Derivative Financial Instruments

12 Months Ended

Dec. 31, 2011

Summary of Derivative Instruments [Abstract]

Derivative Financial Instruments

Note C. Derivative Financial Instruments

The Company may use derivatives in the normal course of business, primarily in an attempt to reduce its exposure to market risk (principally interest rate risk, credit risk, equity price risk and foreign currency risk) stemming from various assets and liabilities. The Company's principal objective under such strategies is to achieve the desired reduction in economic risk, even if the position does not receive hedge accounting treatment.

The Company enters into interest rate swaps, futures and commitments to purchase securities to manage interest rate risk. Credit derivatives such as credit default swaps (CDS) are entered into to modify the credit risk inherent in certain investments. The Company uses foreign currency forward contracts, primarily British pounds, Euros and Canadian dollars, to manage foreign currency risk.

In addition to the derivatives used for risk management purposes described above, the Company may also use derivatives for purposes of income enhancement. Income enhancement transactions are entered into with the intention of providing additional income or yield to a particular portfolio segment or instrument. Income enhancement transactions are limited in scope and primarily involve the sale of covered options in which the Company receives a premium in exchange for selling a call or put option.

Credit exposure associated with non-performance by the counterparties to derivative instruments is generally limited to the uncollateralized fair value of the asset related to the instruments recognized on the Consolidated Balance Sheets. The Company generally requires that all over-the-counter derivative contracts be governed by an International Swaps and Derivatives Association Master Agreement, and exchanges collateral under the terms of these agreements with its derivative investment counterparties depending on the amount of the exposure and the credit rating of the counterparty. The Company does not offset its net derivative positions against the fair value of the collateral provided. The fair value of cash collateral provided by the Company was $1 million and $2 million at December 31, 2011 and 2010. There was no cash collateral received from counterparties held at December 31, 2011 as compared to $1 million at December 31, 2010.

Derivative securities are recorded at fair value. See Note D for information regarding the fair value of derivative securities. Changes in the fair value of derivatives not associated with the trading portfolio are reported in Net realized investment gains (losses) on the Consolidated Statements of Operations. Changes in the fair value of derivatives associated with the trading portfolio are reported in Net investment income on the Consolidated Statements of Operations.

A summary of the recognized gains (losses) related to derivative financial instruments follows.

Recognized Gains (Losses)

Years ended December 31
(In millions)	2011		2010			2009
Without hedge designation
Interest rate swaps	$	—	$	—		$	61
Credit default swaps - purchased protection	—		(1		)	(47		)
Credit default swaps - sold protection	—		—			3
Total return swaps	—		—			(2		)
Futures sold, not yet purchased	—		—			21
Options written	—		—			15
Total without hedge designation	—		(1		)	51
Trading activities
Futures sold, not yet purchased	—		(1		)	(2		)
Total	$	—	$	(2	)	$	49

A summary of the aggregate contractual or notional amounts and gross estimated fair values related to derivative financial instruments reported as Other invested assets or Other liabilities on the Consolidated Balance Sheets follows. The contractual or notional amounts for derivatives are used to calculate the exchange of contractual payments under the agreements and may not be representative of the potential for gain or loss on these instruments.

Derivative Financial Instruments

December 31, 2011	Contractual/ Notional Amount		Estimated Fair Value
(In millions)			Asset		(Liability)
Without hedge designation
Credit default swaps - purchased protection	$	20	$	—	$	(1	)
Currency forwards	22		1		—
Equity warrants	4		—		—
Total	$	46	$	1	$	(1	)

December 31, 2010	Contractual/ Notional Amount		Estimated Fair Value
(In millions)			Asset		(Liability)
Without hedge designation
Credit default swaps - purchased protection	$	20	$	—	$	(2	)
Credit default swaps - sold protection	8		1		—
Currency forwards	18		—		—
Equity warrants	3		—		—
Total	$	49	$	1	$	(2	)

During the year ended December 31, 2011, new derivative transactions entered into totaled $1,073 million in notional value while derivative termination activity totaled $1,076 million. This activity was primarily attributable to interest rate futures, forward commitments for mortgage-backed securities, and foreign currency forwards. During the year ended December 31, 2010, new derivative transactions entered into totaled approximately $2.4 billion in notional value while derivative termination activity totaled approximately $2.6 billion. This activity was primarily attributable to interest rate futures and forward commitments for mortgage-backed securities.