Employee Retirement Benefits

12 Months Ended

Dec. 31, 2011

Employee Retirement Benefits

13. Employee Retirement Benefits

We sponsor a defined benefit pension plan. During 2008, we changed the form of retirement benefit we offer some associates to a company match on contributions to a 401(k) plan from the defined benefit pension plan. We froze entry into the pension plan for new associates as of June 30, 2008, and only participants 40 years of age or older as of August 31, 2008, could elect to continue to participate. For participants who left the pension plan, benefit accruals were frozen as of August 31, 2008. For participants remaining in the pension plan, we continue to contribute to fund future benefit obligations. Benefits for the defined benefit pension plan are based on years of credited service and compensation level. Contributions are based on the prescribed method defined in the Pension Protection Act. Our pension expense is based on certain actuarial assumptions and also is composed of several components that are determined using the projected unit credit actuarial cost method. During the fourth quarter of 2011, the qualified pension plan was amended to allow for distribution of vested balances to terminated participants. The plan paid $9 million to these terminated vested participants during 2011.

We also sponsor a defined contribution plan (401(k) plan). Matching contributions totaled $8 million, $8 million and $7 million during the years 2011, 2010 and 2009, respectively. Associates who are not accruing benefits under the pension plan are eligible to receive the company match of up to 6 percent of cash compensation. We also pay all operating expenses for the 401(k) plan. Participants vest in the company match for the 401(k) plan after three years of eligible service.

We maintain a supplemental executive retirement plan (SERP) with obligations of approximately $8 million at year-end 2011 and $6 million at year-end 2010, which are included in the obligation and expense amounts. The company also makes available to a select group of associates the CFC Top Hat Savings Plan, a non-qualified deferred compensation plan. For SERP participants who left the defined benefit pension plan, SERP benefit accruals were frozen as of December 31, 2008. During 2009, the frozen accrued SERP benefit for those participants, collectively amounting to approximately $1 million, transferred to the Top Hat Savings Plan. Beginning in 2009, for these associates, the company began matching deferrals to the Top Hat Savings Plan up to the first 6 percent of an associate’s compensation that exceeds the compensation limit specified by the Internal Revenue Code of 1986, as amended. Participants vest after three years of eligible service.

Defined Benefit Pension Plan Assumptions

We evaluate our pension plan assumptions annually and update them as necessary. The weighted-average assumptions used to determine benefit obligations at December 31 follow:

	Qualified Pension Plan						SERP
	2011			2010			2011			2010
Discount rate		5.10	%		5.85	%		4.75	%		5.55	%
Rate of compensation increase		3.50-5.50			3.50-5.50			3.50-5.50			3.50-5.50

To determine the discount rate for each plan, a hypothetical diversified portfolio of actual domestic Aa rated bonds was chosen to provide payments approximately matching the plan’s expected benefit payments. A single interest rate for each plan was determined based on the anticipated yield of the constructed portfolio. Based on this analysis, we decreased the rate from the prior year by 0.75 percentage points for the qualified plan and by 0.80 percentage points for the SERP due to market interest rate conditions at year-end 2011. Compensation increase assumptions reflect anticipated rates of inflation, real return on wage growth and merit and promotional increases.

Here is a summary of the weighted-average assumptions we use to determine our net expense for the plan:

	Qualified Pension Plan									SERP
	2011			2010			2009			2011			2010			2009
Discount rate		5.85	%		6.10	%		6.00	%		5.55	%		6.10	%		6.00	%
Expected return on plan assets		7.50			8.00			8.00			n/a			n/a			n/a
Rate of compensation increase		3.50-5.50			4.00-6.00			4.00-6.00			3.50-5.50			4.00-6.00			4.00-6.00

The discount rate was decreased by 0.25 percentage points for the qualified pension plan and 0.55 percentage points for the SERP due to market interest rate conditions at the beginning of 2011. The discount rate assumptions for our benefit obligation generally track with high grade corporate bond yields chosen in our hypothetical portfolio, and yearly adjustments reflect any changes to those bond yields. We believe the expected return on plan assets is representative of the expected long-term rate of return on these assets. We reduced the return on plan assets from 8.00 percent to 7.50 percent, which is consistent with current expectations of interest rates and based partially on the fact that the plan’s common stock holdings pay dividends. We believe this rate is representative of the expected long-term rate of return on these plan assets. Our compensation increase assumptions reflect anticipated rates of inflation, real return on wage growth and merit and promotional increases.

Benefit obligation activity using an actuarial measurement date for our qualified plan and SERP at December 31 follows:

	At December 31,
(In millions)	2011			2010
Change in projected benefit obligation:
Benefit obligation at January 1	$	245		$	221
Service cost		11			10
Interest cost		14			14
Actuarial loss		30			6
Benefits paid		(19	)		(6	)
Projected benefit obligation at December 31	$	281		$	245
Accumulated benefit obligation	$	236		$	213
Change in plan assets:
Fair value of plan assets at January 1	$	183		$	144
Actual return on plan assets		17			20
Employer contributions		35			25
Benefits paid		(19	)		(6	)
Fair value of plan assets at December 31	$	216		$	183
Unfunded status:
Unfunded status at December 31	$	(65	)	$	(62	)

A reconciliation follows of the funded status for our qualified plan and SERP at the end of the measurement period to the amounts recognized in the consolidated balance sheets at December 31:

	At December 31,
(In millions)	2011			2010
Pension amounts recognized as other liabilities in the consolidated balance sheets:	$	(65	)	$	(62	)
Amounts recognized in accumulated other comprehensive income not yet recognized:
Net actuarial loss	$	86		$	60
Prior service cost		2			3
Total	$	88		$	63

The change in the amount recognized in other comprehensive income is largely due to the decrease in discount rate. We assume that 100 percent of participants will choose lump sum payments.

