INVESTMENTS

Investment Holdings

The amortized cost for our investments in debt and perpetual securities, the cost for equity securities and the fair values of these investments are shown in the following tables.



	September 30, 2012
(In millions)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities available for sale, carried at fair value:
Fixed maturities:
Yen-denominated:
Japan government and agencies	$	14,059	$	488	$	6	$	14,541
Mortgage- and asset-backed securities	853		51		1		903
Public utilities	4,026		107		142		3,991
Sovereign and supranational	2,050		53		109		1,994
Banks/financial institutions	4,473		194		369		4,298
Other corporate	6,307		214		256		6,265
Total yen-denominated	31,768		1,107		883		31,992
Dollar-denominated:
U.S. government and agencies	93		25		0		118
Municipalities	1,049		152		5		1,196
Mortgage- and asset-backed securities	235		67		0		302
Public utilities	3,620		699		3		4,316
Sovereign and supranational	476		121		4		593
Banks/financial institutions	3,526		476		17		3,985
Other corporate	11,883		1,902		39		13,746
Total dollar-denominated	20,882		3,442		68		24,256
Total fixed maturities	52,650		4,549		951		56,248
Perpetual securities:
Yen-denominated:
Banks/financial institutions	4,214		139		281		4,072
Other corporate	345		26		0		371
Dollar-denominated:
Banks/financial institutions	269		19		12		276
Total perpetual securities	4,828		184		293		4,719
Equity securities	22		4		2		24
Total securities available for sale	$	57,500	$	4,737	$	1,246	$	60,991



	September 30, 2012
(In millions)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities held to maturity, carried at amortized cost:
Fixed maturities:
Yen-denominated:
Japan government and agencies	$	34,792	$	715	$	6	$	35,501
Municipalities	550		42		0		592
Mortgage- and asset-backed securities	109		5		0		114
Public utilities	5,494		328		66		5,756
Sovereign and supranational	3,712		230		79		3,863
Banks/financial institutions	10,425		272		399		10,298
Other corporate	4,972		239		78		5,133
Total yen-denominated	60,054		1,831		628		61,257
Total securities held to maturity	$	60,054	$	1,831	$	628	$	61,257



	December 31, 2011
(In millions)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities available for sale, carried at fair value:
Fixed maturities:
Yen-denominated:
Japan government and agencies	$	11,108	$	670	$	0	$	11,778
Mortgage- and asset-backed securities	912		43		1		954
Public utilities	3,850		59		226		3,683
Sovereign and supranational	1,704		87		16		1,775
Banks/financial institutions	4,312		74		359		4,027
Other corporate	6,213		120		459		5,874
Total yen-denominated	28,099		1,053		1,061		28,091
Dollar-denominated:
U.S. government and agencies	31		4		0		35
Municipalities	1,060		107		8		1,159
Mortgage- and asset-backed securities	310		74		0		384
Public utilities	3,052		517		27		3,542
Sovereign and supranational	449		89		5		533
Banks/financial institutions	3,324		223		121		3,426
Other corporate	9,031		1,433		62		10,402
Total dollar-denominated	17,257		2,447		223		19,481
Total fixed maturities	45,356		3,500		1,284		47,572
Perpetual securities:
Yen-denominated:
Banks/financial institutions	6,217		155		604		5,768
Other corporate	344		17		0		361
Dollar-denominated:
Banks/financial institutions	336		3		29		310
Total perpetual securities	6,897		175		633		6,439
Equity securities	22		4		1		25
Total securities available for sale	$	52,275	$	3,679	$	1,918	$	54,036



	December 31, 2011
(In millions)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities held to maturity, carried at amortized cost:
Fixed maturities:
Yen-denominated:
Japan government and agencies	$	18,775	$	297	$	1	$	19,071
Municipalities	553		35		4		584
Mortgage- and asset-backed securities	129		5		0		134
Public utilities	5,615		188		166		5,637
Sovereign and supranational	4,200		148		183		4,165
Banks/financial institutions	12,389		170		1,079		11,480
Other corporate	5,348		149		185		5,312
Total yen-denominated	47,009		992		1,618		46,383
Total securities held to maturity	$	47,009	$	992	$	1,618	$	46,383

The methods of determining the fair values of our investments in debt securities, perpetual securities and equity securities are described in Note 5.

