FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements [Abstract]

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

Fair Value of Financial Instruments

The carrying values and estimated fair values of the Company’s financial instruments were as follows:

	March 31, 2012				December 31, 2011
(In millions)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed-maturity securities	$	89,502	$	89,219	$	88,588	$	88,039
Fixed-maturity securities - consolidated variable interest entities	5,854		5,747		5,993		5,916
Perpetual securities	4,159		4,159		5,149		5,149
Perpetual securities - consolidated variable interest entities	1,193		1,193		1,290		1,290
Equity securities	25		25		25		25
Interest rate, foreign currency, and credit default swaps	318		318		375		375
Liabilities:
Notes payable (excluding capitalized leases)	3,955		4,354		3,275		3,536
Interest rate, foreign currency, and credit default swaps	428		428		531		531
Obligation to Japanese policyholder protection corporation	47		47		71		71

We determine the fair values of our fixed maturity securities, perpetual securities, privately issued equity securities and our derivatives using four basic pricing approaches or techniques: quoted market prices readily available from public exchange markets, price quotes and valuations from third party pricing vendors, a discounted cash flow (DCF) pricing model, and non-binding price quotes we obtain from outside brokers.

Our DCF pricing model incorporates an option adjusted spread and utilizes various market inputs we obtain from both active and inactive markets. The estimated fair values developed by the DCF pricing model is most sensitive to prevailing credit spreads, the level of interest rates (yields) and interest rate volatility. Credit spreads are derived using a bond index to create a credit spread matrix which takes into account the current credit spread, ratings and remaining time to maturity, and subordination levels for securities that are included in the bond index. Our DCF pricing model is based on a widely used global bond index that is comprised of investments in active markets. The index provides a broad-based measure of the global fixed-income bond market. This index covers bonds issued by European and American issuers, which account for the majority of bonds that we hold. We validate the reliability of the DCF pricing model periodically by using the model to price investments for which there are quoted market prices from active and inactive markets or, in the alternative, are quoted by our custodian for the same or similar securities.

The pricing data and market quotes we obtain from outside sources are reviewed internally for reasonableness. If a fair value appears unreasonable, we will re-examine the inputs and assess the reasonableness of the pricing data with the vendor. Additionally, we may compare the inputs to relevant market indices and other performance measurements. Based on that analysis, the valuation is confirmed or revised.

The fair values of our publicly issued notes payable were obtained from a limited number of independent brokers, and the fair values of our yen-denominated loans approximate their carrying values. The fair value of the obligation to the Japanese policyholder protection corporation is our estimated share of the industry's obligation calculated on a pro rata basis by projecting our percentage of the industry's premiums and reserves and applying that percentage to the total industry obligation payable in future years.

The carrying amounts for cash and cash equivalents, receivables, accrued investment income, accounts payable, cash collateral and payables for security transactions approximated their fair values due to the short-term nature of these instruments. Consequently, such instruments are not included in the above table. The preceding table also excludes liabilities for future policy benefits and unpaid policy claims as these liabilities are not financial instruments as defined by GAAP.

Fair Value Hierarchy

GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. These two types of inputs create three valuation hierarchy levels. Level 1 valuations reflect quoted market prices for identical assets or liabilities in active markets. Level 2 valuations reflect quoted market prices for similar assets or liabilities in an active market, quoted market prices for identical or similar assets or liabilities in non-active markets or model-derived valuations in which all significant valuation inputs are observable in active markets. Level 3 valuations reflect valuations in which one or more of the significant inputs are not observable in an active market.

The following tables present the fair value hierarchy levels of the Company's assets and liabilities that are measured and carried at fair value on a recurring basis.

