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Fair Value of Financial Instruments
 6 Months Ended
Jun. 30, 2011
Notes to Financial Statements [Abstract]  
Fair Value of Financial Instruments

13. Fair Value of Financial Instruments

 

The carrying values and estimated fair values of our financial instruments (in millions) were as follows:

          As of June 30, 2011 As of December 31, 2010
          Carrying Fair Carrying Fair
          Value Value Value Value
Assets           
AFS securities:           
 Fixed maturity securities$ 70,920 $ 70,920 $ 68,030 $ 68,030
 VIEs' fixed maturity securities  593   593   584   584
 Equity securities  144   144   197   197
Trading securities  2,625   2,625   2,596   2,596
Mortgage loans on real estate  6,871   7,444   6,752   7,183
Derivative investments  1,097   1,097   1,076   1,076
Other investments  1,001   1,001   1,038   1,038
Cash and invested cash  2,912   2,912   2,741   2,741
Separate account assets  88,846   88,846   84,630   84,630
                     
Liabilities           
Future contract benefits:           
 Indexed annuity contracts embedded derivatives  (506)   (506)   (497)   (497)
 GLB reserves embedded derivatives  (278)   (278)   (408)   (408)
Other contract holder funds:           
 Remaining guaranteed interest and similar contracts  (1,156)   (1,156)   (1,119)   (1,119)
 Account values of certain investment contracts  (26,832)   (27,628)   (26,130)   (27,142)
Short-term debt (1)  (251)   (257)   (351)   (364)
Long-term debt  (5,729)   (5,858)   (5,399)   (5,512)
Reinsurance related embedded derivatives  (119)   (119)   (102)   (102)
VIEs' liabilities - derivative instruments  (198)   (198)   (209)   (209)
Other liabilities:           
 Deferred compensation plans embedded derivatives  (360)   (360)   (363)   (363)
 Credit default swaps  (7)   (7)   (16)   (16)

  • The difference between the carrying value and fair value of short-term debt as of June 30, 2011, and December 31, 2010, related to current maturities of long-term debt.

 

Valuation Methodologies and Associated Inputs for Financial Instruments Not Carried at Fair Value

 

The following discussion outlines the methodologies and assumptions used to determine the fair value of our financial instruments not carried at fair value on our Consolidated Balance Sheets. Considerable judgment is required to develop these assumptions used to measure fair value. Accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of our financial instruments.

 

Mortgage Loans on Real Estate

 

The fair value of mortgage loans on real estate is established using a discounted cash flow method based on credit rating, maturity and future income. The ratings for mortgages in good standing are based on property type, location, market conditions, occupancy, debt-service coverage, loan-to-value, quality of tenancy, borrower and payment record. The fair value for impaired mortgage loans on real estate is based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's market price or the fair value of the collateral if the loan is collateral dependent.

 

Other Investments

 

The carrying value of our assets classified as other investments approximates their fair value. Other investments include LPs and other privately held investments that are accounted for using the equity method of accounting.

 

Other Contract Holder Funds

 

Other contract holder funds include remaining guaranteed interest and similar contracts and account values of certain investment contracts. The fair value for the remaining guaranteed interest and similar contracts is estimated using discounted cash flow calculations as of the balance sheet date. These calculations are based on interest rates currently offered on similar contracts with maturities that are consistent with those remaining for the contracts being valued. As of June 30, 2011, and December 31, 2010, the remaining guaranteed interest and similar contracts carrying value approximates fair value. The fair value of the account values of certain investment contracts is based on their approximate surrender value as of the balance sheet date.

 

Short-term and Long-term Debt

 

The fair value of long-term debt is based on quoted market prices or estimated using discounted cash flow analysis determined in conjunction with our incremental borrowing rate as of the balance sheet date for similar types of borrowing arrangements where quoted prices are not available. For short-term debt, excluding current maturities of long-term debt, the carrying value approximates fair value.

 

Financial Instruments Carried at Fair Value

 

We did not have any assets or liabilities measured at fair value on a nonrecurring basis as of June 30, 2011, or December 31, 2010, and we noted no changes in our valuation methodologies between these periods.

