Fair Value

12 Months Ended

Dec. 31, 2011

Fair Value Disclosures [Abstract]

Fair Value

Note D. Fair Value

Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable.

Level 1 - Quoted prices for identical instruments in active markets.

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are not observable.

Prices may fall within Level 1, 2 or 3 depending upon the methodologies and inputs used to estimate fair value for each specific security. In general the Company seeks to price securities using third-party pricing services. Securities not priced by pricing services are submitted to independent brokers for valuation and, if those are not available, internally developed pricing models are used to value assets using methodologies and inputs the Company believes market participants would use to value the assets.

The Company performs control procedures over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures include i) the review of pricing service or broker pricing methodologies, ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, iii) exception reporting, where changes in price, period-over-period, are reviewed and challenged with the pricing service or broker based on exception criteria, iv) deep dives, where the Company independently validates detailed information regarding inputs and assumptions for individual securities and v) pricing validation, where prices received are compared to prices independently estimated by the Company.

Assets and Liabilities Measured at Fair Value

Assets and liabilities measured at fair value on a recurring basis are summarized below.

December 31, 2011								Total Assets/(Liabilities) at Fair Value
(In millions)	Level 1		Level 2		Level 3
Assets
Fixed maturity securities:
Corporate and other bonds	$	—	$	20,402	$	482		$	20,884
States, municipalities and political subdivisions	—		9,611		171			9,782
Asset-backed:
Residential mortgage-backed	—		5,323		452			5,775
Commercial mortgage-backed	—		1,295		59			1,354
Other asset-backed	—		612		343			955
Total asset-backed	—		7,230		854			8,084
U.S. Treasury and obligations of government-sponsored enterprises	451		42		—			493
Foreign government	92		544		—			636
Redeemable preferred stock	5		53		—			58
Total fixed maturity securities	548		37,882		1,507			39,937
Equity securities	124		113		67			304
Derivative and other financial instruments, included in Other invested assets	—		1		11			12
Short term investments	1,106		508		27			1,641
Life settlement contracts, included in Other assets	—		—		117			117
Separate account business	21		373		23			417
Total assets	$	1,799	$	38,877	$	1,752		$	42,428
Liabilities
Derivative financial instruments, included in Other liabilities	$	—	$	—	$	(1	)	$	(1	)
Total liabilities	$	—	$	—	$	(1	)	$	(1	)

December 31, 2010								Total Assets/(Liabilities) at Fair Value
(In millions)	Level 1		Level 2		Level 3
Assets
Fixed maturity securities:
Corporate and other bonds	$	—	$	20,407	$	624		$	21,031
States, municipalities and political subdivisions	—		7,623		266			7,889
Asset-backed:
Residential mortgage-backed	—		5,323		767			6,090
Commercial mortgage-backed	—		920		73			993
Other asset-backed	—		404		359			763
Total asset-backed	—		6,647		1,199			7,846
U.S. Treasury and obligations of government-sponsored enterprises	76		61		—			137
Foreign government	115		505		—			620
Redeemable preferred stock	3		48		3			54
Total fixed maturity securities	194		35,291		2,092			37,577
Equity securities	288		126		26			440
Derivative and other financial instruments, included in Other invested assets	—		—		27			27
Short term investments	1,214		974		27			2,215
Life settlement contracts, included in Other assets	—		—		129			129
Discontinued operations investments, included in Other liabilities	11		60		—			71
Separate account business	28		381		41			450
Total assets	$	1,735	$	36,832	$	2,342		$	40,909
Liabilities
Derivative financial instruments, included in Other liabilities	$	—	$	—	$	(2	)	$	(2	)
Total liabilities	$	—	$	—	$	(2	)	$	(2	)

The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2011 and 2010.

