Fair Value

9 Months Ended

Sep. 30, 2019

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. Corporate bonds and other includes obligations of the U.S. Treasury, government-sponsored enterprises, foreign governments and redeemable preferred stock.

September 30, 2019							Total Assets/Liabilities at Fair Value
(In millions)	Level 1		Level 2		Level 3
Assets
Fixed maturity securities:
Corporate bonds and other	$	161	$	22,095	$	428	$	22,684
States, municipalities and political subdivisions	—		10,795		—		10,795
Asset-backed	—		8,784		196		8,980
Total fixed maturity securities	161		41,674		624		42,459
Equity securities:
Common stock	114		—		6		120
Non-redeemable preferred stock	52		653		16		721
Total equity securities	166		653		22		841
Short term and other	288		1,089		—		1,377
Total assets	$	615	$	43,416	$	646	$	44,677
Liabilities
Other liabilities	$	—	$	9	$	—	$	9
Total liabilities	$	—	$	9	$	—	$	9

December 31, 2018								Total Assets/Liabilities at Fair Value
(In millions)	Level 1		Level 2			Level 3
Assets
Fixed maturity securities:
Corporate bonds and other	$	196	$	19,396		$	222	$	19,814
States, municipalities and political subdivisions	—		10,748			—		10,748
Asset-backed	—		8,787			197		8,984
Total fixed maturity securities	196		38,931			419		39,546
Equity securities:
Common stock	144		—			4		148
Non-redeemable preferred stock	48		570			14		632
Total equity securities	192		570			18		780
Short term and other	216		949			—		1,165
Total assets	$	604	$	40,450		$	437	$	41,491
Liabilities
Other liabilities	$	—	$	(4	)	$	—	$	(4	)
Total liabilities	$	—	$	(4	)	$	—	$	(4	)

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)	Corporate bonds and other			States, municipalities and political subdivisions		Asset-backed			Equity securities		Total
Balance as of July 1, 2019	$	338		$	—	$	193		$	22	$	553
Total realized and unrealized investment gains (losses):
Reported in Net investment gains (losses)	—			—		—			—		—
Reported in Other comprehensive income (loss)	14			—		1			—		15
Total realized and unrealized investment gains (losses)	14			—		1			—		15
Purchases	79			—		22			—		101
Sales	—			—		—			—		—
Settlements	(3		)	—		(4		)	—		(7		)
Transfers into Level 3	—			—		—			—		—
Transfers out of Level 3	—			—		(16		)	—		(16		)
Balance as of September 30, 2019	$	428		$	—	$	196		$	22	$	646
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2019 recognized in Net income (loss) in the period	$	—		$	—	$	—		$	—	$	—
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2019 recognized in Other comprehensive income (loss) in the period	14			—		2			—		16

Level 3 (In millions)	Corporate bonds and other			States, municipalities and political subdivisions			Asset-backed			Equity securities		Total
Balance as of July 1, 2018	$	94		$	1		$	273		$	17	$	385
Total realized and unrealized investment gains (losses):
Reported in Net investment gains (losses)	—			—			(2		)	1		(1		)
Reported in Other comprehensive income (loss)	—			—			—			—		—
Total realized and unrealized investment gains (losses)	—			—			(2		)	1		(1		)
Purchases	67			—			55			—		122
Sales	—			—			—			—		—
Settlements	(3		)	(1		)	(25		)	—		(29		)
Transfers into Level 3	30			—			29			—		59
Transfers out of Level 3	—			—			(32		)	—		(32		)
Balance as of September 30, 2018	$	188		$	—		$	298		$	18	$	504
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2018 recognized in Net income (loss) in the period	$	—		$	—		$	(2	)	$	1	$	(1	)
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2018 recognized in Other comprehensive income (loss) in the period	—			—			1			—		1

Level 3 (In millions)	Corporate bonds and other			States, municipalities and political subdivisions		Asset-backed			Equity securities		Total
Balance as of January 1, 2019	$	222		$	—	$	197		$	18	$	437
Total realized and unrealized investment gains (losses):
Reported in Net investment gains (losses)	—			—		—			2		2
Reported in Other comprehensive income (loss)	34			—		8			—		42
Total realized and unrealized investment gains (losses)	34			—		8			2		44
Purchases	211			—		42			2		255
Sales	—			—		—			—		—
Settlements	(7		)	—		(12		)	—		(19		)
Transfers into Level 3	—			—		45			—		45
Transfers out of Level 3	(32		)	—		(84		)	—		(116		)
Balance as of September 30, 2019	$	428		$	—	$	196		$	22	$	646
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2019 recognized in Net income (loss) in the period	$	—		$	—	$	—		$	2	$	2
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2019 recognized in Other comprehensive income (loss) in the period	29			—		9			—		38

Level 3 (In millions)	Corporate bonds and other			States, municipalities and political subdivisions			Asset-backed			Equity securities			Total
Balance as of January 1, 2018	$	98		$	1		$	335		$	20		$	454
Total realized and unrealized investment gains (losses):
Reported in Net investment gains (losses)	(1		)	—			5			(2		)	2
Reported in Other comprehensive income (loss)	(1		)	—			(6		)	—			(7		)
Total realized and unrealized investment gains (losses)	(2		)	—			(1		)	(2		)	(5		)
Purchases	69			—			126			—			195
Sales	(5		)	—			(72		)	—			(77		)
Settlements	(7		)	(1		)	(37		)	—			(45		)
Transfers into Level 3	35			—			42			—			77
Transfers out of Level 3	—			—			(95		)	—			(95		)
Balance as of September 30, 2018	$	188		$	—		$	298		$	18		$	504
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2018 recognized in Net income (loss) in the period	$	—		$	—		$	(2	)	$	(2	)	$	(4	)
Unrealized gains (losses) on Level 3 assets and liabilities held as of September 30, 2018 recognized in Other comprehensive income (loss) in the period	(2		)	—			(2		)	—			(4		)

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.

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, 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 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.

Short Term and Other Invested Assets

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.

As of September 30, 2019 and December 31, 2018, there were approximately $55 million and $48 million 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.

Derivative Financial Investments

Level 2 investments 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 weighted average rate is calculated based on fair value.

September 30, 2019	Estimated Fair Value (In millions)		Valuation Technique(s)	Unobservable Input(s)	Range  (Weighted Average)
Fixed maturity securities	$	496	Discounted cash flow	Credit spread	1% - 6% (2%)

December 31, 2018	Estimated Fair Value (In millions)		Valuation Technique(s)	Unobservable Input(s)	Range  (Weighted Average)
Fixed maturity securities	$	228	Discounted cash flow	Credit spread	1% - 12% (3%)

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, 2019	Carrying Amount		Estimated Fair Value
(In millions)			Level 1		Level 2		Level 3		Total
Assets
Mortgage loans	$	923	$	—	$	—	$	950	$	950
Note receivable	21		—		—		21		21
Liabilities
Long term debt	$	2,678	$	—	$	2,905	$	—	$	2,905

December 31, 2018	Carrying Amount		Estimated Fair Value
(In millions)			Level 1		Level 2		Level 3		Total
Assets
Mortgage loans	$	839	$	—	$	—	$	827	$	827
Note receivable	35		—		—		35		35
Liabilities
Long term debt	$	2,680	$	—	$	2,731	$	—	$	2,731

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

The fair value of mortgage loans was 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 note receivable is included within Other assets on the Condensed Consolidated Balance Sheets.

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.