Fair Value Measurements

Fair Value Hierarchy

The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2014, and ultimately management determines fair value. Financial instruments reported at fair value in our consolidated financial statements are categorized based upon the following characteristics or inputs to the valuation techniques:


•	Level 1 – Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in active markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities.


•	Level 2 – Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets and liabilities that are actively traded. This also includes pricing models for which the inputs are corroborated by market data.

The technique used for the Level 2 fixed-maturity securities and taxable fixed maturities in separate accounts is the application of market based modeling. The inputs used for all classes of fixed-maturity securities listed in the table below include relevant market information by asset class, trade activity of like securities, marketplace quotes, benchmark yields, spreads off benchmark yields, interest rates, U.S. Treasury or swap curves, yield to maturity and economic events. Specific to commercial mortgage-backed securities, key inputs also include prepayment and default projections based on past performance of the underlying collateral and current market data. All of the Level 2 fixed-maturity securities are priced by a nationally recognized pricing vendor.

The Level 2 nonredeemable preferred equities technique used is the application of market based modeling. The inputs used, similar to those used by the pricing vendor for our fixed-maturity securities, include relevant market information, trade activity of like securities, yield to maturity, corporate action notices and economic events. All of the Level 2 nonredeemable preferred equities are priced by a nationally recognized pricing vendor.


•	Level 3 – Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include the following:


◦	Quotes from brokers or other external sources that are not considered binding;


◦	Quotes from brokers or other external sources where it cannot be determined that market participants would in fact transact for the asset or liability at the quoted price; or


◦	Quotes from brokers or other external sources where the inputs are not deemed observable.

The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2015 and 2014. We do not have any liabilities carried at fair value. There were no transfers between Level 1 and Level 2.



(Dollars in millions)	Quoted prices in active markets for identical assets (Level 1)				Significant unobservable inputs (Level 3)
At December 31, 2015			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Fixed maturities, available for sale:
Corporate	$	—	$	5,402	$	51	$	5,453
States, municipalities and political subdivisions	—		3,611		—		3,611
Commercial mortgage-backed	—		289		—		289
Government-sponsored enterprises	—		278		—		278
Foreign government	—		10		—		10
Convertibles and bonds with warrants attached	—		5		—		5
United States government	4		—		—		4
Subtotal	4		9,595		51		9,650
Common equities, available for sale	4,485		—		—		4,485
Nonredeemable preferred equities, available for sale	—		218		3		221
Separate accounts taxable fixed maturities	—		736		1		737
Top Hat savings plan mutual funds and common equity (included in Other assets)	21		—		—		21
Total	$	4,510	$	10,549	$	55	$	15,114

At December 31, 2014
Fixed maturities, available for sale:
Corporate	$	—	$	5,508	$	18	$	5,526
States, municipalities and political subdivisions	—		3,443		—		3,443
Commercial mortgage-backed	—		259		—		259
Government-sponsored enterprises	—		208		—		208
Foreign government	—		10		—		10
Convertibles and bonds with warrants attached	—		7		—		7
United States government	7		—		—		7
Subtotal	7		9,435		18		9,460
Common equities, available for sale	4,679		—		—		4,679
Nonredeemable preferred equities, available for sale	—		177		2		179
Separate accounts taxable fixed maturities	—		731		—		731
Top Hat savings plan mutual funds and common equity (included in Other assets)	18		—		—		18
Total	$	4,704	$	10,343	$	20	$	15,067

Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the following tables by security type with a summary of changes in fair value for the years ended December 31, 2015 and 2014. Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value in the consolidated balance sheets. Assets presented in the table below were valued based primarily on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. Transfers into Level 3 included situations where a fair value quote was not provided by the company's nationally recognized pricing vendor and as a result the price was stale or had been replaced with a broker quote where the inputs had not been corroborated to be market observable resulting in the security being classified as Level 3. Transfers out of Level 3 included situations where a broker quote was used in the prior period and a fair value quote became available from the company's pricing vendor in the current period. A quote utilizing the new pricing source was not available as of the prior period, and any gains or losses related to the change in valuation source for individual securities were not significant. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to us.

