Fair Value Measurements

12 Months Ended

Dec. 31, 2011

Fair Value Measurements

3. Fair Value Measurements

Fair Value Hierarchy

In accordance with 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 since 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;

· 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 for the years ended December 31, 2011 and 2010. We do not have any material liabilities carried at fair value. There were also no significant transfers between Level 1 and Level 2.

	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:
States, municipalities and political subdivisions	$	-	$	3,249	$	3	$	3,252
Convertibles and bonds with warrants attached		-		59		-		59
United States government		7		-		-		7
Government-sponsored enterprises		-		160		-		160
Foreign government		-		3		-		3
Corporate securities		-		5,280		18		5,298
Subtotal		7		8,751		21		8,779
Common equities, available for sale		2,854		-		-		2,854
Preferred equities, available for sale		-		98		4		102
Taxable fixed-maturities separate accounts		-		628		-		628
Top Hat Savings Plan		8		-		-		8
Total	$	2,869	$	9,477	$	25	$	12,371

	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:
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 table below by security type with a summary of changes in fair value for the years ended December 31, 2011 and 2010. As of December 31, 2011 and 2010, total Level 3 assets were less than 1 percent of financial assets measured at fair value.

The following tables provide changes to Level 3 securities during 2011 and 2010:

	Asset fair value measurements using significant unobservable inputs (Level 3)
(In millions)	Corporate fixed maturities			Taxable fixed maturities-  separate accounts			States, municipalities and political subdivisions fixed maturities			Preferred equities			Total
Beginning balance, January 1, 2011	$	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		16			-			-			-			16
Sales		-			-			(1	)		-			(1	)
Transfers into Level 3		10			-			-			1			11
Transfers out of Level 3		(28	)		(2	)		-			(2	)		(32	)
Ending balance, December 31, 2011	$	18		$	-		$	3		$	4		$	25

	Asset fair value measurements using significant unobservable inputs (Level 3)
(In millions)	Corporate fixed maturities			Taxable fixed maturities-  separate accounts		States, municipalities and political subdivisions fixed maturities		Preferred equities		Total
Beginning balance, January 1, 2010	$	27		$	-	$	4	$	5	$	36
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		-			-		-		-		-
Included in other comprehensive income		2			-		-		-		2
Purchases, sales, issuances, and settlements		(3	)		2		-		-		(1	)
Transfers into Level 3		4			-		-		-		4
Transfers out of Level 3		(10	)		-		-		-		(10	)
Ending balance, December 31, 2010	$	20		$	2	$	4	$	5	$	31

For the year ended December 31, 2011, three Level 3 corporate fixed-maturity securities were purchased for $16 million and three corporate fixed-maturity securities were transferred into Level 3 for $10 million. There were also six corporate fixed-maturity securities that were transferred out of Level 3 for $28 million. As a result of these purchases and transfers, corporate fixed-maturity securities decreased $2 million. There were no other significant changes to Level 3 assets during the year ended December 31, 2011.