 

The following summarizes our financial instruments carried at fair value (in millions) on a recurring basis by the fair value hierarchy levels described in “Summary of Significant Accounting Policies” in Note 1 of the 2010 Form 10-K:

            As of June 30, 2011
            Quoted            
             Prices            
            in Active            
           Markets for Significant  Significant    
            Identical ObservableUnobservable Total
             Assets  Inputs  Inputs  Fair
            (Level 1)  (Level 2)  (Level 3)  Value
Assets               
Investments:               
 Fixed maturity AFS securities:               
  Corporate bonds $ 61  $ 53,196  $ 1,573  $ 54,830
  U.S. Government bonds   235    3    2    240
  Foreign government bonds   -    498    96    594
  MBS:               
   CMOs   -    5,351    28    5,379
   MPTS   -    3,016    133    3,149
   CMBS   -    1,753    53    1,806
  ABS CDOs   -    -    126    126
  State and municipal bonds   -    3,479    -    3,479
  Hybrid and redeemable preferred securities   25    1,186    106    1,317
  VIEs' fixed maturity securities   -    593    -    593
 Equity AFS securities:               
  Banking securities   -    2    -    2
  Insurance securities   3    -    30    33
  Other financial services securities   -    9    22    31
  Other securities   34    -    44    78
 Trading securities   2    2,552    71    2,625
 Derivative investments   -    (395)    1,492    1,097
Cash and invested cash   -    2,912    -    2,912
Separate account assets   -    88,846    -    88,846
    Total assets $ 360  $ 163,001  $ 3,776  $ 167,137
                          
Liabilities               
Future contract benefits:               
 Indexed annuity contracts embedded derivatives $ -  $ -  $ (506)  $ (506)
 GLB reserves embedded derivatives   -    -    (278)    (278)
Long-term debt - interest rate swap agreements   -    (83)    -    (83)
Reinsurance related embedded derivatives   -    (119)    -    (119)
VIEs' liabilities - derivative instruments   -    -    (198)    (198)
Other liabilities:               
 Deferred compensation plans embedded derivatives   -    -    (360)    (360)
 Credit default swaps   -    -    (7)    (7)
    Total liabilities $ -  $ (202)  $ (1,349)  $ (1,551)

            As of December 31, 2010
            Quoted            
             Prices            
            in Active            
           Markets for Significant  Significant    
            Identical ObservableUnobservable Total
             Assets  Inputs  Inputs  Fair
            (Level 1)  (Level 2)  (Level 3)  Value
Assets               
Investments:               
 Fixed maturity AFS securities:               
  Corporate bonds $ 60  $ 49,864  $ 1,816  $ 51,740
  U.S. Government bonds   160    3    2    165
  Foreign government bonds   -    395    113    508
  MBS:               
   CMOs   -    5,734    23    5,757
   MPTS   -    2,985    96    3,081
   CMBS   -    1,944    109    2,053
  ABS CDOs   -    2    172    174
  State and municipal bonds   -    3,155    -    3,155
  Hybrid and redeemable preferred securities   18    1,260    119    1,397
  VIEs' fixed maturity securities   -    584    -    584
 Equity AFS securities:               
  Banking securities   -    58    -    58
  Insurance securities   3    -    34    37
  Other financial services securities   -    8    24    32
  Other securities   34    2    34    70
 Trading securities   2    2,518    76    2,596
 Derivative investments   -    (419)    1,495    1,076
Cash and invested cash   -    2,741    -    2,741
Separate account assets   -    84,630    -    84,630
    Total assets $ 277  $ 155,464  $ 4,113  $ 159,854
                          
Liabilities               
Future contract benefits:               
 Indexed annuity contracts embedded derivatives $ -  $ -  $ (497)  $ (497)
 GLB reserves embedded derivatives   -    -    (408)    (408)
Long-term debt - interest rate swap agreements   -    (55)    -    (55)
Reinsurance related embedded derivatives   -    (102)    -    (102)
VIEs' liabilities - derivative instruments   -    -    (209)    (209)
Other liabilities:               
 Deferred compensation plans embedded derivatives   -    -    (363)    (363)
 Credit default swaps   -    -    (16)    (16)
    Total liabilities $ -  $ (157)  $ (1,493)  $ (1,650)

The following summarizes changes to our financial instruments carried at fair value (in millions) and classified within Level 3 of the fair value hierarchy. This summary excludes any effect of amortization of DAC, VOBA, DSI and DFEL. The gains and losses below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.

