Derivative Financial Instruments

12 Months Ended

Dec. 31, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Note 5.  Derivative Financial Instruments

The Company uses 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, commodity 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 are entered into to modify the credit risk inherent in certain investments. Forward contracts, futures, swaps and options are used primarily to manage foreign currency and commodity price 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 include but are not limited to interest rate swaps, call options, put options, credit default swaps, index futures and foreign currency forwards. See Note 4 for information regarding the fair value of derivative instruments.

A summary of the aggregate contractual or notional amounts and gross estimated fair values related to derivative financial instruments 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.

December 31	2014						2013
	Contractual/						Contractual/
	Notional		Estimated Fair Value				Notional		Estimated Fair Value
	Amount		Asset		(Liability)		Amount		Asset		(Liability)
(In millions)
With hedge designation:
Foreign exchange:
Currency forwards – short		$    70				$    (5)		$  114		$    2		$    (1)
Without hedge designation:
Equity markets:
Options – purchased		544		$    24				1,561		41
– written		292				(21)		729				(23)
Equity swaps and warrants – long		10		2				17		9
Interest rate risk:
Credit default swaps
– purchased protection								50				(3)
– sold protection								25
Foreign exchange:
Currency forwards – long		109				(3)		55
– short		88		2				113
Currency options – long		151		7
Embedded derivative on funds withheld liability		184				(3)
Discontinued operations:
Interest rate risk:
Interest rate swaps								300				(4)
Commodities:
Forwards – short								180		4		(4)

Gross estimated fair values of derivative positions are currently presented in Equity securities, Receivables, Payable to brokers and Assets and Liabilities of discontinued operations on the Consolidated Balance Sheets. There would be no significant difference in the balance included in such accounts if the estimated fair values were presented net for the periods ended December 31, 2014 and 2013.

In connection with the sale of HighMount, as discussed in Note 2, cash flow hedge accounting treatment was discontinued for all of HighMount’s commodity and interest rate swaps in 2014 and a loss of $4 million after tax was reclassified from AOCI into Discontinued operations, net for those hedges where the original forecasted transactions are no longer probable of occurring. In addition, mark-to-market losses of $2 million after tax were recognized on these derivatives in 2014.

For derivative financial instruments without hedge designation, changes in the fair value of derivatives not held in a trading portfolio are reported in Investment gains (losses) and changes in the fair value of derivatives held for trading purposes are reported in Net investment income on the Consolidated Statements of Income. Losses of $1 million, $9 million and $5 million were recorded in Investment gains (losses) for the years ended December 31, 2014, 2013 and 2012. Gains of $12 million and losses of $26 million and $19 million were included in Net investment income for the years ended December 31, 2014, 2013 and 2012.

The Company’s derivative financial instruments with cash flow hedge designation hedge variable price risk associated with the purchase and sale of natural gas and exposure to foreign currency losses on future foreign currency expenditures. Losses of $3 million, $10 million and $1 million were recognized in OCI related to these cash flow hedges for the years ended December 31, 2014, 2013 and 2012. Gains of $1 million and losses of $8 million and $6 million were reclassified from AOCI into income for the years ended December 31, 2014, 2013 and 2012. As of December 31, 2014, the estimated amount of net unrealized losses associated with these cash flow hedges that will be reclassified from AOCI into earnings during the next twelve months was $2 million. For each of the years ended December 31, 2014, 2013 and 2012, the net amounts recognized due to ineffectiveness were less than $1 million.