Pension and Other Postretirement Benefit Plans

12 Months Ended

Dec. 31, 2012

Pension and Other Postretirement Benefit Plans

Pension and Other Postretirement Benefit Plans

Note 10 — Pension and Other Postretirement Benefit Plans

• Pension and Other Postretirement Benefit Plans

The Company and certain of its subsidiaries provide pension, health care and life insurance defined benefits to eligible retired employees, spouses and other eligible dependents through various domestic and foreign plans. The effect of its foreign pension and other postretirement benefit plans is immaterial to the Company's results of operations, liquidity and financial position. Effective July 1, 2009, the Company froze its primary domestic defined benefit pension plans.

The Company measures the assets and liabilities of its domestic pension and other postretirement benefit plans as of December 31. The following table summarizes the projected benefit obligations and assets related to the Company's domestic and international pension and other postretirement benefit plans as of, and for the year ended, December 31:

		Pension				Other Postretirement
		Benefits				Benefits
(In millions)	2012		2011		2012		2011
Change in benefit obligation
Benefit obligation, January 1	$	5,067	$	4,691	$	452	$	444
Service cost		3		2		2		2
Interest cost		198		228		16		20
(Gain) loss from past experience		283		453		(2)		16
Benefits paid from plan assets		(256)		(273)		(3)		(2)
Benefits paid - other		(28)		(34)		(23)		(28)
Benefit obligation, December 31		5,267		5,067		442		452
Change in plan assets
Fair value of plan assets, January 1		3,298		3,163		22		23
Actual return on plan assets		370		156		1		1
Benefits paid		(256)		(273)		(3)		(2)
Contributions		253		252		-		-
Fair value of plan assets, December 31		3,665		3,298		20		22
Funded Status	$	(1,602)	$	(1,769)	$	(422)	$	(430)

The postretirement benefits liability adjustment included in accumulated other comprehensive loss consisted of the following as of December 31:

	Pension				Other
	Benefits				Postretirement Benefits
(In millions)	2012		2011		2012		2011
Unrecognized net loss	$	(2,450)	$	(2,331)	$	(28)	$	(30)
Unrecognized prior service cost		(5)		(5)		23		35
Postretirement benefits liability adjustment	$	(2,455)	$	(2,336)	$	(5)	$	5

During 2012, the Company's postretirement benefits liability adjustment increasedby $129million pre-tax ($92million after-tax) resulting in adecrease to shareholders' equity. The increase in the liability was primarily due to a decrease in the discount rate, partially offset byactual investment returns greater than expected in 2012.

Pension benefits.The Company's pension plans were underfunded by $1.6billion in 2012 and$1.8 billion in 2011 and had related accumulated benefit obligations of $5.3 billion as of December 31, 2012 and $5.1 billion as of December 31, 2011.

The Company funds its qualified pension plans at least at the minimum amount required by the Employee Retirement Income Security Act of 1974 and the Pension Protection Act of 2006.For 2013, the Company expects to makeminimum required and voluntary contributions totaling approximately $250million.Future years' contributions will ultimately be based on a wide range of factors including but not limited to asset returns, discount rates, and funding targets.

Components of net pension cost for the years ended December 31 were as follows:

(In millions)	2012		2011		2010
Service cost	$	3	$	2	$	2
Interest cost		198		228		240
Expected long-term return on plan assets		(270)		(267)		(253)
Amortization of:
Net loss from past experience		58		38		28
Settlement loss		6		-		-
Net pension cost	$	(5)	$	1	$	17

The Company expects to recognize pre-tax losses of $75millionin 2013from amortization of past experience.This estimate is based on a weighted average amortization period for the frozen and inactive plans of approximately 28 years, that isbased on the average expected remaining life of plan participants.

Other postretirement benefits.Unfunded retiree health benefit plans had accumulated benefit obligations of $294million at December 31, 2012, and $302 million at December 31, 2011. Retiree life insurance plans had accumulated benefit obligations of $148million as of December 31, 2012 and $150million as of December 31, 2011.

Components of net other postretirement benefit cost for the years ended December 31 were as follows:

(In millions)	2012		2011		2010
Service cost	$	2	$	2	$	1
Interest cost		16		20		22
Expected long-term return on plan assets		(1)		(1)		(1)
Amortization of:
Prior service cost		(12)		(16)		(18)
Net other postretirement benefit cost	$	5	$	5	$	4

The Company expects to recognize in 2013pre-tax gains of $9million related to amortization of prior service cost and no pre-tax lossesfrom amortization of past experience.The original amortization period is based on an average remaining service period of active employees associated with the other postretirement benefit plans of approximately 11 years. The weighted average remaining amortization period for prior service cost is approximately 2.5 years.