            For the Three Months Ended June 30, 2011
                  Gains Issuances, Transfers   
               Items (Losses)  Sales,  In or   
               Included in Maturities, Out   
            Beginning in OCI Settlements, of Ending
            Fair Net and  Calls,  Level 3, Fair
            Value Income Other (1)  Net  Net (2) Value
Investments: (3)                   
 Fixed maturity AFS securities:                   
  Corporate bonds$ 1,806 $ 23 $ 33  $ (200)  $ (89) $ 1,573
  U.S. Government bonds  2   -   -    -    -   2
  Foreign government bonds  100   -   (4)    -    -   96
  MBS:                   
   CMOs  22   (1)   1    6    -   28
   MPTS  93   -   2    38    -   133
   CMBS  64   (22)   24    (12)    (1)   53
  ABS:                   
  ABS CDOs  136   -   2    (12)    -   126
  Hybrid and redeemable                    
   preferred securities  124   -   4    -    (22)   106
 Equity AFS securities:                   
  Insurance securities  28   -   -    2    -   30
  Other financial services securities  22   -   -    -    -   22
  Other securities  46   -   (2)    -    -   44
 Trading securities  71   -   4    (1)    (3)   71
 Derivative investments  1,439   62   7    (16)    -   1,492
Future contract benefits: (4)                   
 Indexed annuity contracts embedded                    
  derivatives  (528)   6   -    16    -   (506)
 GLB reserves embedded derivatives  (118)   (160)   -    -    -   (278)
VIEs' liabilities - derivative                    
 instruments (5)  (203)   5   -    -    -   (198)
Other liabilities:                   
 Deferred compensation plans embedded                   
  derivatives (6)  (357)   (5)   -    2    -   (360)
 Credit default swaps (7)  (6)   (1)   -    -    -   (7)
    Total, net$ 2,741 $ (93) $ 71  $ (177)  $ (115) $ 2,427

            For the Three Months Ended June 30, 2010
                  Gains Issuances, Transfers   
               Items (Losses)  Sales  In or   
               Included in Maturities, Out   
            Beginning in OCI Settlements, of Ending
            Fair Net and  Calls,  Level 3, Fair
            Value Income Other (1)  Net  Net (2) Value
Investments: (3)                   
 Fixed maturity AFS securities:                   
  Corporate bonds$ 2,281 $ (5) $ 21  $ (11)  $ (377) $ 1,909
  U.S. Government bonds  2   -   -    -    2   4
  Foreign government bonds  90   -   2    -    -   92
  MBS:                   
   CMOs  31   (1)   1    (1)    (1)   29
   MPTS  174   -   3    (76)    -   101
   CMBS  250   (2)   10    (17)    (122)   119
  ABS:                   
  ABS CDOs  159   -   1    (5)    1   156
  State and municipal bonds  -   -   -    20    -   20
  Hybrid and redeemable                    
   preferred securities  135   8   (12)    (38)    -   93
 Equity AFS securities:                   
  Insurance securities  30   -   (4)    -    -   26
  Other financial services securities  27   -   (4)    -    -   23
  Other securities  34   -   -    -    -   34
 Trading securities  75   -   6    (2)    (2)   77
 Derivative investments  1,281   620   5    99    -   2,005
Future contract benefits: (4)                   
 Indexed annuity contracts embedded                   
  derivatives  (457)   56   -    18    -   (383)
 GLB reserves embedded derivatives  (495)   (1,174)   -    -    -   (1,669)
VIEs' liabilities - derivative                    
 instruments (5)  (229)   (68)   -    -    -   (297)
Other liabilities:                   
 Deferred compensation plans embedded                   
  derivatives (6)  (300)   9   -    (28)    -   (319)
 Credit default swaps (7)  (44)   (17)   -    31    -   (30)
    Total, net$ 3,044 $ (574) $ 29  $ (10)  $ (499) $ 1,990