	March 31, 2012
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets:
Securities available for sale, carried at fair value:
Fixed maturities:
Government and agencies	$	9,965	$	764	$	0	$	10,729
Municipalities	0		1,163		0		1,163
Mortgage- and asset-backed securities	0		897		367		1,264
Public utilities	0		6,926		409		7,335
Sovereign and supranational	0		1,787		418		2,205
Banks/financial institutions	0		6,612		1,097		7,709
Other corporate	0		15,082		1,035		16,117
Total fixed maturities	9,965		33,231		3,326		46,522
Perpetual securities:
Banks/financial institutions	0		4,676		325		5,001
Other corporate	0		351		0		351
Total perpetual securities	0		5,027		325		5,352
Equity securities	15		6		4		25
Other assets:
Interest rate swaps	0		0		31		31
Foreign currency swaps	0		47		240		287
Total other assets	0		47		271		318
Cash and cash equivalents	2,210		0		0		2,210
Total assets	$	12,190	$	38,311	$	3,926	$	54,427
Liabilities:
Interest rate swaps	$	0	$	0	$	3	$	3
Foreign currency swaps	0		9		319		328
Credit default swaps	0		0		97		97
Total liabilities	$	0	$	9	$	419	$	428

	December 31, 2011
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets:
Securities available for sale, carried at fair value:
Fixed maturities:
Government and agencies	$	11,092	$	721	$	0	$	11,813
Municipalities	0		1,159		0		1,159
Mortgage- and asset-backed securities	0		944		394		1,338
Public utilities	0		6,803		422		7,225
Sovereign and supranational	0		1,874		434		2,308
Banks/financial institutions	0		6,379		1,074		7,453
Other corporate	0		15,171		1,105		16,276
Total fixed maturities	11,092		33,051		3,429		47,572
Perpetual securities:
Banks/financial institutions	0		5,552		526		6,078
Other corporate	0		361		0		361
Total perpetual securities	0		5,913		526		6,439
Equity securities	15		6		4		25
Other assets:
Interest rate swaps	0		0		34		34
Foreign currency swaps	0		0		341		341
Total other assets	0		0		375		375
Cash and cash equivalents	2,249		0		0		2,249
Total assets	$	13,356	$	38,970	$	4,334	$	56,660
Liabilities:
Interest rate swaps	$	0	$	0	$	4	$	4
Foreign currency swaps	0		0		397		397
Credit default swaps	0		0		130		130
Total liabilities	$	0	$	0	$	531	$	531

The following tables present the fair values categorized by hierarchy levels for the Company's assets and liabilities that are carried at cost or amortized cost and for which fair value is disclosed.

	March 31, 2012
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets:
Securities held to maturity, carried at amortized cost:
Fixed maturities:
Government and agencies	$	23,067	$	0	$	0	$	23,067
Municipalities	0		550		0		550
Mortgage- and asset-backed securities	0		35		86		121
Public utilities	0		5,207		0		5,207
Sovereign and supranational	0		3,953		0		3,953
Banks/financial institutions	0		10,878		0		10,878
Other corporate	0		4,668		0		4,668
Total assets	$	23,067	$	25,291	$	86	$	48,444
Liabilities:
Notes payable (excluding capital leases)	$	0	$	0	$	4,354	$	4,354
Obligation to Japanese policyholder protection corporation	0		0		47		47
Total liabilities	$	0	$	0	$	4,401	$	4,401

	December 31, 2011
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets:
Securities held to maturity, carried at amortized cost:
Fixed maturities:
Government and agencies	$	19,071	$	0	$	0	$	19,071
Municipalities	0		584		0		584
Mortgage- and asset-backed securities	0		39		95		134
Public utilities	0		5,637		0		5,637
Sovereign and supranational	0		4,165		0		4,165
Banks/financial institutions	0		11,480		0		11,480
Other corporate	0		5,312		0		5,312
Total assets	$	19,071	$	27,217	$	95	$	46,383
Liabilities:
Notes payable (excluding capital leases)	$	0	$	0	$	3,536	$	3,536
Obligation to Japanese policyholder protection corporation	0		0		71		71
Total liabilities	$	0	$	0	$	3,607	$	3,607

