Investments

9 Months Ended

Sep. 30, 2012

Investments [Abstract]

Investments

Note D. Investments

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

Net Investment Income

Periods ended September 30	Three Months						Nine Months
(In millions)	2012			2011			2012			2011
Fixed maturity securities	$	507		$	494		$	1,528		$	1,505
Short term investments	2			2			5			6
Limited partnership investments	89			(93		)	184			32
Equity securities	4			4			10			16
Mortgage loans	5			2			13			6
Trading portfolio (a)	7			(1		)	18			5
Other	—			1			3			6
Gross investment income	614			409			1,761			1,576
Investment expense	(13		)	(15		)	(42		)	(45		)
Net investment income	$	601		$	394		$	1,719		$	1,531

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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 nine months ended September 30, 2012. Net unrealized losses related to changes in fair value on trading securities still held included in net investment income were $1 million for the three and nine months ended September 30, 2011.

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

Net Realized Investment Gains (Losses)

Periods ended September 30	Three Months						Nine Months
(In millions)	2012			2011			2012			2011
Net realized investment gains (losses):
Fixed maturity securities:
Gross realized gains	$	75		$	56		$	193		$	233
Gross realized losses	(49		)	(85		)	(120		)	(222		)
Net realized investment gains (losses) on fixed maturity securities	26			(29		)	73			11
Equity securities:
Gross realized gains	5			1			10			7
Gross realized losses	(20		)	(2		)	(24		)	(10		)
Net realized investment gains (losses) on equity securities	(15		)	(1		)	(14		)	(3		)
Derivatives	(1		)	1			(1		)	—
Short term investments and other (a) (b)	(2		)	2			8			(7		)
Net realized investment gains (losses), net of participating policyholders’ interests	$	8		$	(27	)	$	66		$	1

____________________

(a) The nine months ended September 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) included in the three months ended September 30, 2012 or 2011 or the nine months ended September 30, 2012. There were $1 million of net unrealized gains for the nine months ended September 30, 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 September 30	Three Months				Nine Months
(In millions)	2012		2011		2012		2011
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	7	$	49	$	23	$	73
States, municipalities and political subdivisions	17		—		17		—
Asset-backed:
Residential mortgage-backed	20		21		49		95
Other asset-backed	—		4		—		4
Total asset-backed	20		25		49		99
U.S. Treasury and obligation of government-sponsored enterprises	—		—		1		—
Total fixed maturity securities available-for-sale	44		74		90		172
Equity securities available-for-sale:
Common stock	1		3		5		7
Preferred stock	19		—		19		1
Total equity securities available-for-sale	20		3		24		8
Net OTTI losses recognized in earnings	$	64	$	77	$	114	$	180

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

September 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	$	19,209	$	2,634	$	32	$	21,811	$	—
States, municipalities and political subdivisions	9,415		1,450		53		10,812		—
Asset-backed:
Residential mortgage-backed	5,907		264		81		6,090		(12		)
Commercial mortgage-backed	1,582		123		17		1,688		(3		)
Other asset-backed	944		23		1		966		—
Total asset-backed	8,433		410		99		8,744		(15		)
U.S. Treasury and obligations of government-sponsored enterprises	182		11		1		192		—
Foreign government	588		26		—		614		—
Redeemable preferred stock	101		14		—		115		—
Total fixed maturity securities available-for-sale	37,928		4,545		185		42,288		$	(15	)
Total fixed maturity securities trading	17		—		—		17
Equity securities available-for-sale:
Common stock	22		24		—		46
Preferred stock	206		8		—		214
Total equity securities available-for-sale	228		32		—		260
Total	$	38,173	$	4,577	$	185	$	42,565

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 September 30, 2012 and December 31, 2011, the net unrealized gains on investments included in AOCI were net of after-tax Shadow Adjustments of $1,277 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
September 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	$	600	$	18	$	210	$	14	$	810	$	32
States, municipalities and political subdivisions	84		1		227		52		311		53
Asset-backed:
Residential mortgage-backed	327		3		580		78		907		81
Commercial mortgage-backed	142		2		132		15		274		17
Other asset-backed	66		1		—		—		66		1
Total asset-backed	535		6		712		93		1,247		99
U.S. Treasury and obligations of government-sponsored enterprises	22		1		—		—		22		1
Total	$	1,241	$	26	$	1,149	$	159	$	2,390	$	185

	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

Based on current facts and circumstances, the Company believes the unrealized losses presented in the September 30, 2012 Securities in a Gross Unrealized Loss Position table above, are primarily attributable to broader economic conditions, changes in interest rates and credit spreads, market illiquidity and other market factors, but are not indicative of the ultimate collectibility of the current amortized cost 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 September 30, 2012.

The amount of pretax net realized gains (losses) on available-for-sale securities reclassified out of AOCI into earnings was $12 million and $59 million for the three and nine months ended September 30, 2012 and $(29) million and $12 million for the three and nine months ended September 30, 2011.

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

Periods ended September 30	Three Months						Nine Months
(In millions)	2012			2011			2012			2011
Beginning balance of credit losses on fixed maturity securities	$	99		$	82		$	92		$	141
Additional credit losses for securities for which an OTTI loss was previously recognized	2			11			23			29
Credit losses for securities for which an OTTI loss was not previously recognized	—			10			2			11
Reductions for securities sold during the period	(3		)	(4		)	(11		)	(50		)
Reductions for securities the Company intends to sell or more likely than not will be required to sell	—			—			(8		)	(32		)
Ending balance of credit losses on fixed maturity securities	$	98		$	99		$	98		$	99

Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at September 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

	September 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	$	1,861	$	1,876	$	1,802	$	1,812
Due after one year through five years	13,382		14,176		13,110		13,537
Due after five years through ten years	8,490		9,337		8,410		8,890
Due after ten years	14,195		16,899		14,017		15,692
Total	$	37,928	$	42,288	$	37,339	$	39,931

Investment Commitments

As of September 30, 2012, the Company had committed approximately $114 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 September 30, 2012, the Company had commitments to purchase $159 million and sell $154 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 September 30, 2012, the Company had obligations on unfunded bank loan participations in the amount of $6 million.