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Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements [Abstract]

12. Fair Value of Financial Instruments

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

		As of March 31, 2012				As of December 31, 2011
		Carrying		Fair		Carrying		Fair
		Value		Value		Value		Value
Assets
AFS securities:
	Fixed maturity securities	$	76,254	$	76,254	$	75,433	$	75,433
	VIEs' fixed maturity securities		702		702		700		700
	Equity securities		126		126		139		139
Trading securities			2,650		2,650		2,675		2,675
Mortgage loans on real estate			6,938		7,542		6,942		7,608
Derivative investments			2,244		2,244		3,151		3,151
Other investments			1,043		1,043		1,069		1,069
Cash and invested cash			3,516		3,516		4,510		4,510
Separate account assets			91,088		91,088		83,477		83,477

Liabilities
Future contract benefits:
	Indexed annuity contracts embedded derivatives		(480)		(480)		(399)		(399)
	GLB reserves embedded derivatives		(1,064)		(1,064)		(2,217)		(2,217)
Other contract holder funds:
	Remaining guaranteed interest and similar contracts		(1,100)		(1,100)		(1,114)		(1,114)
	Account values of certain investment contracts		(27,707)		(30,526)		(27,468)		(30,812)
Short-term debt⁽¹⁾			(300)		(306)		(300)		(309)
Long-term debt			(5,606)		(5,543)		(5,391)		(5,345)
Reinsurance related embedded derivatives			(158)		(158)		(168)		(168)
VIEs' liabilities - derivative instruments			(221)		(221)		(291)		(291)
Other liabilities:
	Deferred compensation plans		(375)		(375)		(354)		(354)
	Credit default swaps		(10)		(10)		(16)		(16)

The difference between the carrying value and fair value of short-term debt as of March 31, 2012, and December 31, 2011, 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 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. The inputs used to measure the fair value of our mortgage loans on real estate are classified as Level 2 within the fair value hierarchy.

Other Investments

The carrying value of our assets classified as other investments approximates fair value. Other investments include LPs and other privately held investments that are accounted for using the equity method of accounting and the carrying value is based on our proportional share of the net assets of the LPs. The inputs used to measure the fair value of our other investments are classified as Level 3 within the fair value hierarchy.

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 March 31, 2012, and December 31, 2011, the remaining guaranteed interest and similar contracts carrying value approximated 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. The inputs used to measure the fair value of our other contract holder funds are classified as Level 3 within the fair value hierarchy.

Short-Term and Long-Term Debt

The fair value of long-term debt is based on quoted market prices. For short-term debt, excluding current maturities of long-term debt, the carrying value approximates fair value. The inputs used to measure the fair value of our short-term and long-term debt are classified as Level 2 within the fair value hierarchy.

Financial Instruments Carried at Fair Value

We did not have any assets or liabilities measured at fair value on a nonrecurring basis as of March 31, 2012, or December 31, 2011, 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 our 2011 Form 10-K:

					As of March 31, 2012
					Quoted
					Prices
					in Active
				Markets for				Significant			Significant
					Identical		Observable			Unobservable			Total
					Assets			Inputs			Inputs		Fair
					(Level 1)			(Level 2)			(Level 3)		Value
Assets
Investments:
	Fixed maturity AFS securities:
		Corporate bonds			$	64		$	58,603		$	1,932	$	60,599
		U.S. Government bonds				452			33			1		486
		Foreign government bonds				-			551			99		650
		RMBS				-			7,474			98		7,572
		CMBS				-			1,491			32		1,523
		CDOs				-			-			102		102
		State and municipal bonds				-			4,126			-		4,126
		Hybrid and redeemable preferred securities				20			1,060			116		1,196
	VIEs' fixed maturity securities					106			596			-		702
	Equity AFS securities					36			29			61		126
	Trading securities					2			2,580			68		2,650
	Derivative investments					-			207			2,037		2,244
Cash and invested cash						-			3,516			-		3,516
Separate account assets						-			91,088			-		91,088
			Total assets		$	680		$	171,354		$	4,546	$	176,580

Liabilities
Future contract benefits:
	Indexed annuity contracts embedded derivatives				$	-		$	-		$	(480)	$	(480)
	GLB reserves embedded derivatives					-			-			(1,064)		(1,064)
Long-term debt						-			(1,088)			-		(1,088)
Reinsurance related embedded derivatives						-			(158)			-		(158)
VIEs' liabilities - derivative instruments						-			-			(221)		(221)
Other liabilities:
	Deferred compensation plans					-			-			(375)		(375)
	Credit default swaps					-			-			(10)		(10)
			Total liabilities		$	-		$	(1,246)		$	(2,150)	$	(3,396)

