Fair Value Measurements

In accordance with accounting guidance for fair value measurements and disclosures, we categorized our financial instruments, based on the priority of the observable and market-based data for the valuation technique used, into a three-level 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, 2017, and ultimately management determines fair value. See our 2017 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 132, for information on characteristics and valuation techniques used in determining fair value.

Fair Value Disclosures for Assets

The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at September 30, 2018, and December 31, 2017. 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 other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
At September 30, 2018			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Fixed maturities, available for sale:
Corporate	$	—	$	5,742	$	1	$	5,743
States, municipalities and political subdivisions	—		4,291		4		4,295
Commercial mortgage-backed	—		285		—		285
Government-sponsored enterprises	—		280		—		280
United States government	47		—		—		47
Foreign government	—		10		—		10
Subtotal	47		10,608		5		10,660
Common equities	6,472		—		—		6,472
Nonredeemable preferred equities	—		191		—		191
Separate accounts taxable fixed maturities	—		783		—		783
Top Hat savings plan mutual funds and common equity (included in Other assets)	37		—		—		37
Total	$	6,556	$	11,582	$	5	$	18,143

At December 31, 2017
Fixed maturities, available for sale:
Corporate	$	—	$	5,652	$	1	$	5,653
States, municipalities and political subdivisions	—		4,460		5		4,465
Commercial mortgage-backed	—		286		—		286
Government-sponsored enterprises	—		254		—		254
United States government	31		—		—		31
Foreign government	—		10		—		10
Subtotal	31		10,662		6		10,699
Common equities, available for sale	6,039		—		—		6,039
Nonredeemable preferred equities, available for sale	—		210		—		210
Separate accounts taxable fixed maturities	—		795		—		795
Top Hat savings plan mutual funds and common equity (included in Other assets)	31		—		—		31
Total	$	6,101	$	11,667	$	6	$	17,774

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 as of September 30, 2018. Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value in the condensed 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 out of Level 3 included situations where a broker quote was used without observable inputs or data that could be corroborated by our pricing vendors in the prior period and significant other observable inputs were identified in the current period. 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 for the three months ended September 30:



(Dollars in millions)	Asset fair value measurements using significant unobservable inputs
	Corporate fixed maturities		States, municipalities and political subdivisions fixed maturities		Total
Beginning balance, July 1, 2018	$	1	$	4	$	5
Total gains or losses (realized/unrealized):
Included in net income	—		—		—
Included in other comprehensive income	—		—		—
Purchases	—		—		—
Sales	—		—		—
Transfers into Level 3	—		—		—
Transfers out of Level 3	—		—		—
Ending balance, September 30, 2018	$	1	$	4	$	5

Beginning balance, July 1, 2017	$	1	$	5	$	6
Total gains or losses (realized/unrealized):
Included in net income	—		—		—
Included in other comprehensive income	—		—		—
Purchases	—		—		—
Sales	—		—		—
Transfers into Level 3	—		—		—
Transfers out of Level 3	—		—		—
Ending balance, September 30, 2017	$	1	$	5	$	6

The following table provides the change in Level 3 assets for the nine months ended September 30:



(Dollars in millions)	Asset fair value measurements using significant unobservable inputs
		Corporate fixed maturities			States, municipalities and political subdivisions fixed maturities			Total
Beginning balance, January 1, 2018		$	1		$	5		$	6
Total gains or losses (realized/unrealized):
Included in net income		—			—			—
Included in other comprehensive income		—			(1		)	(1		)
Purchases		—			—			—
Sales		—			—			—
Transfers into Level 3		—			—			—
Transfers out of Level 3		—			—			—
Ending balance, September 30, 2018		$	1		$	4		$	5

Beginning balance, January 1, 2017		$	78		$	—		$	78
Total gains or losses (realized/unrealized):
Included in net income		—			—			—
Included in other comprehensive income		—			—			—
Purchases		—			5			5
Sales		—			—			—
Transfers into Level 3		—			—			—
Transfers out of Level 3		(77		)	—			(77		)
Ending balance, September 30, 2017		$	1		$	5		$	6

With the exception of the above tables, additional disclosures for the Level 3 category are not material and therefore not provided.

Fair Value Disclosures 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 condensed consolidated financial statements.

This table summarizes the book value and principal amounts of our long-term debt:



(Dollars in millions)				Book value				Principal amount
Interest rate		Year of issue		September 30,		December 31,		September 30,		December 31,
Interest rate		Year of issue		2018		2017		2018		2017
6.900	%	1998	Senior debentures, due 2028	$	26	$	26	$	28	$	28
6.920	%	2005	Senior debentures, due 2028	391		391		391		391
6.125	%	2004	Senior notes, due 2034	370		370		374		374
			Total	$	787	$	787	$	793	$	793

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 September 30, 2018			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Note payable	$	—	$	30	$	—	$	30
6.900% senior debentures, due 2028	—		32		—		32
6.920% senior debentures, due 2028	—		472		—		472
6.125% senior notes, due 2034	—		437		—		437
Total	$	—	$	971	$	—	$	971

At December 31, 2017
Note payable	$	—	$	24	$	—	$	24
6.900% senior debentures, due 2028	—		34		—		34
6.920% senior debentures, due 2028	—		505		—		505
6.125% senior notes, due 2034	—		477		—		477
Total	$	—	$	1,040	$	—	$	1,040

The following table shows the fair value of our life policy loans included in other invested assets and the fair values 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 September 30, 2018			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Life policy loans	$	—	$	—	$	40	$	40

Deferred annuities	—		—		760		760
Structured settlements	—		194		—		194
Total	$	—	$	194	$	760	$	954

At December 31, 2017
Life policy loans	$	—	$	—	$	41	$	41

Deferred annuities	—		—		834		834
Structured settlements	—		210		—		210
Total	$	—	$	210	$	834	$	1,044

Outstanding principal and interest for these life policy loans totaled $32 million and $31 million at September 30, 2018, and December 31, 2017, respectively.

Recorded reserves for the deferred annuities were $802 million and $835 million at September 30, 2018, and December 31, 2017, respectively. Recorded reserves for the structured settlements were $157 million and $161 million at September 30, 2018, and December 31, 2017, respectively.