The estimated rate of future increases in the per capita cost of health care benefits is 7.5% in 2013, decreasing by0.5% per year to 5% in 2018 and beyond. This estimate reflects the Company's current claim experience and management's estimate that rates of growth will decline in the future. A 1% increase or decrease in the estimated rate would have changed2012 reported amounts as follows:

(In millions)	Increase		Decrease
Effect on total service and interest cost	$	-	$	-
Effect on postretirement benefit obligation	$	12	$	10

Plan assets.The Company's current target investment allocation percentages (37% equity securities, 30% fixed income, 15% securities partnerships, 10% hedge funds and 8% real estate) are developed by management as guidelines, although the fair values of each asset category are expected to vary as a result of changes in market conditions. The pension plan asset portfolio has continued to include a significant allocation of equity securities, consisting of domestic and international investments, in an effort to earn a higher rate of return on pension plan investments over the long-term payout period of the pension benefit obligations. As funding levels improve, the Company would expect to gradually reduce the allocation to equity securities and move into fixed income to mitigate the volatility in returns, while also providing adequate liquidity to fund benefit distributions. The timing of any updates in allocation is not certain.

As of December 31, 2012, pension plan assets included $3.4 billion invested in the separate accounts of Connecticut General Life Insurance Company (“CGLIC”) and Life Insurance Company of North America, that are subsidiaries of the Company, as well as an additional $300 million invested directly in funds offered by the buyer of the retirement benefits business.

The fair values of plan assets by category and by the fair value hierarchy as defined by GAAP are as follows. See Note 11 for a description of how fair value is determined, including the level within the fair value hierarchy and the procedures the Company uses to validate fair value measurements.

December 31, 2012
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Plan assets at fair value:
Fixed maturities:
Federal government and agency	$	-	$	4	$	-	$	4
Corporate		-		416		27		443
Mortgage and other asset-backed		-		8		5		13
Fund investments and pooled separate accounts (1)		-		519		3		522
Total fixed maturities		-		947		35		982
Equity securities:
Domestic		1,202		4		10		1,216
International, including funds and pooled separate accounts (1)		158		149		-		307
Total equity securities		1,360		153		10		1,523
Real estate and mortgage loans, including pooled separate accounts (1)		-		-		351		351
Securities partnerships		-		-		328		328
Hedge funds		-		-		327		327
Guaranteed deposit account contract		-		-		47		47
Cash equivalents		-		107		-		107
Total plan assets at fair value	$	1,360	$	1,207	$	1,098	$	3,665
(1) A pooled separate account has several participating benefit plans and each owns a share of the total pool of investments.

December 31, 2011
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Plan assets at fair value:
Fixed maturities:
Federal government and agency	$	-	$	5	$	-	$	5
Corporate		-		332		7		339
Mortgage and other asset-backed		-		8		2		10
Fund investments and pooled separate accounts (1)		-		546		3		549
Total fixed maturities		-		891		12		903
Equity securities:
Domestic		1,153		1		14		1,168
International, including funds and pooled separate accounts (1)		141		137		-		278
Total equity securities		1,294		138		14		1,446
Real estate and mortgage loans, including pooled separate accounts (1)		-		-		303		303
Securities partnerships		-		-		314		314
Hedge Fund		-		-		148		148
Guaranteed deposit account contract		-		-		39		39
Cash equivalents		-		145		-		145
Total plan assets at fair value	$	1,294	$	1,174	$	830	$	3,298
(1) A pooled separate account has several participating benefit plans and each owns a share of the total pool of investments.

Plan assets in Level 1 include exchange-listed equity securities.Level 2 assets primarily include:

• fixed income and international equity funds priced using their daily net asset value that is the exit price; and
• fixed maturities valued using recent trades of similar securities or pricing models as described below.

Because many fixed maturities do not trade daily, fair values are often derived using recent trades of securities with similar features and characteristics.  When recent trades are not available, pricing models are used to determine these prices.  These models calculate fair values by discounting future cash flows at estimated market interest rates.  Such market rates are derived by calculating the appropriate spreads over comparable U.S. Treasury securities, based on the credit quality, industry and structure of the asset.

Plan assets classified in Level 3 includesecurities partnerships, equity real estateand hedge funds generally valued based on the pension plan's ownership share of the equity of the investee including changes in the fair values of its underlying investments.

The following table summarizes the changes in pension plan assets classified in Level 3 for the years ended December 31, 2012 and December 31, 2011. Actual return on plan assets in this table may include changes in fair value that are attributable to both observable and unobservable inputs.

