FAIR VALUE MEASUREMENTS

The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the fair value accounting guidance hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions. The level in the fair value hierarchy within which the fair value measurement is reported is based on the lowest level input that is significant to the measurement in its entirety. The three levels of the hierarchy are as follows:


•	Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.


•	Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.


•	Level 3 - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use.

Valuation of Investments Reported at Fair Value in Financial Statements

The fair value of a financial instrument is the estimated amount at which the instrument could be exchanged in an orderly transaction between knowledgeable, unrelated, willing parties, i.e., not in a forced transaction. The estimated fair value of a financial instrument may differ from the amount that could be realized if the security was sold in an immediate sale, e.g., a forced transaction. Additionally, the valuation of investments is more subjective when markets are less liquid due to the lack of market based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur.

For investments that have quoted market prices in active markets, the Company uses the unadjusted quoted market prices as fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. The Company receives the quoted market prices from third party, nationally recognized pricing services. When quoted market prices are unavailable, the Company utilizes these pricing services to determine an estimate of fair value. The fair value estimates provided from these pricing services are included in the amount disclosed in Level 2 of the hierarchy. If quoted market prices and an estimate from a pricing service are unavailable, the Company produces an estimate of fair value based on internally developed valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level 3. The Company bases all of its estimates of fair value for assets on the bid price as it represents what a third-party market participant would be willing to pay in an arm’s length transaction.

Fixed Maturities

The Company utilized a pricing service to estimate fair value measurements for approximately 99% and 98% of its fixed maturities at December 31, 2018 and 2017, respectively. The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Additionally, the pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios.

The pricing service evaluates each asset class based on relevant market information, relevant credit information, perceived market movements and sector news. The market inputs utilized in the pricing evaluation, listed in the approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each market input depends on the asset class and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.

The pricing service utilized by the Company has indicated that it will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If the pricing service discontinues pricing an investment, the Company would be required to produce an estimate of fair value using some of the same methodologies as the pricing service but would have to make assumptions for any market-based inputs that were unavailable due to market conditions. The Company reviews the estimates of fair value provided by the pricing service and compares the estimates to the Company’s knowledge of the market to determine if the estimates obtained are representative of the prices in the market. In addition, the Company has periodic discussions with the pricing service to discuss and understand any changes in process and their responsiveness to changes occurring in the markets. The Company also monitors all monthly price changes and further evaluates any securities whose value changed more than 10% from the prior month. The Company has implemented various other processes including randomly selecting purchased or sold securities and comparing execution prices to the estimates from the pricing service as well as reviewing securities whose valuation did not change from their previous valuation (stale price review). The Company also uses a second independent pricing service to further test the primary pricing service’s valuation of the Company’s fixed maturity portfolio. These processes have not highlighted any significant issues with the fair value estimates received from the primary pricing service.

The fair value estimates of most fixed maturity investments are based on observable market information rather than market quotes. Accordingly, the estimates of fair value for such fixed maturities, other than U.S. Treasury securities, provided by the pricing service are included in the amount disclosed in Level 2 of the hierarchy. The estimated fair value of U.S. Treasury securities is included in the amount disclosed in Level 1 as the estimates are based on unadjusted market prices.

The Company also holds certain fixed maturity investments which are not priced by the pricing service and, accordingly, estimates the fair value of such fixed maturities using an internal matrix that is based on market information regarding interest rates, credit spreads and liquidity. The underlying source data for calculating the matrix of credit spreads relative to the U.S. Treasury curve are observable market-based indices that relate to corporate and high-yield fixed maturity investments. The Company includes the fair value estimates of these corporate bonds in Level 2, since all significant inputs are market observable.

While the vast majority of the Company’s fixed maturities are included in Level 2, the Company holds a number of municipal bonds and corporate bonds which are not valued by the pricing service and also estimates the fair value of these bonds using another internal pricing matrix that includes some unobservable inputs that are significant to the valuation. Due to the limited amount of observable market information, the Company includes the fair value estimates for these particular bonds in Level 3. The fair value of the fixed maturities for which the Company used this internal pricing matrix was $82 million and $127 million at December 31, 2018 and 2017, respectively. Additionally, the Company holds a small amount of other fixed maturity investments that have characteristics that make them unsuitable for matrix pricing. For these fixed maturities, the Company obtains a quote from a broker (primarily the market maker). The fair value of the fixed maturities for which the Company received a broker quote was $104 million and $77 million at December 31, 2018 and 2017, respectively. Due to the disclaimers on the quotes that indicate that the price is indicative only, the Company includes these fair value estimates in Level 3.

Equity Securities — Public Common Stock and Non-Redeemable Preferred Stock

For public common stock and non-redeemable preferred stocks, the Company receives prices from pricing services that are based on observable market transactions and includes these estimates in the amount disclosed in Level 1. When current market quotes in active markets are unavailable for certain non-redeemable preferred stocks held by the Company, the Company receives an estimate of fair value from the pricing services. The services utilize similar methodologies to price the non-redeemable preferred stocks as they do for the fixed maturities. The Company includes the fair value estimate for these non-redeemable preferred stocks in the amount disclosed in Level 2.

Other Investments

The Company holds investments in various publicly-traded securities which are reported in other investments. These investments include mutual funds and other small holdings. The $16 million and $19 million fair value of these investments at December 31, 2018 and 2017, respectively, was disclosed in Level 1. At December 31, 2018 and 2017, the Company held investments in non-public common and preferred equity securities, with fair value estimates of $36 million and $38 million, respectively, reported in other investments, where the fair value estimate is determined either internally or by an external fund manager based on recent filings, operating results, balance sheet stability, growth and other business and market sector fundamentals. Due to the significant unobservable inputs in these valuations, the Company includes the total fair value estimate for all of these investments at December 31, 2018 and 2017 in the amount disclosed in Level 3.