					As of December 31, 2011
					Quoted
					Prices
					in Active
				Markets for				Significant			Significant
					Identical		Observable			Unobservable			Total
					Assets			Inputs			Inputs		Fair
					(Level 1)			(Level 2)			(Level 3)		Value
Assets
Investments:
	Fixed maturity AFS securities:
		Corporate bonds			$	63		$	57,310		$	1,888	$	59,261
		U.S. Government bonds				475			18			1		494
		Foreign government bonds				-			636			97		733
		RMBS				-			7,881			158		8,039
		CMBS				-			1,566			34		1,600
		CDOs				-			-			102		102
		State and municipal bonds				-			4,047			-		4,047
		Hybrid and redeemable preferred securities				15			1,042			100		1,157
	VIEs' fixed maturity securities					108			592			-		700
	Equity AFS securities					37			46			56		139
	Trading securities					2			2,605			68		2,675
	Derivative investments					-			681			2,470		3,151
Cash and invested cash						-			4,510			-		4,510
Separate account assets						-			83,477			-		83,477
			Total assets		$	700		$	164,411		$	4,974	$	170,085

Liabilities
Future contract benefits:
	Indexed annuity contracts embedded derivatives				$	-		$	-		$	(399)	$	(399)
	GLB reserves embedded derivatives					-			-			(2,217)		(2,217)
Long-term debt						-			(1,688)			-		(1,688)
Reinsurance related embedded derivatives						-			(168)			-		(168)
VIEs' liabilities - derivative instruments						-			-			(291)		(291)
Other liabilities:
	Deferred compensation plans					-			-			(354)		(354)
	Credit default swaps					-			-			(16)		(16)
			Total liabilities		$	-		$	(1,856)		$	(3,277)	$	(5,133)

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 March 31, 2012
									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			$	1,888	$	(14)	$	-		$	174	$	(116)	$	1,932
		U.S. Government bonds				1		-		-			-		-		1
		Foreign government bonds				97		-		2			-		-		99
		RMBS				158		(3)		3			(5)		(55)		98
		CMBS				34		(3)		8			(7)		-		32
		CDOs				102		-		4			(4)		-		102
		Hybrid and redeemable
			preferred securities			100		-		5			-		11		116
	Equity AFS securities					56		-		5			-		-		61
	Trading securities					68		1		-			(1)		-		68
	Derivative investments					2,470		(520)		(88)			175		-		2,037
Future contract benefits:⁽⁴⁾
	Indexed annuity contracts embedded
		derivatives				(399)		(104)		-			23		-		(480)
	GLB reserves embedded derivatives					(2,217)		1,153		-			-		-		(1,064)
VIEs' liabilities - derivative
	instruments⁽⁵⁾					(291)		70		-			-		-		(221)
Other liabilities:
	Deferred compensation plans⁽⁶⁾					(354)		(28)		-			7		-		(375)
	Credit default swaps⁽⁷⁾					(16)		6		-			-		-		(10)
				Total, net	$	1,697	$	558	$	(61)		$	362	$	(160)	$	2,396

					For the Three Months Ended March 31, 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	$	(1)	$	10		$	54	$	(73)	$	1,806
		U.S. Government bonds				2		-		-			-		-		2
		Foreign government bonds				113		-		7			(3)		(17)		100
		RMBS				119		(2)		2			(4)		-		115
		CMBS				109		(23)		30			(52)		-		64
		CDOs				172		14		(12)			(38)		-		136
		Hybrid and redeemable
			preferred securities			119		-		1			-		4		124
	Equity AFS securities:					92		8		3			(9)		2		96
	Trading securities					76		1		(2)			(2)		(2)		71
	Derivative investments					1,495		(145)		(18)			107		-		1,439
Future contract benefits:⁽⁴⁾
	Indexed annuity contracts embedded
		derivatives				(497)		48		-			(79)		-		(528)
	GLB reserves embedded derivatives					(408)		290		-			-		-		(118)
VIEs' liabilities - derivative
	instruments⁽⁵⁾					(209)		6		-			-		-		(203)
Other liabilities:
	Deferred compensation plans⁽⁶⁾					(363)		(8)		-			14		-		(357)
	Credit default swaps⁽⁷⁾					(16)		4		-			6		-		(6)
				Total, net	$	2,620	$	192	$	21		$	(6)	$	(86)	$	2,741