As of March 31, 2012, approximately 51% of the fair value, or 77% of the number of holdings, of our available-for-sale fixed income and perpetual investments classified as Level 2 and 3% of the fair value, or 7% of the number of holdings, of our held-to-maturity fixed income investments classified as Level 2 are valued by obtaining quoted market prices from our investment custodian. The custodian obtains price quotes from various third party pricing services that estimate fair values based on observable market transactions for similar investments in active markets, market transactions for the same investments in inactive markets, or other observable market data where available. The fair value of approximately 42% of our Level 2 available-for-sale fixed income and perpetual investments, or 10% of the number of Level 2 available-for-sale holdings, and 95% of our Level 2 held-to-maturity fixed income investments, or 85% of the number of Level 2 held-to-maturity holdings, are determined using our DCF pricing model. The significant valuation inputs to the DCF model are obtained from, or corroborated by, observable market sources from both active and inactive markets. For the remaining 7% of Level 2 available-for-sale investment valuations, or 13% of the number of Level 2 available-for-sale holdings, and the remaining 2% of Level 2 held-to-maturity investment valuations, or 8% of the number of Level 2 held-to-maturity holdings, that are not provided by our custodian and are not priced using the DCF pricing model, we obtain quotes from other pricing services that estimate fair values based on observable market transactions for similar investments in active markets, market transactions for the same investment in inactive markets, or other observable market data where available.

Due to our reliance on third-party pricing services to provide valuations on 51% of our Level 2 available-for-sale portfolio and 3% of our Level 2 held-to-maturity portfolio, we regularly discuss and review pricing methodologies with the investment custodian. We also review the custodians' Service Organization Control (SOC 1) report for the period covering the current year to gain satisfaction with the controls and control environment of the custodian.

For securities in Level 2 that are below investment grade or have split ratings where the valuation calculated by our DCF model does not conform to current market conditions, a CDS spread is used in lieu of the index spread discussed above. The CDS is chosen based on an average of spreads of issues with the same issuer, rating and subordination.

We use derivative instruments to manage the risk associated with certain assets. However, the derivative instrument may not be classified in the same fair value hierarchy level as the associated asset. Inputs used to value derivatives include, but are not limited to, interest rates, credit spreads, foreign currency forward and spot rates, and interest volatility.

The fair value of the foreign currency swaps associated with our senior notes is based on the amount we would expect to receive or pay to terminate the swaps. The determination of the fair value of the swaps is based on observable market inputs, therefore they are classified as Level 2.

For derivatives associated with VIEs where we are the primary beneficiary, we are not the direct counterparty to the swap contracts. As a result, the fair value measurements incorporate the credit risk of the collateral associated with the VIE. Prior to the third quarter of 2011, these derivative instruments were reported in Level 2 of the fair value hierarchy, except CDSs and certain foreign currency swaps which were classified as Level 3. The interest rate and certain foreign currency derivative instruments previously classified as Level 2 were priced by broker quotations. In the third quarter of 2011, we changed from receiving valuations from brokers to receiving valuations from a third party pricing vendor for our derivatives. Based on an analysis of these derivatives and a review of the methodology employed by the pricing vendor, we determined that due to the long duration of these swaps and the need to extrapolate from short-term observable data to derive and measure long-term inputs, certain inputs, assumptions and judgments are required to value future cash flows that cannot be corroborated by current inputs or current observable market data. As a result, the derivatives associated with our consolidated VIEs have been classified as Level 3 of the fair value hierarchy as of September 30, 2011 and thereafter.

The fixed maturities classified as Level 3 consist of securities for which there are limited or no observable valuation inputs. We estimate the fair value of these securities by obtaining non-binding broker quotes from a limited number of brokers. These brokers base their quotes on a combination of their knowledge of the current pricing environment and market conditions. We consider these inputs to be unobservable. The significant valuation inputs that are used in the valuation process for the below-investment-grade and private placement investments classified as Level 3 include forward exchange rates, yen swap rates, dollar swap rates, interest rate volatilities, credit spread data on specific issuers, assumed default and default recovery rates, and certain probability assumptions. In obtaining these valuation inputs, we have determined that certain pricing assumptions and data used by our pricing sources are difficult to validate or corroborate by the market and/or appear to be internally developed rather than observed in or corroborated by the market. The use of these unobservable valuation inputs causes more subjectivity in the valuation process for these securities.

