INVESTMENTS

Fixed Maturities

The amortized cost and fair value of investments in fixed maturities classified as available for sale were as follows:



	Amortized		Gross Unrealized				Fair
(at December 31, 2018, in millions)	Cost		Gains		Losses		Value
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities	$	2,076	$	4	$	16	$	2,064
Obligations of states, municipalities and political subdivisions:
Local general obligation	14,473		219		120		14,572
Revenue	9,755		172		74		9,853
State general obligation	1,329		18		13		1,334
Pre-refunded	2,772		80		—		2,852
Total obligations of states, municipalities and political subdivisions	28,329		489		207		28,611
Debt securities issued by foreign governments	1,255		7		5		1,257
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	2,557		54		38		2,573
All other corporate bonds	29,307		156		583		28,880
Redeemable preferred stock	77		2		—		79
Total	$	63,601	$	712	$	849	$	63,464



	Amortized		Gross Unrealized				Fair
(at December 31, 2017, in millions)	Cost		Gains		Losses		Value
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities	$	2,080	$	4	$	8	$	2,076
Obligations of states, municipalities and political subdivisions:
Local general obligation	13,488		444		26		13,906
Revenue	11,307		338		19		11,626
State general obligation	1,443		44		3		1,484
Pre-refunded	3,758		142		1		3,899
Total obligations of states, municipalities and political subdivisions	29,996		968		49		30,915
Debt securities issued by foreign governments	1,505		14		10		1,509
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	2,334		87		11		2,410
All other corporate bonds	25,311		478		100		25,689
Redeemable preferred stock	90		5		—		95
Total	$	61,316	$	1,556	$	178	$	62,694

The amortized cost and fair value of fixed maturities by contractual maturity follow. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



(at December 31, 2018, in millions)	Amortized Cost		Fair Value
Due in one year or less	$	4,489	$	4,505
Due after 1 year through 5 years	17,020		17,021
Due after 5 years through 10 years	17,030		16,785
Due after 10 years	22,505		22,580
	61,044		60,891
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	2,557		2,573
Total	$	63,601	$	63,464

Pre-refunded bonds of $2.85 billion and $3.90 billion at December 31, 2018 and 2017, respectively, were bonds for which states or municipalities have established irrevocable trusts, almost exclusively comprised of U.S. Treasury securities and obligations of U.S. government and government agencies and authorities. These trusts were created to fund the payment of principal and interest due under the bonds.

The Company’s fixed maturity investment portfolio at December 31, 2018 and 2017 included $2.57 billion and $2.41 billion, respectively, of residential mortgage-backed securities, which include pass-through securities and collateralized mortgage obligations (CMOs). Included in the totals at December 31, 2018 and 2017 were $859 million and $804 million, respectively, of GNMA, FNMA, FHLMC (excluding FHA project loans) and Canadian government guaranteed residential mortgage-backed pass-through securities classified as available for sale. Also included in those totals were residential CMOs classified as available for sale with a fair value of $1.71 billion and $1.61 billion at December 31, 2018 and 2017, respectively. Approximately 52% and 55% of the Company’s CMO holdings at December 31, 2018 and 2017, respectively, were guaranteed by or fully collateralized by securities issued by GNMA, FNMA or FHLMC. The weighted average credit rating of the $828 million and $717 million of non-guaranteed CMO holdings at December 31, 2018 and 2017, respectively, was “Aa1” and “A1,” respectively. The weighted average credit rating of all of the above securities was “Aaa/Aa1” and “Aa1” at December 31, 2018 and 2017, respectively.

At December 31, 2018 and 2017, the Company held commercial mortgage-backed securities (CMBS, including FHA project loans) of $1.22 billion and $1.17 billion, respectively, which are included in “All other corporate bonds” in the tables above. At December 31, 2018 and 2017, approximately $458 million and $475 million of these securities, respectively, or the loans backing such securities, contained guarantees by the U.S. government or a government-sponsored enterprise. The weighted average credit rating of the $759 million and $693 million of non-guaranteed securities at December 31, 2018 and 2017, respectively, was “Aaa” at both dates. The CMBS portfolio is supported by loans that are diversified across economic sectors and geographical areas. The weighted average credit rating of the CMBS portfolio was “Aaa” at both December 31, 2018 and 2017.

