those underlying assets are therefore, classified as Level 3 in the valuation hierarchy. For certain cost method investments, impairments of $21 million, $4 million and $8 million were recorded for the years ended December 31, 2013, 2012 and 2011, respectively. The methodologies utilized were primarily discounted future cash flow and, where appropriate, valuations provided by the general partners taking into consideration investment related expenses. These cost method investments are classified as Level 3 in the valuation hierarchy.
For mortgage servicing rights, valuation reserves decreased, resulting in a gain of $16 million for the year ended December 31, 2013. Similarly, valuation reserve increases of $14 million and $9 million were recorded for the years ended December 31, 2012 and 2011, respectively, for mortgage servicing rights. Mortgage servicing rights are valued based on internal models and classified as Level 3 in the valuation hierarchy. For real estate and property and equipment related investments, no impairments were recorded for the year ended December 31, 2013. Impairments of $4 million and $22 million for the years ended December 31, 2012 and 2011, respectively, were recorded for real estate investments, some of which were classified as discontinued operations. The impairments for these real estate investments were based primarily on appraisal values and the assets were therefore classified as Level 3 in the valuation hierarchy.
Fair Value Option - The following table presents information regarding changes in fair values recorded in earnings for commercial mortgage loans, other long-term investments and notes issued by consolidated variable interest entities, where the fair value option has been elected.
Years Ended December 31, | |||||||||||
2013 | 2012 | 2011 | |||||||||
(in millions) | |||||||||||
Assets: | |||||||||||
Commercial mortgage loans: | |||||||||||
Changes in instrument-specific credit risk | $ | 0 | $ | 0 | $ | 1 | |||||
Other changes in fair value | 0 | (1) | 4 | ||||||||
Other long-term investments: | |||||||||||
Changes in fair value | 68 | 40 | (5) | ||||||||
Liabilities: | |||||||||||
Notes issued by consolidated variable interest entities: | |||||||||||
Changes in fair value | $ | (17) | $ | 2 | $ | 0 |
Changes in fair value are reflected in “Realized investment gains (losses), net” for commercial mortgage loans and “Asset management fees and other income” for other long-term investments and notes issued by consolidated variable interest entities. Changes in fair value due to instrument-specific credit risk are estimated based on changes in credit spreads and quality ratings for the period reported.
Interest income on commercial mortgage loans is included in net investment income. For the years ended December 31, 2013, 2012 and 2011, the Company recorded $10 million, $13 million and $12 million of interest income, respectively, on these fair value option loans. Interest income on these loans is recorded based on the effective interest rates as determined at the closing of the loan.
The fair values and aggregate contractual principal amounts of commercial mortgage loans, for which the fair value option has been elected, were $158 million and $154 million, respectively, as of December 31, 2013, and $162 million and $156 million, respectively, as December 31, 2012. As of December 31, 2013, there were no loans in non-accrual status and none of the loans are more than 90 days past due and still accruing.
The fair value of other long-term investments was $873 million and $465 million as of December 31, 2013 and 2012, respectively.
The fair value and aggregate contractual principal amounts of notes issued by consolidated variable interest entities, for which the fair value option has been elected, were $3,254 million and $3,276 million, respectively, as of December 31, 2013, and $1,406 million and $1,422 million, respectively, as December 31, 2012. Interest expense recorded for these liabilities was $106 million and $21 million for the years ended December 31, 2013 and 2012, respectively.
Fair Value of Financial Instruments
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.
December 31, 2013 | December 31, 2012 | ||||||||||||||||||||||
Fair Value | Carrying Amount (1) | Fair Value | Carrying Amount | ||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Total | Total | Total | |||||||||||||||||
(in millions) | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||
Fixed maturities, held-to-maturity | $ | 0 | $ | 2,065 | $ | 1,488 | $ | 3,553 | $ | 3,312 | $ | 4,511 | $ | 4,268 | |||||||||
Commercial mortgage and other loans | 0 | 639 | 42,010 | 42,649 | 40,850 | 39,554 | 36,570 | ||||||||||||||||
Policy loans | 0 | 0 | 11,766 | 11,766 | 11,766 | 14,592 | 11,575 | ||||||||||||||||
Other long term investments | 0 | 0 | 2,470 | 2,470 | 2,203 | 2,159 | 1,995 | ||||||||||||||||
Short-term investments | 0 | 518 | 0 | 518 | 518 | 57 | 57 | ||||||||||||||||
Cash and cash equivalents | 3,661 | 796 | 0 | 4,457 | 4,457 | 4,500 | 4,500 | ||||||||||||||||
Accrued investment income | 0 | 3,089 | 0 | 3,089 | 3,089 | 3,127 | 3,127 | ||||||||||||||||
Other assets | 162 | 2,147 | 252 | 2,561 | 2,561 | 2,601 | 2,601 | ||||||||||||||||
Total assets | $ | 3,823 | $ | 9,254 | $ | 57,986 | $ | 71,063 | $ | 68,756 | $ | 71,101 | $ | 64,693 | |||||||||
Liabilities: | |||||||||||||||||||||||
Policyholders' account balances | |||||||||||||||||||||||
-investment contracts | $ | 0 | $ | 39,347 | $ | 57,253 | $ | 96,600 | $ | 95,476 | $ | 104,200 | $ | 101,232 | |||||||||
Securities sold under agreements | |||||||||||||||||||||||
to repurchase | 0 | 7,898 | 0 | 7,898 | 7,898 | 5,818 | 5,818 | ||||||||||||||||
Cash collateral for loaned securities | 0 | 5,040 | 0 | 5,040 | 5,040 | 3,941 | 3,941 | ||||||||||||||||
Short-term debt | 0 | 2,718 | 0 | 2,718 | 2,669 | 2,506 | 2,484 | ||||||||||||||||
Long-term debt | 1,078 | 19,453 | 5,038 | 25,569 | 23,553 | 27,497 | 24,729 | ||||||||||||||||
Notes of consolidated VIEs | 0 | 0 | 39 | 39 | 48 | 149 | 171 | ||||||||||||||||
Other liabilities | 0 | 5,803 | 266 | 6,069 | 6,069 | 6,356 | 6,356 | ||||||||||||||||
Separate account liabilities | |||||||||||||||||||||||
-investment contracts | 0 | 82,071 | 22,163 | 104,234 | 104,234 | 96,561 | 96,561 | ||||||||||||||||
Total liabilities | $ | 1,078 | $ | 162,330 | $ | 84,759 | $ | 248,167 | $ | 244,987 | $ | 247,028 | $ | 241,292 |
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.
