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Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements [Abstract]

21. Fair Value of Financial Instruments

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

		As of December 31,
		2011				2010
		Carrying		Fair		Carrying		Fair
		Value		Value		Value		Value
Assets
AFS securities:
	Fixed maturity securities	$	75,433	$	75,433	$	68,030	$	68,030
	VIEs' fixed maturity securities		700		700		584		584
	Equity securities		139		139		197		197
Trading securities			2,675		2,675		2,596		2,596
Mortgage loans on real estate			6,942		7,608		6,752		7,183
Derivative investments			3,151		3,151		1,076		1,076
Other investments			1,069		1,069		1,038		1,038
Cash and invested cash			4,510		4,510		2,741		2,741
Separate account assets			83,477		83,477		84,630		84,630

Liabilities
Future contract benefits:
	Indexed annuity contracts embedded derivatives		(399)		(399)		(497)		(497)
	GLB reserves embedded derivatives		(2,217)		(2,217)		(408)		(408)
Other contract holder funds:
	Remaining guaranteed interest and similar contracts		(1,114)		(1,114)		(1,108)		(1,108)
	Account values of certain investment contracts		(27,468)		(30,812)		(26,130)		(27,142)
Short-term debt⁽¹⁾			(300)		(309)		(351)		(364)
Long-term debt			(5,391)		(5,025)		(5,399)		(5,512)
Reinsurance related embedded derivatives			(168)		(168)		(102)		(102)
VIEs' liabilities - derivative instruments			(291)		(291)		(209)		(209)
Other liabilities:
	Deferred compensation plans embedded derivatives		(354)		(354)		(363)		(363)
	Credit default swaps		(16)		(16)		(16)		(16)

Benefit Plans' Assets⁽²⁾			1,345		1,345		1,269		1,269

The difference between the carrying value and fair value of short-term debt as of December 31, 2011 and 2010, related to current maturities of long-term debt.
Included in the funded statuses of the benefit plans, which is reported in other liabilities on our Consolidated Balance Sheets. Refer to Note 17 for additional detail.

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.

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 December 31, 2011 and 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 December 31, 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 above:

					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 - interest rate swap agreements						-			(319)			-		(319)
Reinsurance related embedded derivatives						-			(168)			-		(168)
VIEs' liabilities - derivative instruments						-			-			(291)		(291)
Other liabilities:
	Deferred compensation plans embedded derivatives					-			-			(354)		(354)
	Credit default swaps					-			-			(16)		(16)
			Total liabilities		$	-		$	(487)		$	(3,277)	$	(3,764)

Benefit Plans' Assets					$	99		$	1,246		$	-	$	1,345

					As of December 31, 2010
					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			$	60		$	49,864		$	1,816	$	51,740
		U.S. Government bonds				160			3			2		165
		Foreign government bonds				-			395			113		508
		RMBS				-			8,719			119		8,838
		CMBS				-			1,944			109		2,053
		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					37			68			92		197
	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)

Benefit Plans' Assets					$	116		$	1,113		$	40	$	1,269

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 impact 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 Year Ended December 31, 2011
											Purchases,
									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	$	2	$	42		$	(138)	$	166	$	1,888
		U.S. Government bonds				2		-		-			(1)		-		1
		Foreign government bonds				113		-		4			(3)		(17)		97
		RMBS				119		(3)		7			35		-		158
		CMBS				109		(62)		62			(78)		3		34
		CDOs				172		19		(17)			(72)		-		102
		Hybrid and redeemable
			preferred securities			119		(1)		(6)			(9)		(3)		100
	Equity AFS securities					92		8		(12)			1		(33)		56
	Trading securities					76		1		3			(8)		(4)		68
	Derivative investments					1,495		495		363			117		-		2,470
Future contract benefits:⁽⁴⁾
	Indexed annuity contracts embedded
		derivatives				(497)		5		-			93		-		(399)
	GLB reserves embedded derivatives					(408)		(1,809)		-			-		-		(2,217)
VIEs' liabilities - derivative
	instruments⁽⁵⁾					(209)		(82)		-			-		-		(291)
Other liabilities:
	Deferred compensation plans embedded
		derivatives⁽⁶⁾				(363)		(11)		-			20		-		(354)
	Credit default swaps⁽⁷⁾					(16)		(7)		-			7		-		(16)
				Total, net	$	2,620	$	(1,445)	$	446		$	(36)	$	112	$	1,697

Benefit plans' assets⁽⁸⁾					$	40	$	2	$	(3)		$	(39)	$	-	$	-

					For the Year Ended December 31, 2010
											Purchases,
									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	$	(42)	$	56		$	(218)	$	(50)	$	1,816
		U.S. Government bonds				3		-		-			(4)		3		2
		Foreign government bonds				92		-		8			(4)		17		113
		RMBS				136		(5)		9			(17)		(4)		119
		CMBS				259		(47)		87			(72)		(118)		109
		CDOs				153		1		30			(12)		-		172
		CLNs				322		-		278			-		(600)		-
		Hybrid and redeemable
			preferred securities			156		3		(26)			(14)		-		119
	Equity AFS securities					88		-		8			(4)		-		92
	Trading securities					91		3		(10)			(7)		(1)		76
	Derivative investments					1,368		(151)		7			271		-		1,495
Future contract benefits:⁽⁴⁾
	Indexed annuity contracts embedded
		derivatives				(419)		(81)		-			3		-		(497)
	GLB reserves embedded derivatives					(676)		268		-			-		-		(408)
	VIEs' liabilities - derivative
		instruments⁽⁵⁾				-		16		-			-		(225)		(209)
Other liabilities:
	Deferred compensation plans embedded
		derivatives⁽⁶⁾				(332)		(34)		-			3		-		(363)
	Credit default swaps⁽⁷⁾					(65)		7		-			42		-		(16)
				Total, net	$	3,246	$	(62)	$	447		$	(33)	$	(978)	$	2,620

