Fair Value

9 Months Ended

Sep. 30, 2020

Assets and liabilities recorded at fair value in our 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 our 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, foreign 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, which 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.

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 observable market inputs for similar derivative transactions. Derivatives are designated as Level II securities. Derivatives presented within the fair value hierarchy table below are presented on a gross basis and not on a master netting basis by counterparty.

A summary of fair value measurements by level for assets and liabilities measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019 is as follows:


	Level I		Level II		Level III		Total
September 30, 2020
Assets:
Cash equivalents	$	1,764	$	—	$	—	$	1,764
Fixed maturity securities, available-for-sale:
United States Government securities	—		813		—		813
Government sponsored securities	—		81		—		81
Foreign government securities	—		292		—		292
States, municipalities and political subdivisions, tax-exempt	—		5,363		—		5,363
Corporate securities	—		10,258		313		10,571
Residential mortgage-backed securities	—		4,166		2		4,168
Commercial mortgage-backed securities	—		75		—		75
Other securities	—		1,897		5		1,902
Total fixed maturity securities, available-for-sale	—		22,945		320		23,265
Equity securities:
Exchange traded funds	2,646		—		—		2,646
Fixed maturity mutual funds	—		143		—		143
Common equity securities	197		28		—		225
Private equity securities	—		—		61		61
Total equity securities	2,843		171		61		3,075
Securities lending collateral	—		1,019		—		1,019
Derivatives	—		40		—		40
Total assets	$	4,607	$	24,175	$	381	$	29,163
Liabilities:
Derivatives	$	—	$	(1)	$	—	$	(1)
Total liabilities	$	—	$	(1)	$	—	$	(1)

December 31, 2019
Assets:
Cash equivalents	$	2,015	$	—	$	—	$	2,015
Fixed maturity securities, available-for-sale:
United States Government securities	—		525		—		525
Government sponsored securities	—		141		—		141
States, municipalities and political subdivisions, tax-exempt	—		4,851		—		4,851
Corporate securities	—		8,882		303		9,185
Residential mortgage-backed securities	—		3,730		2		3,732
Commercial mortgage-backed securities	—		86		—		86
Other securities	—		1,654		7		1,661
Total fixed maturity securities, available-for-sale	—		19,869		312		20,181
Equity securities:
Exchange traded funds	44		—		—		44
Fixed maturity mutual funds	—		643		—		643
Common equity securities	206		31		—		237
Private equity securities	—		—		85		85
Total equity securities	250		674		85		1,009
Securities lending collateral	—		353		—		353
Derivatives	—		23		—		23
Total assets	$	2,265	$	20,919	$	397	$	23,581
Liabilities:
Derivatives	$	—	$	(1)	$	—	$	(1)
Total liabilities	$	—	$	(1)	$	—	$	(1)

A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level III inputs for the three months ended September 30, 2020 and 2019 is as follows:





	Corporate Securities		Residential Mortgage- backed Securities		Other Securities		Equity Securities		Total
Three Months Ended September 30, 2020
Beginning balance at July 1, 2020	$	314	$	2	$	5	$	62	$	383
Total (losses) gains:
Recognized in net income	(1)		—		—		(3)		(4)
Recognized in accumulated other comprehensive loss	14		—		—		—		14
Purchases	5		—		—		2		7
Sales	(5)		—		—		—		(5)
Settlements	(14)		—		—		—		(14)


Ending balance at September 30, 2020	$	313	$	2	$	5	$	61	$	381
Change in unrealized losses included in net income related to assets still held at September 30, 2020	$	—	$	—	$	—	$	(3)	$	(3)

Three Months Ended September 30, 2019
Beginning balance at July 1, 2019	$	297	$	3	$	11	$	305	$	616
Total (losses) gains:
Recognized in net income	(3)		—		—		(5)		(8)
Recognized in accumulated other comprehensive loss	12		—		—		—		12
Purchases	28		—		—		25		53
Sales	(9)		—		—		(19)		(28)
Settlements	(18)		—		—		—		(18)
Transfers into Level III	4		—		—		—		4

