Guaranteed Minimum Death Benefit Contracts

3 Months Ended

Mar. 31, 2012

Guaranteed Minimum Death Benefits Disclosure [Abstract]

Guaranteed minimum death benefit contracts

Note6―Guaranteed Minimum Death Benefit Contracts

The Company had future policy benefit reserves for guaranteed minimum death benefit(“GMDB”) contracts of $1.1billion as of March 31, 2012 and $1.2billion as ofDecember 31, 2011.   The determination of liabilities for GMDB requires the Company to make critical accounting estimates.  The Company estimates its liabilities for GMDB exposures using an internal model run using many scenarios and based on assumptions regarding lapse, future partial surrenders, claim mortality (deaths that result in claims), interest rates (mean investment performance and discount rate) and volatility. These assumptions are based on the Company's experience and future expectations over the long-term period, consistent with the long-term nature of this product. The Company regularly evaluates these assumptions and changes its estimates if actual experience or other evidence suggests that assumptions should be revised.  If actual experience differs from the assumptions used in estimating these liabilities, the result could have a material adverse effect on the Company's consolidated results of operations, and in certain situations, could have a material adverse effect on the Company's financial condition.

In 2000, the Company determined that the GMDB reinsurance business was premium deficient because the recorded future policy benefit reserve was less than the expected present value of future claims and expenses less the expected present value of future premiums and investment income using revised assumptions based on actual and expected experience. The Company tests for premium deficiency by reviewing its reserve each quarter using current market conditions and its long-term assumptions. Under premium deficiency accounting, if the recorded reserve is determined insufficient, an increase to the reserve is reflected as a charge to current period income. Consistent with GAAP, the Company does not recognize gains on premium deficient long duration products.

See Note 9 for further information on the Company's dynamic hedge programs that are used to reduce certain equity and interest rate exposures associated with this business.

During the first quarter of 2012, the Company's normal review of reserves resulted in a charge to strengthen GMDB reserves of $18 million($11 million after-tax) reported in other benefit expenses. The charge was due to the update of long-term assumptions described below, and primarily reflected the decrease in assumed lapses.

Since December 31, 2011, the Company has updated the following long-term assumptions for GMDB based on a review of experience:

• The lapse assumption for the largest client of the business, that represents approximately 70% of the reserve, was updated. The lapse rate varies depending on contract type, policy duration, and the ratio of the net amount at risk to account value. As a result of this update, the overall range of lapses for the entire block of businesschanged from 0% to 24% at December 31, 2011 to 0% to 18% at March 31, 2012. The effect of this update was an increase in the reserve.
• The reserves include an estimate for partial surrenders,that essentially lock in the death benefit for a particular policy based on annual election rates, depending on the net amount at risk for each policy and whether surrender charges apply. The election rates were updated from 0%-15% at December 31, 2011 to 0%-13% at March 31, 2012. The effect of this update was a decrease in the reserve.
• The volatility assumption was updated to use a review of historical weekly returns for each index (e.g. S&P 500) for a 20-year period. Volatility represents the dispersion of historical returns compared to the average historical return (standard deviation) for each index. The volatility assumption for equity fund types has been updated from 16% -25% at December 31, 2011 to 18% - 24% at March 31, 2012; for bond funds from 4% - 10% at December 31, 2011 to 5% - 7% at March 31, 2012; and for money market funds from 2% at December 31, 2011 to 0% - 1% at March 31, 2012. The degree of correlation between asset classes was also updated. The effect of these updates was an increase in the reserve.

During 2011, the Company completed its normal review of reserves (including assumptions) and recorded additional other benefit expenses of $70 million ($45 million after-tax) to strengthen GMDB reserves. The reserve strengthening was driven primarily by anadverse impact of$34 million ($22 million after-tax) due to volatile equity market conditions, adverse interest rate impacts of $22 million ($15 million after-tax) reflecting management's consideration of the anticipated impact of continuing low current short-term interest rates and adverse impacts of overall market declines in the third quarter of $13 million ($8 million after-tax), that included an increase in the provision for expected future partial surrenders and declines in the value of contractholders' non-equity investments.

Activity in future policy benefit reserves for the GMDB business was as follows

	For the period ended
	March 31,		December 31,
(In millions)	2012		2011
Balance at January 1	$	1,170	$	1,138
Add: Unpaid Claims		40		37
Less: Reinsurance and other amounts recoverable		53		51
Balance at January 1, net		1,157		1,124
Add: Incurred benefits		(50)		138
Less: Paid benefits		32		105
Ending balance, net		1,075		1,157
Less: Unpaid Claims		38		40
Add: Reinsurance and other amounts recoverable		44		53
Ending balance	$	1,081	$	1,170

Benefits paid and incurred are net of ceded amounts.  Incurred benefits reflect the favorable or unfavorable impact of a rising or falling equity market on the liability, and include thecharges discussed above.  

The aggregate value of the underlying mutual fund investments was $14.5billion as of March 31, 2012 and $13.8 billion as ofDecember 31, 2011. The death benefit coverage in force was $4.3billion as of March 31, 2012 and$5.4billion as of December 31, 2011.  The death benefit coverage in force represents the excess of the guaranteed benefit amount over the value of the underlying mutual fund investments for all contractholders (approximately 470,000 as of March 31, 2012 and 480,000 as of December 31, 2011).

The Company has also written reinsurance contracts with issuers of variable annuity contracts that provide annuitants with certain guarantees related to minimum income benefits (“GMIB”). All reinsured GMIB policies also have a GMDB benefit reinsured by the Company. See Note 7 for further information.