Investments

12 Months Ended

Dec. 31, 2018

Investments [Abstract]

Investments

Investments

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

Years ended December 31
(In millions)	2018			2017			2016
Fixed maturity securities	$	1,795		$	1,812		$	1,819
Equity securities	18			12			10
Limited partnership investments	(22		)	207			155
Mortgage loans	50			34			41
Short term investments	26			15			8
Trading portfolio	7			12			10
Other	4			1			4
Gross investment income	1,878			2,093			2,047
Investment expense	(61		)	(59		)	(59		)
Net investment income	$	1,817		$	2,034		$	1,988

For the year ended December 31, 2018, Net investment income was reduced by $24 million due to the change in fair value of common stock still held as of December 31, 2018.

As of December 31, 2018 the Company held no non-income producing fixed maturity securities. As of December 31, 2017 the Company held $2 million of non-income producing fixed maturity securities. As of December 31, 2018 and 2017, 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)	2018			2017			2016
Net realized investment gains (losses):
Fixed maturity securities:
Gross realized gains	$	168		$	186		$	204
Gross realized losses	(164		)	(64		)	(138		)
Net realized investment gains (losses) on fixed maturity securities	4			122			66
Equity securities	(74		)	—			(5		)
Derivatives	9			(4		)	(2		)
Short term investments and other	9			(25		)	(9		)
Net realized investment gains (losses)	$	(52	)	$	93		$	50

For the year ended December 31, 2018, Net realized investment gains (losses) were reduced by $73 million due to the change in fair value of non-redeemable preferred stock still held as of December 31, 2018. Net realized investment gains (losses) for the year ended December 31, 2017 included a $42 million loss related to the redemption of the Company's $350 million senior notes due November 2019.

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

Years ended December 31
(In millions)	2018			2017			2016
Net change in unrealized gains on investments:
Fixed maturity securities	$	(1,811	)	$	728		$	225
Equity securities(1)	—			32			(2		)
Other	—			(2		)	1
Total net change in unrealized gains on investments	$	(1,811	)	$	758		$	224

(1) As of January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The change in fair value of equity securities is now recognized through the income statement. See Note A to the Consolidated Financial Statements for additional information.

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

Years ended December 31
(In millions)	2018		2017		2016
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	12	$	12	$	59
Asset-backed	9		1		13
Total fixed maturity securities available-for-sale	21		13		72
Equity securities available-for-sale	—		1		9
OTTI losses recognized in earnings	$	21	$	14	$	81

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

December 31, 2018 (1)	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	$	18,764	$	791	$	395	$	19,160	$	—
States, municipalities and political subdivisions	9,681		1,076		9		10,748		—
Asset-backed:
Residential mortgage-backed	4,815		68		57		4,826		(20		)
Commercial mortgage-backed	2,200		28		32		2,196		—
Other asset-backed	1,975		11		24		1,962		—
Total asset-backed	8,990		107		113		8,984		(20		)
U.S. Treasury and obligations of government-sponsored enterprises	156		3		—		159		—
Foreign government	480		5		4		481		—
Redeemable preferred stock	10		—		—		10		—
Total fixed maturity securities available-for-sale	38,081		1,982		521		39,542		$	(20	)
Total fixed maturity securities trading	4		—		—		4
Total fixed maturity securities	$	38,085	$	1,982	$	521	$	39,546

December 31, 2017	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	$	17,210	$	1,625	$	28	$	18,807	$	—
States, municipalities and political subdivisions	12,478		1,551		2		14,027		(11		)
Asset-backed:
Residential mortgage-backed	5,043		109		32		5,120		(27		)
Commercial mortgage-backed	1,840		46		14		1,872		—
Other asset-backed	1,083		16		5		1,094		—
Total asset-backed	7,966		171		51		8,086		(27		)
U.S. Treasury and obligations of government-sponsored enterprises	111		2		4		109		—
Foreign government	437		9		2		444		—
Redeemable preferred stock	10		1		—		11		—
Total fixed maturity securities available-for-sale	38,212		3,359		87		41,484		$	(38	)
Total fixed maturity securities trading	3		—		—		3
Equity securities available-for-sale:
Common stock	21		7		1		27
Preferred stock	638		31		1		668
Total equity securities available-for-sale	659		38		2		695
Total fixed maturity and equity securities	$	38,874	$	3,397	$	89	$	42,182

(1) As of January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The change in fair value of equity securities is now recognized through the income statement. See Note A to the Consolidated Financial Statements for additional information.