At December 31, 2018 and 2017, the Company had $367 million and $304 million, respectively, of securities on loan as part of a tri-party lending agreement.

Proceeds from sales of fixed maturities classified as available for sale were $3.55 billion, $1.85 billion and $1.42 billion in 2018, 2017 and 2016, respectively. Gross gains of $51 million, $42 million and $79 million and gross losses of $18 million, $38 million and $20 million were realized on those sales in 2018, 2017 and 2016, respectively.

At December 31, 2018 and 2017, the Company’s insurance subsidiaries had $4.23 billion and $4.41 billion, respectively, of securities on deposit at financial institutions in certain states pursuant to the respective states’ insurance regulatory requirements. Funds deposited with third parties to be used as collateral to secure various liabilities on behalf of insureds, cedants and other creditors had a fair value of $37 million and $35 million at December 31, 2018 and 2017, respectively. Other investments pledged as collateral securing outstanding letters of credit had a fair value of $1 million at both December 31, 2018 and 2017. In addition, the Company utilizes Lloyd’s trust deposits, whereby owned securities with a fair value of approximately $115 million and $37 million held by a wholly-owned subsidiary at December 31, 2018 and 2017, respectively, and $33 million held by TRV at both December 31, 2018 and 2017 were pledged into Lloyd’s trust accounts to provide a portion of the capital needed to support the Company’s obligations at Lloyd’s.

Equity Securities

The cost and fair value of investments in equity securities were as follows:



(at December 31, 2018, in millions)	Cost		Gross Gains		Gross Losses		Fair Value
Public common stock	$	338	$	2	$	24	$	316
Non-redeemable preferred stock	44		8		—		52
Total	$	382	$	10	$	24	$	368



(at December 31, 2017, in millions)	Cost		Gross Gains		Gross Losses		Fair Value
Public common stock	$	332	$	8	$	1	$	339
Non-redeemable preferred stock	108		12		6		114
Total	$	440	$	20	$	7	$	453

For the year ended December 31, 2018, the Company recognized $29 million of net losses on equity securities still held as of December 31, 2018.

Proceeds from sales of equity securities previously classified as available for sale were $765 million and $92 million in 2017 and 2016, respectively. Gross gains of $239 million and $17 million and gross losses of $3 million and $3 million were realized on those sales in 2017 and 2016, respectively.

Real Estate

The Company’s real estate investments include warehouses, office buildings and other commercial land and properties that are directly owned. The Company negotiates commercial leases with individual tenants through unrelated, licensed real estate brokers. Negotiated terms and conditions include, among others, rental rates, length of lease period and improvements to the premises to be provided by the landlord.

Proceeds from the sale of real estate investments were $74 million, $23 million and $69 million in 2018, 2017 and 2016, respectively. Gross gains of $23 million, $10 million and $7 million were realized on those sales in 2018, 2017 and 2016, respectively, and there were no gross losses. Accumulated depreciation on real estate held for investment purposes was $383 million and $364 million at December 31, 2018 and 2017, respectively.

Future minimum rental income on operating leases relating to the Company’s real estate properties is expected to be $101 million, $90 million, $77 million, $62 million and $39 million for 2019, 2020, 2021, 2022 and 2023, respectively, and $75 million for 2024 and thereafter.

Short-term Securities

The Company’s short-term securities consist of Aaa-rated registered money market funds, U.S. Treasury securities, high-quality commercial paper (primarily A1/P1) and high-quality corporate securities purchased within a year to their maturity with a combined average of 54 days to maturity at December 31, 2018. The amortized cost of these securities, which totaled $3.99 billion and $4.90 billion at December 31, 2018 and 2017, respectively, approximated their fair value.

Variable Interest Entities

Entities which do not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristic of a controlling financial interest are referred to as variable interest entities (VIE). A VIE is consolidated by the variable interest holder that is determined to have the controlling financial interest (primary beneficiary) as a result of having both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE’s capital structure, contractual terms, nature of the VIE’s operations and purpose and the Company’s relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE. The Company reassesses its VIE determination with respect to an entity on an ongoing basis.