The equity securities classified in Level 3 are related to investments in Japanese businesses, each of which are insignificant and in the aggregate are immaterial. Because fair values for these investments are not readily available, we carry them at their original cost. We review each of these investments periodically and, in the event we determine that any are other-than-temporarily impaired, we write them down to their estimated fair value at that time.

The fair values of our publicly issued notes payable classified as Level 3 were obtained from a limited number of independent brokers. These brokers base their quotes on a combination of their knowledge of the current pricing environment and market conditions. We consider these inputs to be unobservable. The fair value of the obligation to the Japanese policyholder protection corporation classified as Level 3 is our estimated share of the industry's obligation calculated on a pro rata basis by projecting our percentage of the industry's premiums and reserves and applying that percentage to the total industry obligation payable in future years. We consider our inputs for this valuation to be unobservable.

Historically, we have not adjusted the quotes or prices we obtain from the brokers and pricing services we use.

Level 3 Rollforward and Transfers between Hierarchy Levels

The following tables present the changes in our available-for-sale investments and derivatives classified as Level 3.

Three Months Ended March 31, 2012
	Fixed Maturities														Perpetual Securities			Equity Securities		Derivatives
(In millions)	Mortgage- and Asset- Backed Securities			Public Utilities			Sovereign and Supranational			Banks/ Financial Institutions		Other Corporate			Banks/ Financial Institutions					Interest Rate Swaps			Foreign Currency Swaps			Credit Default Swaps			Total
Balance, beginning of period	$	394		$	422		$	434		$	1,074	$	1,105		$	526		$	4	$	30		$	(56	)	$	(130	)	$	3,803
Realized gains or losses included in earnings	0			0			0			0		2			49			0		(2		)	13			33			95
Unrealized gains or losses included in other comprehensive income	(23		)	(13		)	(16		)	23		(38		)	6			0		0			(12		)	0			(73		)
Purchases, issuances, sales and settlements:
Purchases	0			0			0			0		0			0			0		0			0			0			0
Issuances	0			0			0			0		0			0			0		0			0			0			0
Sales	0			0			0			0		(34		)	(256		)	0		0			0			0			(290		)
Settlements	(4		)	0			0			0		0			0			0		0			(24		)	0			(28		)
Transfers into Level 3	0			0			0			0		0			0			0		0			0			0			0
Transfers out of Level 3	0			0			0			0		0			0			0		0			0			0			0
Balance, end of period	$	367		$	409		$	418		$	1,097	$	1,035		$	325		$	4	$	28		$	(79	)	$	(97	)	$	3,507
Change in unrealized gains (losses) still held (1)	$	0		$	0		$	0		$	0	$	0		$	0		$	0	$	(2	)	$	13		$	33		$	44

⁽¹⁾Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in unrealized gains (losses) relating to assets classified as

Level 3 that were still held at March 31, 2012

Three Months Ended March 31, 2011
	Fixed Maturities													Perpetual Securities		Equity Securities		Derivatives
(In millions)	Mortgage- and Asset- Backed Securities			Public Utilities		Collateralized Debt Obligations		Sovereign and Supranational		Banks/ Financial Institutions		Other Corporate		Banks/ Financial Institutions				Foreign Currency Swaps			Credit Default Swaps			Total
Balance, beginning of period	$	267		$	0	$	5	$	0	$	386	$	0	$	0	$	4	$	241		$	(343	)	$	560
Realized gains or losses included in earnings	(6		)	0		0		0		1		0		0		0		(64		)	5			(64		)
Unrealized gains or losses included in other comprehensive income	(10		)	0		0		0		33		0		0		0		(51		)	0			(28		)
Purchases, issuances, sales and settlements:
Purchases	0			0		0		0		0		0		0		0		0			0			0
Issuances	0			0		0		0		0		0		0		0		0			0			0
Sales	0			0		0		0		0		0		0		0		0			0			0
Settlements	(3		)	0		0		0		0		0		0		0		0			0			(3		)
Transfers into Level 3	0			0		0		0		0		0		0		0		0			0			0
Transfers out of Level 3	0			0		0		0		0		0		0		0		0			0			0
Balance, end of period	$	248		$	0	$	5	$	0	$	420	$	0	$	0	$	4	$	126		$	(338	)	$	465
Change in unrealized gains    (losses) still held(1)	$	(6	)	$	0	$	0	$	0	$	1	$	0	$	0	$	0	$	(64	)	$	5		$	(64	)

