Fair Value

9 Months Ended

Sep. 30, 2017

Fair Value Disclosures [Abstract]

Fair Value

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.

September 30, 2017							Total Assets/Liabilities at Fair Value
(In millions)	Level 1		Level 2		Level 3
Assets
Fixed maturity securities:
Corporate and other bonds	$	—	$	19,469	$	119	$	19,588
States, municipalities and political subdivisions	—		13,955		1		13,956
Asset-backed:
Residential mortgage-backed	—		4,829		176		5,005
Commercial mortgage-backed	—		1,876		24		1,900
Other asset-backed	—		915		146		1,061
Total asset-backed	—		7,620		346		7,966
U.S. Treasury and obligations of government-sponsored enterprises	115		—		—		115
Foreign government	—		445		—		445
Redeemable preferred stock	20		—		—		20
Total fixed maturity securities	135		41,489		466		42,090
Equity securities	110		—		19		129
Other invested assets	—		5		—		5
Short term investments	479		876		—		1,355
Total assets	$	724	$	42,370	$	485	$	43,579
Liabilities
Other liabilities	$	—	$	1	$	—	$	1
Total liabilities	$	—	$	1	$	—	$	1

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	)

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 July 1, 2017		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 September 30, 2017		Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2017 recognized in Net income (loss)*
Fixed maturity securities:
Corporate and other bonds	$	100	$	1		$	1		$	13	$	—		$	(11	)	$	15	$	—	$	119	$	—
States, municipalities and political subdivisions	1		—			—			—		—			—			—		—		1		—
Asset-backed:
Residential mortgage-backed	123		1			1			—		—			(7		)	58		—		176		—
Commercial mortgage-backed	13		—			(1		)	12		—			(2		)	2		—		24		—
Other asset-backed	82		(1		)	1			27		—			(4		)	41		—		146		—
Total asset-backed	218		—			1			39		—			(13		)	101		—		346		—
Total fixed maturity securities	319		1			2			52		—			(24		)	116		—		466		—
Equity securities	19		—			—			—		—			—			—		—		19		—
Life settlement contracts	1		—			—			—		(1		)	—			—		—		—		—
Total	$	339	$	1		$	2		$	52	$	(1	)	$	(24	)	$	116	$	—	$	485	$	—

Level 3 (In millions)	Balance as of July 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 September 30, 2016		Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2016 recognized in Net income (loss)*
Fixed maturity securities:
Corporate and other bonds	$	242	$	1		$	7		$	16	$	—	$	(5	)	$	—	$	—		$	261	$	—
States, municipalities and political subdivisions	2		—			—			—		—		(1		)	—		—			1		—
Asset-backed:
Residential mortgage-backed	134		—			(1		)	5		—		(1		)	—		(58		)	79		—
Commercial mortgage-backed	11		—			—			23		—		(8		)	—		(2		)	24		—
Other asset-backed	45		—			—			34		—		—			—		(36		)	43		—
Total asset-backed	190		—			(1		)	62		—		(9		)	—		(96		)	146		—
Total fixed maturity securities	434		1			6			78		—		(15		)	—		(96		)	408		—
Equity securities	19		(1		)	1			—		—		—			—		—			19		(2		)
Life settlement contracts	67		—			—			—		—		—			—		—			67		—
Total	$	520	$	—		$	7		$	78	$	—	$	(15	)	$	—	$	(96	)	$	494	$	(2	)

Level 3 (In millions)	Balance as of January 1, 2017		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 September 30, 2017		Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2017 recognized in Net income (loss)*
Fixed maturity securities:
Corporate and other bonds	$	130	$	1		$	2			$	18	$	(1	)	$	(36	)	$	15	$	(10	)	$	119	$	—
States, municipalities and political subdivisions	1		—			—			—	—		—			—			—		—			1		—
Asset-backed:
Residential mortgage-backed	129		3			4			—	—		—			(18		)	58		—			176		—
Commercial mortgage-backed	13		—			(1		)	—	12		—			(2		)	2		—			24		—
Other asset-backed	57		(2		)	1			—	78		—			(6		)	93		(75		)	146		—
Total asset-backed	199		1			4				90		—			(26		)	153		(75		)	346		—
Total fixed maturity securities	330		2			6				108		(1		)	(62		)	168		(85		)	466		—
Equity securities	19		—			2			—	1		(3		)	—			—		—			19		—
Derivative financial instruments	—		1			—			—	—		(1		)	—			—		—			—		—
Life settlement contracts	58		6			—				—		(59		)	(5		)	—		—			—		—
Total	$	407	$	9		$	8			$	109	$	(64	)	$	(67	)	$	168	$	(85	)	$	485	$	—

