Employee Retirement Benefits

12 Months Ended

Dec. 31, 2019

We sponsor a qualified defined benefit pension plan that we closed entry into 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. During 2008, we changed the form of retirement benefit we offer some associates to a company match on contributions to a 401(k) plan as further explained below. For participants remaining in the pension plan, we continue 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 net periodic benefit cost 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 sponsor a defined contribution plan (401(k) plan) for eligible associates with matching company contributions totaling $19 million, $18 million and $16 million during the years 2019, 2018 and 2017, respectively. Associates who are not accruing benefits under the pension plan are eligible to receive the company match of up to 6% of cash compensation. 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 $11 million at

year-end 2019 and $10 million at year-end 2018, 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 $45 million and $34 million at December 31, 2019 and 2018, respectively. Company matching contributions to the CFC Top Hat Savings Plan totaled approximately $1 million for the years 2019, 2018 and 2017, 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
	2019		2018		2019		2018
Discount rate	3.40	%	4.34	%	3.33	%	4.25	%
Rate of compensation increase	2.25-3.25		2.25-3.25		2.25-3.25		2.25-3.25

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 0.94 percentage points for the qualified pension plan and by 0.92 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 is updated annually to reflect the updated scale, but at year-end 2019 the base table was also changed to reflect the Pri-2012 tables released in 2019. The RP-2014 table projected generationally with Scale MP-2018 and Scale MP-2017 were used for the years 2018 and 2017, respectively. The updated mortality table did not have a significant impact on our consolidated financial statements as our qualified plan assumes the majority of benefits will be paid in the form of lump sums.

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



	Qualified Pension Plan						SERP
	2019		2018		2017		2019		2018		2017
Discount rate	4.34	%	3.73	%	4.30	%	4.25	%	3.61	%	4.10	%
Expected return on plan assets	7.00		7.25		7.25		n/a		n/a		n/a
Rate of compensation increase	2.25-3.25		2.75-3.25		2.75-3.25		2.25-3.25		2.75-3.25		2.75-3.25

The discount rate was increased by 0.61 percentage points for the qualified pension plan and 0.64 percentage points for the SERP due to market interest rate conditions at the beginning of 2019. 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 2019 expectations of interest rates and based partially on the fact that the plan’s common stock holdings pay dividends. We review historical actual return on plan assets when determining our expected long-term rate of return. Total portfolio return for 2019 was 24.5% and for 2018 was negative 1.7%. Our compensation increase assumptions in 2019 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 pension plan and SERP at December 31 follows:



(Dollars in millions)	At December 31,
	2019			2018
Change in projected benefit obligation:
Benefit obligation, January 1	$	318		$	351
Service cost	8			11
Interest cost	13			13
Actuarial loss (gain)	45			(19		)
Benefits paid	(34		)	(38		)
Projected benefit obligation, December 31	$	350		$	318

Change in plan assets:
Fair value of plan assets, January 1	$	318		$	345
Actual return on plan assets	70			(4		)
Employer contribution	—			15
Benefits paid	(34		)	(38		)
Fair value of plan assets, December 31	$	354		$	318

Funded status, December 31	$	4		$	—

Accumulated benefit obligation	$	327		$	297

Our funded status improved for 2019 primarily due to higher returns on plan assets partially offset by actuarial losses from decreases in discount rates and assumed lump sum rates.

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,
	2019		2018
Pension amounts recognized in the consolidated balance sheets:
Other assets	$	4	$	—
Total	$	4	$	—

Pension amounts recognized in accumulated other comprehensive income:
Net actuarial loss	$	9	$	16
Total	$	9	$	16

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,
	2019			2018			2017
Net periodic benefit cost:
Service cost	$	8		$	11		$	11
Non-service costs (benefit):
Interest cost	13			13			14
Expected return on plan assets	(20		)	(22		)	(21		)
Amortization of actuarial loss and prior service cost	1			1			2
Other	1			2			1
Net periodic benefit cost	$	3		$	5		$	7

Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Current year actuarial (gain) loss	$	(5	)	$	7		$	(11	)
Amortization of actuarial loss	(2		)	(3		)	(3		)
Total recognized in other comprehensive (income) loss	$	(7	)	$	4		$	(14	)
Total recognized in net periodic benefit cost and other comprehensive (income) loss	$	(4	)	$	9		$	(7	)

The 2019 amount recognized in net periodic benefit cost and other comprehensive income improved from 2018 largely due to changes in the actuarial gain resulting from increases in discount and assumed lump sum rates. The estimated costs to be amortized from AOCI into net periodic benefit cost over the next year for our plans are $3 million in actuarial loss and less than $1 million in prior service cost.

Service costs and non-service costs (benefit) are allocated in the same proportion primarily to underwriting, acquisition and insurance expenses line item with the remainder allocated to the insurance losses and contract holders' benefits line item on the consolidated statements of income for 2019, 2018 and 2017.

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 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 2019 we held approximately 77% of our pension portfolio in domestic common equity investments. The remainder of the portfolio consisted of 8% in states, municipalities and taxable political subdivisions fixed-maturity investments, 8% in domestic corporate fixed-maturity investments and 7% in United States government fixed maturity investments. Our common equity portfolio consisted of 23% in the financial sector, 21% in the information technology sector, 13% in the healthcare sector, 13% in the industrial sector, and 11% in the consumer discretionary industrial sector at year-end 2019. No additional sectors accounted for 10% or more of our common equity portfolio balance at year-end 2019.

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, 2019 and 2018. There have been no transfers between Level 1 and Level 2 for the years ended December 31, 2019 and 2018. The following table shows the fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2019 and 2018. Excluded from the table below is cash on hand of $17 million and $32 million at December 31, 2019 and 2018, respectively.



(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, 2019			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Fixed maturities, available for sale:
States, municipalities and political subdivisions	$	—	$	25	$	—	$	25
Corporate	—		27		—		27
United States Government	25		—		—		25
Total fixed maturities, available for sale	25		52		—		77
Common equities	260		—		—		260
Total	$	285	$	52	$	—	$	337

At December 31, 2018
Fixed maturities, available for sale:
States, municipalities and political subdivisions	$	—	$	29	$	—	$	29
Corporate	—		37		—		37
United States Government	5		—		—		5
Total fixed maturities, available for sale	5		66		—		71
Common equities	215		—		—		215
Total	$	220	$	66	$	—	$	286

Our pension plan assets included 232,113 shares of the company’s common stock at both December 31, 2019 and 2018, which had a fair value of $24 million and $18 million at December 31, 2019 and 2018, respectively. The defined benefit pension plan did not purchase or sell any shares of our common stock during 2019 and 2018. The company paid less than $1 million in 2019 and 2018 in cash dividends on our common stock to the pension plan.

We estimate $9 million of benefit payments from the SERP during 2020. 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,
	2020		2021		2022		2023		2024		2025 - 2029
Expected future benefit payments	$	31	$	26	$	25	$	26	$	28	$	147