Fair Value

12 Months Ended

Dec. 31, 2016

Fair Value Disclosures [Abstract]

Fair Value

Note C. 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 methodology 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 a methodology 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 may include i) the review of pricing service methodologies or broker pricing qualifications, ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, iii) exception reporting, where period-over-period changes in price 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 basis are presented in the following tables.

December 31, 2016								Total Assets/Liabilities at Fair Value
(In millions)	Level 1		Level 2			Level 3
Assets
Fixed maturity securities:
Corporate and other bonds	$	—	$	18,840		$	130	$	18,970
States, municipalities and political subdivisions	—		13,239			1		13,240
Asset-backed:
Residential mortgage-backed	—		4,944			129		5,073
Commercial mortgage-backed	—		2,027			13		2,040
Other asset-backed	—		968			57		1,025
Total asset-backed	—		7,939			199		8,138
U.S. Treasury and obligations of government-sponsored enterprises	93		—			—		93
Foreign government	—		445			—		445
Redeemable preferred stock	19		—			—		19
Total fixed maturity securities	112		40,463			330		40,905
Equity securities	91		—			19		110
Other invested assets	—		5			—		5
Short term investments	475		853			—		1,328
Life settlement contracts, included in Other assets	—		—			58		58
Total assets	$	678	$	41,321		$	407	$	42,406
Liabilities
Other liabilities	$	—	$	(3	)	$	—	$	(3	)
Total liabilities	$	—	$	(3	)	$	—	$	(3	)

December 31, 2015								Total Assets/Liabilities at Fair Value
(In millions)	Level 1		Level 2			Level 3
Assets
Fixed maturity securities:
Corporate and other bonds	$	—	$	17,592		$	168	$	17,760
States, municipalities and political subdivisions	—		13,172			2		13,174
Asset-backed:
Residential mortgage-backed	—		4,938			134		5,072
Commercial mortgage-backed	—		2,175			22		2,197
Other asset-backed	—		868			53		921
Total asset-backed	—		7,981			209		8,190
U.S. Treasury and obligations of government-sponsored enterprises	66		1			—		67
Foreign government	—		346			—		346
Redeemable preferred stock	35		—			—		35
Total fixed maturity securities	101		39,092			379		39,572
Equity securities	177		—			20		197
Other invested assets	—		17			—		17
Short term investments	448		1,134			—		1,582
Life settlement contracts, included in Other assets	—		—			74		74
Total assets	$	726	$	40,243		$	473	$	41,442
Liabilities
Other liabilities	$	—	$	(5	)	$	—	$	(5	)
Total liabilities	$	—	$	(5	)	$	—	$	(5	)

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).

Level 3 (In millions)	Balance as of January 1, 2016		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 as of December 31, 2016		Unrealized gains (losses) on Level 3 assets and liabilities held as of December 31, 2016 recognized in Net income (loss)*
Fixed maturity securities:
Corporate and other bonds	$	168	$	1		$	1		$	163	$	(36	)	$	(103	)	$	—	$	(64	)	$	130	$	—
States, municipalities and political subdivisions	2		—			—			—		—			(1		)	—		—			1		—
Asset-backed:
Residential mortgage-backed	134		3			(5		)	15		—			(14		)	56		(60		)	129		—
Commercial mortgage-backed	22		(1		)	(1		)	32		—			(17		)	3		(25		)	13		—
Other asset-backed	53		(2		)	1			86		(25		)	(1		)	2		(57		)	57		—
Total asset-backed	209		—			(5		)	133		(25		)	(32		)	61		(142		)	199		—
Total fixed maturity securities	379		1			(4		)	296		(61		)	(136		)	61		(206		)	330		—
Equity securities	20		(1		)	—			—		—			—			—		—			19		(2		)
Life settlement contracts	74		5			—			—		—			(21		)	—		—			58		(3		)
Total	$	473	$	5		$	(4	)	$	296	$	(61	)	$	(157	)	$	61	$	(206	)	$	407	$	(5	)

Level 3 (In millions)	Balance as of January 1, 2015		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 as of December 31, 2015		Unrealized gains (losses) on Level 3 assets and liabilities held as of December 31, 2015 recognized in Net income (loss)*
Fixed maturity securities:
Corporate and other bonds	$	162	$	(2	)	$	(3	)	$	65	$	(13	)	$	(35	)	$	40	$	(46	)	$	168	$	(2	)
States, municipalities and political subdivisions	94		1			—			—		—			(10		)	—		(83		)	2		—
Asset-backed:
Residential mortgage-backed	189		5			(3		)	81		—			(35		)	14		(117		)	134		—
Commercial mortgage-backed	83		7			(4		)	23		—			(17		)	17		(87		)	22		—
Other asset-backed	655		3			3			130		(263		)	(52		)	7		(430		)	53		—
Total asset-backed	927		15			(4		)	234		(263		)	(104		)	38		(634		)	209		—
Total fixed maturity securities	1,183		14			(7		)	299		(276		)	(149		)	78		(763		)	379		(2		)
Equity securities	16		—			(1		)	4		—			—			1		—			20		—
Life settlement contracts	82		25			—			—		—			(33		)	—		—			74		1
Total	$	1,281	$	39		$	(8	)	$	303	$	(276	)	$	(182	)	$	79	$	(763	)	$	473	$	(1	)

