Fair Value

3 Months Ended

Mar. 31, 2014

Fair Value Disclosures [Abstract]

Fair Value

Note E. Fair Value

Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable.

Level 1 - Quoted prices for identical instruments in active markets.

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are not observable.

Prices may fall within Level 1, 2 or 3 depending upon the methodologies and inputs used to estimate fair value for each specific security. In general the Company seeks to price securities using third-party pricing services. Securities not priced by pricing services are submitted to independent brokers for valuation and, if those are not available, internally developed pricing models are used to value assets using methodologies and inputs the Company believes market participants would use to value the assets. Prices obtained from third-party pricing services or brokers are not adjusted by the Company.

The Company performs control procedures over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures include i) the review of pricing service or broker pricing methodologies, ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, iii) exception reporting, where changes in price, period-over-period, are reviewed and challenged with the pricing service or broker based on exception criteria, iv) deep dives, where the Company performs an independent analysis of the inputs and assumptions used to price individual securities and v) pricing validation, where prices received are compared to prices independently estimated by the Company.

Assets and Liabilities Measured at Fair Value

Assets and liabilities measured at fair value on a recurring and nonrecurring basis are summarized below.

March 31, 2014								Total Assets/(Liabilities) at Fair Value
(In millions)	Level 1			Level 2		Level 3
Assets
Fixed maturity securities:
Corporate and other bonds	$	24		$	18,623	$	189	$	18,836
States, municipalities and political subdivisions	—			11,769		86		11,855
Asset-backed:
Residential mortgage-backed	—			4,585		359		4,944
Commercial mortgage-backed	—			1,927		126		2,053
Other asset-backed	—			537		439		976
Total asset-backed	—			7,049		924		7,973
U.S. Treasury and obligations of government-sponsored enterprises	135			6		—		141
Foreign government	76			500		—		576
Redeemable preferred stock	23			11		—		34
Total fixed maturity securities	258			37,958		1,199		39,415
Equity securities	117			55		2		174
Other invested assets	—			55		—		55
Short term investments	1,353			651		—		2,004
Life settlement contracts, included in Other assets	—			—		87		87
Total recurring basis assets	1,728			38,719		1,288		41,735
Assets held for sale - nonrecurring basis	—		—	3,486		—		3,486
Total assets	$	1,728		$	42,205	$	1,288	$	45,221
Liabilities
Liabilities held for sale - nonrecurring basis	$	—		$	3,250	$	—	$	3,250
Total liabilities	$	—		$	3,250	$	—	$	3,250

December 31, 2013							Total Assets/(Liabilities) at Fair Value
(In millions)	Level 1		Level 2		Level 3
Assets
Fixed maturity securities:
Corporate and other bonds	$	33	$	20,661	$	204	$	20,898
States, municipalities and political subdivisions	—		11,486		71		11,557
Asset-backed:
Residential mortgage-backed	—		4,640		331		4,971
Commercial mortgage-backed	—		1,912		151		2,063
Other asset-backed	—		509		446		955
Total asset-backed	—		7,061		928		7,989
U.S. Treasury and obligations of government-sponsored enterprises	116		28		—		144
Foreign government	81		462		—		543
Redeemable preferred stock	45		57		—		102
Total fixed maturity securities	275		39,755		1,203		41,233
Equity securities	126		48		11		185
Other invested assets	—		54		—		54
Short term investments	769		563		—		1,332
Life settlement contracts, included in Other assets	—		—		88		88
Separate account business	9		171		1		181
Total assets	$	1,179	$	40,591	$	1,303	$	43,073

The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2014 and 2013.

Level 3 (In millions)	Balance at January 1, 2014		Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*		Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)			Purchases		Sales			Settlements			Transfers into Level 3		Transfers out of Level 3			Balance at March 31, 2014		Unrealized gains (losses) on Level 3 assets and liabilities held at March 31, 2014 recognized in net income (loss)*
Fixed maturity securities:
Corporate and other bonds	$	204	$	1	$	1		$	5	$	(4	)	$	(5	)	$	3	$	(16	)	$	189	$	—
States, municipalities and political subdivisions	71		—		1			—		—			—			14		—			86		—
Asset-backed:
Residential mortgage-backed	331		1		15			25		—			(21		)	21		(13		)	359		—
Commercial mortgage-backed	151		1		(1		)	—		—			(1		)	—		(24		)	126		—
Other asset-backed	446		1		—			148		(83		)	(72		)	—		(1		)	439		—
Total asset-backed	928		3		14			173		(83		)	(94		)	21		(38		)	924		—
Total fixed maturity securities	1,203		4		16			178		(87		)	(99		)	38		(54		)	1,199		—
Equity securities	11		3		(4		)	—		(8		)	—			—		—			2		—
Life settlement contracts	88		10		—			—		—			(11		)	—		—			87		1
Separate account business	1		—		—			—		—			—			—		(1		)	—		—
Total	$	1,303	$	17	$	12		$	178	$	(95	)	$	(110	)	$	38	$	(55	)	$	1,288	$	1