During the third quarter of 2012, we reclassified one investment from the held-to-maturity portfolio to the available-for-sale portfolio as a result of significant declines in the issuer's creditworthiness. At the time of transfer, this security issued by BBVA Subordinated Capital, a financial institution domiciled in Spain, had an amortized cost of $206 million after we recognized an other-than-temporary impairment of $52 million in the third quarter of 2012. During the second quarter of 2012, we reclassified five investments from the held-to-maturity portfolio to the available-for-sale portfolio as a result of significant declines in the issuers' creditworthiness. At the time of transfer, the securities had an aggregate amortized cost of $842 million and an aggregate unrealized loss of $268 million. Included in this transfer were securities issued by UniCredit and Bankia SA, financial institutions, and Generalitat de Catalunya and Junta de Andalucia, regional governments in Spain. During the first quarter of 2012, we reclassified one investment from the held-to-maturity portfolio to the available-for-sale portfolio as a result of a significant decline in the issuer's creditworthiness. At the time of transfer, the security had an amortized cost of $122 million and an unrealized loss of $23 million. This investment was issued by Energias de Portugal SA (EDP), an integrated electric utility domiciled in Portugal.

We did not reclassify any investments from the held-to-maturity portfolio to the available-for-sale portfolio during the second or third quarter of 2011. During the first quarter of 2011, we reclassified eight investments from the held-to-maturity portfolio to the available-for-sale portfolio as a result of significant declines in the issuers’ creditworthiness. At the time of the transfer, the securities had an aggregate amortized cost of $1.6 billion and an aggregate unrealized loss of $270 million. The securities transferred included investments in the Republic of Tunisia and securities associated with financial institutions in Portugal and Ireland. The investments from the financial institutions in Portugal were subsequently sold by the end of the third quarter of 2011.

Contractual and Economic Maturities

The contractual maturities of our investments in fixed maturities at September 30, 2012, were as follows:



	Aflac Japan				Aflac U.S.
(In millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale:
Due in one year or less	$	1,812	$	1,837	$	53	$	54
Due after one year through five years	2,519		2,645		336		373
Due after five years through 10 years	4,792		5,177		1,004		1,186
Due after 10 years	32,928		34,042		7,980		9,568
Mortgage- and asset-backed securities	1,044		1,148		44		56
Total fixed maturities available for sale	$	43,095	$	44,849	$	9,417	$	11,237
Held to maturity:
Due in one year or less	$	6,575	$	6,580	$	0	$	0
Due after one year through five years	819		885		0		0
Due after five years through 10 years	3,371		3,778		0		0
Due after 10 years	49,180		49,900		0		0
Mortgage- and asset-backed securities	109		114		0		0
Total fixed maturities held to maturity	$	60,054	$	61,257	$	0	$	0

At September 30, 2012, the Parent Company had a portfolio of investment-grade available-for-sale fixed-maturity securities totaling $138 million at amortized cost and $162 million at fair value, which is not included in the table above.

Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties.

The majority of our perpetual securities are subordinated to other debt obligations of the issuer, but rank higher than the issuer's equity securities. Perpetual securities have characteristics of both debt and equity investments, along with unique features that create economic maturity dates for the securities. Although perpetual securities have no contractual maturity date, they have stated interest coupons that were fixed at their issuance and subsequently change to a floating short-term interest rate of 125 to more than 300 basis points above an appropriate market index, generally by the 25th year after issuance, thereby creating an economic maturity date. The economic maturities of our investments in perpetual securities, which were all reported as available for sale at September 30, 2012, were as follows:



	Aflac Japan				Aflac U.S.
(In millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	322	$	325	$	0	$	0
Due after one year through five years	1,251		1,304		5		5
Due after five years through 10 years	468		498		0		0
Due after 10 years	2,623		2,422		159		165
Total perpetual securities available for sale	$	4,664	$	4,549	$	164	$	170

Investment Concentrations

Our investment process begins with an independent approach to underwriting each issuer's fundamental credit quality. We evaluate independently those factors which we believe could influence an issuer's ability to make payments under the contractual terms of our instruments. This includes a thorough analysis of a variety of items including the issuer's country of domicile (including political, legal, and financial considerations); the industry in which the issuer competes (with an analysis of industry structure, end-market dynamics, and regulation); company specific issues (such as management, assets, earnings, cash generation, and capital needs); and contractual provisions of the instrument (such as financial covenants and position in the capital structure). We further determine the appropriateness of the investment considering portfolio management needs, asset/liability requirements, portfolio diversification, and expected income.

