Investments

12 Months Ended

Dec. 31, 2016

Investments [Abstract]

Investments

Note B. Investments

The significant components of Net investment income are presented in the following table.

Years ended December 31
(In millions)	2016			2015			2014
Fixed maturity securities	$	1,819		$	1,751		$	1,803
Equity securities	10			12			12
Limited partnership investments	155			92			263
Mortgage loans	41			33			31
Short term investments	8			6			3
Trading portfolio	10			8			10
Other	4			1			3
Gross investment income	2,047			1,903			2,125
Investment expense	(59		)	(63		)	(58		)
Net investment income	$	1,988		$	1,840		$	2,067

As of December 31, 2016, the Company held no non-income producing fixed maturity securities. As of December 31, 2015, the Company held $54 million of non-income producing fixed maturity securities. As of December 31, 2016 and 2015, no investments in a single issuer exceeded 10% of stockholders' equity, other than investments in securities issued by the U.S. Treasury and obligations of government-sponsored enterprises.

Net realized investment gains (losses) are presented in the following table.

Years ended December 31
(In millions)	2016			2015			2014
Net realized investment gains (losses):
Fixed maturity securities:
Gross realized gains	$	204		$	131		$	170
Gross realized losses	(138		)	(197		)	(129		)
Net realized investment gains (losses) on fixed maturity securities	66			(66		)	41
Equity securities:
Gross realized gains	5			2			8
Gross realized losses	(10		)	(25		)	(7		)
Net realized investment gains (losses) on equity securities	(5		)	(23		)	1
Derivatives	(2		)	10			(1		)
Short term investments and other	(9		)	12			16
Net realized investment gains (losses)	$	50		$	(67	)	$	57

Net change in unrealized gains on investments is presented in the following table.

Years ended December 31
(In millions)	2016			2015			2014
Net change in unrealized gains on investments:
Fixed maturity securities	$	225		$	(1,114	)	$	1,511
Equity securities	(2		)	(6		)	6
Other	1			1			—
Total net change in unrealized gains on investments	$	224		$	(1,119	)	$	1,517

The components of OTTI losses recognized in earnings by asset type are presented in the following table.

Years ended December 31
(In millions)	2016		2015		2014
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	59	$	104	$	18
States, municipalities and political subdivisions	—		18		46
Asset-backed:
Residential mortgage-backed	10		8		5
Other asset-backed	3		1		1
Total asset-backed	13		9		6
Total fixed maturity securities available-for-sale	72		131		70
Equity securities available-for-sale -- Common stock	9		25		7
OTTI losses recognized in earnings	$	81	$	156	$	77

The following tables present a summary of fixed maturity and equity securities.

December 31, 2016	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Unrealized OTTI Losses (Gains)
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	17,711	$	1,323	$	76	$	18,958	$	(1	)
States, municipalities and political subdivisions	12,060		1,213		33		13,240		(16		)
Asset-backed:
Residential mortgage-backed	5,004		120		51		5,073		(28		)
Commercial mortgage-backed	2,016		48		24		2,040		—
Other asset-backed	1,022		8		5		1,025		—
Total asset-backed	8,042		176		80		8,138		(28		)
U.S. Treasury and obligations of government-sponsored enterprises	83		10		—		93		—
Foreign government	435		13		3		445		—
Redeemable preferred stock	18		1		—		19		—
Total fixed maturity securities available-for-sale	38,349		2,736		192		40,893		$	(45	)
Total fixed maturity securities trading	12						12
Equity securities available-for-sale:
Common stock	13		6		—		19
Preferred stock	93		2		4		91
Total equity securities available-for-sale	106		8		4		110
Total	$	38,467	$	2,744	$	196	$	41,015

December 31, 2015	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Unrealized OTTI Losses (Gains)
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	17,080	$	1,019	$	342	$	17,757	$	—
States, municipalities and political subdivisions	11,729		1,453		8		13,174		(4		)
Asset-backed:
Residential mortgage-backed	4,935		154		17		5,072		(37		)
Commercial mortgage-backed	2,154		55		12		2,197		—
Other asset-backed	923		6		8		921		—
Total asset-backed	8,012		215		37		8,190		(37		)
U.S. Treasury and obligations of government-sponsored enterprises	62		5		—		67		—
Foreign government	334		13		1		346		—
Redeemable preferred stock	33		2		—		35		—
Total fixed maturity securities available-for-sale	37,250		2,707		388		39,569		$	(41	)
Total fixed maturity securities trading	3						3
Equity securities available-for-sale:
Common stock	46		3		1		48
Preferred stock	145		7		3		149
Total equity securities available-for-sale	191		10		4		197
Total	$	37,444	$	2,717	$	392	$	39,769

The following tables present the estimated fair value and gross unrealized losses of fixed maturity and equity securities in a gross unrealized loss position by the length of time in which the securities have continuously been in that position.