Level 3 (In millions)	Balance at January 1, 2011		Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*			Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)			Purchases		Sales			Settlements			Transfers into Level 3		Transfers out of Level 3			Balance at December 31, 2011		Unrealized gains (losses) on Level 3 assets and liabilities held at December 31, 2011 recognized in net income (loss)*
Fixed maturity securities:
Corporate and other bonds	$	624	$	(11	)	$	(1	)	$	484	$	(204	)	$	(149	)	$	79	$	(340	)	$	482	$	(12	)
States, municipalities and political subdivisions	266		—			(1		)	3		—			(92		)	—		(5		)	171		—
Asset-backed:
Residential mortgage-backed	767		(16		)	(11		)	225		(290		)	(60		)	—		(163		)	452		(6		)
Commercial mortgage-backed	73		20			(7		)	81		(27		)	—			—		(81		)	59		—
Other asset-backed	359		(9		)	5			537		(341		)	(99		)	2		(111		)	343		(5		)
Total asset-backed	1,199		(5		)	(13		)	843		(658		)	(159		)	2		(355		)	854		(11		)
Redeemable preferred stock	3		3			(3		)	—		(3		)	—			—		—			—		—
Total fixed maturity securities	2,092		(13		)	(18		)	1,330		(865		)	(400		)	81		(700		)	1,507		(23		)
Equity securities	26		(2		)	2			66		(27		)	—			5		(3		)	67		(3		)
Derivative and other financial instruments, net	25		3			—			1		(19		)	—			—		—			10		2
Short term investments	27		—			—			39		—			(29		)	—		(10		)	27		—
Life settlement contracts	129		33			—			—		—			(45		)	—		—			117		5
Separate account business	41		—			—			—		(6		)	—			—		(12		)	23		—
Total	$	2,340	$	21		$	(16	)	$	1,436	$	(917	)	$	(474	)	$	86	$	(725	)	$	1,751	$	(19	)

Level 3 (In millions)	Balance at January 1, 2010			Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) included in net income (loss)*			Net change in unrealized appreciation (depreciation) included in other comprehensive income (loss)		Purchases, sales, issuances and settlements			Transfers into Level 3		Transfers out of Level 3			Balance at December 31, 2010		Unrealized gains (losses) on Level 3 assets and liabilities held at December 31, 2010 recognized in net income (loss)*
Fixed maturity securities:
Corporate and other bonds	$	609		$	9		$	56	$	45		$	60	$	(155	)	$	624	$	(4	)
States, municipalities and political subdivisions	756			—			15		(507		)	2		—			266		—
Asset-backed:
Residential mortgage-backed	629			(10		)	15		181			—		(48		)	767		(13		)
Commercial mortgage-backed	123			10			13		(8		)	7		(72		)	73		(2		)
Other asset-backed	348			6			30		30			—		(55		)	359		(1		)
Total asset-backed	1,100			6			58		203			7		(175		)	1,199		(16		)
Redeemable preferred stock	2			6			2		(7		)	—		—			3		—
Total fixed maturity securities	2,467			21			131		(266		)	69		(330		)	2,092		(20		)
Equity securities	11			(4		)	1		17			8		(7		)	26		(5		)
Derivative and other financial instruments, net	(11		)	(1		)	—		37			—		—			25		(1		)
Short term investments	—			—			—		37			1		(11		)	27		—
Life settlement contracts	130			29			—		(30		)	—		—			129		10
Discontinued operations investments	16			—			1		(2		)	—		(15		)	—		—
Separate account business	38			—			—		3			—		—			41		—
Total	$	2,651		$	45		$	133	$	(204	)	$	78	$	(363	)	$	2,340	$	(16	)

* Net realized and unrealized gains and losses shown above are reported in Net income (loss) as follows:

Major Category of Assets and Liabilities	Consolidated Statements of Operations Line Items
Fixed maturity securities available-for-sale	Net realized investment gains (losses)
Fixed maturity securities trading	Net investment income
Equity securities	Net realized investment gains (losses)
Derivative financial instruments held in a trading portfolio	Net investment income
Derivative financial instruments not held in a trading portfolio and fair value option financial instruments	Net realized investment gains (losses)
Life settlement contracts	Other revenues

Securities shown in the Level 3 tables on the previous pages may be transferred in or out of Level 3 based on the availability of observable market information used to determine the fair value of the security. The availability of observable market information varies based on market conditions and trading volume and may cause securities to move in and out of Level 3 from reporting period to reporting period. There were no significant transfers between Level 1 and Level 2 during the years ended December 31, 2011 or 2010. The Company's policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

Valuation Methodologies and Inputs

The following section describes the valuation methodologies and relevant inputs used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instruments are generally classified.

