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Fair Value

6 Months Ended

Jun. 30, 2023

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 collateralized loan obligation securities and 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.

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 June 30, 2023 and December 31, 2022 is as follows:


	Level I		Level II		Level III		Total
June 30, 2023
Assets:
Cash equivalents	$	6,100	$	—	$	—	$	6,100
Fixed maturity securities, available-for-sale:
United States Government securities	—		1,883		—		1,883
Government sponsored securities	—		91		—		91
Foreign government securities	—		297		—		297
States, municipalities and political subdivisions, tax-exempt	—		3,772		—		3,772
Corporate securities	—		13,222		103		13,325
Residential mortgage-backed securities	—		3,315		—		3,315
Commercial mortgage-backed securities	—		2,082		—		2,082
Other asset-backed securities	—		3,665		366		4,031
Total fixed maturity securities, available-for-sale	—		28,327		469		28,796
Equity securities:
Exchange traded funds	166		—		—		166

Common equity securities	12		19		—		31
Private equity securities	—		—		75		75
Total equity securities	178		19		75		272
Other invested assets - common equity securities	121		—		—		121
Securities lending collateral	—		2,312		—		2,312
Derivatives - other assets	—		3		—		3
Total assets	$	6,399	$	30,661	$	544	$	37,604
Liabilities:
Derivatives - other liabilities	$	—	$	(69)	$	—	$	(69)
Total liabilities	$	—	$	(69)	$	—	$	(69)

December 31, 2022
Assets:
Cash equivalents	$	3,567	$	—	$	—	$	3,567
Fixed maturity securities, available-for-sale:
United States Government securities	—		1,401		—		1,401
Government sponsored securities	—		78		—		78
Foreign government securities	—		274		—		274
States, municipalities and political subdivisions, tax-exempt	—		4,143		—		4,143
Corporate securities	—		12,392		137		12,529
Residential mortgage-backed securities	—		2,663		—		2,663
Commercial mortgage-backed securities	—		1,878		—		1,878
Other asset-backed securities	—		3,382		356		3,738
Total fixed maturity securities, available-for-sale	—		26,211		493		26,704
Equity securities:
Exchange traded funds	822		—		—		822

Common equity securities	2		41		—		43
Private equity securities	—		—		88		88
Total equity securities	824		41		88		953
Other invested assets - common equity securities	103		—		—		103
Securities lending collateral	—		2,457		—		2,457
Derivatives - other assets	—		3		—		3
Total assets	$	4,494	$	28,712	$	581	$	33,787
Liabilities:
Derivatives - other liabilities	$	—	$	(60)	$	—	$	(60)
Total liabilities	$	—	$	(60)	$	—	$	(60)

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 June 30, 2023 and 2022 is as follows:





	Corporate Securities		Residential Mortgage- backed Securities		Other Asset- backed Securities		Equity Securities		Total
Three Months Ended June 30, 2023
Beginning balance at April 1, 2023	$	142	$	—	$	390	$	78	$	610
Total gains (losses):
Recognized in net income	(2)		—		1		2		1
Recognized in accumulated other comprehensive loss	1		—		(9)		—		(8)
Purchases	2		—		7		—		9
Sales	(10)		—		(5)		(5)		(20)
Settlements	(4)		—		—		—		(4)
Transfers into Level III	—		—		6		—		6
Transfers out of Level III	(26)		—		(24)		—		(50)
Ending balance at June 30, 2023	$	103	$	—	$	366	$	75	$	544
Change in unrealized losses included in net income related to assets still held at June 30, 2023	$	—	$	—	$	—	$	1	$	1

Three Months Ended June 30, 2022
Beginning balance at April 1, 2022	$	341	$	4	$	37	$	99	$	481
Total gains (losses):
Recognized in net income	(5)		—		—		(2)		(7)

Purchases	11		—		190		11		212
Sales	(188)		—		—		(14)		(202)
Settlements	(5)		—		—		—		(5)
Transfers into Level III	14		—		—		—		14
Transfers out of Level III	(13)		(4)		(9)		—		(26)
Ending balance at June 30, 2022	$	155	$	—	$	218	$	94	$	467
Change in unrealized gains included in net income related to assets still held at June 30, 2022	$	—	$	—	$	—	$	(3)	$	(3)

A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level III inputs for the six months ended June 30, 2023 and 2022 is as follows:



	Corporate Securities		Residential Mortgage- backed Securities		Other Asset- backed Securities		Equity Securities		Total
Six Months Ended June 30, 2023
Beginning balance at January 1, 2023	$	137	$	—	$	356	$	88	$	581
Total losses:
Recognized in net income	(3)		—		1		(5)		(7)
Recognized in accumulated other comprehensive loss	2		—		(4)		—		(2)
Purchases	4		—		18		1		23
Sales	(10)		—		(11)		(9)		(30)
Settlements	(6)		—		—		—		(6)
Transfers into Level III	—		—		6		—		6
Transfers out of Level III	(21)		—		—		—		(21)
Ending balance at June 30, 2023	$	103	$	—	$	366	$	75	$	544
Change in unrealized gains included in net income related to assets still held at June 30, 2023	$	—	$	—	$	—	$	(6)	$	(6)

Six Months Ended June 30, 2022
Beginning balance at January 1, 2022	$	336	$	5	$	19	$	89	$	449
Total gains:
Recognized in net income	(4)		—		—		1		(3)
Recognized in accumulated other comprehensive loss	(2)		—		—		—		(2)
Purchases	35		—		205		20		260
Sales	(175)		—		—		(16)		(191)
Settlements	(39)		—		—		—		(39)
Transfers into Level III	14		—		—		—		14
Transfers out of Level III	(10)		(5)		(6)		—		(21)
Ending balance at June 30, 2022	$	155	$	—	$	218	$	94	$	467
Change in unrealized gains included in net income related to assets still held at June 30, 2022	$	—	$	—	$	—	$	1	$	1

There were no individually material transfers into or out of Level III during the three and six months ended June 30, 2023 or 2022.

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 and Divestitures,” we completed our acquisition of BioPlus in the first quarter of 2023 and Integra during the second quarter of 2022. The net assets acquired in our acquisitions of BioPlus and Integra and resulting goodwill and other intangible assets were recorded at fair value primarily using Level III inputs. The majority of tangible assets acquired and liabilities assumed were recorded at their carrying values as of the acquisition date, 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 acquisitions of BioPlus and Integra 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 acquisitions of BioPlus and Integra described above, there were no

material assets or liabilities measured at fair value on a nonrecurring basis during the three and six months ended June 30, 2023 or 2022.

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 six months ended June 30, 2023 or 2022.

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 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, premium receivables, self-funded receivables, other receivables, unearned income, accounts payable and accrued expenses, 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 and mortgage loans, 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. Mortgage loans are carried at amortized cost, 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. 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 June 30, 2023 and December 31, 2022 is as follows:


	Carrying Value		Estimated Fair Value
			Level I		Level II		Level III		Total
June 30, 2023
Assets:
Other invested assets	$	5,872	$	—	$	—	$	5,872	$	5,872
Liabilities:
Debt:
Short-term borrowings	265		—		265		—		265


Notes	24,859		—		22,872		—		22,872


December 31, 2022
Assets:
Other invested assets	$	5,582	$	—	$	—	$	5,582	$	5,582
Liabilities:
Debt:
Short-term borrowings	265		—		265		—		265

Notes	23,786		—		21,861		—		21,861
Convertible debentures	63		—		463		—		463

- 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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