Fair Value Measurements

9 Months Ended

Sep. 30, 2011

NOTE 3 – Fair Value Measurements

Fair Value Hierarchy

In accordance with accounting guidance for fair value measurements and disclosures, we categorized our financial instruments, based on the priority of the observable and market-based data for the valuation technique used, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2010, and ultimately management determines fair value.

Financial instruments are categorized based upon the following characteristics or inputs to the valuation techniques:

·	Level 1 – Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in active markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities.

·	Level 2 – Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets and liabilities that are actively traded. This also includes pricing models for which the inputs are corroborated by market data.

·	Level 3 – Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include the following:

Quotes from brokers or other external sources that are not considered binding;

Quotes from brokers or other external sources where it cannot be determined that market participants would in fact transact for the asset or liability at the quoted price; or

Quotes from brokers or other external sources where the inputs are not deemed observable.

We conduct a thorough review of fair value hierarchy classifications on a quarterly basis. Reclassification of certain financial instruments may occur when input observability changes. As noted below in the Level 3 disclosure table, reclassifications are reported as transfers in or out of the Level 3 category as of the beginning of the quarter in which the reclassification occurred.

The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at September 30, 2011, and December 31, 2010. We do not have any material liabilities carried at fair value. There were no significant transfers between Level 1 and Level 2.

Fair Value Disclosures for Assets

(In millions)	Asset fair value measurements at September 30, 2011 using:
	Quoted prices in				Significant
	active markets for		Significant other		unobservable
	identical assets		observable inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Fixed maturities, available for sale:
States, municipalities and political subdivisions	$	-	$	3,236	$	3	$	3,239
Convertibles and bonds with warrants attached		-		69		-		69
United States government		7		-		-		7
Government-sponsored enterprises		-		217		-		217
Foreign government		-		3		-		3
Corporate securities		-		5,297		22		5,319
Subtotal		7		8,822		25		8,854
Common equities, available for sale		2,509		-		-		2,509
Preferred equities, available for sale		-		94		6		100
Taxable fixed maturities separate accounts		-		631		-		631
Top Hat Savings Plan		7		-		-		7
Total	$	2,523	$	9,547	$	31	$	12,101

(In millions)	Asset fair value measurements at December 31, 2010 using:
	Quoted prices in				Significant
	active markets for		Significant other		unobservable
	identical assets		observable inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Fixed maturities, available for sale:
States, municipalities and political subdivisions	$	-	$	3,139	$	4	$	3,143
Convertibles and bonds with warrants attached		-		69		-		69
United States government		5		-		-		5
Government-sponsored enterprises		-		200		-		200
Foreign government		-		3		-		3
Corporate securities		-		4,943		20		4,963
Subtotal		5		8,354		24		8,383
Common equities, available for sale		2,940		-		-		2,940
Preferred equities, available for sale		-		96		5		101
Taxable fixed maturities separate accounts		-		606		2		608
Top Hat Savings Plan		9		-		-		9
Total	$	2,954	$	9,056	$	31	$	12,041

Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the tables below by security type with a summary of changes in fair value as of September 30, 2011. Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value. At September 30, 2011, total fair value of assets priced with broker quotes and other non-observable market inputs for the fair value measurements and disclosures was $31 million.

The following table provides the change in Level 3 assets for the three months ended September 30, 2011. Level 3 corporate fixed-maturity securities increased by $7 million as one security was purchased for $8 million, two securities totaling $8 million were transferred into Level 2 and one security totaling $7 million was transferred into Level 3. There were no other significant changes to Level 3 assets during this period.

(In millions)	Asset fair value measurements using significant unobservable inputs (Level 3)
						States,
						municipalities and
	Corporate			Taxable fixed		political
	fixed			maturities-		subdivisions fixed			Preferred
	maturities			separate accounts		maturities			equities			Total
Beginning balance, June 30, 2011	$	15		$	-	$	4		$	7		$	26
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		-			-		-			-			-
Included in other comprehensive income		-			-		-			(1	)		(1	)
Purchases		8			-		-			-			8
Sales		-			-		(1	)		-			(1	)
Transfers into Level 3		7			-		-			-			7
Transfers out of Level 3		(8	)		-		-			-			(8	)
Ending balance, September 30, 2011	$	22		$	-	$	3		$	6		$	31

