Fair Value Measurements

9 Months Ended

Sep. 30, 2019

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, 2018, and ultimately management determines fair value. See our 2018 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 141, 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, 2019, and December 31, 2018. 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, 2019			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Fixed maturities, available for sale:
Corporate	$	—	$	6,410	$	—	$	6,410
States, municipalities and political subdivisions	—		4,590		—		4,590
Commercial mortgage-backed	—		305		—		305
Government-sponsored enterprises	—		162		—		162
United States government	109		—		—		109
Foreign government	—		24		—		24
Subtotal	109		11,491		—		11,600
Common equities	6,956		—		—		6,956
Nonredeemable preferred equities	—		220		—		220
Separate accounts taxable fixed maturities	—		868		—		868
Top Hat savings plan mutual funds and common equity (included in Other assets)	45		—		—		45
Total	$	7,110	$	12,579	$	—	$	19,689

At December 31, 2018
Fixed maturities, available for sale:
Corporate	$	—	$	5,709	$	1	$	5,710
States, municipalities and political subdivisions	—		4,300		4		4,304
Commercial mortgage-backed	—		288		—		288
Government-sponsored enterprises	—		310		—		310
United States government	67		—		—		67
Foreign government	—		10		—		10
Subtotal	67		10,617		5		10,689
Common equities	5,742		—		—		5,742
Nonredeemable preferred equities	—		178		—		178
Separate accounts taxable fixed maturities	—		791		—		791
Top Hat savings plan mutual funds and common equity (included in Other assets)	34		—		—		34
Total	$	5,843	$	11,586	$	5	$	17,434

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, 2019. 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. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to us.

The following table provides the changes in Level 3 assets for the three months ended September 30, 2019.



(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, 2019	$	1		$	4		$	5
Total gains or losses (realized/unrealized):
Included in net income	—			—			—
Included in other comprehensive income	—			—			—
Purchases	—			—			—
Sales	(1		)	—			(1		)
Transfers into Level 3	—			—			—
Transfers out of Level 3	—			(4		)	(4		)
Ending balance, September 30, 2019	$	—		$	—		$	—

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

The following table provides the changes in Level 3 assets for the nine months ended September 30, 2019:



(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, 2019		$	1		$	4		$	5
Total gains or losses (realized/unrealized):
Included in net income		—			—			—
Included in other comprehensive income		—			—			—
Purchases		—			—			—
Sales		(1		)	—			(1		)
Transfers into Level 3		—			—			—
Transfers out of Level 3		—			(4		)	(4		)
Ending balance, September 30, 2019		$	—		$	—		$	—

Beginning balance, January 1, 2018		$	1		$	5		$	6
Total gains or losses (realized/unrealized):
Included in net income (loss)		—			—			—
Included in other comprehensive income (loss)		—			(1		)	(1		)
Purchases		—			—			—
Sales		—			—			—
Transfers into Level 3		—			—			—
Transfers out of Level 3		—			—			—
Ending balance, September 30, 2018		$	1		$	4		$	5

With the exception of the above table, 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		2019		2018		2019		2018
6.900	%	1998	Senior debentures, due 2028	$	27	$	27	$	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	$	788	$	788	$	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, 2019			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Note payable	$	—	$	38	$	—	$	38
6.900% senior debentures, due 2028	—		35		—		35
6.920% senior debentures, due 2028	—		512		—		512
6.125% senior notes, due 2034	—		510		—		510
Total	$	—	$	1,095	$	—	$	1,095

At December 31, 2018
Note payable	$	—	$	32	$	—	$	32
6.900% senior debentures, due 2028	—		32		—		32
6.920% senior debentures, due 2028	—		471		—		471
6.125% senior notes, due 2034	—		440		—		440
Total	$	—	$	975	$	—	$	975

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, 2019			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Life policy loans	$	—	$	—	$	43	$	43

Deferred annuities	—		—		787		787
Structured settlements	—		212		—		212
Total	$	—	$	212	$	787	$	999

At December 31, 2018
Life policy loans	$	—	$	—	$	40	$	40

Deferred annuities	—		—		742		742
Structured settlements	—		185		—		185
Total	$	—	$	185	$	742	$	927

Outstanding principal and interest for these life policy loans totaled $32 million and $33 million at

September 30, 2019 and December 31, 2018, respectively.

Recorded reserves for the deferred annuities were $768 million and $787 million at September 30, 2019 and December 31, 2018, respectively. Recorded reserves for the structured settlements were $152 million and $156 million at September 30, 2019 and December 31, 2018, respectively.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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