Fixed Maturity Securities

Fixed maturity securities are valued using methodologies that model information generated by market transactions involving identical or comparable assets, as well as discounted cash flow methodologies. Common inputs include: prices from recently executed transactions of similar securities, broker/dealer quotes, benchmark yields, spreads off benchmark yields, interest rates, and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data.

Level 1 securities include highly liquid U.S. and foreign government bonds, and redeemable preferred stock, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. Securities are generally assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include tax-exempt and taxable auction rate certificates. Fair value of auction rate securities is determined utilizing a pricing model with three primary inputs. The interest rate and spread inputs are observable from like instruments while the maturity date assumption is unobservable due to the uncertain nature of principal prepayments prior to maturity.

Equity Securities

Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily non-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions, broker/dealer quotes and other pricing models utilizing market observable inputs. Level 3 securities are priced using internal models with inputs that are not market observable.

Derivative and Other Financial Instruments

Exchange traded derivatives, primarily futures, are valued using quoted market prices and are classified within Level 1 of the fair value hierarchy. Level 2 derivatives primarily include currency forwards valued using observable market forward rates. Over-the-counter derivatives, principally interest rate swaps, total return swaps, credit default swaps, equity warrants and options, are valued using inputs including broker/dealer quotes and are classified within Level 3 of the valuation hierarchy due to a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Other financial instruments consist of Level 3 securities for which the fair value option has been elected which contain embedded derivatives and are priced using either broker/dealer quotes or internal models with inputs that are not market observable.

Short Term Investments

The valuation of securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 primarily includes commercial paper, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are classified consistent with fixed maturity securities discussed above.

Life Settlement Contracts

The fair values of life settlement contracts are determined as the present value of the anticipated death benefits less anticipated premium payments based on contract terms that are distinct for each insured, as well as the Company's own assumptions for mortality, premium expense, and the rate of return that a buyer would require on the contracts, as no comparable market pricing data is available.

Separate Account Business

Separate account business includes fixed maturity securities, equities and short term investments. The valuation methodologies and inputs for these asset types have been described above.

Financial Assets and Liabilities Not Measured at Fair Value

The carrying amount and estimated fair value of the Company's financial instrument assets and liabilities which are not measured at fair value on the Consolidated Balance Sheets are listed in the table below.

December 31	2011				2010
(In millions)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets
Notes receivable for the issuance of common stock	$	22	$	22	$	26	$	26
Mortgage loans	234		247		87		86
Financial liabilities
Premium deposits and annuity contracts	$	109	$	114	$	104	$	105
Short term debt	83		84		400		411
Long term debt	2,525		2,679		2,251		2,376

The following methods and assumptions were used to estimate the fair value of these financial assets and liabilities.

The fair values of notes receivable for the issuance of common stock were estimated using discounted cash flows utilizing interest rates currently offered for obligations securitized with similar collateral.

The fair values of mortgage loans were based on the present value of the expected future cash flows discounted at the current interest rate for origination of similar quality loans.

Premium deposits and annuity contracts were valued based on cash surrender values, estimated fair values or policyholder liabilities, net of amounts ceded related to sold business.

The Company's senior notes and debentures were valued based on observable market prices. The fair value for other debt was estimated using discounted cash flows based on current incremental borrowing rates for similar borrowing arrangements.

The carrying amounts reported on the Consolidated Balance Sheets for Cash, Accrued investment income and certain other assets and other liabilities approximate fair value due to the short term nature of these items. These assets and liabilities are not listed in the table above.