Investments

6 Months Ended

Jun. 30, 2012

Investments [Abstract]

Investments

Note C. Investments

The significant components of net investment income are presented in the following table.

Net Investment Income

Periods ended June 30	Three Months						Six Months
(In millions)	2012			2011			2012			2011
Fixed maturity securities	$	505		$	505		$	1,021		$	1,011
Short term investments	2			2			3			4
Limited partnership investments	(35		)	11			95			125
Equity securities	2			6			6			12
Mortgage loans	5			2			8			4
Trading portfolio (a)	4			3			11			6
Other	2			3			3			5
Gross investment income	485			532			1,147			1,167
Investment expense	(15		)	(15		)	(29		)	(30		)
Net investment income	$	470		$	517		$	1,118		$	1,137

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(a) There were no net unrealized gains (losses) related to changes in fair value of trading securities still held included in net investment income for the three or six months ended June 30, 2012 or 2011.

Net realized investment gains (losses) are presented in the following table.

Net Realized Investment Gains (Losses)

Periods ended June 30	Three Months						Six Months
(In millions)	2012			2011			2012			2011
Net realized investment gains (losses):
Fixed maturity securities:
Gross realized gains	$	49		$	89		$	118		$	177
Gross realized losses	(32		)	(69		)	(71		)	(137		)
Net realized investment gains (losses) on fixed maturity securities	17			20			47			40
Equity securities:
Gross realized gains	2			1			5			6
Gross realized losses	(2		)	(3		)	(4		)	(8		)
Net realized investment gains (losses) on equity securities	—			(2		)	1			(2		)
Derivatives	1			—			—			(1		)
Short term investments and other (a) (b)	4			(3		)	10			(9		)
Net realized investment gains (losses), net of participating policyholders’ interests	$	22		$	15		$	58		$	28

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(a) The six months ended June 30, 2011 included a $9 million loss related to the early extinguishment of debt in 2011.

(b) Includes net unrealized gains (losses) related to changes in the fair value of securities for which the fair value option has been elected. There were no net unrealized gains (losses) for the three months ended June 30, 2012 or 2011. There were no net unrealized gains (losses) for the six months ended June 30, 2012 as compared with unrealized gains of $1 million for the same period in 2011.

The components of net other-than-temporary impairment (OTTI) losses recognized in earnings by asset type are summarized in the following table.

Periods ended June 30	Three Months				Six Months
(In millions)	2012		2011		2012		2011
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	6	$	15	$	16	$	24
Asset-backed:
Residential mortgage-backed	15		46		29		74
U.S. Treasury and obligation of government-sponsored enterprises	—		—		1		—
Total fixed maturity securities available-for-sale	21		61		46		98
Equity securities available-for-sale:
Common stock	2		1		4		4
Preferred stock	—		—		—		1
Total equity securities available-for-sale	2		1		4		5
Net OTTI losses recognized in earnings	$	23	$	62	$	50	$	103

A security is impaired if the fair value of the security is less than its cost adjusted for accretion, amortization and previously recorded OTTI losses, otherwise defined as an unrealized loss. When a security is impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary.

Significant judgment is required in the determination of whether an OTTI loss has occurred for a security. The Company follows a consistent and systematic process for determining and recording an OTTI loss. The Company has established a committee responsible for the OTTI process. This committee, referred to as the Impairment Committee, is made up of three officers appointed by the Company’s Chief Financial Officer (CFO). The Impairment Committee is responsible for evaluating all securities in an unrealized loss position on at least a quarterly basis.

The Impairment Committee’s assessment of whether an OTTI loss has occurred incorporates both quantitative and qualitative information. Fixed maturity securities that the Company intends to sell, or it more likely than not will be required to sell before recovery of amortized cost, are considered to be other-than-temporarily impaired and the entire difference between the amortized cost basis and fair value of the security is recognized as an OTTI loss in earnings. The remaining fixed maturity securities in an unrealized loss position are evaluated to determine if a credit loss exists. The factors considered by the Impairment Committee include (a) the financial condition and near term prospects of the issuer, (b) whether the debtor is current on interest and principal payments, (c) credit ratings of the securities and (d) general market conditions and industry or sector specific outlook. The Company also considers results and analysis of cash flow modeling for asset-backed securities, and when appropriate, other fixed maturity securities. The focus of the analysis for asset-backed securities is on assessing the sufficiency and quality of underlying collateral and timing of cash flows based on scenario tests. If the present value of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss is judged to exist and the asset-backed security is deemed to be temporarily impaired. If the present value of the expected cash flows is less than amortized cost, the security is judged to be other-than-temporarily impaired for credit reasons and that shortfall, referred to as the credit component, is recognized as an OTTI loss in earnings. The difference between the adjusted amortized cost basis and fair value, referred to as the non-credit component, is recognized as OTTI in Other comprehensive income. In subsequent reporting periods, a change in intent to sell or further credit impairment on a security whose fair value has not deteriorated will cause the non-credit component originally recorded as OTTI in Other comprehensive income to be recognized as an OTTI loss in earnings.