Benefit plans' assets⁽⁸⁾					$	3	$	-	$	3		$	34	$	-	$	40

					For the Year Ended December 31, 2009
											Purchases,
									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			$	2,335	$	(46)	$	321		$	(239)	$	(301)	$	2,070
		U.S. Government bonds				3		-		-			-		-		3
		Foreign government bonds				60		1		2			10		19		92
		RMBS				179		(8)		36			85		(156)		136
		CMBS				244		1		59			(45)		-		259
		CDOs				151		(35)		61			(22)		(2)		153
		CLNs				50		-		272			-		-		322
		State and municipal bonds				125		-		-			69		(194)		-
		Hybrid and redeemable
			preferred securities			117		(21)		49			2		9		156
	Equity AFS securities					94		(8)		26			(24)		-		88
	Trading securities					81		34		-			(7)		(17)		91
	Derivative investments					2,147		(712)		(135)			68		-		1,368
Future contract benefits:⁽⁴⁾
	Indexed annuity contracts embedded
		derivatives				(252)		(75)		-			(92)		-		(419)
	GLB reserves embedded derivatives					(2,904)		2,228		-			-		-		(676)
Other liabilities:
	Deferred compensation plans embedded
		derivatives⁽⁶⁾				(336)		(63)		-			67		-		(332)
	Credit default swaps⁽⁷⁾					(51)		(37)		-			23		-		(65)
				Total, net	$	2,043	$	1,259	$	691		$	(105)	$	(642)	$	3,246

Benefit plans' assets⁽⁸⁾					$	12	$	-	$	-		$	(2)	$	(7)	$	3

The changes in fair value of the interest rate swaps are offset by an adjustment to derivative investments (see 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-year amortized cost and beginning-of-year fair value was included in OCI and earnings, respectively, in prior years.
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 expected return on plan assets is reported in underwriting, acquisition, insurance and other expenses 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 Year Ended December 31, 2011
					Issuances		Sales		Maturities		Settlements			Calls		Total
Investments:
	Fixed maturity AFS securities:
		Corporate bonds			$	237	$	(216)	$	(16)		$	(54)	$	(89)	$	(138)
		U.S. Government bonds				-		-		-			(1)		-		(1)
		Foreign government bonds				-		(2)		-			-		(1)		(3)
		RMBS				51		(1)		-			(15)		-		35
		CMBS				-		(53)		-			(24)		(1)		(78)
		CDOs				-		(33)		-			(39)		-		(72)
		Hybrid and redeemable
			preferred securities			9		(18)		-			-		-		(9)
	Equity AFS securities					19		(18)		-			-		-		1
	Trading securities					-		(3)		-			(5)		-		(8)
	Derivative investments					396		(2)		(277)			-		-		117
Future contract benefits:
	Indexed annuity contracts embedded
		derivatives				(59)		-		-			152		-		93
Other liabilities:
	Deferred compensation plans embedded
		derivatives				-		-		-			20		-		20
	Credit default swaps					-		7		-			-		-		7
				Total, net	$	653	$	(339)	$	(293)		$	34	$	(91)	$	(36)

Benefit plans' assets					$	-	$	(22)	$	(17)		$	-	$	-	$	(39)

The following summarizes changes in unrealized gains (losses) included in net income, excluding any impact 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 Years Ended December 31,
			2011		2010		2009
Investments:⁽¹⁾
	Trading securities		$	-	$	-	$	32
	Derivative investments			472		(162)		(486)
Future contract benefits:⁽¹⁾
	Indexed annuity contracts embedded derivatives			(1)		44		(17)
	GLB reserves embedded derivatives			(1,615)		419		2,405
VIEs' liabilities - derivative instruments⁽¹⁾				(82)		16		-
Other liabilities:
	Deferred compensation plans embedded derivatives⁽²⁾			(11)		(34)		(63)
	Credit default swaps⁽³⁾			(8)		(12)		(14)
		Total, net	$	(1,245)	$	271	$	1,857

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 Years Ended December 31,
					2011						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			$	249	$	(83)	$	166	$	147	$	(197)	$	(50)
		U.S. Government bonds				-		-		-		3		-		3
		Foreign government bonds				-		(17)		(17)		17		-		17
		RMBS				-		-		-		-		(4)		(4)
		CMBS				4		(1)		3		3		(121)		(118)
		CLNs				-		-		-		-		(600)		(600)
		Hybrid and redeemable preferred
			securities			18		(21)		(3)		-		-		-
	Equity AFS securities					2		(35)		(33)		-		-		-
	Trading securities					1		(5)		(4)		-		(1)		(1)
Future contract benefits:
	VIEs' liabilities - derivative instruments					-		-		-		(225)		-		(225)
				Total, net	$	274	$	(162)	$	112	$	(55)	$	(923)	$	(978)

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 years ended December 31, 2011 and 2010, our corporate bonds and CMBS transfers in and out were attributable primarily to the securities' observable market information being available or no longer being available, respectively. For the year ended December 31, 2010, the 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 2. For the years ended December 31, 2011 and 2010, there were no significant transfers between Level 1 and 2 of the fair value hierarchy.

- 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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