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 September 30, 2016		Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2016 recognized in Net income (loss)*
Fixed maturity securities:
Corporate and other bonds	$	168	$	1		$	14		$	163	$	(36	)	$	(15	)	$	—	$	(34	)	$	261	$	—
States, municipalities and political subdivisions	2		—			—			—		—			(1		)	—		—			1		—
Asset-backed:
Residential mortgage-backed	134		2			(2		)	15		—			(10		)	—		(60		)	79		—
Commercial mortgage-backed	22		—			—			32		—			(17		)	3		(16		)	24		—
Other asset-backed	53		—			2			69		(25		)	(1		)	2		(57		)	43		—
Total asset-backed	209		2			—			116		(25		)	(28		)	5		(133		)	146		—
Total fixed maturity securities	379		3			14			279		(61		)	(44		)	5		(167		)	408		—
Equity securities	20		(1		)	—			—		—			—			—		—			19		(2		)
Life settlement contracts	74		10			—			—		—			(17		)	—		—			67		2
Total	$	473	$	12		$	14		$	279	$	(61	)	$	(61	)	$	5	$	(167	)	$	494	$	—

*Net realized and unrealized gains and losses from Level 3 securities and derivatives 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 (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 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 three and nine months ended September 30, 2017 and 2016, there were no transfers between Level 1 and Level 2. 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 September 30, 2017 and December 31, 2016, there were approximately $37 million and $31 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 Condensed Consolidated Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.

Life Settlement Contracts

The Company accounts for its investment in life settlement contracts using the fair value method. Historically, the fair value of life settlement contracts was 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.

The entire portfolio of life settlement contracts, which is included within the Life and Group Non-Core segment, was determined to be held for sale as of December 31, 2016 as the Company reached an agreement on terms to sell the portfolio. As such, the Company adjusted the fair value to the estimated sales proceeds less cost to sell. The definitive Purchase and Sale Agreement (PSA) related to the portfolio was executed on March 7, 2017 (sale date). In connection therewith, the life settlement contracts and related sale proceeds were placed in escrow until the buyer was recognized as the owner and beneficiary of each individual life settlement contract by the life insurance company that issued the policy. All of the contracts have been released from escrow as of September 30, 2017. The Company derecognized the released contracts and recorded the consideration, including a note receivable, which is payable over three years and is carried at amortized cost less any valuation allowance. The note receivable of $45 million is included within Other assets on the September 30, 2017 Condensed Consolidated Balance Sheet and interest income is accreted to the principal balance of the note.

The fair value of the Company's investments in life settlement contracts were $0 million and $58 million as of September 30, 2017 and December 31, 2016, and are included in Other assets on the Condensed Consolidated Balance Sheets. Despite the sale, the contracts were classified as Level 3 as there is not an active market for life settlement contracts. The cash receipts and payments related to the life settlement contracts prior to the sale date are included in Cash Flows from operating activities on the Condensed Consolidated Statements of Cash Flows. Cash receipts related to the sale of the life settlement contracts, as well as principal payments on the note receivable, are included in Cash Flows from investing activities.

Derivative Financial Investments

Level 2 securities primarily include the embedded derivative on the 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 was based on the terms of the sale of the contracts to a third party; therefore, the contracts are not included in the table below.

September 30, 2017	Estimated Fair Value (In millions)		Valuation Technique(s)	Unobservable Input(s)	Range  (Weighted Average)
Fixed maturity securities	$	139	Discounted cash flow	Credit spread	1% - 12% (3%)

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%)

For fixed maturity securities, an increase to the credit spread assumptions 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 Condensed Consolidated Balance Sheets are presented in the following tables.

September 30, 2017	Carrying Amount			Estimated Fair Value
(In millions)				Level 1		Level 2			Level 3		Total
Assets
Mortgage loans	$	722		$	—	$	—		$	731	$	731
Note receivable	45		—	—		—		—	46		46
Liabilities
Short term debt	$	150		$	—	$	152		$	—	$	152
Long term debt	2,707			—		2,916			—		2,916

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

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 fair value of the note receivable was based on the present value of the expected future cash flows discounted at the current interest rate for origination of similar notes, adjusted for specific credit 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 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.