Other Liabilities

The Company has a put/call option that was entered into in connection with a business acquisition that allows the Company to acquire the remaining shares of the acquired company at a future date. The fair value of the put/call at December 31, 2018 was $10 million and was determined using an internal model and is based on the acquired company's financial performance, adjusted for a risk margin and discounted to present value. The Company includes the fair value estimate of the put/call in Level 3.

Fair Value Hierarchy

The following tables present the level within the fair value hierarchy at which the Company’s financial assets and financial liabilities are measured on a recurring basis. An investment transferred between levels during a period is transferred at its fair value as of the beginning of that period.



(at December 31, 2018, in millions)	Total		Level 1		Level 2		Level 3
Invested assets:
Fixed maturities
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities	$	2,064	$	2,064	$	—	$	—
Obligations of states, municipalities and political subdivisions	28,611		—		28,599		12
Debt securities issued by foreign governments	1,257		—		1,257		—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	2,573		—		2,554		19
All other corporate bonds	28,880		—		28,725		155
Redeemable preferred stock	79		3		76		—
Total fixed maturities	63,464		2,067		61,211		186
Equity securities
Public common stock	316		316		—		—
Non-redeemable preferred stock	52		30		22		—
Total equity securities	368		346		22		—
Other investments	52		16		—		36
Total	$	63,884	$	2,429	$	61,233	$	222

Other liabilities	$	10	$	—	$	—	$	10



(at December 31, 2017, in millions)	Total		Level 1		Level 2		Level 3
Invested assets:
Fixed maturities
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities	$	2,076	$	2,076	$	—	$	—
Obligations of states, municipalities and political subdivisions	30,915		—		30,910		5
Debt securities issued by foreign governments	1,509		—		1,509		—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	2,410		—		2,371		39
All other corporate bonds	25,689		11		25,518		160
Redeemable preferred stock	95		3		92		—
Total fixed maturities	62,694		2,090		60,400		204
Equity securities
Public common stock	339		339		—		—
Non-redeemable preferred stock	114		45		69		—
Total equity securities	453		384		69		—
Other investments	57		19		—		38
Total	$	63,204	$	2,493	$	60,469	$	242

During the years ended December 31, 2018 and 2017, the Company’s transfers between Level 1 and Level 2 were not significant.

The following tables present the changes in the Level 3 fair value category for the years ended December 31, 2018 and 2017.



(in millions)	Fixed Maturities			Other Investments			Total
Balance at December 31, 2017	$	204		$	38		$	242
Total realized and unrealized investment gains (losses):
Reported in net realized investment gains ⁽¹⁾	2			7			9
Reported in increases in other comprehensive income (loss)	(4		)	—			(4		)
Purchases, sales and settlements/maturities:
Purchases	146			3			149
Sales	(11		)	(12		)	(23		)
Settlements/maturities	(71		)	—			(71		)
Gross transfers into Level 3	11			—			11
Gross transfers out of Level 3	(91		)	—			(91		)
Balance at December 31, 2018	$	186		$	36		$	222
Amount of total realized investment gains (losses) for the period included in the consolidated statement of income attributable to changes in the fair value of assets still held at the reporting date	$	—		$	—		$	—

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(1)	Includes impairments on investments held at the end of the period as well as amortization on fixed maturities.

The Company also includes in Level 3 the put/call option entered into in connection with a business combination that is reported in other liabilities and had a fair value of $10 million at December 31, 2018.



(in millions)	Fixed Maturities			Other Investments			Total
Balance at December 31, 2016	$	184		$	36		$	220
Total realized and unrealized investment gains (losses):
Reported in net realized investment gains ⁽¹⁾	—			(1		)	(1		)
Reported in increases in other comprehensive income (loss)	1			3			4
Purchases, sales and settlements/maturities:
Purchases	312			—			312
Sales	(2		)	—			(2		)
Settlements/maturities	(47		)	—			(47		)
Gross transfers into Level 3	21			—			21
Gross transfers out of Level 3	(265		)	—			(265		)
Balance at December 31, 2017	$	204		$	38		$	242
Amount of total realized investment gains (losses) for the period included in the consolidated statement of income attributable to changes in the fair value of assets still held at the reporting date	$	—		$	(1	)	$	(1	)

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(1)	Includes impairments on investments held at the end of the period as well as amortization on fixed maturities.

Financial Instruments Disclosed, But Not Carried, At Fair Value

The following tables present the carrying value and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value, and the level within the fair value hierarchy at which such assets and liabilities are categorized.



(at December 31, 2018, in millions)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Short-term securities	$	3,985	$	3,985	$	632	$	3,316	$	37
Financial liabilities:
Debt	$	6,464	$	7,128	$	—	$	7,128	$	—
Commercial paper	100		100		—		100		—



(at December 31, 2017, in millions)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Short-term securities	$	4,895	$	4,895	$	1,238	$	3,622	$	35
Financial liabilities:
Debt	$	6,471	$	7,702	$	—	$	7,702	$	—
Commercial paper	100		100		—		100		—

The Company had no material assets or liabilities that were measured at fair value on a non-recurring basis during the years ended December 31, 2018 and 2017.