The Company is a passive investor in limited partner equity interests issued by third party VIEs. These include certain of the Company’s investments in private equity limited partnerships, hedge funds and real estate partnerships where the Company is not related to the general partner. These investments are generally accounted for under the equity method and reported in the Company’s consolidated balance sheet as other investments unless the Company is deemed the primary beneficiary. These equity interests generally cannot be redeemed. Distributions from these investments are received by the Company as a result of liquidation of the underlying investments of the funds and/or as income distribution. The Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company’s consolidated balance sheet and any unfunded commitment. The Company considers an investment in a VIE in which it has a 20% or greater equity interest as a significant VIE. Neither the Company’s carrying amounts nor the unfunded commitments related to these significant VIE’s are material individually or in the aggregate.

Unrealized Investment Losses

The following tables summarize, for all investments in an unrealized loss position at December 31, 2018 and 2017, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position. The fair value amounts reported in the tables are estimates that are prepared using the process described in note 4. The Company also relies upon estimates of several factors in its review and evaluation of individual investments, using the process described in note 1, in determining whether such investments are other-than-temporarily impaired.



	Less than 12 months				12 months or longer				Total
(at December 31, 2018, in millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Fixed maturities
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities	$	484	$	5	$	1,011	$	11	$	1,495	$	16
Obligations of states, municipalities and political subdivisions	5,241		82		3,298		125		8,539		207
Debt securities issued by foreign governments	96		—		328		5		424		5
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	593		9		1,070		29		1,663		38
All other corporate bonds	12,622		303		6,872		280		19,494		583
Total fixed maturities	$	19,036	$	399	$	12,579	$	450	$	31,615	$	849



	Less than 12 months				12 months or longer				Total
(at December 31, 2017, in millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Fixed maturities
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities	$	1,150	$	5	$	470	$	3	$	1,620	$	8
Obligations of states, municipalities and political subdivisions	505		2		2,959		47		3,464		49
Debt securities issued by foreign governments	394		6		111		4		505		10
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	1,021		7		250		4		1,271		11
All other corporate bonds	6,062		48		1,990		52		8,052		100
Total fixed maturities	9,132		68		5,780		110		14,912		178
Equity securities
Public common stock	18		—		34		1		52		1
Non-redeemable preferred stock	3		—		56		6		59		6
Total equity securities	21		—		90		7		111		7
Total	$	9,153	$	68	$	5,870	$	117	$	15,023	$	185

At December 31, 2018, the amount of gross unrealized losses for all fixed maturity investments reported at fair value for which fair value was less than 80% of amortized cost was not significant.

Impairment Charges

Impairment charges included in net realized investment gains in the consolidated statement of income were as follows:



(for the year ended December 31, in millions)	2018		2017		2016
Fixed maturities
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities	$	—	$	—	$	—
Obligations of states, municipalities and political subdivisions	—		—		—
Debt securities issued by foreign governments	—		—		—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	—		—		—
All other corporate bonds	1		4		15
Redeemable preferred stock	—		—		—
Total fixed maturities	1		4		15
Equity securities
Public common stock	—		9		9
Non-redeemable preferred stock	—		—		3
Total equity securities	—		9		12
Other investments	—		1		2
Total	$	1	$	14	$	29

The following tables present the cumulative amount of and the changes during the year in credit losses on fixed maturities held at December 31, 2018 and 2017, that were recognized in the consolidated statement of income from other-than-temporary impairments (OTTI) and for which a portion of the OTTI was recognized in other comprehensive income (loss) in the consolidated balance sheet.



