Investments

12 Months Ended

Dec. 31, 2012

Investments [Abstract]

Investments

Note C. Investments

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

Net Investment Income

Years ended December 31
(In millions)	2012			2011			2010
Fixed maturity securities	$	2,022		$	2,011		$	2,051
Short term investments	5			8			15
Limited partnership investments	251			48			249
Equity securities	12			20			32
Mortgage loans	17			9			2
Trading portfolio (a)	24			9			13
Other	7			7			8
Gross investment income	2,338			2,112			2,370
Investment expense	(56		)	(58		)	(54		)
Net investment income	$	2,282		$	2,054		$	2,316

___________________

(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 years ended December 31, 2012, 2011 and 2010.

As of December 31, 2012, the Company held nine non-income producing fixed maturity securities aggregating $1 million of fair value. As of December 31, 2011, the Company held nine non-income producing fixed maturity securities aggregating $3 million of fair value. As of December 31, 2012 and 2011, no investments in a single issuer exceeded 10% of stockholders' equity, other than investments in securities issued by the U.S. Treasury and obligations of government-sponsored enterprises.

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

Net Realized Investment Gains (Losses)

Years ended December 31
(In millions)	2012			2011			2010
Net realized investment gains (losses):
Fixed maturity securities:
Gross realized gains	$	232		$	289		$	475
Gross realized losses	(149		)	(311		)	(383		)
Net realized investment gains (losses) on fixed maturity securities	83			(22		)	92
Equity securities:
Gross realized gains	19			10			50
Gross realized losses	(42		)	(11		)	(52		)
Net realized investment gains (losses) on equity securities	(23		)	(1		)	(2		)
Derivatives	(2		)	—			(1		)
Short term investments and other (a)	5			21			(3		)
Net realized investment gains (losses), net of participating policyholders’ interests	$	63		$	(2	)	$	86

____________________

(a) Includes net unrealized gains (losses) related to changes in the fair value of securities for which the fair value option has been elected. Net unrealized gains (losses) were $(1) million, $2 million and $(1) million for the years ended December 31, 2012, 2011 and 2010.

Net change in unrealized gains (losses) on investments is presented in the following table.

Net Change in Unrealized Gains (Losses)

Years ended December 31
(In millions)	2012			2011			2010
Net change in unrealized gains (losses) on investments:
Fixed maturity securities	$	1,871		$	1,442		$	1,140
Equity securities	5			(2		)	7
Other	(1		)	(3		)	(1		)
Total net change in unrealized gains (losses) on investments	$	1,875		$	1,437		$	1,146

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

Years ended December 31
(In millions)	2012		2011		2010
Fixed maturity securities available-for-sale:
Corporate and other bonds	$	27	$	95	$	68
States, municipalities and political subdivisions	34		—		62
Asset-backed:
Residential mortgage-backed	50		105		71
Commercial mortgage-backed	—		—		3
Other asset-backed	—		6		3
Total asset-backed	50		111		77
U.S. Treasury and obligation of government-sponsored enterprises	1		—		—
Total fixed maturity securities available-for-sale	112		206		207
Equity securities available-for-sale:
Common stock	6		8		11
Preferred stock	36		1		14
Total equity securities available-for-sale	42		9		25
Short term investments	—		1		—
Net OTTI losses recognized in earnings	$	154	$	216	$	232

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

December 31, 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	$	19,530	$	2,698	$	21	$	22,207	$	—
States, municipalities and political subdivisions	9,372		1,455		44		10,783		—
Asset-backed:
Residential mortgage-backed	5,745		246		71		5,920		(28		)
Commercial mortgage-backed	1,692		147		17		1,822		(3		)
Other asset-backed	929		23		—		952		—
Total asset-backed	8,366		416		88		8,694		(31		)
U.S. Treasury and obligations of government-sponsored enterprises	172		11		1		182		—
Foreign government	588		25		—		613		—
Redeemable preferred stock	113		13		1		125		—
Total fixed maturity securities available-for-sale	38,141		4,618		155		42,604		$	(31	)
Total fixed maturity securities trading	29		—		—		29
Equity securities available-for-sale:
Common stock	38		14		—		52
Preferred stock	190		7		—		197
Total equity securities available-for-sale	228		21		—		249
Total	$	38,398	$	4,639	$	155	$	42,882

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 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
December 31, 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	$	846	$	13	$	108	$	8	$	954	$	21
States, municipalities and political subdivisions	254		5		165		39		419		44
Asset-backed:
Residential mortgage-backed	583		5		452		66		1,035		71
Commercial mortgage-backed	85		2		141		15		226		17
Total asset-backed	668		7		593		81		1,261		88
U.S. Treasury and obligations of government-sponsored enterprises	23		1		—		—		23		1
Redeemable preferred stock	28		1		—		—		28		1
Total	$	1,819	$	27	$	866	$	128	$	2,685	$	155

	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 December 31, 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 December 31, 2012.