Level 3 (In millions)	Balance at January 1, 2013		Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*			Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)		Purchases		Sales			Settlements			Transfers into Level 3		Transfers out of Level 3			Balance at March 31, 2013			Unrealized gains (losses) on Level 3 assets and liabilities held at March 31, 2013 recognized in net income (loss)*
Fixed maturity securities:
Corporate and other bonds	$	219	$	—		$	2	$	110	$	(17	)	$	(20	)	$	26	$	(18	)	$	302		$	(1	)
States, municipalities and political subdivisions	96		(3		)	—		85		(47		)	(2		)	—		—			129			—
Asset-backed:
Residential mortgage-backed	413		3			—		61		—			(11		)	—		(16		)	450			—
Commercial mortgage-backed	129		1			5		73		—			(7		)	—		(24		)	177			—
Other asset-backed	368		3			1		136		(99		)	(13		)	—		—			396			—
Total asset-backed	910		7			6		270		(99		)	(31		)	—		(40		)	1,023			—
Redeemable preferred stock	26		—			—		—		—			—			—		—			26			—
Total fixed maturity securities	1,251		4			8		465		(163		)	(53		)	26		(58		)	1,480			(1		)
Equity securities	34		(15		)	1		—		—			—			—		(1		)	19			(15		)
Other invested assets, including derivatives, net	—		—			—		—		(1		)	—			—		—			(1		)	—
Short term investments	6		—			—		—		(1		)	—			—		—			5			—
Life settlement contracts	100		7			—		—		—			(12		)	—		—			95			—
Separate account business	2		—			—		—		—			—			—		—			2			—
Total	$	1,393	$	(4	)	$	9	$	465	$	(165	)	$	(65	)	$	26	$	(59	)	$	1,600		$	(16	)

* Net realized and unrealized gains and losses shown above are reported in Net income (loss) as follows:

Major Category of Assets and Liabilities	Condensed Consolidated Statements of Operations Line Items
Fixed maturity securities available-for-sale	Net realized investment gains (losses)
Fixed maturity securities trading	Net investment income
Equity securities	Net realized investment gains (losses)
Other invested assets - Derivative financial instruments held in a trading portfolio	Net investment income
Other invested assets - Derivative financial instruments not held in a trading portfolio	Net realized investment gains (losses)
Other invested assets - Overseas deposits	Net investment income
Life settlement contracts	Other revenues

Securities shown in the Level 3 tables on the previous pages may be transferred in or out of Level 3 based on the availability of observable market information used to determine the fair value of the security. The availability of observable market information varies based on market conditions and trading volume and may cause securities to move in and out of Level 3 from reporting period to reporting period. There were $23 million of transfers from Level 2 to Level 1 and $1 million of transfers from Level 1 to Level 2 during the three months ended March 31, 2014. There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2013. The Company's policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

Valuation Methodologies and Inputs

The following section describes the valuation methodologies and relevant inputs used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instruments are generally classified.

Fixed Maturity Securities

Fixed maturity securities are valued using methodologies that model information generated by market transactions involving identical or comparable assets, as well as discounted cash flow methodologies. Common inputs include: prices from recently executed transactions of similar securities, broker/dealer quotes, benchmark yields, spreads off benchmark yields, interest rates, and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data.

Level 1 securities include exchange traded bonds, highly liquid U.S. and foreign government bonds, and redeemable preferred stock, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. Securities are generally assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include private placement debt securities whose fair value is determined using internal models with inputs that are not market observable.

Equity Securities

Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily non-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions, broker/dealer quotes and other pricing models utilizing market observable inputs. Level 3 securities are priced using internal models with inputs that are not market observable.

Other Invested Assets

Level 1 securities include exchange traded derivatives, primarily futures, valued using quoted market prices. Level 2 securities include overseas deposits, which can be redeemed at net asset value in 90 days or less, and derivatives, primarily currency forwards valued using observable market forward rates. Over-the-counter derivatives, principally interest rate swaps, total return swaps, credit default swaps, equity warrants and options, are valued using inputs including broker/dealer quotes and are classified within Level 3 of the valuation hierarchy due to a lack of transparency as to whether these quotes are based on information that is observable in the marketplace.