Here are the components of our net periodic benefit cost, as well as other changes in plan assets and benefit obligations recognized in other comprehensive income for our qualified plan and SERP at December 31:

	Years ended December 31,
(In millions)	2011			2010			2009
Service cost	$	11		$	10		$	10
Interest cost		14			14			12
Expected return on plan assets		(16	)		(14	)		(12	)
Amortization of actuarial loss and prior service cost		4			2			1
Net periodic benefit cost	$	13		$	12		$	11

	Years ended December 31,
(In millions)	2011			2010			2009
Current year actuarial loss	$	30		$	0		$	15
Recognition of actuarial loss		(4	)		(2	)		0
Recognition of prior service cost		(1	)		(1	)		(1	)
Total loss (gain) recognized in other comprehensive income	$	25		$	(3	)	$	14

The total recognized in net periodic benefit cost and other comprehensive income was $38 million, $9 million and $25 million for the years ended December 31, 2011, 2010 and 2009, respectively. The increase in the amount recognized in other comprehensive income is largely due to the decreases in discount rate and lump sum rate from prior year end. The estimated costs to be amortized from AOCI into net periodic benefit cost over the next year for our plans are a $6 million actuarial loss and a $1 million prior service cost.

Defined Benefit Pension Plan Assets

The pension plan assets are managed to maximize total return over the long term while providing sufficient liquidity and current return to satisfy the cash flow requirements of the plan. The plan’s day-to-day investment decisions are managed by our internal investment department; however, overall investment strategies are discussed with our employee benefits committee.

Excluding cash, during 2011 we allocated approximately 70 percent of our pension portfolio to highly observable domestic common equity investments, which reflect the long-term time horizon of pension obligations. The remainder of the portfolio is allocated 16 percent to states, municipalities and taxable political subdivisions fixed-maturity investments, 12 percent to domestic corporate fixed-maturity investments and 2 percent to preferred equities. Our common equity portfolio allocated 20 percent to the information technology sector, 19 percent to the financial sector and 13 percent to the healthcare sector during 2011. All remaining sectors account for 10 percent or less of the portfolio at year end 2011. We had $2 million of cash on hand at December 31, 2011, with carrying value approximating fair value. We have purchased more fixed maturities over the past several years to increase the duration of the fixed-maturity portfolio, diversify the types of credit risk and to better match our liability risks, which is consistent with our investment strategy. Our fixed-maturity bond portfolio is investment grade. The plan does not engage in derivative transactions. We do not expect to change the current allocation of pension investments for 2012.

Investments in securities are valued based on the fair value hierarchy outlined in Note 3, Fair Value Measurements, Page 123. The following table illustrates the fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2011 and 2010. The pension plan did not have any liabilities carried at fair value or any Level 3 assets at or during the years ended December 31, 2011 and 2010. There have been no transfers between Level 1 and Level 2 for the period ended December 31, 2011 and 2010.

	Asset fair value measurements at December 31, 2011 using:
(In millions)	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Fixed maturities, available for sale:
Corporate securities	$	-	$	25	$	-	$	25
States, municipalities and political subdivisions		-		34		-		34
Total fixed maturities, available for sale		-		59		-		59
Common equities, available for sale		149		-		-		149
Preferred equities, available for sale		4		-		-		4
Total	$	153	$	59	$	-	$	212
	Asset fair value measurements at December 31, 2010 using:
(In millions)	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Fixed maturities, available for sale:
Corporate securities	$	-	$	27	$	-	$	27
States, municipalities and political subdivisions		-		21		-		21
Total fixed maturities, available for sale		-		48		-		48
Common equities, available for sale		122		-		-		122
Preferred equities, available for sale		4		-		-		4
Total	$	126	$	48	$	-	$	174

Our pension plan assets included 567,113 shares of the company’s common stock, which had a fair value of $17 million at December 31, 2011. At December 31, 2010 our pension plan held 642,113 shares of the company’s common stock, which had a fair value of $20 million. The defined benefit pension plan did not purchase any shares of our common stock during 2011 and 2010. During 2011, the pension plan sold 75,000 shares of the company’s common stock for a realized gain of $2 million. No shares of our common stock were sold during 2010. The company paid $1 million in cash dividends on our common stock to the pension plan in both 2011 and 2010.

We expect to contribute $14 million to our qualified plan and $2 million to the SERP during 2012. We expect to make the following benefit payments for our qualified plan and SERP, reflecting expected future service:

	Years ended December 31,
(In millions)	2012		2013		2014		2015		2016		2017 - 2021
Expected future benefit payments	$	23	$	26	$	22	$	16	$	20	$	127