Employee Retirement Benefits

12 Months Ended

Dec. 31, 2012

Employee Retirement Benefits [Abstract]

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 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 quarters of 2012 and 2011, we offered limited opportunities for distribution of vested balances to terminated participants in the qualified pension plan. The plan paid $2 million and $9 million to these terminated vested participants during 2012 and 2011, respectively. The qualified plan was amended to allow for distribution of vested balances to terminated participants on an ongoing basis.

We also sponsor a defined contribution plan (401(k) plan). Matching contributions totaled $9 million, $8 million and $8 million during the years 2012, 2011 and 2010, 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 $9 million at year-end 2012 and $8 million at year-end 2011, 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 nonqualified deferred compensation plan.

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
	2012		2011		2012		2011
Discount rate	4.20	%	5.10	%	3.95	%	4.75	%
Rate of compensation increase	2.75-3.25		3.50-5.50		2.75-3.25		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 0.90 percentage points for the qualified plan and by 0.80 percentage points for the SERP due to market interest rate conditions at year-end 2012. Compensation increase assumptions reflect anticipated rates of inflation, real return on wage growth and merit and promotional increases. We decreased our compensation assumption to reflect the current demographics of participants in the plans and expectations of near-term salary increases.

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

	Qualified Pension Plan						SERP
	2012		2011		2010		2012		2011		2010
Discount rate	5.10	%	5.85	%	6.10	%	4.75	%	5.55	%	6.10	%
Expected return on plan assets	7.50		7.50		8.00		n/a		n/a		n/a
Rate of compensation increase	3.50-5.50		3.50-5.50		4.00-6.00		3.50-5.50		3.50-5.50		4.00-6.00

The discount rate was decreased by 0.75 percentage points for the qualified pension plan and 0.80 percentage points for the SERP due to market interest rate conditions at the beginning of 2012. 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 assumption from 8.00 percent to 7.50 percent during 2011, which is consistent with 2012 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 in 2012 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:

(In millions)		At December 31,
		2012		2011
Change in projected benefit obligation:
Benefit obligation at January 1	$	281	$	245
Service cost		12		11
Interest cost		14		14
Actuarial loss		28		30
Benefits paid		(15)		(19)
Projected benefit obligation at December 31	$	320	$	281
Accumulated benefit obligation	$	282	$	236
Change in plan assets:
Fair value of plan assets at January 1	$	216	$	183
Actual return on plan assets		23		17
Employer contributions		14		35
Benefits paid		(15)		(19)
Fair value of plan assets at December 31	$	238	$	216
Unfunded status:
Unfunded status at December 31	$	(82)	$	(65)

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:

(In millions)		At December 31,
		2012		2011
Pension amounts recognized as other liabilities in the consolidated balance sheets:	$	(82)	$	(65)
Amounts recognized in accumulated other comprehensive income not yet recognized:
Net actuarial loss	$	100	$	86
Prior service cost		1		2
Total	$	101	$	88

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

Below 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:

(In millions)		Years ended December 31,
		2012		2011		2010
Service cost	$	12	$	11	$	10
Interest cost		14		14		14
Expected return on plan assets		(16)		(16)		(14)
Amortization of actuarial loss and prior service cost		8		4		2
Net periodic benefit cost	$	18	$	13	$	12

(In millions)		Years ended December 31,
		2012		2011		2010
Current year actuarial loss	$	20	$	30	$	0
Recognition of actuarial loss		(6)		(4)		(2)
Recognition of prior service cost		(1)		(1)		(1)
Total loss (gain) recognized in other comprehensive income	$	13	$	25	$	(3)

The total recognized in net periodic benefit cost and other comprehensive income was $31 million, $38 million and $9 million for the years ended December 31, 2012, 2011 and 2010, respectively. The increase in the amount recognized in other comprehensive income from 2010 is largely due to the decreases in discount rate and lump sum rate. The estimated costs to be amortized from AOCI into net periodic benefit cost over the next year for our plans are an  $8 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 2012 we held approximately 75 percent of our pension portfolio in domestic common equity investments, which reflect the long-term time horizon of pension obligations. The remainder of the portfolio consists of 15 percent in states, municipalities and taxable political subdivisions fixed-maturity investments and 10 percent in domestic corporate fixed-maturity investments. Our common equity portfolio consists of 22 percent in the financial sector, 19 percent in the information technology sector,13 percent in the healthcare sector ,  11 percent in the industrial sector and 10 percent in the consumer discretionary sector during 2012.  We had no additional sectors which accounted for 10 percent or more of our common equity portfolio balance at year end 2012. We had $3 million of cash on hand at December 31, 2012, 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 2013.

Investments in securities are valued based on the fair value hierarchy outlined in Note 3, Fair Value Measurements, Page 121. The following table illustrates the fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2012 and 2011. 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, 2012 and 2011. There have been no transfers between Level 1 and Level 2 for the years ended December 31, 2012 and 2011.  

(In millions)	Asset fair value measurements at December 31, 2012 using:
At December 31, 2012		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	$	-	$	36	$	-	$	36
Corporate securities		-		24		-		24
Total fixed maturities, available for sale		-		60		-		60
Common equities, available for sale		175		-		-		175
Total	$	175	$	60	$	-	$	235
(In millions)	Asset fair value measurements at December 31, 2011 using:
At December 31, 2011		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	$	-	$	34	$	-	$	34
Corporate securities		-		25		-		25
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

Our pension plan assets included 567,113 shares of the company’s common stock, which had a fair value of $22 million and $17 million at December 31, 2012 and 2011 The defined benefit pension plan did not purchase any shares of our common stock during 2012 and 2011.  No shares of our common stock were sold during 2012. During 2011, the pension plan sold 75,000 shares of the company’s common stock for a realized gain of $2 million. The company paid $1 million in cash dividends on our common stock to the pension plan in both 2012 and 2011.

We contributed  $15 million to our qualified plan during the first quarter of 2013 and expect to contribute $3 million of benefit payments from the SERP during 2013. We expect to make the following benefit payments for our qualified plan and SERP, reflecting expected future service:

(In millions)	Years ended December 31,
	2013		2014		2015		2016		2017		2018 - 2022
Expected future benefit payments	$	30	$	25	$	27	$	26	$	26	$	134