Short Term Investments

Securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 primarily includes commercial paper, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are classified consistent with fixed maturity securities discussed above. Short term investments as presented in the tables above differ from the amounts presented on the Condensed Consolidated Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.

Life Settlement Contracts

The fair values of life settlement contracts are determined as the present value of the anticipated death benefits less anticipated premium payments based on contract terms that are distinct for each insured, as well as the Company's own assumptions for mortality, premium expense, and the rate of return that a buyer would require on the contracts, as no comparable market pricing data is available.

Separate Account Business

Separate account business includes fixed maturity securities, equities and short term investments. The valuation methodologies and inputs for these asset types have been described above.

Assets and Liabilities Held for Sale on a Nonrecurring Basis

Assets and liabilities held for sale include assets and liabilities of CAC. These assets and liabilities are valued using the agreed upon transaction price for the sale of the common stock of CAC and are classified within Level 2 of the fair value hierarchy. See Notes A and M to the Condensed Consolidated Financial Statements for further discussion of the assets and liabilities classified as held for sale.

Significant Unobservable Inputs

The table below presents quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Valuations for assets and liabilities not presented in the table below are primarily based 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 the Company.

Assets (In millions)	Fair Value at March 31, 2014		Valuation Technique	Unobservable Input(s)	Range  (Weighted Average)
Fixed maturity securities	$	116	Discounted cash flow	Credit spread	2% - 15% (4%)
Equity securities	$	2	Market approach	Private offering price	$4,295 per share
Life settlement contracts	$	87	Discounted cash flow	Discount rate risk premium	9%
				Mortality assumption	70% - 743% (191%)

Assets (In millions)	Fair Value at December 31, 2013		Valuation Technique	Unobservable Input(s)	Range  (Weighted Average)
Fixed maturity securities	$	142	Discounted cash flow	Credit spread	2% - 20% (4%)
Equity securities	$	10	Market approach	Private offering price	$360 - $4,268 per share ($1,148)
Life settlement contracts	$	88	Discounted cash flow	Discount rate risk premium	9%
				Mortality assumption	70% - 743% (192%)

For fixed maturity securities, an increase in the credit spread assumptions would result in a lower fair value measurement. For equity securities, an increase in the private offering price, earnings projections and earnings multiple would result in a higher fair value measurement. For life settlement contracts, an increase in the discount rate risk premium or decrease in the mortality assumption would result in a lower fair value measurement.

Financial Assets and Liabilities Not Measured at Fair Value

The carrying amount and estimated fair value of the Company's financial instrument assets and liabilities which are not measured at fair value on the Condensed Consolidated Balance Sheets are listed in the tables below.

March 31, 2014	Carrying Amount		Estimated Fair Value
(In millions)			Level 1		Level 2		Level 3		Total
Financial assets
Notes receivable for the issuance of common stock	$	22	$	—	$	—	$	22	$	22
Mortgage loans	495		—		—		510		510
Financial liabilities
Short term debt	$	549	—		569		—		569
Long term debt	2,558		—		2,908		—		2,908

December 31, 2013	Carrying Amount		Estimated Fair Value
(In millions)			Level 1		Level 2		Level 3		Total
Financial assets
Notes receivable for the issuance of common stock	$	23	$	—	$	—	$	23	$	23
Mortgage loans	508		—		—		515		515
Financial liabilities
Premium deposits and annuity contracts	$	57	$	—	$	—	$	58	$	58
Short term debt	549		—		575		—		575
Long term debt	2,011		—		2,328		—		2,328

The following methods and assumptions were used to estimate the fair value of these financial assets and liabilities.

The fair values of Notes receivable for the issuance of common stock were estimated using discounted cash flows utilizing interest rates currently offered for obligations securitized with similar collateral, adjusted for specific note receivable risk.

The fair values of Mortgage loans were based on the present value of the expected future cash flows discounted at the current interest rate for origination of similar quality loans, adjusted for specific loan risk.

Premium deposits and annuity contracts were valued based on cash surrender values or estimated fair values of policyholder liabilities, net of amounts ceded related to sold business.

The Company's senior notes and debentures were valued based on observable market prices. The fair value for other debt was estimated using discounted cash flows based on current incremental borrowing rates for similar borrowing arrangements.

The carrying amounts reported on the Condensed Consolidated Balance Sheets for Cash, Short term investments not carried at fair value, Accrued investment income and certain other assets and other liabilities approximate fair value due to the short term nature of these items. These assets and liabilities are not listed in the tables above.