	Less than 12 Months				12 Months or Longer				Total
December 31, 2016	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	2,615	$	61	$	254	$	15	$	2,869	$	76
States, municipalities and political subdivisions	959		32		23		1		982		33
Asset-backed:
Residential mortgage-backed	2,136		44		201		7		2,337		51
Commercial mortgage-backed	756		22		69		2		825		24
Other asset-backed	398		5		24		—		422		5
Total asset-backed	3,290		71		294		9		3,584		80
U.S. Treasury and obligations of government-sponsored enterprises	5		—		—		—		5		—
Foreign government	108		3		—		—		108		3
Redeemable preferred stock	—		—		—		—		—		—
Total fixed maturity securities available-for-sale	6,977		167		571		25		7,548		192
Equity securities available-for-sale -- Preferred stock	12		—		13		4		25		4
Total	$	6,989	$	167	$	584	$	29	$	7,573	$	196

	Less than 12 Months				12 Months or Longer				Total
December 31, 2015	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	4,882	$	302	$	162	$	40	$	5,044	$	342
States, municipalities and political subdivisions	338		8		75		—		413		8
Asset-backed:
Residential mortgage-backed	963		9		164		8		1,127		17
Commercial mortgage-backed	652		10		96		2		748		12
Other asset-backed	552		8		5		—		557		8
Total asset-backed	2,167		27		265		10		2,432		37
U.S. Treasury and obligations of government-sponsored enterprises	4		—		—		—		4		—
Foreign government	54		1		—		—		54		1
Redeemable preferred stock	3		—		—		—		3		—
Total fixed maturity securities available-for-sale	7,448		338		502		50		7,950		388
Equity securities available-for-sale:
Common Stock	3		1		—		—		3		1
Preferred stock	13		3		—		—		13		3
Total equity securities available-for-sale	16		4		—		—		16		4
Total	$	7,464	$	342	$	502	$	50	$	7,966	$	392

Based on current facts and circumstances, the Company believes the unrealized losses presented in the December 31, 2016 securities in a gross unrealized loss position table above are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are attributable to changes in interest rates, credit spreads and other factors. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded as of December 31, 2016.

The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held as of December 31, 2016, 2015 and 2014 for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).

Years ended December 31
(In millions)	2016			2015			2014
Beginning balance of credit losses on fixed maturity securities	$	53		$	62		$	74
Reductions for securities sold during the period	(16		)	(9		)	(9		)
Reductions for securities the Company intends to sell or more likely than not will be required to sell	(1		)	—			(3		)
Ending balance of credit losses on fixed maturity securities	$	36		$	53		$	62

Contractual Maturity

The following table presents available-for-sale fixed maturity securities by contractual maturity.

December 31	2016				2015
(In millions)	Cost or Amortized Cost		Estimated Fair Value		Cost or Amortized Cost		Estimated Fair Value
Due in one year or less	$	1,779	$	1,828	$	1,574	$	1,595
Due after one year through five years	7,566		7,955		7,721		8,070
Due after five years through ten years	15,892		16,332		14,652		14,915
Due after ten years	13,112		14,778		13,303		14,989
Total	$	38,349	$	40,893	$	37,250	$	39,569

Actual maturities may differ from contractual maturities because certain securities may be called or prepaid. Securities not due at a single date are allocated based on weighted average life.

Limited Partnerships

The carrying value of limited partnerships as of December 31, 2016 and 2015 was $2,371 million and $2,548 million, which includes undistributed earnings of $523 million and $687 million. Limited partnerships comprising 60% of the total carrying value are reported on a current basis through December 31, 2016 with no reporting lag, 18% are reported on a one month lag and the remainder are reported on more than a one month lag. The number of limited partnerships held and the strategies employed provide diversification to the limited partnership portfolio and the overall invested asset portfolio.

Limited partnerships comprising 68% and 70% of the carrying value as of December 31, 2016 and 2015 employ hedge fund strategies. Limited partnerships comprising 27% and 26% of the carrying value as of December 31, 2016 and 2015 were invested in private debt and equity and the remainder were primarily invested in real estate strategies. Hedge fund strategies include both long and short positions in fixed income, equity and derivative instruments. These hedge fund strategies may seek to generate gains from mispriced or undervalued securities, price differentials between securities, distressed investments, sector rotation or various arbitrage disciplines. Within hedge fund strategies, approximately 55% were equity related, 26% pursued a multi-strategy approach, 17% were focused on distressed investments and 2% were fixed income related as of December 31, 2016.