The Company performs the discounted cash flow analysis using stressed scenarios to determine future expectations regarding recoverability. For asset-backed securities, significant assumptions enter into these cash flow projections including delinquency rates, probable risk of default, loss severity upon a default, over collateralization and interest coverage triggers, and credit support from lower level tranches.

The Company applies the same impairment model as described above for the majority of non-redeemable preferred stock securities on the basis that these securities possess characteristics similar to debt securities and that the issuers maintain their ability to pay dividends. For all other equity securities, in determining whether the security is other-than-temporarily impaired, the Impairment Committee considers a number of factors including, but not limited to: (a) the length of time and the extent to which the fair value has been less than amortized cost, (b) the financial condition and near term prospects of the issuer, (c) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for an anticipated recovery in value and (d) general market conditions and industry or sector specific outlook.

The following tables provide a summary of fixed maturity and equity securities.

Summary of Fixed Maturity and Equity Securities

June 30, 2012	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Unrealized OTTI Losses (Gains)
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	19,350	$	2,209	$	79	$	21,480	$	—
States, municipalities and political subdivisions	9,225		1,225		66		10,384		—
Asset-backed:
Residential mortgage-backed	5,817		215		141		5,891		42
Commercial mortgage-backed	1,514		82		27		1,569		(2		)
Other asset-backed	1,046		20		1		1,065		—
Total asset-backed	8,377		317		169		8,525		40
U.S. Treasury and obligations of government-sponsored enterprises	172		12		—		184		—
Foreign government	616		23		—		639		—
Redeemable preferred stock	101		10		—		111		—
Total fixed maturity securities available-for-sale	37,841		3,796		314		41,323		$	40
Total fixed maturity securities trading	44		—		—		44
Equity securities available-for-sale:
Common stock	27		21		—		48
Preferred stock	225		17		—		242
Total equity securities available-for-sale	252		38		—		290
Total	$	38,137	$	3,834	$	314	$	41,657

December 31, 2011	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Unrealized OTTI Losses (Gains)
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	19,086	$	1,946	$	154	$	20,878	$	—
States, municipalities and political subdivisions	9,018		900		136		9,782		—
Asset-backed:
Residential mortgage-backed	5,786		172		183		5,775		99
Commercial mortgage-backed	1,365		48		59		1,354		(2		)
Other asset-backed	946		13		4		955		—
Total asset-backed	8,097		233		246		8,084		97
U.S. Treasury and obligations of government-sponsored enterprises	479		14		—		493		—
Foreign government	608		28		—		636		—
Redeemable preferred stock	51		7		—		58		—
Total fixed maturity securities available-for-sale	37,339		3,128		536		39,931		$	97
Total fixed maturity securities trading	6		—		—		6
Equity securities available-for-sale:
Common stock	30		17		—		47
Preferred stock	258		4		5		257
Total equity securities available-for-sale	288		21		5		304
Total	$	37,633	$	3,149	$	541	$	40,241

The net unrealized gains on investments included in the tables above are recorded as a component of AOCI. When presented in AOCI, these amounts are net of tax and any required Shadow Adjustments. At June 30, 2012 and December 31, 2011, the net unrealized gains on investments included in AOCI were net of Shadow Adjustments of $940 million and $723 million. To the extent that unrealized gains on fixed income securities supporting certain products within the Life & Group Non-Core segment would result in a premium deficiency if realized, a related decrease in Deferred acquisition costs and/or increase in Insurance reserves is recorded, net of tax, as a reduction through Other comprehensive income (Shadow Adjustments).

The following tables summarize the estimated fair value and gross unrealized losses of available-for-sale fixed maturity and equity securities in a gross unrealized loss position by the length of time in which the securities have continuously been in that position.

Securities in a Gross Unrealized Loss Position

	Less than 12 Months				12 Months or Longer				Total
June 30, 2012	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	1,550	$	53	$	192	$	26	$	1,742	$	79
States, municipalities and political subdivisions	174		2		301		64		475		66
Asset-backed:
Residential mortgage-backed	276		13		923		128		1,199		141
Commercial mortgage-backed	158		5		153		22		311		27
Other asset-backed	181		1		—		—		181		1
Total asset-backed	615		19		1,076		150		1,691		169
Total	$	2,339	$	74	$	1,569	$	240	$	3,908	$	314

	Less than 12 Months				12 Months or Longer				Total
December 31, 2011	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
(In millions)
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	2,552	$	126	$	159	$	28	$	2,711	$	154
States, municipalities and political subdivisions	67		1		721		135		788		136
Asset-backed:
Residential mortgage-backed	719		36		874		147		1,593		183
Commercial mortgage-backed	431		39		169		20		600		59
Other asset-backed	389		4		—		—		389		4
Total asset-backed	1,539		79		1,043		167		2,582		246
Total fixed maturity securities available-for-sale	4,158		206		1,923		330		6,081		536
Equity securities available-for-sale:
Preferred stock	117		5		—		—		117		5
Total	$	4,275	$	211	$	1,923	$	330	$	6,198	$	541

The amount of pretax net realized gains on available-for-sale securities reclassified out of AOCI into earnings was $15 million and $47 million for the three and six months ended June 30, 2012 and $20 million and $41 million for the three and six months ended June 30, 2011.