The following table provides the change in Level 3 assets during 2015 and 2014:



(Dollars in millions)	Asset fair value measurements using significant unobservable input
		Corporate fixed maturities			Taxable fixed maturities-separate accounts		Nonredeemable preferred equities		Total
Beginning balance, January 1, 2015		$	18		$	—	$	2	$	20
Total gains or losses (realized/unrealized):
Included in net income		—			—		—		—
Included in other comprehensive income		—			—		1		1
Purchases		36			1		—		37
Sales		—			—		—		—
Transfers into Level 3		—			—		—		—
Transfers out of Level 3		(3		)	—		—		(3		)
Ending balance, December 31, 2015		$	51		$	1	$	3	$	55

Beginning balance, January 1, 2014		$	2		$	—	$	2	$	4
Total gains or losses (realized/unrealized):
Included in net income		—			—		—		—
Included in other comprehensive income		—			—		—		—
Purchases		—			—		—		—
Sales		—			—		—		—
Transfers into Level 3		16			—		—		16
Transfers out of Level 3		—			—		—		—
Ending balance, December 31, 2014		$	18		$	—	$	2	$	20

With the exception of the above table, additional disclosures for the Level 3 category are not material.

Fair Value Disclosure for Assets and Liabilities Not Carried at Fair Value

The disclosures below are presented to provide information about the effects of current market conditions on financial instruments that are not reported at fair value in our consolidated financial statements.

The following table shows fair values of our note payable and long-term debt:



(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, 2015			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Note payable	$	—	$	35	$	—	$	35
6.900% senior debentures, due 2028	—		31		—		31
6.920% senior debentures, due 2028	—		480		—		480
6.125% senior notes, due 2034	—		425		—		425
Total	$	—	$	971	$	—	$	971

At December 31, 2014
Note payable	$	—	$	49	$	—	$	49
6.900% senior debentures, due 2028	—		34		—		34
6.920% senior debentures, due 2028	—		496		—		496
6.125% senior notes, due 2034	—		449		—		449
Total	$	—	$	1,028	$	—	$	1,028

Fair value of the note payable was determined based upon the outstanding balance at December 31, 2015 and 2014, because it is short term and tied to a variable interest rate. The note payable was classified as Level 2 as an active market does not exist, but fair value is determined based on observable inputs.

Fair value of the long-term debt was determined under the fair value measurements and disclosure accounting rules based on market pricing of similar debt instruments that are actively trading. We determine fair value for our debt the same way that we value corporate fixed maturities in our investment portfolio. Fair value can vary with macroeconomic conditions. Regardless of the fluctuations in fair value, the outstanding principal amount of our long-term debt is $793 million at both December 31, 2015 and 2014. None of the long-term debt is encumbered by rating triggers.

The following table shows the fair value of our life policy loans, included in other invested assets:



(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, 2015			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Life policy loans	$	—	$	—	$	40	$	40

At December 31, 2014
Life policy loans	$	—	$	—	$	39	$	39

Outstanding principal and interest for these life policy loans totaled $31 million at December 31, 2015 and 2014. To determine the fair value, we make the following significant assumptions: (1) the discount rates used to calculate the present value of expected payments are the risk-free spot rates, as nonperformance risk is minimal; and (2) the loan repayment rate by which policyholders pay off their loan balances is in line with past experience.

The following table shows fair value of our deferred annuities and structured settlements included in life policy and investment contract reserves:



(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, 2015			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Deferred annuities	$	—	$	—	$	886	$	886
Structured settlements	—		208		—		208
Total	$	—	$	208	$	886	$	1,094

At December 31, 2014
Deferred annuities	$	—	$	—	$	897	$	897
Structured settlements	—		217		—		217
Total	$	—	$	217	$	897	$	1,114

Recorded reserves for the deferred annuities were $860 million and $863 million at December 31, 2015 and 2014, respectively. Recorded reserves for the structured settlements were $174 million and $182 million at December 31, 2015 and 2014, respectively.

Fair values for deferred annuities were calculated based upon internally developed models because active, observable markets do not exist for those items. To determine the fair value, we made the following significant assumptions: (1) the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at December 31, 2015 and 2014, to account for nonperformance risk; (2) the rate of interest credited to policyholders is the portfolio net earned interest rate less a spread for expenses and profit; and (3) additional lapses occur when the credited interest rate is exceeded by an assumed competitor credited rate, which is a function of the risk-free rate of the economic scenario being modeled.

Determination of fair value for structured settlements assumes the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at December 31, 2015 and 2014, to account for nonperformance risk.