            For the Six Months Ended June 30, 2011
                  Gains  Issuances,  Transfers   
               Items (Losses) Sales, In or   
               Included in Maturities, Out   
            Beginning in OCI Settlements, of Ending
            Fair Net and  Calls,  Level 3, Fair
            Value Income Other (1)  Net  Net (2) Value
Investments: (3)                   
 Fixed maturity AFS securities:                   
  Corporate bonds$ 1,816 $ 23 $ 44  $ (221)  $ (89) $ 1,573
  U.S. Government bonds  2   -   -    -    -   2
  Foreign government bonds  113   -   3    (3)    (17)   96
  MBS:                   
   CMOs  23   (3)   3    5    -   28
   MPTS  96   -   1    36    -   133
   CMBS  109   (45)   54    (64)    (1)   53
  ABS:                   
  ABS CDOs  172   14   (9)    (51)    -   126
  Hybrid and redeemable                    
   preferred securities  119   (1)   5    -    (17)   106
 Equity AFS securities:                   
  Insurance securities  34   1   -    (5)    -   30
  Other financial services securities  24   7   (1)    (8)    -   22
  Other securities  34   -   2    6    2   44
 Trading securities  76   -   2    (3)    (4)   71
 Derivative investments  1,495   (84)   (11)    92    -   1,492
Future contract benefits: (4)                   
 Indexed annuity contracts embedded                    
  derivatives  (497)   54   -    (63)    -   (506)
 GLB reserves embedded derivatives  (408)   130   -    -    -   (278)
VIEs' liabilities - derivative                    
 instruments (5)  (209)   11   -    -    -   (198)
Other liabilities:                   
 Deferred compensation plans embedded                   
  derivatives (6)  (363)   (13)   -    16    -   (360)
 Credit default swaps (7)  (16)   2   -    7    -   (7)
    Total, net$ 2,620 $ 96 $ 93  $ (256)  $ (126) $ 2,427

            For the Six Months Ended June 30, 2010
                  Gains  Issuances,  Transfers   
               Items (Losses) Sales, In or   
               Included in Maturities, Out   
            Beginning in OCI Settlements, of Ending
            Fair Net and  Calls,  Level 3, Fair
            Value Income Other (1)  Net  Net (2) Value
Investments: (3)                   
 Fixed maturity AFS securities:                   
  Corporate bonds$ 2,070 $ (9) $ 11  $ (119)  $ (44) $ 1,909
  U.S. Government bonds  3   -   -    (1)    2   4
  Foreign government bonds  92   -   2    (3)    1   92
  MBS:                   
   CMOs  35   (2)   1    (3)    (2)   29
   MPTS  101   -   4    (4)    -   101
   CMBS  259   (2)   20    (36)    (122)   119
  ABS:                   
   CDOs  153   -   11    (11)    3   156
   CLNs  322   -   278    -    (600)   -
  State and municipal bonds  -   -   -    20    -   20
  Hybrid and redeemable                    
   preferred securities  156   3   (37)    (29)    -   93
 Equity AFS securities:                   
  Insurance securities  43   -   (4)    (13)    -   26
  Other financial services securities  22   (3)   4    -    -   23
  Other securities  23   -   -    11    -   34
 Trading securities  91   1   (10)    (5)    -   77
 Derivative investments  1,368   489   7    141    -   2,005
Future contract benefits: (4)                   
 Indexed annuity contracts embedded                   
  derivatives  (419)   15   -    21    -   (383)
 GLB reserves embedded derivatives  (676)   (993)   -    -    -   (1,669)
 VIEs' liabilities - derivative                    
  instruments (5)  -   (72)   -    -    (225)   (297)
Other liabilities:                   
 Deferred compensation plans embedded                   
  derivatives (6)  (332)   1   -    12    -   (319)
 Credit default swaps (7)  (65)   (7)   -    42    -   (30)
    Total, net$ 3,246 $ (579) $ 287  $ 23  $ (987) $ 1,990