The changes in fair value of the interest rate swaps are offset by an adjustment to derivative investments (see Note 5).
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 Comprehensive Income (Loss). Gains (losses) from sales, maturities, settlements and calls and OTTI are included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
Gains (losses) from sales, maturities, settlements and calls are included in realized gain (loss) on our Consolidated Statements of Comprehensive 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 Comprehensive 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 Comprehensive Income (Loss).
Gains (losses) from sales, maturities, settlements and calls are included in net investment income on our Consolidated Statements of Comprehensive 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 March 31, 2012
				Issuances		Sales		Maturities		Settlements			Calls		Total
Investments:
	Fixed maturity AFS securities:
		Corporate bonds		$	231	$	(26)	$	-		$	(29)	$	(2)	$	174
		RMBS			-		-		-			(5)		-		(5)
		CMBS			-		-		-			(7)		-		(7)
		CDOs			-		-		-			(4)		-		(4)
	Trading securities				-		-		-			(1)		-		(1)
	Derivative investments				209		15		(49)			-		-		175
Future contract benefits:
	Indexed annuity contracts embedded
		derivatives			(9)		-		-			32		-		23
Other liabilities:
	Deferred compensation plans				-		-		-			7		-		7
			Total, net	$	431	$	(11)	$	(49)		$	(7)	$	(2)	$	362

				For the Three Months Ended March 31, 2011
				Issuances		Sales		Maturities		Settlements			Calls		Total
Investments:
	Fixed maturity AFS securities:
		Corporate bonds		$	101	$	(8)	$	(1)		$	(37)	$	(1)	$	54
		Foreign government bonds			-		(3)		-			-		-		(3)
		RMBS			-		-		-			(4)		-		(4)
		CMBS			1		(44)		-			(9)		-		(52)
		CDOs			-		(33)		-			(5)		-		(38)
	Equity AFS securities				6		(15)		-			-		-		(9)
	Trading securities				-		-		-			(2)		-		(2)
	Derivative investments				167		(2)		(58)			-		-		107
Future contract benefits:
	Indexed annuity contracts embedded
		derivatives			(17)		-		-			(62)		-		(79)
Other liabilities:
	Deferred compensation plans				-		-		-			14		-		14
	Credit default swaps				-		6		-			-		-		6
			Total, net	$	258	$	(99)	$	(59)		$	(105)	$	(1)	$	(6)

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
			Months Ended
			March 31,
			2012		2011
Investments:⁽¹⁾
	Derivative investments		$	(520)	$	(140)
Future contract benefits:⁽¹⁾
	Indexed annuity contracts embedded derivatives			21		(4)
	GLB reserves embedded derivatives			1,183		338
VIEs' liabilities - derivative instruments⁽¹⁾				70		2
Other liabilities:
	Deferred compensation plans⁽²⁾			(28)		(8)
	Credit default swaps⁽³⁾			6		6
		Total, net	$	732	$	194

Included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
Included in underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Comprehensive Income (Loss).
Included in net investment income on our Consolidated Statements of Comprehensive 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 March 31, 2012						Ended March 31, 2011
				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		$	150		(266)	$	(116)	$	32	$	(105)	$	(73)
		Foreign government bonds			-		-		-		-		(17)		(17)
		RMBS			-		(55)		(55)		-		-		-
		Hybrid and redeemable preferred securities			20		(9)		11		4		-		4
	Equity AFS securities				-		-		-		2		-		2
	Trading securities				-		-		-		-		(2)		(2)
			Total, net	$	170	$	(330)	$	(160)	$	38	$	(124)	$	(86)

Transfers in and out of Level 3 are generally the result of observable market information on a security no longer being available or becoming available to our pricing vendors. For the three months ended March 31, 2012 and 2011, our corporate bonds transfers in and out were attributable primarily to the securities' observable market information being available or no longer being available, respectively. Transfers in and out of Levels 1 and 2 are generally the result of a change in the type of input used to measure the fair value of an asset or liability at the end of the reporting period. When quoted prices in active markets become available or when these prices become unavailable, but we are able to employ a valuation methodology using significant observable inputs, transfers between Levels 1 and 2 will result. For the quarterly periods ended March 31, 2012 and 2011, the transfers between Levels 1 and 2 of the fair value hierarchy were less than $1 million for our financial instruments carried at fair value.

