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84
sensitivity of the fair values of our fixed maturity securities to changes in interest rates. However, actual fair values
may differ significantly from estimates based on duration. The average duration of our investment portfolio, including
cash and cash equivalents, was approximately 4.1 years as of December 31, 2015 and 4.1 years as of December 31,
2014. Based on the duration including cash equivalents, a 1% increase in interest rates would generally decrease the
fair value of our securities by approximately $459 million.
We have also evaluated the impact on our investment income and interest expense resulting from a hypothetical
change in interest rates of 100, 200, and 300 basis points over the next twelve-month period, as reflected in the following
table. The evaluation was based on our investment portfolio and our outstanding indebtedness at December 31, 2015
and 2014. Our investment portfolio consists of cash, cash equivalents, and investment securities. The modeling technique
used to calculate the pro forma net change in pretax earnings considered the cash flows related to fixed income
investments and debt, which are subject to interest rate changes during a prospective twelve-month period. This
evaluation measures parallel shifts in interest rates and may not account for certain unpredictable events that may affect
interest income, including unexpected changes of cash flows into and out of the portfolio, changes in the asset allocation,
including shifts between taxable and tax-exempt securities, and spread changes specific to various investment categories.
In the past ten years, changes in 3 month LIBOR rates during the year have exceeded 300 basis points once, have not
changed between 200 and 300 basis points, have changed between 100 and 200 basis points two times, and have changed
by less than 100 basis points seven times.
Increase (decrease) in
pretax earnings given an
interest rate decrease of
X basis points
Increase (decrease) in
pretax earnings given an
interest rate increase of
X basis points
(300) (200) (100) 100 200 300
(in millions)
As of December 31, 2015
Investment income (a) $ (33) $ (27) $ (21) $ 41 $ 82 $ 124
Interest expense (b) 3 3 3 (3)(6)(9)
Pretax $ (30) $ (24) $ (18) $ 38 $ 76 $ 115
As of December 31, 2014
Investment income (a) $ (20) $ (15) $ (9) $ 42 $ 85 $ 128
Interest expense (b) — — — — — —
Pretax $ (20) $ (15) $ (9) $ 42 $ 85 $ 128
(a) As of December 31, 2015 and 2014, some of our investments had interest rates below 3% so the assumed
hypothetical change in pretax earnings does not reflect the full 3% point reduction.
(b) The interest rate under our senior notes is fixed. There were no borrowings outstanding under the credit agreement
at December 31, 2015 or December 31, 2014. There was $299 million outstanding under our commercial paper
program at December 31, 2015. As of December 31, 2015, our interest rate under our commercial paper program
was less than 1% so the assumed hypothetical change in pretax earnings does not reflect the full 1% point
reduction. There were no borrowings outstanding under our commercial paper program at December 31, 2014.