Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements

NOTE 4 – 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, 2011, 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:

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

o 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

o 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. We primarily base fair value for investments in equity and fixed-maturity securities (including redeemable preferred stock and assets held in separate accounts) on quoted market prices or on prices from a nationally recognized pricing vendor, an outside resource that supplies global securities pricing, dividend, corporate action and descriptive information to support fund pricing, securities operations, research and portfolio management. The company obtains and reviews the pricing service’s valuation methodologies and related inputs and validates these prices by replicating a sample across each asset class using a discounted cash flow model. When a price is not available from these sources, as in the case of securities that are not publicly traded, we determine the fair value using various inputs including quotes from independent brokers. We have generally obtained and evaluated two nonbinding quotes from brokers; our investment professionals determine our best estimate of fair value. The fair value of investments not priced by a pricing vendor is less than 1 percent of the fair value of our total investment portfolio. Reclassification of certain financial instruments may occur when input observability changes. All 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 technique used for the Level 2 fixed-maturity securities and taxable fixed maturities in separate accounts is the application of matrix pricing. The inputs used include relevant market information by asset class, trade activity of like securities, yield to maturity and economic events. All of the Level 2 fixed-maturity securities are priced by a nationally recognized pricing vendor.

The Level 2 preferred equities technique used is the application of matrix pricing. The inputs used, similar to those used by the pricing vendor for our fixed-maturity securities, include relevant market information, trade activity of like securities, yield to maturity, corporate action notices and economic events. All of the Level 2 preferred equities are priced by a nationally recognized pricing vendor.

Fair Value Disclosures for Assets

The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at September 30, 2012, and December 31, 2011. We do not have any material liabilities carried at fair value. There were no transfers between Level 1 and Level 2.

	Asset fair value measurements at September 30, 2012 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	$	-	$	3,287	$	1	$	3,288
Convertibles and bonds with warrants attached		-		31		-		31
United States government		8		-		-		8
Government-sponsored enterprises		-		116		-		116
Foreign government		-		3		-		3
Corporate securities		-		5,666		4		5,670
Subtotal		8		9,103		5		9,116
Common equities, available for sale		3,210		-		-		3,210
Preferred equities, available for sale		-		132		7		139
Taxable fixed maturities separate accounts		-		676		-		676
Top Hat Savings Plan		9		-		-		9
Total	$	3,227	$	9,911	$	12	$	13,150

	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

Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the following tables by security type with a summary of changes in fair value as of September 30, 2012. Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value in the condensed consolidated balance sheets. Assets presented in the table below were valued based primarily on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to us.

The following tables provide the change in Level 3 assets for the three months ended September 30:

	Asset fair value measurements using significant unobservable inputs (Level 3)
(In millions)	Corporate fixed maturities			States, municipalities and political subdivisions fixed maturities			Preferred equities			Total
Beginning balance, June 30, 2012	$	4		$	2		$	7		$	13
Total gains or losses (realized/unrealized):
Included in earnings		-			-			-			-
Included in other comprehensive income		-			-			-			-
Purchases		-			-			-			-
Sales		-			(1	)		-			(1	)
Transfers into Level 3					-			-			-
Transfers out of Level 3		-			-			-			-
Ending balance, September 30, 2012	$	4		$	1		$	7		$	12
Beginning balance, June 30, 2011	$	15		$	4		$	7		$	26
Total gains or losses (realized/unrealized):
Included in earnings		-			-			-			-
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

The following tables provide the change in Level 3 assets for the nine months ended September 30:

	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, December 31, 2011	$	18		$	-		$	3		$	4	$	25
Total gains or losses (realized/unrealized):
Included in earnings		-			-			-			-		-
Included in other comprehensive income		3			-			-			2		5
Purchases		-			-			-			1		1
Sales		(4	)		-			(2	)		-		(6	)
Transfers into Level 3		1			-			-			-		1
Transfers out of Level 3		(14	)		-			-			-		(14	)
Ending balance, September 30, 2012	$	4		$	-		$	1		$	7	$	12
Beginning balance, December 31, 2010	$	20		$	2		$	4		$	5	$	31
Total gains or losses (realized/unrealized):
Included in earnings		-			-			-			-		-
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

With the exception of the Level 3 reconciliation table, additional disclosure for the Level 3 category is not material.

Fair Value Disclosure for Assets and Liabilities Not Carried at Fair Value

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 book value and principal amounts of our long-term debt:

					Book value				Principal amount
(In millions)					September 30,		December 31,		September 30,		December 31,
Interest rate			Year of issue		2012		2011		2012		2011
	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 following table shows fair values of our note payable and long-term debt subject to fair value disclosure requirements:

	Note payable and long-term debt fair value disclosures at September 30, 2012 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
Note payable	$	-	$	104	$	-	$	104
6.900% senior debentures, due 2028		-		33		-		33
6.920% senior debentures, due 2028		-		472		-		472
6.125% senior notes, due 2034		-		425		-		425
Total	$	-	$	1,034	$	-	$	1,034

Fair value of the note payable is determined based upon the outstanding balance at September 30, 2012, because it is short term and tied to a variable interest rate. The note payable was classified as Level 2 as a market does not exist.

The fair value of our long-term debt approximated $814 million at year-end 2011. 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. We determine fair value for our debt the same way that corporate fixed maturities are valued in our investment portfolio. 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.

The following table shows the fair value of our life policy loans, included in other invested assets, subject to fair value disclosure requirements:

	Life insurance assets fair value disclosures at September 30, 2012 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
Life policy loans	$	-	$	-	$	49	$	49

The fair value of life policy loans outstanding principal and interest approximated $43 million at December 31, 2011. Outstanding principal and interest for these life policy loans was $37 million at September 30, 2012, and December 31, 2011. 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 as nonperformance risk is minimal; and (2) the loan repayment rate by which policyholders pay off their loan balances is in line with past experience.

The following table shows fair values of our deferred annuities and structured settlements, included in life policy and investment contract reserves, subject to fair value disclosure requirements:

	Life insurance liabilities fair value disclosures at September 30, 2012 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
Deferred annuities	$	-	$	-	$	884	$	884
Structured settlements		-		234		-		234
Total	$	-	$	234	$	884	$	1,118

The fair values for deferred annuities and structured settlements were $794 million and $208 million, respectively, at December 31, 2011. Recorded reserves for the deferred annuities and structured settlements were $1.046 billion and $1.025 billion at September 30, 2012, and December 31, 2011, respectively.

Fair values for deferred annuities 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, 2012, to account for nonperformance 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.

Determination of fair value for structured settlements assumes 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, 2012, to account for nonperformance risk.