  • The changes in fair value of the interest rate swaps are offset by an adjustment to derivative investments. See “Derivatives Instruments Designated and Qualifying as Fair Value Hedges” section in Note 6.
  • Transfers in or out of Level 3 for AFS and trading securities are displayed at amortized cost as of the beginning-of-period. For AFS and trading securities, the difference between beginning-of-period amortized cost and beginning-of-period fair value was included in OCI and earnings, respectively, in prior periods.
  • Amortization and accretion of premiums and discounts are included in net investment income on our Consolidated Statements of Income (Loss). Gains (losses) from sales, maturities, settlements and calls and OTTI are included in realized gain (loss) on our Consolidated Statements of Income (Loss).
  • Gains (losses) from sales, maturities, settlements and calls are included in realized gain (loss) on our Consolidated Statements of Income (Loss).
  • The changes in fair value of the credit default swaps and contingency forwards are included in realized gain (loss) on our Consolidated Statements of Income (Loss).
  • Deferrals and subsequent changes in fair value for the participants' investment options are reported in underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income (Loss).
  • Gains (losses) from sales, maturities, settlements and calls are included in net investment income on our Consolidated Statements of Income (Loss).

 

The following provides the components of the items included in issuances, sales, maturities, settlements, calls, net, excluding any effect of amortization of DAC, VOBA, DSI and DFEL and changes in future contract benefits, (in millions) as reported above:

 

 

            For the Three Months Ended June 30, 2011
            Issuances Sales Maturities Settlements Calls Total
Investments:                   
 Fixed maturity AFS securities:                   
  Corporate bonds$ 22 $ (125) $ -  $ (9)  $ (88) $ (200)
  MBS:                   
   CMOs  7   -   -    (1)    -   6
   MPTS  40   -   -    (2)    -   38
   CMBS  -   (9)   -    (3)    -   (12)
  ABS CDOs  -   -   -    (12)    -   (12)
 Equity AFS securities:                   
  Insurance securities  2   -   -    -    -   2
 Trading securities  -   (1)   -    -    -   (1)
 Derivative investments  107   (25)   (98)    -    -   (16)
Future contract benefits:                   
 Indexed annuity contracts embedded                    
  derivatives  (20)   -   -    36    -   16
Other liabilities:                   
 Deferred compensation plans embedded                   
  derivatives  -   -   -    2    -   2
    Total, net$ 158 $ (160) $ (98)  $ 11  $ (88) $ (177)

            For the Six Months Ended June 30, 2011
            Issuances Sales Maturities Settlements Calls Total
Investments:                   
 Fixed maturity AFS securities:                   
  Corporate bonds$ 38 $ (133) $ (1)  $ (36)  $ (89) $ (221)
  Foreign government bonds  -   (3)   -    -    -   (3)
  MBS:                   
   CMOs  8   -   -    (3)    -   5
   MPTS  40   -   -    (4)    -   36
   CMBS  -   (53)   -    (11)    -   (64)
  ABS CDOs  -   (33)   -    (18)    -   (51)
 Equity AFS securities:                   
  Insurance securities  2   (7)   -    -    -   (5)
  Other financial services securities  -   (8)   -    -    -   (8)
  Other securities  6   -   -    -    -   6
 Trading securities  -   (1)   -    (2)    -   (3)
 Derivative investments  275   (27)   (156)    -    -   92
Future contract benefits:                   
 Indexed annuity contracts embedded                    
  derivatives  (38)   -   -    (25)    -   (63)
Other liabilities:                   
 Deferred compensation plans embedded                   
  derivatives  -   -   -    16    -   16
 Credit default swaps  -   7   -    -    -   7
    Total, net$ 331 $ (258) $ (157)  $ (83)  $ (89) $ (256)