Banks and Financial Institutions

After Japanese government bonds (JGBs), our second largest investment concentration as of September 30, 2012, was banks and financial institutions. Within the countries we approve for investment opportunities, we primarily invest in financial institutions that are strategically crucial to each approved country's economy. The bank and financial institution sector is a highly regulated industry and plays a strategic role in the global economy. We achieve some degree of diversification in the bank and financial institution sector through a geographically diverse universe of credit exposures. Within this sector, our credit risk by geographic region or country of issuer at September 30, 2012, based on amortized cost, was: Europe, excluding the United Kingdom (33%); United States (23%); United Kingdom (8%); Japan (8%); and other (28%).

Our total investments in the bank and financial institution sector, including those classified as perpetual securities, were as follows:



	September 30, 2012						December 31, 2011
	Total Investments in Banks and Financial Institutions Sector (in millions)			Percentage of Total Investment Portfolio			Total Investments in Banks and Financial Institutions Sector (in millions)			Percentage of Total Investment Portfolio
Fixed maturities:
Amortized cost		$	18,424		15	%		$	20,025		20	%
Fair value		18,581			15			18,933			19
Perpetual securities:
Upper Tier II:
Amortized cost		$	3,189		3	%		$	4,285		5	%
Fair value		3,165			3			4,244			4
Tier I:
Amortized cost		1,294			1			2,268			2
Fair value		1,183			1			1,834			2
Total:
Amortized cost		$	22,907		19	%		$	26,578		27	%
Fair value		22,929			19			25,011			25

Derisking

During the three- and nine-month periods ended September 30, 2012, we continued our efforts of pursuing strategic investment activities to lower the risk profile of our investment portfolio. During the first nine months of 2012, we have reduced our exposure to perpetual and other subordinated securities of European issuers, particularly in the financial sector. See further details in the Realized Investment Gains and Losses section below.

Realized Investment Gains and Losses

Information regarding pretax realized gains and losses from investments is as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2012			2011			2012			2011
Realized investment gains (losses) on securities:
Fixed maturities:
Available for sale:
Gross gains from sales	$	313		$	354		$	346		$	458
Gross losses from sales	(1		)	(56		)	(37		)	(375		)
Net gains (losses) from redemptions	0			9			2			15
Other-than-temporary impairment losses	(70		)	(44		)	(400		)	(793		)
Held to maturity:
Net gains (losses) from redemptions	0			0			3			0
Total fixed maturities	242			263			(86		)	(695		)
Perpetual securities:
Available for sale:
Gross gains from sales	12			0			82			54
Gross losses from sales	(36		)	0			(98		)	(109		)
Net gains (losses) from redemptions	0			0			60			0
Other-than-temporary impairment losses	(27		)	(122		)	(243		)	(306		)
Total perpetual securities	(51		)	(122		)	(199		)	(361		)
Equity securities:
Other-than-temporary impairment losses	0			0			0			(1		)
Total equity securities	0			0			0			(1		)
Derivatives and other:
Derivative gains (losses)	95			(224		)	108			(291		)
Other	0			0			0			18
Total derivatives and other	95			(224		)	108			(273		)
Total realized investment gains (losses)	$	286		$	(83	)	$	(177	)	$	(1,330	)

During the three- and nine-month periods ended September 30, 2012, sales and redemptions of securities generated a net realized investment gain. This net gain from sales and redemptions primarily resulted from the sale of Japanese government bonds (JGBs) in a bond-swap program executed in the third quarter of 2012. Other gains in the nine-month period resulted from the redemption in the first quarter of 2012 of a previously impaired perpetual security and sales related to our plan to reduce the risk exposure in our investment portfolio (see the Investment Concentrations section above for more information).

During the three- and nine-month periods ended September 30, 2011, we recognized realized investment losses from the sale of securities, primarily a result of a plan to reduce the risk exposure in our investment portfolio. The sales losses were more than offset by the investment gains generated in the third quarter of 2011 from the sale of U.S. Treasury securities and JGBs.

