Fair Value Measurements

3 Months Ended

Mar. 31, 2020

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019, respectively:


	March 31, 2020
	Level 1		Level 2		Level 3		Total
	(In millions)
Fixed maturity securities available for sale:
U.S. government and agencies	$	—	$	278	$	—	$	278
State and political subdivisions	—		92		—		92
Corporate debt securities	—		1,553		14		1,567
Mortgage-backed/asset-backed securities	—		63		—		63
Foreign government bonds	—		57		—		57
Preferred securities	141		163		—		304
Equity securities	627		—		1		628
Other long-term investments	59		—		—		59


Total assets	$	827	$	2,206	$	15	$	3,048


	December 31, 2019
	Level 1		Level 2		Level 3		Total
	(In millions)
Fixed maturity securities available for sale:
U.S. government and agencies	$	—	$	288	$	—	$	288
State and political subdivisions	—		93		—		93
Corporate debt securities	—		1,570		17		1,587
Mortgage-backed/asset-backed securities	—		62		—		62
Foreign government bonds	—		60		—		60
Preferred securities	65		258		—		323
Equity securities	810		—		1		811
Other long-term investments	—		—		120		120


Total assets	$	875	$	2,331	$	138	$	3,344

Our Level 2 fair value measures for preferred securities and fixed maturity securities available for sale are provided by a third-party pricing service. We utilize one firm for our preferred stock and our bond portfolios. The pricing service is a leading global provider of financial market data, analytics and related services to financial institutions. The inputs utilized in these pricing methodologies include observable measures such as benchmark yields, reported trades, broker dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including market research publications. We review the pricing methodologies for all of our Level 2 securities by obtaining an understanding of the valuation models and assumptions used by the third-party as well as independently comparing the resulting prices to other publicly available measures of fair value and internally developed models. The pricing methodologies used by the relevant third-party pricing services are as follows:

•U.S. government and agencies: These securities are valued based on data obtained for similar securities in active markets and from inter-dealer brokers.

•State and political subdivisions: These securities are valued based on data obtained for similar securities in active markets and from inter-dealer brokers. Factors considered include relevant trade information, dealer quotes and other relevant market data.

•Corporate debt securities: These securities are valued based on dealer quotes and related market trading activity. Factors considered include the bond's yield, its terms and conditions, or any other feature which may influence its risk and thus marketability, as well as relative credit information and relevant sector news.

•Foreign government bonds: These securities are valued based on a discounted cash flow model incorporating observable market inputs such as available broker quotes and yields of comparable securities.

•Mortgage-backed/asset-backed securities: These securities are comprised of commercial mortgage-backed securities, agency mortgage-backed securities, collateralized mortgage obligations and asset-backed securities. They are valued based on available trade information, dealer quotes, cash flows, relevant indices and market data for similar assets in active markets.

•Preferred securities: Preferred securities are valued by calculating the appropriate spread over a comparable U.S. Treasury security. Inputs include benchmark quotes and other relevant market data.

Our Level 3 fair value measures for our other long-term investment were provided by a third-party pricing service. We utilized one firm to value our Level 3 other long-term investment. The pricing service is a leading global provider of financial market data, analytics and related services to financial institutions. We utilized the income approach and a discounted cash flow analysis in determining the fair value of our Level 3 other long-term investment. The primary unobservable input utilized in this pricing methodology is the discount rate used which is determined based on underwriting yield, credit spreads, yields on benchmark indices and comparable public company debt. The discount rate used in our determination of the fair value of our Level 3 other long-term investment as of December 31, 2019 was a range of 6.8% - 7.4% and a weighted-average of 7.0%. Based on the total fair value of our Level 3 other long-term investment as of December 31, 2019, changes in the discount rate utilized will not result in a fair value significantly different than the amount recorded.

Our remaining Level 3 fair value measures for our equity and corporate debt securities relate to multiple investments which are considered immaterial individually and in the aggregate.

The following table presents a summary of the changes in the fair values of Level 3 assets, measured on a recurring basis, for the three-month periods ended March 31, 2020 and 2019.


	Three months ended March 31, 2020														Three months ended March 31, 2019
	Other Long-Term		Equity		Corporate Debt				Other Long-Term		Corporate Debt
	Investment		Securities		Securities		Total		Investment		Securities		Total
	(In millions)														(In millions)
Fair value, beginning balance	$	120	$	1	$	17	$	138	$	101	$	17	$	118


Transfers out of Level 3	(59)		—		—		(59)		—		(4)		(4)
Paid-in-kind dividends (1)	2		—		—		2		1		1		2
Purchases	—		—		—		—		—		5		5
Sales and maturities	—		—		—		—		—		(1)		(1)
Net valuation (loss) gain included in earnings (2)	(63)		—		(3)		(66)		5		—		5

Fair value, ending balance	$	—	$	1	$	14	$	15	$	107	$	18	$	125

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(1) Included in Interest and investment income on the Condensed Consolidated Statements of Earnings

(2) Included in Realized gains and losses, net on the Condensed Consolidated Statements of Earnings

Transfers into or out of the Level 3 fair value category occur when unobservable inputs become more or less significant to the fair value measurement or upon a change in valuation technique. For the three months ended March 31, 2020, we transferred $59 million of other long-term investments from Level 3 to Level 1 based on a change in valuation technique. For the three months ended March 31, 2019, transfers out of Level 3 are not considered material.

Substantially all of the unrealized gain (loss) on investments and other financial instruments, net (excluding investments in unconsolidated affiliates) on our Condensed Consolidated Statements of Comprehensive Income relate to fixed maturity securities which are considered Level 2 fair value measures.

The carrying amounts of short-term investments, accounts receivable and notes receivable approximate fair value due to their short-term nature and/or short time period since consummation. Additional information regarding the fair value of our investment portfolio is included in Note D. Investments.

- 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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