The following table summarizes the activity for the three and six months ended June 30, 2012 and 2011 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at June 30, 2012 and 2011 for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).

Periods ended June 30	Three Months						Six Months
(In millions)	2012			2011			2012			2011
Beginning balance of credit losses on fixed maturity securities	$	100		$	113		$	92		$	141
Additional credit losses for securities for which an OTTI loss was previously recognized	10			8			21			18
Credit losses for securities for which an OTTI loss was not previously recognized	1			—			2			1
Reductions for securities sold during the period	(4		)	(21		)	(8		)	(46		)
Reductions for securities the Company intends to sell or more likely than not will be required to sell	(8		)	(18		)	(8		)	(32		)
Ending balance of credit losses on fixed maturity securities	$	99		$	82		$	99		$	82

Based on current facts and circumstances, the Company has determined that no additional OTTI losses related to the securities in an unrealized loss position presented in the June 30, 2012 Securities in a Gross Unrealized Loss Position table above are required to be recorded. A discussion of some of the factors reviewed in making that determination is presented below.

The classification between investment grade and non-investment grade presented in the discussion below is based on a ratings methodology that takes into account ratings from two major providers, Standard & Poor's (S&P) and Moody's Investor Services, Inc. (Moody's) in that order of preference. If a security is not rated by these providers, the Company formulates an internal rating.

Asset-Backed Securities

Asset-backed securities include residential mortgage-backed securities, both agency and non-agency, commercial mortgage-backed securities, and other asset-backed securities. The fair value of total asset-backed holdings at June 30, 2012 was $8,525 million which was comprised of 2,034 different securities. The fair value of these securities tends to be influenced by the characteristics and projected cash flows of the underlying collateral rather than the credit of the issuer. Each security has deal-specific tranche structures, credit support that results from the unique deal structure, particular collateral characteristics and other distinct security terms. As a result, seemingly common factors such as delinquency rates and collateral performance affect each security differently.

The gross unrealized losses on residential mortgage-backed securities included $63 million related to securities guaranteed by a U.S. government agency or sponsored enterprise and $78 million related to non-agency structured securities. Non-agency structured securities included 94 securities that had at least one trade lot in a gross unrealized loss position and the aggregate severity of the gross unrealized loss was approximately 9% of amortized cost.

Commercial mortgage-backed securities included 44 securities that had at least one trade lot in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 8% of amortized cost.

The following table summarizes asset-backed securities in a gross unrealized loss position by ratings distribution at June 30, 2012.

Gross Unrealized Losses by Ratings Distribution

June 30, 2012	Amortized Cost		Estimated Fair Value		Gross Unrealized Losses
(In millions)
U.S. Government, Government Agencies, and Government-Sponsored Enterprises	$	468	$	405	$	63
AAA	247		241		6
AA	163		155		8
A	141		134		7
BBB	162		148		14
Non-investment grade	679		608		71
Total	$	1,860	$	1,691	$	169

The Company believes the unrealized losses are primarily attributable to broader economic conditions, changes in interest rates and credit spreads, market illiquidity, and uncertainty with regard to the timing and amount of ultimate collateral realization, but are not indicative of the ultimate collectibility of the current carrying values of the securities. The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at June 30, 2012.

Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at June 30, 2012 and December 31, 2011. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Securities not due at a single date are allocated based on weighted average life.

Contractual Maturity

	June 30, 2012				December 31, 2011
(In millions)	Cost or Amortized Cost		Estimated Fair Value		Cost or Amortized Cost		Estimated Fair Value
Due in one year or less	$	1,889	$	1,904	$	1,802	$	1,812
Due after one year through five years	13,118		13,728		13,110		13,537
Due after five years through ten years	8,561		9,228		8,410		8,890
Due after ten years	14,273		16,463		14,017		15,692
Total	$	37,841	$	41,323	$	37,339	$	39,931

Investment Commitments

As of June 30, 2012, the Company had committed approximately $141 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.

The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. The purchase and sale of these investments are recorded on the date that the legal agreements are finalized and cash settlements are made. As of June 30, 2012, the Company had commitments to purchase $145 million and sell $124 million of such investments. The Company has an obligation to fund additional amounts under the terms of current loan participations that may not be recorded until a draw is made. As of June 30, 2012, the Company had obligations on unfunded bank loan participations in the amount of $12 million.

As of June 30, 2012, the Company had mortgage loan commitments of $20 million representing signed loan applications received and accepted. Mortgage loans are recorded once funded.