Other-than-temporary Impairment

The fair value of our debt and perpetual security investments fluctuates based on changes in interest rates and credit spreads in the global financial markets. Credit spreads are most impacted by the general and specific credit environment and global market liquidity. We believe that fluctuations in the fair value of our investment securities related to changes in credit spreads have little bearing on whether our investment is ultimately recoverable. Generally, we consider such declines in fair value to be temporary even in situations where an investment remains in an unrealized loss position for a year or more.

However, in the course of our credit review process, we may determine that it is unlikely that we will recover our investment in an issuer due to factors specific to an individual issuer, as opposed to general changes in global credit spreads. In this event, we consider such a decline in the investment's fair value, to the extent it is below the investment's cost or amortized cost, to be an other-than-temporary impairment of the investment and write the investment down to its fair value.

In addition to the usual investment risk associated with a debt instrument, our perpetual security holdings may be subject to the risk of nationalization of their issuers in connection with capital injections from an issuer's sovereign government. We cannot be assured that such capital support will extend to all levels of an issuer's capital structure. In addition, certain governments or regulators may consider imposing interest and principal payment restrictions on issuers of hybrid securities to preserve cash and build capital. In addition to the cash flow impact that additional deferrals would have on our portfolio, such deferrals could result in ratings downgrades of the affected securities, which in turn could result in a reduction of fair value of the securities and increase our regulatory capital requirements. We consider these factors in our credit review process.

When determining our intention to sell a security prior to recovery of its fair value to amortized cost, we evaluate facts and circumstances such as, but not limited to, sales of securities to meet cash flow needs and decisions to reposition our security portfolio. We perform ongoing analyses of our liquidity needs, which includes cash flow testing of our policy liabilities, debt maturities, projected dividend payments and other cash flow and liquidity needs. Our cash flow testing includes extensive duration matching of our investment portfolio and policy liabilities. Based on our analyses, we have concluded that we have sufficient excess cash flows to meet our liquidity needs without selling any of our investments prior to their maturity. Recently, we have started to reposition our security portfolio in an effort to enhance diversification and our credit profile by reducing our risk exposure through opportunistic investment transactions.

The following table details our pretax other-than-temporary impairment losses by investment category that resulted from our impairment evaluation process.



	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2012			2011			2012			2011
Perpetual securities	$	27		$	122		$	243		$	306
Corporate bonds	70			43			253			783
Mortgage- and asset-backed securities	0			1			3			9
Municipalities	0			0			0			1
Sovereign and supranational	0			0			144			0
Equity securities	0			0			0			1
Total other-than-temporary impairment losses realized	$	97	⁽¹⁾	$	166	⁽²⁾	$	643	⁽¹⁾	$	1,100	⁽²⁾

⁽¹⁾Includes $70 and $365 for the three- and nine-month periods ended September 30, 2012, respectively, for credit-related impairments;

$0 and $251 for the three- and nine-month periods ended September 30, 2012, respectively, from change in intent to sell securities; and $27 for the three- and nine-month periods ended September 30, 2012 for impairments due to severity and duration of decline in fair value

⁽²⁾Consisted completely of credit-related impairments

Unrealized Investment Gains and Losses

Effect on Shareholders’ Equity

The net effect on shareholders’ equity of unrealized gains and losses from investment securities was as follows:



(In millions)	September 30, 2012			December 31, 2011
Unrealized gains (losses) on securities available for sale	$	3,491		$	1,761
Unamortized unrealized gains on securities transferred to held to maturity	24			34
Deferred income taxes	(1,255		)	(652		)
Shareholders’ equity, unrealized gains (losses) on investment securities	$	2,260		$	1,143

Gross Unrealized Loss Aging

The following tables show the fair value and gross unrealized losses of our available-for-sale and held-to-maturity investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.



	September 30, 2012
	Total				Less than 12 months				12 months or longer
(In millions)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturities:
Japan government and agencies:
Yen-denominated	$	7,617	$	12	$	7,617	$	12	$	0	$	0
Municipalities:
Dollar-denominated	33		5		0		0		33		5
Mortgage- and asset- backed securities:
Dollar-denominated	10		0		10		0		0		0
Yen-denominated	152		1		0		0		152		1
Public utilities:
Dollar-denominated	185		3		145		2		40		1
Yen-denominated	4,030		208		642		24		3,388		184
Sovereign and supranational:
Dollar-denominated	37		4		6		0		31		4
Yen-denominated	1,796		188		913		104		883		84
Banks/financial institutions:
Dollar-denominated	304		17		99		1		205		16
Yen-denominated	6,408		768		189		5		6,219		763
Other corporate:
Dollar-denominated	1,334		39		1,225		24		109		15
Yen-denominated	4,652		334		765		7		3,887		327
Total fixed maturities	26,558		1,579		11,611		179		14,947		1,400
Perpetual securities:
Dollar-denominated	133		12		118		2		15		10
Yen-denominated	1,751		281		126		2		1,625		279
Total perpetual securities	1,884		293		244		4		1,640		289
Equity securities	8		2		5		1		3		1
Total	$	28,450	$	1,874	$	11,860	$	184	$	16,590	$	1,690