The following summarizes the fair value (in millions), valuation techniques and significant unobservable inputs of the Level 3 fair value measurements that were developed as of March 31, 2012:

Fair

Valuation

Significant

Value

Technique

Unobservable Inputs

Range

Assets

Investments:

Fixed maturity AFS and trading

securities

Corporate bonds

1,119

Discounted cash flow

Liquidity/duration adjustment⁽¹⁾

0.5% - 9.0%

Foreign government bonds

Discounted cash flow

Liquidity/duration adjustment⁽¹⁾

2.5% - 6.0%

Equity AFS and trading

securities

Discounted cash flow

Liquidity/duration adjustment⁽¹⁾

4.0% - 4.5%

Fair

Valuation

Significant

Value

Technique

Unobservable Inputs

Range

Liabilities

Future contract benefits:

Indexed annuity contracts

embedded derivatives

(480)

Discounted cash flow

Lapse rate⁽²⁾

1.0% - 15.0%

Mortality rate⁽³⁾

⁽⁷⁾

GLB reserves embedded

derivatives

(1,064)

Monte Carlo simulation

Long-term lapse rate⁽²⁾

0.5% - 13.0%

Wait period⁽⁴⁾

0 - 25 years (or

years until the

eligible age)

Percent of maximum

withdrawal amount⁽⁵⁾

95.0% - 100.0%

Non-performance risk ("NPR")⁽⁶⁾

0.05% - 0.35%

Mortality rate⁽³⁾

⁽⁷⁾

The liquidity/duration adjustment input represents an estimated market participant composite of adjustments attributable to liquidity premiums, expected durations, structures and credit quality that would be applied to the market observable information of an investment.
The lapse rate input represents the estimated probability of a contract surrendering during a year, and thereby forgoing any future benefits. The range represents the lapse rates during the surrender charge period for indexed annuity contracts.
The mortality rate input represents the estimated probability of when an individual belonging to a particular group, categorized according to age or some other factor such as occupation, will die.
The wait period input represents the estimated period a contract holder would wait to withdraw after becoming eligible.
The percent of maximum withdrawal amount input represents the estimated ratio of contract withdrawal amount to the maximum withdrawal amount specified.
The NPR input represents the estimated additional credit spread that market participants would apply to the market observable discount rate when pricing a contract.
Based on the “Annuity 2000 Mortality Table” developed by the Society of Actuaries Committee on Life Insurance Research that was adopted by the National Association of Insurance Commissioners in 1996 for our mortality input.

From the table above, we have excluded Level 3 fair value measurements obtained from independent, third-party pricing sources. We do not develop the significant inputs used to measure the fair value of these assets and liabilities, and the information regarding the significant inputs is not readily available to us. Independent broker-quoted fair values are non-binding quotes developed by market makers or broker-dealers obtained from third-party sources recognized as market participants. The fair value of a broker-quoted asset or liability is based solely on the receipt of an updated quote from a single market maker or a broker-dealer recognized as a market participant as we do not adjust broker quotes when used as the fair value measurement for an asset or liability. Significant increases or decreases in any of the quotes received from a third-party broker-dealer may result in a significantly higher or lower fair value measurement.

Changes in any of the significant inputs presented in the table above may result in a significant change in the fair value measurement of the asset or liability as follows:

Investments – An increase in the liquidity/duration input would result in a decrease in the fair value measurement.

Indexed annuity contracts embedded derivatives – An increase in the lapse rate or mortality rate inputs would result in a decrease in the fair value measurement.
GLB reserves embedded derivatives – An increase in our lapse rate, wait period, NPR or mortality rate inputs would result in a decrease in the fair value measurement. An increase in the percent of maximum withdrawal amount input would result in an increase in the fair value measurement.

For each category discussed above, the unobservable inputs are not inter-related; therefore, a directional change in one input will not affect the other inputs.

As part of our on-going valuation process, we assess the reasonableness of our valuation techniques or models and make adjustments as necessary. For more information, see “Summary of Significant Accounting Policies” in Note 1 of our 2011 Form 10-K.

- Definition

This item represents the complete disclosure regarding the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments, assets, and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the Company is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risk is are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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