Fair Value

Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs, as defined by FASB guidance for fair value measurements and disclosures, are as follows:



Level Input:		Input Definition:
Level I		Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level II		Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.
Level III		Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The following methods, assumptions and inputs were used to determine the fair value of each class of the following assets and liabilities recorded at fair value in the consolidated balance sheets:

Cash equivalents: Cash equivalents primarily consist of highly rated money market funds with maturities of three months or less, and are purchased daily at par value with specified yield rates. Due to the high ratings and short-term nature of the funds, we designate all cash equivalents as Level I.

Fixed maturity securities, available-for-sale: Fair values of available-for-sale fixed maturity securities are based on quoted market prices, where available. These fair values are obtained primarily from third-party pricing services, which generally use Level I or Level II inputs for the determination of fair value to facilitate fair value measurements and disclosures. Level II securities primarily include corporate securities, securities from states, municipalities and political subdivisions, mortgage-backed securities, United States Government securities and certain other asset-backed securities. For securities not actively traded, the pricing services may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. We have controls in place to review the pricing services’ qualifications and procedures used to determine fair values. In addition, we periodically review the pricing services’ pricing methodologies, data sources and pricing inputs to ensure the fair values obtained are reasonable. Inputs that are often used in the valuation methodologies include, but are not limited to, broker quotes, benchmark yields, credit spreads, default rates and prepayment speeds. We also have certain fixed maturity securities, primarily corporate debt securities, that are designated Level III securities. For these securities, the valuation methodologies may incorporate broker quotes or discounted cash flow analyses using assumptions for inputs such as expected cash flows, benchmark yields, credit spreads, default rates and prepayment speeds that are not observable in the markets.

Equity securities: Fair values of equity securities are generally designated as Level I and are based on quoted market prices. For certain equity securities, quoted market prices for the identical security are not always available and the fair value is estimated by reference to similar securities for which quoted prices are available. These securities are designated Level II. We also have certain equity securities, including private equity securities, for which the fair value is estimated based on each security’s current condition and future cash flow projections. Such securities are designated Level III. The fair values of these private equity securities are generally based on either broker quotes or discounted cash flow projections using assumptions for inputs such as the weighted-average cost of capital, long-term revenue growth rates and earnings before interest, taxes, depreciation and amortization, and/or revenue multiples that are not observable in the markets.

Other invested assets, current: Other invested assets, current include securities held in rabbi trusts that are classified as trading. These securities are designated Level I securities as fair values are based on quoted market prices.

Securities lending collateral: Fair values of securities lending collateral are based on quoted market prices, where available. These fair values are obtained primarily from third-party pricing services, which generally use Level I or Level II inputs for the determination of fair value, to facilitate fair value measurements and disclosures.

Derivatives: Fair values are based on the quoted market prices by the financial institution that is the counterparty to the derivative transaction. We independently verify prices provided by the counterparties using valuation models that incorporate market observable inputs for similar derivative transactions. Derivatives are designated as Level II securities.

In addition, the following methods and assumptions were used to determine the fair value of each class of pension benefit plan assets and other benefit plan assets not defined above (see Note 10, “Retirement Benefits,” for fair values of benefit plan assets):

Mutual funds: Fair values are based on quoted market prices, which represent the net asset value, or NAV, of the shares held.

Common and collective trusts: Fair values of common/collective trusts that replicate traded money market funds are based on cost, which approximates fair value. Fair values of common/collective trusts that invest in securities are valued at the NAV of the shares held, where the trust applies fair value measurements to the underlying investments to determine the NAV.

Partnership interests: Fair values are estimated based on the plan’s proportionate share of the undistributed partners’ capital as reported in audited financial statements of the partnership.

Contract with insurance company: Fair value of the contract in the insurance company general investment account is determined by the insurance company based on the fair value of the underlying investments of the account.

Investment in DOL 103-12 trust: Fair value is based on the plan’s proportionate share of the fair value of investments held by the trust, qualified as a Department of Labor Regulation 2520.103-12 entity, or DOL 103-12 trust, as reported in the audited financial statements of the trust, where the trustee applies fair value measurements to the underlying investments of the trust.

Life insurance contracts: Fair value is based on the cash surrender value of the policies as reported by the insurer.