The following table summarizes the activity for the years ended December 31, 2012, 2011 and 2010 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at December 31, 2012, 2011 and 2010 for which a portion of an OTTI loss was recognized in Other comprehensive income.

Years ended December 31
(In millions)	2012			2011			2010
Beginning balance of credit losses on fixed maturity securities	$	92		$	141		$	164
Additional credit losses for securities for which an OTTI loss was previously recognized	23			39			37
Credit losses for securities for which an OTTI loss was not previously recognized	2			11			11
Reductions for securities sold during the period	(14		)	(67		)	(62		)
Reductions for securities the Company intends to sell or more likely than not will be required to sell	(8		)	(32		)	(9		)
Ending balance of credit losses on fixed maturity securities	$	95		$	92		$	141

Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at December 31, 2012 and 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

	December 31, 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	$	1,648	$	1,665	$	1,802	$	1,812
Due after one year through five years	13,603		14,442		13,110		13,537
Due after five years through ten years	8,726		9,555		8,410		8,890
Due after ten years	14,164		16,942		14,017		15,692
Total	$	38,141	$	42,604	$	37,339	$	39,931

Limited Partnerships

The carrying value of limited partnerships as of December 31, 2012 and 2011 was $2,462 million and $2,245 million, which includes undistributed earnings of $768 million and $560 million. Limited partnerships comprising 67% of the total carrying value are reported on a current basis through December 31, 2012 with no reporting lag, 17% are reported on a one month lag and the remainder are reported on more than a one month lag. As of December 31, 2012 and 2011, the Company had 79 active limited partnership investments. The number of limited partnerships held and the strategies employed provide diversification to the limited partnership portfolio and the overall invested asset portfolio.

Of the limited partnerships held, 80% and 81% at December 31, 2012 and 2011 employ hedge fund strategies that generate returns through investing in securities that are marketable while engaging in various management techniques primarily in public fixed income and equity markets. These hedge fund strategies include both long and short positions in fixed income, equity and derivative instruments. The hedge fund strategies may seek to generate gains from mispriced or undervalued securities, price differentials between securities, distressed investments, sector rotation, or various arbitrage disciplines. Within hedge fund strategies, approximately 48% were equity related, 27% pursued a multi-strategy approach, 22% were focused on distressed investments and 3% were fixed income related at December 31, 2012.

Limited partnerships representing 16% and 14% at December 31, 2012 and 2011 were invested in private debt and equity. The remaining were invested in various other partnerships including real estate. The ten largest limited partnership positions held totaled $1,309 million and $1,218 million as of December 31, 2012 and 2011. Based on the most recent information available regarding the Company’s percentage ownership of the individual limited partnerships, the carrying value reflected on the Consolidated Balance Sheets represents approximately 4% of the aggregate partnership equity at December 31, 2012 and 2011, and the related income reflected on the Consolidated Statements of Operations represents approximately 3%, 4%, and 3% of the changes in partnership equity for all limited partnership investments for the years ended December 31, 2012, 2011 and 2010.

While the Company generally does not invest in highly leveraged partnerships, there are risks which may result in losses due to short-selling, derivatives or other speculative investment practices. The use of leverage increases volatility generated by the underlying investment strategies.

The Company’s limited partnership investments contain withdrawal provisions that generally limit liquidity for a period of thirty days up to one year and in some cases do not permit withdrawals until the termination of the partnership. Typically, withdrawals require advance written notice of up to 90 days.

Commercial Mortgage Loans

Risks related to the recoverability of loan balances include declines in the estimated cash flows from underlying property leases, fair value of collateral and creditworthiness of tenants of credit tenant loan properties, where lease payments directly service the loan. The Company evaluates loans for impairment on a specific loan basis and identifies loans for evaluation of impairment based on the collection experience of each loan and other credit quality indicators such as debt service coverage ratio and the creditworthiness of the borrower or tenants of credit tenant loan properties. As of December 31, 2012 and 2011, there were no loans past due or in non-accrual status, and no valuation allowance was recorded.

Investment Commitments

As of December 31, 2012, the Company had committed approximately $202 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.

As of December 31, 2012, the Company had mortgage loan commitments of $22 million representing signed loan applications received and accepted.

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. As of December 31, 2012, the Company had commitments to purchase $185 million and sell $164 million of such investments.

Investments on Deposit

Securities with carrying values of approximately $3.6 billion and $3.5 billion were deposited by the Company’s insurance subsidiaries under requirements of regulatory authorities and others as of December 31, 2012 and 2011.

Cash and securities with carrying values of approximately $4 million and $5 million were deposited with financial institutions as collateral for letters of credit as of December 31, 2012 and 2011. In addition, cash and securities were deposited in trusts with financial institutions to secure reinsurance and other obligations with various third parties. The carrying values of these deposits were approximately $277 million and $288 million as of December 31, 2012 and 2011.