Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Fair Value Measurements disclosure

Fair Value Measurements disclosure [Text Block]

4. FAIR VALUE MEASUREMENTS

The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance.  The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets, and requires that observable inputs be used in the valuations when available.  The disclosure of fair value estimates in the fair value accounting guidance hierarchy is based on whether the significant inputs into the valuation are observable.  In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions.  The level in the fair value hierarchy within which the fair value measurement is reported is based on the lowest level input that is significant to the measurement in its entirety.  The three levels of the hierarchy are as follows:

· Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.

· Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

· Level 3 - Valuations based on models where significant inputs are not observable.  The unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use.

Valuation of Investments Reported at Fair Value in Financial Statements

The fair value of a financial instrument is the estimated amount at which the instrument could be exchanged in an orderly transaction between knowledgeable, unrelated, willing parties, i.e., not in a forced transaction.  The estimated fair value of a financial instrument may differ from the amount that could be realized if the security was sold in an immediate sale, e.g., a forced transaction.  Additionally, the valuation of fixed maturity investments is more subjective when markets are less liquid due to the lack of market based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur.

For investments that have quoted market prices in active markets, the Company uses the unadjusted quoted market prices as fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy.  The Company receives the quoted market prices from a third party, nationally recognized pricing service (pricing service).  When quoted market prices are unavailable, the Company utilizes a pricing service to determine an estimate of fair value, which is mainly used for its fixed maturity investments.  The fair value estimates provided from this pricing service are included in the amount disclosed in Level 2 of the hierarchy.  If quoted market prices and an estimate from a pricing service are unavailable, the Company produces an estimate of fair value based on internally developed valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level 3.  The Company bases all of its estimates of fair value for assets on the bid price as it represents what a third-party market participant would be willing to pay in an arm’s length transaction.

Fixed Maturities

The Company utilizes a pricing service to estimate fair value measurements for approximately 99% of its fixed maturities.  The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets.  Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing.  Additionally, the pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios.

The pricing service evaluates each asset class based on relevant market information, relevant credit information, perceived market movements and sector news.  The market inputs utilized in the pricing evaluation, listed in the approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events.  The extent of the use of each market input depends on the asset class and the market conditions.  Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant.  For some securities, additional inputs may be necessary.

The pricing service utilized by the Company has indicated that they will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation.  If the pricing service discontinues pricing an investment, the Company would be required to produce an estimate of fair value using some of the same methodologies as the pricing service but would have to make assumptions for market-based inputs that are unavailable due to market conditions.

The fair value estimates of most fixed maturity investments are based on observable market information rather than market quotes.  Accordingly, the estimates of fair value for such fixed maturities, other than U.S. Treasury securities, provided by the pricing service are included in the amount disclosed in Level 2 of the hierarchy.  The estimated fair value of U.S. Treasury securities is included in the amount disclosed in Level 1 as the estimates are based on unadjusted market prices.

The Company holds privately placed corporate bonds and estimates the fair value of these bonds using an internal matrix that is based on market information regarding interest rates, credit spreads and liquidity.  The underlying source data for calculating the matrix of credit spreads relative to the U.S. Treasury curve are the BofA Merrill Lynch U.S. Corporate Index and the BofA Merrill Lynch High Yield BB Rated Index.  The Company includes the fair value estimates of these corporate bonds in Level 2, since all significant inputs are market observable.

While the vast majority of the Company’s municipal bonds are included in Level 2, the Company holds a small number of municipal bonds which are not valued by the pricing service and estimates the fair value of these bonds using an internal pricing matrix with some unobservable inputs that are significant to the valuation.  Due to the limited amount of observable market information, the Company includes the fair value estimates for these particular bonds in Level 3.  Additionally, the Company holds a small amount of fixed maturities that have characteristics that make them unsuitable for matrix pricing.  For these fixed maturities, the Company obtains a quote from a broker (typically a market maker).  Due to the disclaimers on the quotes that indicate that the price is indicative only, the Company includes these fair value estimates in Level 3.