The following summarizes changes in unrealized gains (losses) included in net income, excluding any effect of amortization of DAC, VOBA, DSI and DFEL and changes in future contract benefits, related to financial instruments carried at fair value classified within Level 3 that we still held (in millions):

          For the Three For the Six
          Months Ended Months Ended
          June 30, June 30,
          2011 2010 2011 2010
Investments: (1)           
 Derivative investments$ 62 $ 599 $ (94) $ 487
Future contract benefits: (1)           
 Indexed annuity contracts embedded derivatives   -   (78)   (4)   (5)
 GLB reserves embedded derivatives   (108)   (1,130)   229   (910)
VIEs' liabilities - derivative instruments (1)  5   (68)   11   (72)
Other liabilities:           
 Deferred compensation plans embedded derivatives (2)  5   9   13   1
 Credit default swaps (3)  (1)   (26)   1   (27)
  Total, net $ (37) $ (694) $ 156 $ (526)

  • Included in realized gain (loss) on our Consolidated Statements of Income (Loss).
  • Included in underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income (Loss).
  • Included in net investment income on our Consolidated Statements of Income (Loss).

 

The following provides the components of the transfers in and out of Level 3 (in millions) as reported above:

            For the Three Months For the Three Months
            Ended June 30, 2011 Ended June 30, 2010
            Transfers Transfers    Transfers Transfers   
            In to Out of    In to Out of   
            Level 3 Level 3 Total Level 3 Level 3 Total
Investments:                 
 Fixed maturity AFS securities:                 
  Corporate bonds$ 21 $ (110) $ (89) $ 39 $ (416) $ (377)
  U.S. Government bonds  -   -   -   2   -   2
  MBS:                 
   CMOs  -   -   -   -   (1)   (1)
   CMBS  -   (1)   (1)   3   (125)   (122)
  ABS CDOs  -   -   -   1   -   1
  Hybrid and redeemable preferred                 
   securities  -   (22)   (22)   -   -   -
 Trading securities  -   (3)   (3)   -   (2)   (2)
    Total, net $ 21 $ (136) $ (115) $ 45 $ (544) $ (499)

            For the Six Months For the Six Months
            Ended June 30, 2011 Ended June 30, 2010
            Transfers Transfers    Transfers Transfers   
            In to Out of    In to Out of   
            Level 3 Level 3 Total Level 3 Level 3 Total
Investments:                 
 Fixed maturity AFS securities:                 
  Corporate bonds$ 34   (123) $ (89) $ 143   (187) $ (44)
  U.S. Government bonds  -   -   -   2   -   2
  Foreign government bonds  -   (17)   (17)   1   -   1
  MBS:                 
   CMOs  -   -   -   -   (2)   (2)
   CMBS  -   (1)   (1)   3   (125)   (122)
  ABS:                 
   CDOs  -   -   -   3   -   3
   CLNs  -   -   -   -   (600)   (600)
  Hybrid and redeemable preferred securities  4   (21)   (17)   -   -   -
 Equity AFS securities:                 
  Other securities  2   -   2   -   -   -
 Trading securities  -   (4)   (4)   -   -   -
 VIEs' liabilities - derivative instruments  -   -   -   (225)   -   (225)
    Total, net $ 40 $ (166) $ (126) $ (73) $ (914) $ (987)

For the three and six months ended June 30, 2011, our corporate bonds transfers in and out were attributable primarily to the securities' observable market information being available or no longer being available. For the three and six months ended June 30, 2010, our corporate bonds transfers in and out were attributable primarily to the securities' observable market information being available or no longer being available and the ABS CLNs transfer out of Level 3 and VIEs' liabilities – derivative instruments transfer into Level 3 were related to new accounting guidance that is discussed in Note 4 of our 2010 Form 10-K. For the three and six months ended June 30, 2011 and 2010, there were no significant transfers between Level 1 and 2 of the fair value hierarchy.