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, 2018 (1)	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	$	8,543	$	340	$	825	$	55	$	9,368	$	395
States, municipalities and political subdivisions	517		8		5		1		522		9
Asset-backed:
Residential mortgage-backed	1,932		23		1,119		34		3,051		57
Commercial mortgage-backed	728		10		397		22		1,125		32
Other asset-backed	834		21		125		3		959		24
Total asset-backed	3,494		54		1,641		59		5,135		113
U.S. Treasury and obligations of government-sponsored enterprises	21		—		19		—		40		—
Foreign government	114		2		124		2		238		4
Total	$	12,689	$	404	$	2,614	$	117	$	15,303	$	521

	Less than 12 Months				12 Months or Longer				Total
December 31, 2017	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	$	1,354	$	21	$	168	$	7	$	1,522	$	28
States, municipalities and political subdivisions	72		1		85		1		157		2
Asset-backed:
Residential mortgage-backed	1,228		5		947		27		2,175		32
Commercial mortgage-backed	403		4		212		10		615		14
Other asset-backed	248		3		18		2		266		5
Total asset-backed	1,879		12		1,177		39		3,056		51
U.S. Treasury and obligations of government-sponsored enterprises	49		2		21		2		70		4
Foreign government	166		2		4		—		170		2
Total fixed maturity securities available-for-sale	3,520		38		1,455		49		4,975		87
Equity securities available-for-sale:
Common stock	7		1		—		—		7		1
Preferred stock	93		1		—		—		93		1
Total equity securities available-for-sale	100		2		—		—		100		2
Total	$	3,620	$	40	$	1,455	$	49	$	5,075	$	89

(1) As of January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The change in fair value of equity securities is now recognized through the income statement. See Note A to the Consolidated Financial Statements for additional information.

Based on current facts and circumstances, the Company believes the unrealized losses presented in the December 31, 2018 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, 2018.

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, 2018, 2017 and 2016 for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).

Years ended December 31
(In millions)	2018			2017			2016
Beginning balance of credit losses on fixed maturity securities	$	27		$	36		$	53
Reductions for securities sold during the period	(9		)	(9		)	(16		)
Reductions for securities the Company intends to sell or more likely than not will be required to sell	—			—			(1		)
Ending balance of credit losses on fixed maturity securities	$	18		$	27		$	36

Contractual Maturity

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

December 31	2018				2017
(In millions)	Cost or Amortized Cost		Estimated Fair Value		Cost or Amortized Cost		Estimated Fair Value
Due in one year or less	$	1,350	$	1,359	$	1,135	$	1,157
Due after one year through five years	7,979		8,139		8,165		8,501
Due after five years through ten years	16,859		16,870		16,060		16,718
Due after ten years	11,893		13,174		12,852		15,108
Total	$	38,081	$	39,542	$	38,212	$	41,484

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, 2018 and 2017 was $1,982 million and $2,369 million, which includes net undistributed earnings of $153 million and $539 million. Limited partnerships comprising 60% of the total carrying value are reported on a current basis through December 31, 2018 with no reporting lag, 14% 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 65% and 71% of the carrying value as of December 31, 2018 and 2017 employ hedge fund strategies. Limited partnerships comprising 30% and 25% of the carrying value as of December 31, 2018 and 2017 were invested in private debt and equity. The remainder was 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 60% were equity related, 18% pursued a multi-strategy approach, 19% were focused on distressed investments and 3% were fixed income related as of December 31, 2018.

The ten largest limited partnership positions held totaled $876 million and $1,136 million as of December 31, 2018 and 2017. 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 2% and 3% of the aggregate partnership equity as of December 31, 2018 and 2017, and the related income reflected on the Consolidated Statements of Operations represents approximately 3%, 3% and 4% of the changes in aggregate partnership equity for the years ended December 31, 2018, 2017 and 2016.

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 Sheets. 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 as of December 31, 2018 and 2017.

There was no cash collateral provided by the Company as of December 31, 2018 or 2017. There was no cash collateral received from counterparties held as of December 31, 2018 or 2017.

The Company holds an embedded derivative on a funds withheld liability with a notional value of $172 million and $167 million as of December 31, 2018 and 2017 and a fair value of $4 million and $(3) million as of December 31, 2018 and 2017. The embedded derivative on the funds withheld liability is accounted for separately and reported with the funds withheld liability in Other liabilities on the Consolidated Balance Sheets.

Investment Commitments

As of December 31, 2018, the Company had committed approximately $574 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, 2018, the Company had mortgage loan commitments of $59 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, 2018, the Company had commitments to purchase or fund additional amounts of $230 million and sell $78 million under the terms of such securities.

Investments on Deposit

Securities with carrying values of approximately $2.5 billion and $2.6 billion were deposited by the Company’s insurance subsidiaries under requirements of regulatory authorities and others as of December 31, 2018 and 2017.

Cash and securities with carrying values of approximately $1.0 billion and $1.1 billion were deposited with financial institutions in trust accounts or as collateral for letters of credit to secure obligations with various third parties as of December 31, 2018 and 2017.