⁽¹⁾Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in unrealized gains (losses) relating to assets classified as Level 3 that were still held at March 31, 2011

Transfers into and/or out of Level 3 are attributable to a change in the observability of inputs. Transfers into and/or out of any fair value hierarchy level are assumed to occur at the balance sheet date. There were no transfers between Level 1 and 2 for the three-month periods ended March 31, 2012 and 2011.

Fair Value Sensitivity

DCF Sensitivity

Our DCF pricing model utilizes various market inputs we obtain from both active and inactive markets. The estimated fair values developed by the DCF pricing models are most sensitive to prevailing credit spreads, the level of interest rates (yields), and, for our callable securities, interest rate volatility. Management believes that under normal market conditions, a movement of 50 basis points (bps) in interest rates and credit spreads and 50 percent in interest rate volatility would be sufficiently reasonable stresses to illustrate the sensitivity of valuations to these risk factors. Therefore, we selected these magnitudes of movement and provided both upward and downward movements in these key assumptions used to estimate fair value. Since the changes in fair value are relatively linear, readers of these financial statements can make their own judgments as to the movement in interest rates and the change in fair value based upon this data. The following scenarios provide a view of the sensitivity of our securities priced by our DCF pricing model.

The fair values of our available-for-sale fixed-maturity and perpetual securities valued by our DCF pricing model totaled $18.2 billion at March 31, 2012. The estimated effect of potential changes in interest rates, credit spreads and interest rate volatility on these fair values as of such date is as follows:

	Interest Rates						Credit Spreads						Interest Rate Volatility
Factor Change		Change in fair value   (in millions)				Factor change		Change in fair value   (in millions)				Factor change		Change in fair value   (in millions)
	+50 bps		$	(978	)		+50 bps		$	(975	)		+50 %		$	(36	)
	-50 bps		999				-50 bps		1,011				-50 %		1

The fair values of our held-to-maturity fixed-maturity securities valued by our DCF pricing model totaled $23.9 billion at March 31, 2012. The estimated effect of potential changes in interest rates, credit spreads and interest rate volatility on these fair values as of such date is as follows:

	Interest Rates						Credit Spreads						Interest Rate Volatility
Factor Change		Change in fair value   (in millions)				Factor change		Change in fair value   (in millions)				Factor change		Change in fair value   (in millions)
	+50 bps		$	(1,488	)		+50 bps		$	(1,379	)		+50 %		$	(132	)
	-50 bps		1,314				-50 bps		1,380				-50 %		167

Level 3 Significant Unobservable Input Sensitivity

The following tables summarize the significant unobservable inputs used in the valuation of our Level 3 available-for-sale investments and derivatives. Included in the tables are the inputs or range of possible inputs that have an effect on the overall valuation of the financial instruments.