The ten largest limited partnership positions held totaled $1,168 million and $1,221 million as of December 31, 2016 and 2015. Based on the most recent information available regarding the Company’s percentage ownership of the individual limited partnerships, the carrying value reflected on the Consolidated Balance Sheets represents approximately 4% and 3% of the aggregate partnership equity as of December 31, 2016 and 2015, and the related income reflected on the Consolidated Statements of Operations represents approximately 4%, 3% and 4% of the changes in aggregate partnership equity for the years ended December 31, 2016, 2015 and 2014.

While the Company generally does not invest in highly leveraged partnerships, there are risks inherent in limited partnership investments which may result in losses due to short-selling, derivatives or other speculative investment practices. The use of leverage increases volatility generated by the underlying investment strategies.

The Company’s limited partnership investments contain withdrawal provisions that generally limit liquidity for a period of thirty days up to one year and in some cases do not permit withdrawals until the termination of the partnership. Typically, withdrawals require advance written notice of up to 90 days.

Derivative Financial Instruments

The Company may use derivatives in the normal course of business, primarily in an attempt to reduce its exposure to market risk (principally interest rate risk, credit risk, equity price risk and foreign currency risk) stemming from various assets and liabilities. The Company's principal objective under such strategies is to achieve the desired reduction in economic risk, even if the position does not receive hedge accounting treatment.

The Company may enter into interest rate swaps, futures and forward commitments to purchase securities to manage interest rate risk. The Company may use foreign currency forward contracts to manage foreign currency risk.

Credit exposure associated with non-performance by the counterparties to derivative instruments is generally limited to the uncollateralized fair value of the asset related to the instruments recognized on the Consolidated Balance Sheets. The Company generally requires that all over-the-counter derivative contracts be governed by an International Swaps and Derivatives Association Master Agreement, and exchanges collateral under the terms of these agreements with its derivative investment counterparties depending on the amount of the exposure and the credit rating of the counterparty. Gross estimated fair values of derivative positions are presented in Other invested assets and Other liabilities on the Consolidated Balance Sheet. The Company does not offset derivative positions against the fair value of collateral provided or positions subject to netting arrangements. There would be no significant difference in the balance included in such accounts if the estimated fair values were presented net for the periods ended December 31, 2016 and 2015.

There was no cash collateral provided by the Company as of December 31, 2016 or 2015. There was no cash collateral received from counterparties held as of December 31, 2016 or 2015.

The Company holds an embedded derivative on funds withheld liability with a notional value of $174 million and $179 million as of December 31, 2016 and 2015 and a fair value of $3 million and $5 million as of December 31, 2016 and 2015. The embedded derivative on funds withheld liability is accounted for separately and reported with the funds withheld liability in Other liabilities on the Consolidated Balance Sheets.

Commercial Mortgage Loans

Risks related to the recoverability of loan balances include declines in the estimated cash flows from underlying property leases, fair value of collateral and creditworthiness of tenants of credit tenant loan properties, where lease payments directly service the loan. The Company evaluates loans for impairment on a specific loan basis and identifies loans for evaluation of impairment based on the collection experience of each loan and other credit quality indicators such as debt service coverage ratio and the creditworthiness of the borrower or tenants of credit tenant loan properties. As of December 31, 2016 and 2015, there were no loans past due or in non-accrual status, and no valuation allowance was recorded.

Investment Commitments

As of December 31, 2016, the Company had committed approximately $380 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.

As of December 31, 2016, the Company had mortgage loan commitments of $20 million representing signed loan applications received and accepted.

The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. Purchases and sales of privately placed debt securities are recorded once funded. As of December 31, 2016, the Company had commitments to purchase or fund additional amounts of $130 million and sell $121 million under the terms of such securities.

Investments on Deposit

Securities with carrying values of approximately $2.3 billion and $2.8 billion were deposited by the Company’s insurance subsidiaries under requirements of regulatory authorities and others as of December 31, 2016 and 2015.

Cash and securities with carrying values of approximately $514 million and $364 million were deposited with financial institutions as collateral for letters of credit as of December 31, 2016 and 2015. In addition, cash and securities were deposited in trusts with financial institutions to secure reinsurance and other obligations with various third parties. The carrying values of these deposits were approximately $261 million and $263 million as of December 31, 2016 and 2015.