A summary of fair value measurements by level for assets and liabilities measured at fair value on a recurring basis at December 31, 2018 and 2017 is as follows:



	Level I		Level II			Level III		Total
December 31, 2018
Assets:
Cash equivalents	$	1,815	$	—		$	—	$	1,815
Fixed maturity securities, available-for-sale:
United States Government securities	—		416			—		416
Government sponsored securities	—		108			—		108
States, municipalities and political subdivisions, tax-exempt	—		4,785			—		4,785
Corporate securities	2		7,648			287		7,937
Residential mortgage-backed securities	—		2,744			6		2,750
Commercial mortgage-backed securities	—		67			—		67
Other securities	—		1,099			17		1,116
Total fixed maturity securities, available-for-sale	2		16,867			310		17,179
Equity securities:
Exchange traded funds	2		—			—		2
Fixed maturity mutual funds	—		557			—		557
Common equity securities	601		53			—		654
Private equity securities	—		—			313		313
Total equity securities	603		610			313		1,526
Other invested assets, current	21		—			—		21
Securities lending collateral	314		290			—		604
Derivatives	—		16			—		16
Total assets	$	2,755	$	17,783		$	623	$	21,161
Liabilities:
Derivatives	$	—	$	(17	)	$	—	$	(17	)
Total liabilities	$	—	$	(17	)	$	—	$	(17	)

December 31, 2017
Assets:
Cash equivalents	$	1,956	$	—		$	—	$	1,956
Fixed maturity securities, available-for-sale:
United States Government securities	—		645			—		645
Government sponsored securities	—		90			—		90
States, municipalities and political subdivisions, tax-exempt	—		6,035			—		6,035
Corporate securities	25		7,232			229		7,486
Residential mortgage-backed securities	—		2,534			5		2,539
Commercial mortgage-backed securities	—		79			—		79
Other securities	75		973			16		1,064
Total fixed maturity securities, available-for-sale	100		17,588			250		17,938
Equity securities:
Exchange traded funds	1,300		—			—		1,300
Fixed maturity mutual funds	—		791			—		791
Common equity securities	1,147		107			—		1,254
Private equity securities	—		—			287		287
Total equity securities	2,447		898			287		3,632
Other invested assets, current	17		—			—		17
Securities lending collateral	214		241			—		455
Derivatives	—		3			—		3
Total assets	$	4,734	$	18,730		$	537	$	24,001
Liabilities:
Derivatives	$	—	$	(21	)	$	—	$	(21	)
Total liabilities	$	—	$	(21	)	$	—	$	(21	)

A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level III inputs for the years ended December 31, 2018, 2017 and 2016 is as follows:



	Corporate Securities			Residential Mortgage- backed Securities			Commercial Mortgage- backed Securities			Other Securities			Equity Securities			Total
Year ended December 31, 2018
Beginning balance at January 1, 2018	$	229		$	5		$	—		$	16		$	287		$	537
Total gains (losses):
Recognized in net income	1			—			—			—			(229		)	(228		)
Recognized in accumulated other comprehensive loss	(5		)	—			—			—			—			(5		)
Purchases	120			2			—			18			290			430
Sales	(33		)	—			—			(1		)	(35		)	(69		)
Settlements	(88		)	(1		)	—			(10		)	—			(99		)
Transfers into Level III	65			—			—			9			—			74
Transfers out of Level III	(2		)	—			—			(15		)	—			(17		)
Ending balance at December 31, 2018	$	287		$	6		$	—		$	17		$	313		$	623
Change in unrealized losses included in net income related to assets still held at December 31, 2018	$	—		$	—		$	—		$	—		$	30		$	30

Year ended December 31, 2017
Beginning balance at January 1, 2017	$	239		$	11		$	—		$	43		$	188		$	481
Total (losses) gains:
Recognized in net income	(1		)	—			—			—			—			(1		)
Recognized in accumulated other comprehensive loss	3			—			—			—			11			14
Purchases	88			4			—			36			89			217
Sales	(48		)	(5		)	—			(1		)	(1		)	(55		)
Settlements	(64		)	(2		)	—			(7		)	—			(73		)
Transfers into Level III	15			3			—			15			—			33
Transfers out of Level III	(3		)	(6		)	—			(70		)	—			(79		)
Ending balance at December 31, 2017	$	229		$	5		$	—		$	16		$	287		$	537
Change in unrealized losses included in net income related to assets still held at December 31, 2017	$	(3	)	$	—		$	—		$	—		$	—		$	(3	)

Year ended December 31, 2016
Beginning balance at January 1, 2016	$	186		$	—		$	2		$	26		$	102		$	316
Total (losses) gains:
Recognized in net income	(3		)	—			—			—			1			(2		)
Recognized in accumulated other comprehensive loss	(2		)	—			—			(1		)	(1		)	(4		)
Purchases	170			4			—			—			223			397
Sales	(5		)	—			—			—			(137		)	(142		)
Settlements	(57		)	—			—			(1		)	—			(58		)
Transfers into Level III	7			9			—			29			—			45
Transfers out of Level III	(57		)	(2		)	(2		)	(10		)	—			(71		)
Ending balance at December 31, 2016	$	239		$	11		$	—		$	43		$	188		$	481
Change in unrealized losses included in net income related to assets still held at December 31, 2016	$	(2	)	$	—		$	—		$	—		$	—		$	(2	)

There were no individually material transfers into or out of Level III during the years ended December 31, 2018, 2017 or 2016.