March 31, 2012
(In millions)	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Assets:
Securities available for sale, carried at fair value:
Fixed maturities:
Mortgage- and asset-backed securities	$	367	Consensus pricing	Offered quotes	N/A	(e)
Public utilities	409		Discounted cash flow	Historical volatility	8.85%
Sovereign and supranational	418		Discounted cash flow	Historical volatility	8.85%
Banks/financial institutions	547		Discounted cash flow	Historical volatility	8.85%
	550		Consensus pricing	Offered quotes	N/A	(e)
Other corporate	594		Discounted cash flow	Historical volatility	8.85%
	441		Consensus pricing	Offered quotes	N/A	(e)
Perpetual securities:
Banks/financial institutions	325		Discounted cash flow	Historical volatility	8.85%
Equity securities	4		Net asset value	Offered quotes	$0-$993 ($4)
Other assets:
Interest rate swaps	31		Discounted cash flow	Base correlation	44% - 52%	(a)
				CDS spreads	3 - 1673 (136) bps
				Recovery rate	25% - 70% (40%)
Foreign currency swaps	81		Discounted cash flow	Interest rates (USD)	2.29% - 3.05%	(c)
				Interest rates (JPY)	1.04% - 2.00%	(d)
				CDS spreads	6 - 157 (112) bps
				Foreign exchange rates	20.69%	(b)
	46		Discounted cash flow	Interest rates (USD)	2.29% - 3.05%	(c)
				Interest rates (JPY)	1.04% - 2.00%	(d)
				CDS spreads	13 - 190 (97) bps
	113		Discounted cash flow	Interest rates (USD)	2.29% - 3.05%	(c)
				Interest rates (JPY)	1.04% - 2.00%	(d)
				Foreign exchange rates	20.69%	(b)
Total assets	$	3,926

(a) Weighted-average range of base correlations for our bespoke tranches for attachment and detachment points corresponding to market indices

(b) Based on 10 year volatility of JPY/USD exchange rate

(c) Inputs derived from U.S. long-term rates to accommodate long maturity nature of our swaps

(d) Inputs derived from Japan long-term rates to accommodate long maturity nature of our swaps

(e) N/A represents securities where we receive unadjusted broker quotes and for which there is no transparency into the providers' valuation techniques or unobservable inputs.

March 31, 2012
(In millions)	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Liabilities:
Interest rate swaps	$	3	Discounted cash flow	Base correlation	44% - 52%	(a)
				CDS spreads	3 - 1673 (136) bps
				Recovery rate	25% - 70% (40%)
Foreign currency swaps	91		Discounted cash flow	Interest rates (USD)	2.29% - 3.05%	(c)
				Interest rates (JPY)	1.04% - 2.00%	(d)
				CDS spreads	14 - 239 (128) bps
				Foreign exchange rates	20.69%	(b)
	21		Discounted cash flow	Interest rates (USD)	2.29% - 3.05%	(c)
				Interest rates (JPY)	1.04% - 2.00%	(d)
				CDS spreads	11 - 359 (214) bps
	207		Discounted cash flow	Interest rates (USD)	2.29% - 3.05%	(c)
				Interest rates (JPY)	1.04% - 2.00%	(d)
				Foreign exchange rates	20.69%	(b)
Credit default swaps	97		Discounted cash flow	Base correlations	44% - 52%	(a)
				CDS spreads	3 - 1673 (136) bps
				Recovery rate	25% - 70% (40%)
Total liabilities	$	419

The following is a discussion of the significant unobservable inputs or valuation technique used in determining the fair value of securities and derivatives classified as Level 3. Listed below each discussion are the asset and derivative categories impacted by the respective input or valuation technique.

Annualized historical foreign exchange volatility

We own a portfolio of callable reverse dual-currency bonds (RDCs). RDCs are securities that have principal denominated in yen while paying U.S. dollar (USD) coupons. The significant unobservable input used for valuation is the historical foreign exchange volatility. The market standard approach is to use implied volatility to value options or instruments with optionality, because historical volatility may not represent current market participants' expectations about future volatility. Given the importance of this input to the overall valuation, use of historical volatility could result in a significant increase or decrease in fair value measurement.

• Public utilities, Other corporate, Sovereign and supranational, Banks/financial institutions

Net Asset Value

We hold certain unlisted equity securities whose fair value is derived based on the financial statements published by the investee. These securities do not trade on an active market and the valuations derived are dependent on the availability of timely financial reporting of the investee.

