Employee Retirement Benefits

We sponsor a qualified defined benefit pension plan. During 2008, we changed the form of retirement benefit we offer some associates to a company match on contributions to a 401(k) plan from the defined benefit pension plan. We closed entry into the pension plan for new associates as of June 30, 2008, and only participants 40 years of age or older as of August 31, 2008, could elect to continue to participate. For participants remaining in the pension plan, we continue to contribute to fund future benefit obligations. Benefits for the defined benefit pension plan are based on years of credited service and compensation level. Contributions are based on the prescribed method defined in the Pension Protection Act. Our pension expense is based on certain actuarial assumptions and also is composed of several components that are determined using the projected unit credit actuarial cost method. The qualified plan has been amended to allow for distribution of vested balances to terminated participants.

We also sponsor a defined contribution plan (401(k) plan). Matching company contributions totaled $11 million,

$10 million and $9 million during the years 2014, 2013 and 2012, respectively. Associates who are not accruing benefits under the pension plan are eligible to receive the company match of up to 6 percent of cash compensation. We also pay all operating expenses for the 401(k) plan. Participants vest in the company match for the 401(k) plan after three years of eligible service.

We maintain a supplemental executive retirement plan (SERP) with a benefit obligation of $13 million at

year-end 2014 and $9 million at year-end 2013, which is included in the projected benefit obligation. The company also makes available to a select group of associates the CFC Top Hat Savings Plan, a nonqualified deferred compensation plan, which had a fair value of $18 million and $14 million at December 31, 2014 and 2013, respectively.

Defined Benefit Pension Plan Assumptions

We evaluate our pension plan assumptions annually and update them as necessary. This is a summary of the weighted-average assumptions used to determine our benefit obligations at December 31 for the plans:



	Qualified Pension Plan				SERP
	2014		2013		2014		2013
Discount rate	4.25	%	5.15	%	4.05	%	4.80	%
Rate of compensation increase	2.75-3.25		2.75-3.25		2.75-3.25		2.75-3.25

To determine the discount rate for each plan, a theoretical settlement portfolio of high quality rated corporate bonds was chosen to provide payments approximately matching the plan’s projected benefit payments. A single interest rate for each plan was determined resulting in a discounted value of the plan's benefit payments that equates to the market value of the selected bonds. The discount rate is reflective of current market interest rate conditions and our plan's liability characteristics. Based on this analysis, we decreased the rate from the prior year by 0.90 percentage points for the qualified pension plan and by 0.75 percentage points for the SERP. Compensation increase assumptions reflect anticipated rates of inflation, real return on wage growth and merit and promotional increases. The mortality assumption was updated in 2014 to the RP-2014 Employee Mortality Tables and RP-2014 Annuitant Mortality Tables for males and females projected generationally with Scale MP-2014. The updated mortality table did not have a significant impact on our financial statements as our qualified plan assumes benefits will be paid in the form of lump sums.

This is a summary of the weighted-average assumptions used to determine our net expense for the plans:



	Qualified Pension Plan						SERP
	2014		2013		2012		2014		2013		2012
Discount rate	5.15	%	4.20	%	5.10	%	4.80	%	3.95	%	4.75	%
Expected return on plan assets	7.25		7.50		7.50		n/a		n/a		n/a
Rate of compensation increase	2.75-3.25		2.75-3.25		3.50-5.50		2.75-3.25		2.75-3.25		3.50-5.50

The discount rate was increased by 0.95 percentage points for the qualified pension plan and 0.85 percentage points for the SERP due to market interest rate conditions in 2014. The discount rate assumptions for our benefit obligation generally track with high quality rated corporate bond yields chosen in our theoretical settlement portfolio, and yearly adjustments reflect any changes to those bond yields. We believe the expected return on plan assets is representative of the expected long-term rate of return on these assets, which is consistent with 2014 expectations of interest rates and based partially on the fact that the plan’s common stock holdings pay dividends. We believe this rate is representative of the expected long-term rate of return on these plan assets. We review historical actual return on plan assets when determining our expected long-term rate of return. Total portfolio return for 2014 was 11.7 percent and for 2013 was 24.0 percent. Our compensation increase assumptions in 2014 reflect anticipated rates of inflation, real return on wage growth and merit and promotional increases.

Benefit obligation activity using an actuarial measurement date for our qualified plan and SERP at December 31 follows:



(Dollars in millions)	At December 31,
	2014			2013
Change in projected benefit obligation:
Benefit obligation, January 1	$	284		$	320
Service cost	10			13
Interest cost	15			13
Actuarial loss (gain)	35			(34		)
Benefits paid	(27		)	(28		)
Other	2			—
Projected benefit obligation, December 31	$	319		$	284

Accumulated benefit obligation	$	284		$	257

Change in plan assets:
Fair value of plan assets, January 1	$	280		$	238
Actual return on plan assets	30			55
Employer contribution	5			15
Benefits paid	(27		)	(28		)
Fair value of plan assets, December 31	$	288		$	280

Funded status, December 31	$	(31	)	$	(4	)

The decreases in discount rate and lump sum rate resulted in an increase in actuarial loss and projected benefit obligation from 2013 and an increase in unfunded status.