Fixed Maturities, Held-to-Maturity
The fair values of public fixed maturity securities are generally based on prices from third-party pricing services, which are reviewed to validate reasonableness. However, for certain public fixed maturity securities and investments in private placement fixed maturity securities, this information is either not available or not reliable. For these public fixed maturity securities, the fair value is based on indicative broker quotes, if available, or determined using a discounted cash flow model or internally-developed values. For private fixed maturities, fair value is determined using a discounted cash flow model. In determining the fair value of certain fixed maturity securities, the discounted cash flow model may also use unobservable inputs, which reflect the Company's own assumptions about the inputs market participants would use in pricing the security.
Commercial Mortgage and Other Loans
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 or foreign government bond rate (for non-U.S. dollar-denominated loans) 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.
Certain commercial mortgage loans are valued incorporating other factors, including the terms of the loans, the principal exit strategies for the loans, prevailing interest rates and credit risk. Other loan valuations are primarily based upon the present value of the expected future cash flows discounted at the appropriate local government bond rate and local market swap rates or credit default swap spreads, plus an appropriate credit spread and liquidity premium. The credit spread and liquidity premium are a significant component of the pricing inputs, and are based upon an internally-developed methodology, which takes into account, among other factors, the credit quality of the loans, the property type of the collateral, the weighted average coupon and the weighted average life of the loans.
Policy Loans
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, while Japanese insurance policy loans used the risk-free proxy based on the yen LIBOR.
Other Long-term Investments
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. For the year end December 31, 2013 and 2012, no such adjustments were made.
Short-Term Investments, Cash and Cash Equivalents, Accrued Investment Income and Other Assets
The Company believes that due to the short-term nature of certain assets, the carrying value approximates fair value. These assets include: certain short-term investments which are not securities, are recorded at amortized cost and include quality loans; cash and cash equivalent instruments; accrued investment income; and other assets that meet the definition of financial instruments, including receivables, such as reinsurance recoverables, unsettled trades, accounts receivable and restricted cash.
Policyholders' Account Balances – Investment Contracts
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, single premium endowments, 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 guaranteed investment contracts, funding agreements, structured settlements without life contingencies and other similar products, fair values are derived using discounted projected cash flows based on interest rates being offered for similar contracts with maturities consistent with those of the contracts being valued. 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. For defined contribution and defined benefit contracts and certain other products, the fair value is the market value of the assets supporting the liabilities.
Securities Sold Under Agreements to Repurchase
The Company receives collateral for selling securities under agreements to repurchase, or pledges collateral under agreements to resell. Repurchase and resale agreements are also generally short-term in nature, and therefore, the carrying amounts of these instruments approximate fair value.
Cash Collateral for Loaned Securities
Cash collateral for loaned securities represents the collateral received or paid in connection with loaning or borrowing securities, similar to the securities sold under agreement to repurchase above. For these transactions, the carrying value of the related asset or liability approximates fair value, as they equal the amount of cash collateral received/paid.
Debt
The fair value of short-term and long-term debt, as well as notes issued by consolidated VIEs, is generally determined by either prices obtained from independent pricing services, which are validated by the Company, or discounted cash flow models. With the exception of the notes issued by consolidated VIEs for which recourse is limited to the assets of the respective VIE and does not extend to the general credit of the Company, the fair values of these instruments 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.
A portion of the senior secured notes issued by Prudential Holdings, LLC (the "IHC debt") is insured by a third-party financial guarantee insurance policy. The effect of the third-party credit enhancement is not included in the fair value measurement of the IHC debt and the methodologies used to determine fair value consider the Company's own non-performance risk.
Other Liabilities
Other liabilities are primarily payables, such as reinsurance payables, unsettled trades, drafts 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.
Separate Account Liabilities–Investment Contracts
Only the portion of separate account liabilities related to products that are investments contracts are reflected in the table above. Separate account liabilities are recorded at the amount credited to the contractholder, which reflects the change in fair value of the corresponding separate account assets including contractholder deposits less withdrawals and fees. Therefore, carrying value approximates fair value.