Equities — Public Common and Preferred

For public common and preferred stocks, the Company receives prices from a nationally recognized pricing service that are based on observable market transactions and includes these estimates in the amount disclosed in Level 1.  Infrequently, current market quotes in active markets are unavailable for certain non-redeemable preferred stocks held by the Company.  In these instances, the Company receives an estimate of fair value from the pricing service that provides fair value estimates for the Company’s fixed maturities. The service utilizes some of the same methodologies to price the non-redeemable preferred stocks as it does for the fixed maturities. The Company includes the fair value estimate for these non-redeemable preferred stocks in the amount disclosed in Level 2.

Other Investments

At June 30, 2011 and December 31, 2010, the Company held investments in non-public common and preferred equity securities, with fair value estimates of $71 million and $57 million, respectively, reported in other investments, where the fair value estimate is determined either internally or by an external fund manager based on recent filings, operating results, balance sheet stability, growth and other business and market sector fundamentals.  Due to the significant unobservable inputs in these valuations, the Company includes the total fair value estimate for all of these investments at June 30, 2011 and December 31, 2010 in the amount disclosed in Level 3. The Company holds investments in various publicly-traded securities which are reported in other investments.  The $43 million and $42 million fair value of these investments at June 30, 2011 and December 31, 2010, respectively, was disclosed in Level 1.  These investments include securities in the Company’s trading portfolio, mutual funds and other small holdings.

Derivatives

At June 30, 2011 and December 31, 2010, the Company held $30 million and $37 million, respectively, of convertible bonds containing embedded conversion options that are valued separately from the host bond contract in the amount disclosed in Level 2 — fixed maturities.

Fair Value Hierarchy

The following tables present the level within the fair value hierarchy at which the Company’s financial assets and financial liabilities are measured on a recurring basis at June 30, 2011 and December 31, 2010.

(at June 30, 2011, in millions)	Total		Level 1		Level 2		Level 3
Invested assets:
Fixed maturities
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	$	2,146	$	2,103	$	43	$	—
Obligations of states, municipalities and political subdivisions	39,180		—		39,159		21
Debt securities issued by foreign governments	2,031		—		2,031		—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	3,772		—		3,771		1
All other corporate bonds	15,810		—		15,635		175
Redeemable preferred stock	37		36		1		—
Total fixed maturities	62,976		2,139		60,640		197
Equity securities
Common stock	398		386		12		—
Non-redeemable preferred stock	202		134		68		—
Total equity securities	600		520		80		—
Other investments	114		43		—		71
Total	$	63,690	$	2,702	$	60,720	$	268

The Company did not have significant transfers between Levels 1 and 2 during the six months ended June 30, 2011.

(at December 31, 2010, in millions)	Total		Level 1		Level 2		Level 3
Invested assets:
Fixed maturities
U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities	$	2,008	$	1,991	$	17	$	—
Obligations of states, municipalities and political subdivisions	39,535		—		39,433		102
Debt securities issued by foreign governments	2,202		—		2,202		—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	4,164		—		4,163		1
All other corporate bonds	14,876		—		14,749		127
Redeemable preferred stock	35		34		1		—
Total fixed maturities	62,820		2,025		60,565		230
Equity securities
Common stock	304		281		23		—
Non-redeemable preferred stock	215		131		84		—
Total equity securities	519		412		107		—
Other investments	99		42		—		57
Total	$	63,438	$	2,479	$	60,672	$	287

The Company did not have significant transfers between Levels 1 and 2 during the year ended December 31, 2010.

The following tables present the changes in the Level 3 fair value category during the three months and six months ended June 30, 2011 and the twelve months ended December 31, 2010.

Three Months Ended June 30, 2011 (in millions)	FixedMaturities			OtherInvestments			Total
Balance at March 31, 2011	$	170		$	63		$	233
Total realized and unrealized investment gains (losses):
Included in realized investment gains (losses) (1)	—			3			3
Included in increases (decreases) in accumulated other changes in equity from nonowner sources	—			8			8
Purchases, sales and settlements/maturities:
Purchases	47			—			47
Sales	(12		)	(3		)	(15		)
Settlements/maturities	(5		)	—			(5		)
Gross transfers into Level 3	—			—			—
Gross transfers out of Level 3	(3		)	—			(3		)
Balance at June 30, 2011	$	197		$	71		$	268
Amount of total realized investment gains (losses) for the period included in the consolidated statement of income (loss) attributable to changes in the fair value of assets still held at the reporting date	$	—		$	—		$	—

(1) Includes impairments on investments held at the end of the period as well as amortization on fixed maturities.