	December 31, 2011
	Total				Less than 12 months				12 months or longer
(In millions)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturities:
Japan government and agencies:
Yen-denominated	$	940	$	1	$	859	$	1	$	81	$	0
Municipalities:
Dollar-denominated	54		8		22		1		32		7
Yen-denominated	60		4		0		0		60		4
Mortgage- and asset- backed securities:
Yen-denominated	151		1		0		0		151		1
Public utilities:
Dollar-denominated	295		27		110		3		185		24
Yen-denominated	4,995		392		2,404		141		2,591		251
Sovereign and supranational:
Dollar-denominated	66		5		34		2		32		3
Yen-denominated	2,349		199		749		62		1,600		137
Banks/financial institutions:
Dollar-denominated	770		121		391		56		379		65
Yen-denominated	10,175		1,438		1,639		46		8,536		1,392
Other corporate:
Dollar-denominated	834		62		639		27		195		35
Yen-denominated	6,106		644		2,523		110		3,583		534
Total fixed maturities	26,795		2,902		9,370		449		17,425		2,453
Perpetual securities:
Dollar-denominated	217		29		109		4		108		25
Yen-denominated	2,290		604		630		69		1,660		535
Total perpetual securities	2,507		633		739		73		1,768		560
Equity securities	8		1		6		1		2		0
Total	$	29,310	$	3,536	$	10,115	$	523	$	19,195	$	3,013

Analysis of Securities in Unrealized Loss Positions

The unrealized losses on our investments have been primarily related to changes in foreign exchange rates or the general widening of credit spreads rather than specific issuer credit-related events. The following summarizes our evaluation of investment categories with significant unrealized losses and securities that were rated below investment grade as of September 30, 2012.

Public Utilities

As of September 30, 2012, 56% of the unrealized losses on investments in the public utilities sector was related to investments that were investment grade, compared with 77% at December 31, 2011. This decline is due to the total balance of unrealized losses on public utility investments improving as of September 30, 2012, while the unrealized losses on below-investment-grade investments has remained stable. For any credit-related declines in fair value, we perform a more focused review of the related issuer's credit ratings, financial statements and other available financial data, timeliness of payment, competitive environment and any other significant data related to the issuer. From those reviews, we evaluate the issuer's continued ability to service our investment. We have determined that the majority of the unrealized losses on the investments in the public utilities sector was caused by widening credit spreads. Based on our credit analysis, we believe that the issuers of our investments in this sector have the ability to service their obligations to us.

Sovereign and Supranational

As of September 30, 2012, 41% of the unrealized losses on investment securities in the sovereign and supranational sector were related to investments that were investment grade, compared with 100% at December 31, 2011. This decline is due to a higher balance of unrealized losses on below-investment-grade sovereign and supranational investments as of September 30, 2012, primarily driven by the increase in the unrealized loss on our investment in a certain foreign central bank. For any credit-related declines in fair value, we perform a more focused review of the related issuer's credit ratings, financial statements and other available financial data, timeliness of payment, gross domestic product growth projections, balance of payments, foreign currency reserves, and any other significant data related to the issuer. From those reviews, we evaluate the issuer's continued ability to service our investments. We have determined that the majority of the unrealized losses on the investments in the sovereign and supranational sector was caused by widening credit spreads. Based on our credit analysis, we believe that the issuers of our investments in this sector have the ability to service their obligations to us.

Bank and Financial Institution Investments

Our efforts during 2011 and the three- and nine-month periods ended September 30, 2012 to reduce risk in our investment portfolio included sales and impairments of certain investments in banks and financial institutions, with an emphasis on reducing our exposure to European financial institutions. The following table shows the composition of our investments in an unrealized loss position in the bank and financial institution sector by fixed-maturity securities and perpetual securities. The table reflects those securities in that sector that were in an unrealized loss position as a percentage of our total investment portfolio in an unrealized loss position. The table also reflects the respective unrealized losses in this sector as a percentage of total unrealized losses in our investment portfolio.