Year ended December 31, 2018 (in millions)	Cumulative OTTI Credit Losses Recognized for Securities Held, Beginning of Period		Additions for OTTI Securities Where No Credit Losses Were Previously Recognized		Additions for OTTI Securities Where Credit Losses Have Been Previously Recognized		Reductions Due to Sales/Defaults of Credit- Impaired Securities			Adjustments to Book Value of Credit- Impaired Securities due to Changes in Cash Flows		Cumulative OTTI Credit Losses Recognized for Securities Still Held, End of Period
Fixed maturities
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	$	29	$	—	$	—	$	(18	)	$	4	$	15
All other corporate bonds	46		—		—		(12		)	8		42
Total fixed maturities	$	75	$	—	$	—	$	(30	)	$	12	$	57



Year ended December 31, 2017 (in millions)	Cumulative OTTI Credit Losses Recognized for Securities Held, Beginning of Period		Additions for OTTI Securities Where No Credit Losses Were Previously Recognized		Additions for OTTI Securities Where Credit Losses Have Been Previously Recognized		Reductions Due to Sales/Defaults of Credit- Impaired Securities			Adjustments to Book Value of Credit- Impaired Securities due to Changes in Cash Flows			Cumulative OTTI Credit Losses Recognized for Securities Still Held, End of Period
Fixed maturities
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	$	31	$	—	$	—	$	—		$	(2	)	$	29
All other corporate bonds	54		—		1		(7		)	(2		)	46
Total fixed maturities	$	85	$	—	$	1	$	(7	)	$	(4	)	$	75

Concentrations and Credit Quality

Concentrations of credit risk arise from exposure to counterparties that are engaged in similar activities and have similar economic characteristics that could cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Company seeks to mitigate credit risk by actively monitoring the creditworthiness of counterparties, obtaining collateral as deemed appropriate and applying controls that include credit approvals, limits of credit exposure and other monitoring procedures.

At December 31, 2018 and 2017, other than U.S. Treasury securities and obligations of U.S. government and government agencies and authorities, the Company was not exposed to any concentration of credit risk of a single issuer greater than 5% of the Company’s shareholders’ equity.

Included in fixed maturities are below investment grade securities totaling $1.48 billion and $1.67 billion at December 31, 2018 and 2017, respectively. The Company defines its below investment grade securities as those securities rated below investment grade by external rating agencies, or the equivalent by the Company when a public rating does not exist. Such securities include below investment grade bonds that are publicly traded and certain other privately issued bonds that are classified as below investment grade loans.

Net Investment Income



(for the year ended December 31, in millions)	2018		2017		2016
Gross investment income
Fixed maturities	$	1,980	$	1,895	$	1,981
Equity securities	16		28		37
Short-term securities	92		62		29
Real estate investments	48		44		51
Other investments	377		406		242
Gross investment income	2,513		2,435		2,340
Investment expenses	39		38		38
Net investment income	$	2,474	$	2,397	$	2,302

Changes in net unrealized gains on investment securities that are included as a separate component of other comprehensive income (loss) were as follows:



(at and for the year ended December 31, in millions)	2018			2017			2016
Changes in net unrealized investment gains
Fixed maturities	$	(1,515	)	$	513		$	(915	)
Equity securities	—			(215		)	51
Other investments	(1		)	4			2
Change in net pre-tax unrealized gains on investment securities	(1,516		)	302			(862		)
Related tax expense (benefit)	(319		)	78			(303		)
Change in net unrealized gains on investment securities	(1,197		)	224			(559		)
Cumulative effect of adoption of updated accounting guidance for equity financial instruments at January 1, 2018	(22		)	—			—
Reclassification of certain tax effects from accumulated other comprehensive income at January 1, 2018	152			—			—
Balance, beginning of year	954			730			1,289
Balance, end of year	$	(113	)	$	954		$	730

The total impact of net unrealized gains on investment securities was $1.11 billion after-tax at December 31, 2017, which included the $954 million reported in accumulated other comprehensive income shown above, as well as $158 million included in retained earnings that was part of the impact of enactment of the Tax Cuts and Jobs Act of 2017 recorded in earnings.

Derivative Financial Instruments

From time to time, the Company enters into U.S. Treasury note futures contracts to modify the effective duration of specific assets within the investment portfolio. U.S. Treasury futures contracts require a daily mark-to-market and settlement with the broker. At December 31, 2018 and 2017, the Company had $0 and $400 million notional value of open U.S. Treasury futures contracts, respectively. Net realized investment gains and losses related to U.S. Treasury futures contracts in 2018, 2017 and 2016 were not significant.

The Company also sells a small amount of U.S. equity index put option contracts that are settled for cash upon their expiration or when they are rolled over. Net realized investment losses related to these derivatives in 2018, 2017 and 2016 were not significant.