Six Months Ended June 30, 2011 (in millions)	FixedMaturities			OtherInvestments			Total
Balance at December 31, 2010	$	230		$	57		$	287
Total realized and unrealized investment gains (losses):
Included in realized investment gains (losses) (1)	—			6			6
Included in increases (decreases) in accumulated other changes in equity from nonowner sources	—			13			13
Purchases, sales and settlements/maturities:
Purchases	82			2			84
Sales	(12		)	(7		)	(19		)
Settlements/maturities	(21		)	—			(21		)
Gross transfers into Level 3	8			—			8
Gross transfers out of Level 3 (2)	(90		)	—			(90		)
Balance at June 30, 2011	$	197		$	71		$	268
Amount of total realized investment gains (losses) for the period included in the consolidated statement of income (loss) attributable to changes in the fair value of assets still held at the reporting date	$	—		$	—		$	—

(1)   Includes impairments on investments held at the end of the period as well as amortization on fixed maturities.

(2)During the six months ended June 30, 2011, approximately $81 million of municipal fixed maturity securities were valued using observable market data which resulted in a transfer out of Level 3 into Level 2.  In prior periods, these securities were valued internally using unobservable inputs.

Twelve Months Ended December 31, 2010 (in millions)	FixedMaturities			OtherInvestments			Total
Balance at December 31, 2009	$	240		$	154		$	394
Total realized and unrealized investment gains (losses):
Included in realized investment gains (losses) (1)	5			2			7
Included in increases (decreases) in accumulated other changes in equity from nonowner sources	10			11			21
Purchases, sales and settlements/maturities:
Purchases	44			3			47
Sales	(9		)	(113		)	(122		)
Settlements/maturities	(41		)	—			(41		)
Gross transfers into Level 3	13			—			13
Gross transfers out of Level 3	(32		)	—			(32		)
Balance at December 31, 2010	$	230		$	57		$	287
Amount of total realized investment gains (losses) for the period included in the consolidated statement of income attributable to changes in the fair value of assets still held at the reporting date	$	—		$	—		$	—

(1)     Includes impairments on investments held at the end of the period as well as amortization on fixed maturities.

The Company had no financial assets or financial liabilities that were measured at fair value on a non-recurring basis during the six months ended June 30, 2011 or twelve months ended December 31, 2010.

Financial Instruments Disclosed, But Not Carried, At Fair Value

The Company uses various financial instruments in the normal course of its business. The Company’s insurance contracts are excluded from fair value of financial instruments accounting guidance and, therefore, are not included in the amounts discussed below.

The carrying values of cash, short-term securities and investment income accrued approximated their fair values.

The carrying values of $534 million and $647 million of financial instruments classified as other assets approximated their fair values at June 30, 2011 and December 31, 2010, respectively.  The carrying values of $3.71 billion and $3.75 billion of financial instruments classified as other liabilities at June 30, 2011 and December 31, 2010, respectively, also approximated their fair values. Fair value is determined using various methods including discounted cash flows, as appropriate for the various financial instruments.

The carrying value and fair value of the Company’s debt at June 30, 2011 was $6.60 billion and $7.15 billion, respectively. The respective totals at December 31, 2010 were $6.61 billion and $7.21 billion.  The Company utilized a pricing service to estimate fair value measurements for approximately 96% and 94% of its debt, other than commercial paper, at June 30, 2011 and December 31, 2010, respectively.  The pricing service utilizes market quotations for debt that have quoted prices in active markets.  For the small amount of the Company’s debt securities for which a pricing service is not used, the Company utilizes pricing estimates from a nationally recognized broker/dealer to estimate fair value.  If estimates of fair value are unavailable from the pricing service or the broker/dealer, the Company produces an estimate of fair value based on internally developed valuation techniques which are based on a discounted cash flow methodology and incorporates all available relevant observable market inputs.

The fair value of commercial paper included in debt outstanding at June 30, 2011 and December 31, 2010 approximated its book value because of its short-term nature.