(In millions)	Asset fair value measurements using significant unobservable inputs (Level 3)
						States,
						municipalities and
	Corporate			Taxable fixed		political
	fixed			maturities-		subdivisions fixed		Preferred
	maturities			separate accounts		maturities		equities		Total
Beginning balance, June 30, 2010	$	23		$	-	$	4	$	5	$	32
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		-			-		-		-		-
Included in other comprehensive income		1			-		-		-		1
Purchases, sales, issuances, and settlements		(4	)		2		-		-		(2	)
Transfers in and/or out of Level 3		1			-		-		-		1
Ending balance, September 30, 2010	$	21		$	2	$	4	$	5	$	32

The following table provides the change in Level 3 assets for the nine months ended September 30, 2011. Level 3 corporate fixed-maturity securities increased $2 million for the nine months ended September 30, 2011. The change in corporate fixed-maturity securities resulted from the transfer of five securities totaling $20 million into Level 2, two securities totaling $7 million transferred into Level 3 and the purchase of two securities totaling $15 million. There were no other significant changes to Level 3 assets during this period.

(In millions)	Asset fair value measurements using significant unobservable inputs (Level 3)
							States,
							municipalities and
	Corporate			Taxable fixed			political
	fixed			maturities-			subdivisions fixed			Preferred
	maturities			separate accounts			maturities			equities		Total
Beginning balance, December 31, 2010	$	20		$	2		$	4		$	5	$	31
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		-			-			-			-		-
Included in other comprehensive income		-			-			-			-		-
Purchases		15			-			-			-		15
Sales		-			-			(1	)		-		(1	)
Transfers into Level 3		7			-			-			1		8
Transfers out of Level 3		(20	)		(2	)		-			-		(22	)
Ending balance, September 30, 2011	$	22		$	-		$	3		$	6	$	31

(In millions)	Asset fair value measurements using significant unobservable inputs (Level 3)
	Taxable			Taxable fixed
	fixed			maturities-		Tax-exempt fixed		Preferred
	maturities			separate accounts		maturities		equities		Total
Beginning balance, December 31, 2009	$	27		$	-	$	4	$	5	$	36
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		-			-		-		-		-
Included in other comprehensive income		1			-		-		-		1
Purchases, sales, issuances, and settlements		(2	)		2		-		-		-
Transfers in and/or out of Level 3		(5	)		-		-		-		(5	)
Ending balance, September 30, 2010	$	21		$	2	$	4	$	5	$	32

Fair Value Disclosure for Senior Debt and Life Insurance Assets and Liabilities

The disclosures below are presented to provide timely information about the effects of current market conditions on financial instruments that are not reported at fair value in our condensed consolidated financial statements.

This table summarizes the amortized cost and principal amounts of our long-term debt:

(In millions)			Book value				Principal amount
			September 30,		December 31,		September 30,		December 31,
Interest rate	Year of issue		2011		2010		2011		2010
6.900%	1998	Senior debentures, due 2028	$	28	$	28	$	28	$	28
6.920%	2005	Senior debentures, due 2028		391		391		391		391
6.125%	2004	Senior notes, due 2034		371		371		374		374
		Total	$	790	$	790	$	793	$	793

The fair value of our senior debt approximated $815 million at September 30, 2011, compared with $783 million at year-end 2010. Fair value was determined under the fair value measurements and disclosure accounting rules based on market pricing of similar debt instruments that are actively trading. Fair value can vary with macroeconomic conditions. Regardless of the fluctuations in fair value, the outstanding principal amount of our long-term debt is $793 million. None of the long-term debt is encumbered by rating triggers. Also, we have one variable rate note payable with outstanding principal amount of $104 million, which approximates fair value. The additional $55 million in short-term borrowing in the third quarter was primarily to fund share repurchases using our relatively low-cost source of borrowing.

The fair value of life policy loans outstanding principal and interest approximated $41 million, compared with amortized cost of $38 million reported in the condensed consolidated balance sheets at September 30, 2011. The fair value of life policy loans outstanding principal and interest approximated $46 million, compared with amortized cost of $40 million reported in the consolidated balance sheets at December 31, 2010.

Life reserves and liabilities for deferred annuities and other investment contracts were $1.017 billion and $930 million at September 30, 2011, and December 31, 2010, respectively. Fair value for these deferred annuities and investment contracts was $923 million and $933 million at September 30, 2011, and December 31, 2010, respectively. Fair values of liabilities associated with certain investment contracts are calculated based upon internally developed models because active, observable markets do not exist for those items. To determine the fair value, we make the following significant assumptions: (1) the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at September 30, 2011, to account for non-performance risk; (2) the rate of interest credited to policyholders is the portfolio net earned interest rate less a spread for expenses and profit; and (3) additional lapses occur when the credited interest rate is exceeded by an assumed competitor credited rate, which is a function of the risk-free rate of the economic scenario being modeled.

- 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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