Ending balance at September 30, 2019	$	311	$	3	$	11	$	306	$	631
Change in unrealized losses included in net income related to assets still held at September 30, 2019	$	—	$	—	$	—	$	(4)	$	(4)

A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level III inputs for the nine months ended September 30, 2020 and 2019 is as follows:


	Corporate Securities		Residential Mortgage- backed Securities		Other Securities		Equity Securities		Total
Nine Months Ended September 30, 2020
Beginning balance at January 1, 2020	$	303	$	2	$	7	$	85	$	397
Total losses:
Recognized in net income	(2)		—		—		(19)		(21)
Recognized in accumulated other comprehensive loss	(3)		—		—		—		(3)
Purchases	44		—		—		17		61
Sales	(9)		—		—		(22)		(31)
Settlements	(33)		—		(2)		—		(35)
Transfers into Level III	13		—		—		—		13

Ending balance at September 30, 2020	$	313	$	2	$	5	$	61	$	381
Change in unrealized losses included in net income related to assets still held at September 30, 2020	$	—	$	—	$	—	$	(20)	$	(20)

Nine Months Ended September 30, 2019
Beginning balance at January 1, 2019	$	287	$	6	$	17	$	313	$	623
Total (losses) gains:
Recognized in net income	(7)		—		—		(5)		(12)
Recognized in accumulated other comprehensive loss	14		—		—		—		14
Purchases	91		—		2		46		139
Sales	(11)		—		—		(48)		(59)
Settlements	(58)		(1)		(2)		—		(61)
Transfers into Level III	4		—		3		—		7
Transfers out of Level III	(9)		(2)		(9)		—		(20)
Ending balance at September 30, 2019	$	311	$	3	$	11	$	306	$	631
Change in unrealized losses included in net income related to assets still held at September 30, 2019	$	—	$	—	$	—	$	(4)	$	(4)

There were no individually material transfers into or out of Level III during the three and nine months ended September 30, 2020 or 2019.

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 Beacon on February 28, 2020. The preliminary values of net assets acquired in our acquisition of Beacon and resulting goodwill and other intangible assets were recorded at fair value primarily using Level III inputs. The majority of Beacon’s 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 preliminary fair values of goodwill and other intangible assets acquired in our acquisition of Beacon 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 Beacon described above, there were no material assets or liabilities measured at fair value on a nonrecurring basis during the three and nine months ended September 30, 2020 or 2019.

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, unobservable inputs or other valuation techniques. These techniques are significantly affected by our assumptions, including discount rates and estimates of future cash flows. The use of assumptions for unobservable inputs for the determination of fair value involves a level of judgment and uncertainty. Changes in assumptions that reasonably could have been different at the reporting date may result in a higher or lower determination of fair value. Changes in fair value measurements, if significant, may affect performance of 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 three and nine months ended September 30, 2020 or 2019.

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 our consolidated balance sheets.

Non-financial instruments such as real estate, property and equipment, other current or noncurrent 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 for cash, accrued investment income, premium receivables, self-funded receivables, other receivables, income taxes receivable/payable, 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 in our consolidated balance sheets:

Other invested assets: Other invested assets include primarily 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 September 30, 2020 and December 31, 2019 is as follows:


	Carrying Value		Estimated Fair Value
			Level I		Level II		Level III		Total
September 30, 2020
Assets:
Other invested assets	$	4,170	$	—	$	—	$	4,170	$	4,170
Liabilities:
Debt:
Short-term borrowings	150		—		150		—		150


Notes	20,574		—		23,714		—		23,714
Convertible debentures	119		—		656		—		656

December 31, 2019
Assets:
Other invested assets	$	4,258	$	—	$	—	$	4,258	$	4,258
Liabilities:
Debt:
Short-term borrowings	700		—		700		—		700
Commercial paper	400		—		400		—		400
Notes	18,840		—		20,470		—		20,470
Convertible debentures	145		—		904		—		904

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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