• Equity securities

Offered quotes

In circumstances where our valuation model price is overridden because it implies a value that is not consistent with current market conditions, we will solicit bids from a limited number of brokers. We also receive unadjusted prices from brokers for our mortgage and asset-backed securities. These quotes are non-binding and are best estimates of value at that particular point in time.

• Mortgage- and asset-backed securities

• Banks/financial institutions

• Other Corporate

Interest Rates, CDS Spreads, Foreign exchange rates

The significant drivers of the valuation of the interest and foreign exchange swaps are interest rates, foreign exchange rates and CDS spreads. Our swaps have long maturities with fixed pay and receive legs. This increases the sensitivity of the swap to interest rate fluctuations. Since most of our yen-denominated cross currency swaps are in a net liability position, an increase in interest rates will decrease the liabilities and increase the value of the swap.

Foreign exchange swaps also have a lump-sum final settlement of foreign exchange principal receivables at the termination of the swap. An increase in yen interest rates will decrease the value of the final settlement foreign exchange receivables and decrease the value of the swap, and an increase in USD interest rates increase the swap value.

A similar sensitivity pattern is observed for the foreign exchange rates. When the spot U.S. dollar/Japanese yen (USD/JPY) foreign exchange rate decreases and the swap is receiving a final exchange payment in JPY, the swap value will increase due to the appreciation of the JPY. Most of our swaps are designed to receive payments in JPY at the termination and will thus be impacted by USD/JPY foreign exchange rate in this way. In cases where there is no final exchange foreign exchange receivable in JPY and we are paying JPY as interest payments, a decrease in the foreign exchange rate will lead to a decrease in the swap value.

The extinguisher feature in most of our swaps results in a cessation of cash flows and no further payments between the parties to the swap in the event of a default on the referenced or underlying collateral. To price this feature, we apply the survival probability of the referenced entity to the projected cash flows. The survival probability uses the CDS spreads and recovery rates to adjust the present value of the cash flows. For extinguisher swaps with positive values, an increase in CDS spreads decreases the likelihood of receiving the final exchange payments and reduces the value of the swap.

Due to the long duration of these swaps and the need to extrapolate from short-term observable data to derive and measure long-term inputs, certain inputs, assumptions and judgments are required to value future cash flows that cannot be corroborated by current inputs or current observable market data.

• Foreign currency swaps

Base Correlations, CDS Spreads

Our CDOs are tranches on baskets of single-name credit default swaps. The risks in these types of synthetic CDOs come from the single-name CDS risk and the correlations between the single names. The valuation of synthetic CDOs is dependent on the calibration of market prices for interest rates, single name CDS default probabilities and base correlation using financial modeling tools. Since there is limited or no observable data available for these tranches, these base correlations must be obtained from commonly traded market tranches such as the CDX and iTraxx indices. From the historical prices of these indices, base correlations can be obtained to develop a pricing curve of CDOs with different seniorities. Since the reference entities of the market indices do not match those in our portfolio underlying the synthetic CDO to be valued, several processing steps are taken to map the names in our portfolio to the indices. With the base correlation determined and the appropriate spreads selected, a valuation is calculated. An increase in the CDS spreads in the underlying portfolio leads to a decrease in the value due to higher probability of defaults and losses. The impact on the valuation due to base correlation depends on a number of factors, including the riskiness between market tranches and the modeled tranche based on our portfolio and the equivalence between detachment points in these tranches. Generally speaking, an increase in base correlation will decrease the value of the senior tranches while increasing the value of junior tranches. This may result in a positive or negative value change.

Our interest rate swaps are linked to the underlying synthetic CDOs. The valuation of these swaps is performed using a similar approach to that of the synthetic CDOs themselves; that is, the base correlation model is used to ensure consistency between the synthetic CDOs and the swaps.

• Credit default swaps, Interest rate swaps

For additional information on our investments and financial instruments, see the accompanying Notes 1, 3 and 4 and Notes 1, 3 and 4 of the Notes to the Consolidated Financial Statements in our annual report to shareholders for the year ended December 31, 2011.