(In millions)	Fixed Maturities & Equity Securities		Real Estate & Mortgage Loans		Securities Partnerships		Hedge Funds		Guaranteed Deposit Account Contract		Total
Balance at January 1, 2012	$	26	$	303	$	314	$	148	$	39	$	830
Actual return on plan assets:
Assets still held at the reporting date		-		38		18		10		3		69
Assets sold during the period		-		-		-		-		-		-
Total actual return on plan assets		-		38		18		10		3		69
Purchases, sales, settlements, net		5		11		(4)		169		5		186
Transfers into/out of Level 3		13		-		-		-		-		13
Balance at December 31, 2012	$	44	$	352	$	328	$	327	$	47	$	1,098

(In millions)	Fixed Maturities & Equity Securities		Real Estate & Mortgage Loans		Securities Partnerships		Hedge Fund		Guaranteed Deposit Account Contract		Total
Balance at January 1, 2011	$	46	$	240	$	347	$	-	$	24	$	657
Actual return on plan assets:
Assets still held at the reporting date		1		44		66		(2)		3		112
Assets sold during the period		18		-		-		-		-		18
Total actual return on plan assets		19		44		66		(2)		3		130
Purchases, sales, settlements, net		(33)		21		(99)		150		12		51
Transfers into/out of Level 3		(6)		(2)		-		-		-		(8)
Balance at December 31, 2011	$	26	$	303	$	314	$	148	$	39	$	830

The assets related to other postretirement benefit plans are invested in deposit funds with interest credited based on fixed income investments in the general account of CGLIC. As there are significant unobservable inputs used in determining the fair value of theseassets, they are classified as Level 3. During 2012, these assets earned a return of $1 million, offset by a net withdrawal from the fund of $3 million, while during 2011, they earned a return of $1 million, offset by a net withdrawal of $2 million.

Assumptions for pension and other postretirement benefit plans. Management determined the present value of the projected benefit obligation and the accumulated other postretirement benefit obligation and related benefit costs based on the following weighted average assumptions as of and for the years ended December 31:

	2012	2011
Discount rate:
Pension benefit obligation	3.50%	4.00%
Other postretirement benefit obligation	3.25%	3.75%
Pension benefit cost	4.00%	5.00%
Other postretirement benefit cost	3.75%	4.75%
Expected long-term return on plan assets:
Pension benefit cost	8.00%	8.00%
Other postretirement benefit cost	5.00%	5.00%

In measuring the 2012 benefit obligations, the Company set discount rates by applying actual annualized yields at various durations from the Citigroup Above-Median Pension Liability curve tothe expected cash flows of the postretirement benefits liabilities. Prior to 2012, the Company used the broader Cititgroup Pension Liability curve. The Company believes that the Citigroup Above-Median Pension Liability curve is more representative of the yields that the Company is able to achieve in its plan asset investment strategy. The curve uses an array of bonds in various industries throughout the domestic market for high quality bonds, but only selects those for the curve that have an above median return at each duration. As with the broader curve, Citigroup monitors the bond portfolioto ensure that only high quality issues are included. In setting its discount rate for 2012, the Company reviewed alternative indices and determined that they were not materially differentthan the result produced by the Citigroup Above-Median curve.

Expected long-term rates of return on plan assets were developed considering actual long-term historical returns, expected long-term market conditions, plan asset mix and management's investment strategy, that continues a significant allocation to domestic and foreign equity securities as well as real estate, securities partnerships and hedge funds.Expected long-term market conditions take into consideration certain key macroeconomic trends including expected domestic and foreign GDP growth, employment levels and inflation. Based on the Company's current outlook, the expected return assumption is considered reasonable.

To measure pension costs, the Company uses a market-related asset valuation for domestic pension plan assets invested in non-fixed income investments. The market-related value of these pension assets recognizes the difference between actual and expected long-term returns in the portfolio over 5 years, a method that reduces the short-term impact of market fluctuations on pension cost. At December 31, 2012, the market-related asset value was approximately $3.5 billion compared with a market value of approximately $3.6 billion.

Benefit payments. The following benefit payments, including expected future services, are expected to be paid in:

	Pension		Other Postretirement
(In millions)	Benefits		Benefits
2013	$	396	$	35
2014	$	342	$	36
2015	$	333	$	36
2016	$	331	$	35
2017	$	332	$	34
2018-2022	$	1,630	$	149

B.       401(k) Plans

The Company sponsors a 401(k) plan in which the Company matches a portion of employees' pre-tax contributions. Another 401(k) plan with an employer match was frozen in 1999. Participants in the active plan may invest in various funds that invest in the Company's common stock, several diversified stock funds, a bond fund or a fixed-income fund. In conjunction with the action to freeze the domestic defined benefit pension plans, effective January 1, 2010, the Company increased its matching contributions to 401(k) plan participants.

The Company may elect to increase its matching contributions if the Company's annual performance meets certain targets. A substantial amount of the Company's matching contributions are invested in the Company's common stock. The Company's expense for these plans was $78million for 2012, $72 million for 2011 and $69 million for 2010.