Major Category of Assets and Liabilities	Consolidated Statements of Operations Line Items
Fixed maturity securities available-for-sale (1)	Net realized investment gains (losses)
Fixed maturity securities trading	Net investment income
Equity securities (1)	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)
Life settlement contracts	Other revenues
Other liabilities - Derivative financial instruments	Net realized investment gains (losses)

(1) Unrealized gains and losses are reported within AOCI.

Securities shown on the previous page may be transferred in or out of levels within the fair value hierarchy based on the availability of observable market information and quoted prices used to determine the fair value of the security. The availability of observable market information and quoted prices varies based on market conditions and trading volume. During the year ended December 31, 2016 there were no transfers between Level 1 and Level 2. There were $63 million of transfers from Level 2 to Level 1 and $52 million from Level 1 to Level 2 during the year ended December 31, 2015. 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

Level 1 securities include highly liquid and exchange traded 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. All classes of Level 2 fixed maturity securities are valued using a methodology based on information generated by market transactions involving identical or comparable assets, a discounted cash flow methodology, or a combination of both when necessary. Common inputs for all classes of fixed maturity securities include prices from recently executed transactions of similar securities, marketplace 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. Fixed maturity securities are primarily 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 and other pricing models utilizing market observable inputs. Level 3 securities are primarily priced using broker/dealer quotes and internal models with inputs that are not market observable.

Other Invested Assets

The fair value of Federal Home Loan Bank of Chicago (FHLBC) stock is equal to par because it can only be redeemed by the FHLBC at par or sold to another member of the FHLBC at par and is classified as Level 2.

As of December 31, 2016 and December 31, 2015, there were approximately $31 million and $27 million respectively of overseas deposits within other invested assets, which can be redeemed at net asset value in 90 days or less. Overseas deposits are excluded from the fair value hierarchy because their fair value is recorded using the net asset value per share (or equivalent) practical expedient.

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 Consolidated Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.

Life Settlement Contracts

Historically, the fair values of life settlement contracts were 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 discussed in Note A, Summary of Significant Accounting Policies, because the Company has reached agreement on terms to sell the portfolio of life settlement contracts to a third party, the fair value was written down to reflect the value determined per the agreed terms of sale. Despite the pending sale, as there is not an active market for life settlement contracts, they have been classified as Level 3.

Derivative Financial Investments

Level 2 securities primarily include the embedded derivative on funds withheld liability. The embedded derivative on funds withheld liability is valued using the change in fair value of the assets supporting the funds withheld liability, which are fixed maturity securities valued with observable inputs.

Significant Unobservable Inputs

The following tables present 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 tables 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. The valuation of life settlement contracts as of December 31, 2016 was based on the terms of the pending sale of the contracts to a third party, therefore the contracts are not included in the table below.

December 31, 2016	Estimated Fair Value (In millions)		Valuation Technique(s)	Unobservable Input(s)	Range  (Weighted Average)
Fixed maturity securities	$	106	Discounted cash flow	Credit spread	2% - 40% (4%)

December 31, 2015	Estimated Fair Value (In millions)		Valuation Technique(s)	Unobservable Input(s)	Range  (Weighted Average)
Fixed maturity securities	$	138	Discounted cash flow	Credit spread	3% - 184% (6%)
Life settlement contracts	74		Discounted cash flow	Discount rate risk premium	9%
				Mortality assumption	55% - 1676% (164%)

For fixed maturity securities, an increase to the credit spread assumptions would result in a lower 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 assets and liabilities which are not measured at fair value on the Consolidated Balance Sheets are presented in the following tables.

December 31, 2016	Carrying Amount		Estimated Fair Value
(In millions)			Level 1		Level 2		Level 3		Total
Assets
Mortgage loans	$	591	$	—	$	—	$	594	$	594
Liabilities
Long term debt	$	2,710	$	—	$	2,952	$	—	$	2,952

December 31, 2015	Carrying Amount		Estimated Fair Value
(In millions)			Level 1		Level 2		Level 3		Total
Assets
Mortgage loans	$	678	$	—	$	—	$	688	$	688
Liabilities
Short term debt	$	350	$	—	$	360	$	—	$	360
Long term debt	2,210		—		2,433		—		2,433

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

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.

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 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.