Our valuation policy is determined by members of our treasury and accounting departments. Whenever possible, our policy is to obtain quoted market prices in active markets to estimate fair values for recognition and disclosure purposes. Where quoted market prices in active markets are not available, fair values are estimated using discounted cash flow analyses, broker quotes or other valuation techniques. These techniques are significantly affected by our assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs are not considered in estimating fair values. Our valuation policy is generally to obtain quoted prices for each security from third-party pricing services, which are derived through recently reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. As we are responsible for the determination of fair value, we perform analysis on the prices received from the pricing services to determine whether the prices are reasonable estimates of fair value. This analysis is performed by our internal treasury personnel who are familiar with our investment portfolios, the pricing services engaged and the valuation techniques and inputs used. Our analysis includes procedures such as a review of month-to-month price fluctuations and price comparisons to secondary pricing services. There were no adjustments to quoted market prices obtained from the pricing services during the years ended December 31, 2018, 2017 or 2016.

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. As disclosed in Note 3, “Business Acquisitions,” we completed our acquisition of America’s 1st Choice on February 15, 2018. The net assets acquired in our acquisition of America’s 1st Choice and resulting goodwill and other intangible assets were recorded at fair value primarily using Level III inputs. The majority of America’s 1st Choice assets acquired and liabilities assumed were recorded at their carrying values as of the respective date of acquisition, as their carrying values approximated their fair values due to their short-term nature. The fair values of goodwill and other intangible assets acquired in our acquisition of America’s 1st Choice were internally estimated based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets could be expected to generate in the future. We developed internal estimates for the expected cash flows and discount rate in the present value calculation. Other than the assets acquired and liabilities assumed in our acquisition of America’s 1st Choice described above, there were no other material assets or liabilities measured at fair value on a nonrecurring basis during the years ended December 31, 2018 or 2017.

In addition to the preceding disclosures on assets recorded at fair value in the consolidated balance sheets, FASB guidance also requires the disclosure of fair values for certain other financial instruments for which it is practicable to estimate fair value, whether or not such values are recognized in the consolidated balance sheets.

Non-financial instruments such as real estate, property and equipment, other current assets, deferred income taxes, intangible assets and certain financial instruments, such as policy liabilities, are excluded from the fair value disclosures. Therefore, the fair value amounts cannot be aggregated to determine our underlying economic value.

The carrying amounts reported in the consolidated balance sheets for cash, accrued investment income, premium receivables, self-funded receivables, other receivables, income taxes receivable, unearned income, accounts payable and accrued expenses, security trades pending payable, securities lending payable and certain other current liabilities approximate fair value because of the short-term nature of these items. These assets and liabilities are not listed in the table below.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument that is recorded at its carrying value on the consolidated balance sheets:

Other invested assets, long-term: Other invested assets, long-term primarily include our investments in limited partnerships, joint ventures and other non-controlled corporations, as well as the cash surrender value of corporate-owned life insurance policies. Investments in limited partnerships, joint ventures and other non-controlled corporations are carried at our share in the entities’ undistributed earnings, which approximates fair value. The carrying value of corporate-owned life insurance policies represents the cash surrender value as reported by the respective insurer, which approximates fair value.

Short-term borrowings: The fair value of our short-term borrowings is based on quoted market prices for the same or similar debt, or if no quoted market prices were available, on the current market interest rates estimated to be available to us for debt of similar terms and remaining maturities.

Long-term debt - commercial paper: The carrying amount for commercial paper approximates fair value, as the underlying instruments have variable interest rates at market value.

Long-term debt - senior unsecured notes and surplus notes: The fair values of our notes are based on quoted market prices in active markets for the same or similar debt, or, if no quoted market prices are available, on the current market observable rates estimated to be available to us for debt of similar terms and remaining maturities.

Long-term debt—convertible debentures: The fair value of our convertible debentures is based on the quoted market price in the active private market in which the convertible debentures trade.

A summary of the estimated fair values by level of each class of financial instrument that is recorded at its carrying value on our consolidated balance sheets at December 31, 2018 and 2017 are as follows:



	Carrying Value		Estimated Fair Value
			Level I		Level II		Level III		Total
December 31, 2018
Assets:
Other invested assets, long-term	$	3,726	$	—	$	—	$	3,726	$	3,726
Liabilities:
Debt:
Short-term borrowings	1,145		—		1,145		—		1,145
Commercial paper	697		—		697		—		697
Notes	17,178		—		17,145		—		17,145
Convertible debentures	191		—		1,030		—		1,030

December 31, 2017
Assets:
Other invested assets, long-term	$	3,344	$	—	$	—	$	3,344	$	3,344
Liabilities:
Debt:
Short-term borrowings	1,275		—		1,275		—		1,275
Commercial paper	804		—		804		—		804
Notes	17,593		—		18,815		—		18,815
Convertible debentures	260		—		1,216		—		1,216