A reconciliation follows of the funded status for our qualified plan and SERP at the end of the measurement period to the amounts recognized in the consolidated balance sheets at December 31:



(Dollars in millions)	At December 31,
	2014			2013
Pension amounts recognized in the consolidated balance sheets:
Other assets	$	—		$	4
Other liabilities	(31		)	(8		)
Net amount recognized	$	(31	)	$	(4	)

Amounts recognized in accumulated other comprehensive income:
Net actuarial loss	$	34		$	18
Prior service cost	2			—
Total	$	36		$	18

The change in the amount recognized in other comprehensive income is largely due to the decrease in discount rate and corresponding decreases in assumed lump sum rates.

Below are the components of our net periodic benefit cost, as well as other changes in plan assets and benefit obligations recognized in other comprehensive income for our qualified plan and SERP at December 31:



(Dollars in millions)	Years ended December 31,
	2014			2013			2012
Net periodic benefit cost:
Service cost	$	10		$	13		$	12
Interest cost	15			13			14
Expected return on plan assets	(17		)	(17		)	(16		)
Amortization of actuarial loss and prior service cost	2			9			8
Other	3			2			—
Net periodic benefit cost	$	13		$	20		$	18



(Dollars in millions)	Years ended December 31,
	2014			2013			2012
Other changes in plan assets and benefit obligations recognized in
other comprehensive income:
Current year actuarial loss (gain)	$	21		$	(72	)	$	20
Amortization of actuarial loss	(5		)	(10		)	(6		)
Current year prior service cost	2			—			—
Amortization of prior service cost	—			(1		)	(1		)
Total recognized in other comprehensive loss (income)	$	18		$	(83	)	$	13

The total recognized in net periodic benefit cost and other comprehensive income was a net cost of $31 million, net benefit of $63 million, and a net cost of $31 million for the years ended December 31, 2014, 2013 and 2012, respectively. The change in the amount recognized in other comprehensive income from 2013 is largely due to decreases in discount and lump sum rates, partially offset with greater than anticipated return on plan assets. The estimated costs to be amortized from AOCI into net periodic benefit cost over the next year for our plans are

$5 million in actuarial loss and $1 million in prior service cost.

Defined Benefit Pension Plan Assets

The pension plan assets are managed to maximize total return over the long term while providing sufficient liquidity and current return to satisfy the cash flow requirements of the plan. The plan’s day-to-day investment decisions are managed by our internal investment department; however, overall investment strategies are discussed with our employee benefits committee. Our investment strategy, currently driven by the low interest rate environment, is to weight our portfolio towards large cap, high quality, dividend growing equities that we have historically favored. As our plan matures and interest rates normalize, we expect a greater allocation to fixed income securities to better align asset and liability market risks. Our fixed-maturity bond portfolio is investment grade. The plan does not engage in derivative transactions.

Excluding cash, during 2014 we held approximately 81 percent of our pension portfolio in domestic common equity investments, which reflect the long-term time horizon of pension obligations. The remainder of the portfolio consisted of 12 percent in states, municipalities and taxable political subdivisions fixed-maturity investments and 7 percent in domestic corporate fixed-maturity investments. Our common equity portfolio consisted of 23 percent in the financial sector, 19 percent in the information technology sector, 14 percent in the healthcare sector and 12 percent in the industrial sector at year-end 2014. No additional sectors accounted for 10 percent or more of our common equity portfolio balance at year-end 2014. We had $11 million of cash on hand at December 31, 2014, to cover retirements.

Investments in securities are valued based on the fair value hierarchy outlined in Note 3, Fair Value Measurements. The pension plan did not have any liabilities carried at fair value during the years ended December 31, 2014 and 2013. There have been no transfers between Level 1 and Level 2 for the years ended December 31, 2014 and 2013. The following table shows the fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2014 and 2013. Excluded from the table below is cash on hand of $11 million and $19 million at December 31, 2014 and 2013.



(Dollars in millions)	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
At December 31, 2014			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Fixed maturities, available for sale:
States, municipalities and political subdivisions	$	—	$	33	$	—	$	33
Corporate securities	—		19		—		19
Total fixed maturities, available for sale	—		52		—		52
Common equities, available for sale	225		—		—		225
Total	$	225	$	52	$	—	$	277

At December 31, 2013
Fixed maturities, available for sale:
States, municipalities and political subdivisions	$	—	$	32	$	—	$	32
Corporate securities	—		21		—		21
Total fixed maturities, available for sale	—		53		—		53
Common equities, available for sale	208		—		—		208
Total	$	208	$	53	$	—	$	261

Our pension plan assets included 467,113 shares of the company’s common stock at both December 31, 2014 and 2013, which had a fair value of $24 million at both December 31, 2014 and 2013. The defined benefit pension plan did not purchase any shares of our common stock during 2014 and 2013. No shares of our common stock were sold during 2014. During 2013, the pension plan sold 100,000 shares of the company’s common stock for a realized gain of $5 million. The company paid $1 million in cash dividends on our common stock to the pension plan in both 2014 and 2013.

We contributed $5 million to our qualified plan during the first quarter of 2015 and expect to pay out $3 million of benefit payments from the SERP during 2015. We expect to make the following benefit payments for our qualified plan and SERP, reflecting expected future service:



(Dollars in millions)	Years ended December 31,
	2015		2016		2017		2018		2019		2020 - 2024
Expected future benefit payments	$	26	$	32	$	29	$	23	$	24	$	142