	September 30, 2012						December 31, 2011
	Percentage of Total Investments in an Unrealized Loss Position			Percentage of Total Unrealized Losses			Percentage of Total Investments in an Unrealized Loss Position			Percentage of Total Unrealized Losses
Fixed maturities		24	%		42	%		37	%		44	%
Perpetual securities:
Upper Tier II		4			7			4			6
Tier I		2			9			5			12
Total perpetual securities		6			16			9			18
Total		30	%		58	%		46	%		62	%

As of September 30, 2012, 70% of the $1.1 billion in unrealized losses on investments in the bank and financial institution sector, including perpetual securities, was related to investments that were investment grade, compared with 80% at December 31, 2011. Of the $8.6 billion in total investments, at fair value, in this sector in an unrealized loss position at September 30, 2012, only $1.0 billion, which had $325 million in unrealized losses, was below investment grade. Three issuers of investments comprised nearly 98% of the $325 million unrealized loss.

We conduct our own independent credit analysis for investments in the bank and financial institution sector. Our assessment includes analysis of financial statements and other available financial data, timeliness of payment, competitive environment, and any other significant data related to the issuers as well as consultation with the issuers from time to time. Based on our credit analysis, we have determined that the majority of the unrealized losses on the investments in this sector was caused by widening credit spreads, the downturn in the global economic environment and, to a lesser extent, changes in foreign exchange rates. Unrealized gains or losses related to prevailing interest rate environments are impacted by the remaining time to maturity of an investment. Assuming no credit-related factors develop, as investments near maturity, the unrealized gains or losses can be expected to diminish. Based on our credit analysis, we believe that the issuers of our investments in this sector have the ability to service their obligations to us.

Other Corporate Investments

As of September 30, 2012, 63% of the unrealized losses on investments in the other corporate sector was related to investments that were investment grade, compared with 73% at December 31, 2011. This decline is due to the overall improvement in the balance of unrealized losses, primarily on investment-grade securities, as of September 30, 2012. For any credit-related declines in fair value, we perform a more focused review of the related issuer's credit ratings, financial statements and other available financial data, timeliness of payment, competitive environment and any other significant data related to the issuer. From that review, we evaluate the issuer's continued ability to service our investment. We have determined that the majority of the unrealized losses on the investments in the other corporate sector was caused by widening credit spreads. Based on our credit analysis, we believe that the issuers of our investments in this sector have the ability to service their obligations to us.

Perpetual Securities

As of September 30, 2012, 99% of the unrealized losses on investments in perpetual securities was related to investments that were investment grade, compared with 73% at December 31, 2011. This improvement is primarily a result of sales and the recognition of other-than-temporary impairments during the nine-month period ended September 30, 2012. The majority of our investments in Upper Tier II and Tier I perpetual securities were in highly rated global financial institutions. Upper Tier II securities have more debt-like characteristics than Tier I securities and are senior to Tier I securities, preferred stock, and common equity of the issuer. Conversely, Tier I securities have more equity-like characteristics, but are senior to the common equity of the issuer. They may also be senior to certain preferred shares, depending on the individual security, the issuer's capital structure and the regulatory jurisdiction of the issuer.

Details of our holdings of perpetual securities were as follows:

Perpetual Securities



		September 30, 2012							December 31, 2011
(In millions)	Credit Rating	Amortized Cost		Fair Value		Unrealized Gain (Loss)			Amortized Cost		Fair Value		Unrealized Gain (Loss)
Upper Tier II:
	AA	$	0	$	0	$	0		$	196	$	204	$	8
	A	504		524		20			2,108		2,046		(62		)
	BBB	2,317		2,263		(54		)	1,791		1,804		13
	BB or lower	368		378		10			190		190		0
Total Upper Tier II		3,189		3,165		(24		)	4,285		4,244		(41		)
Tier I:
	A	60		59		(1		)	0		0		0
	BBB	1,009		856		(153		)	1,684		1,417		(267		)
	BB or lower	225		268		43			584		417		(167		)
Total Tier I		1,294		1,183		(111		)	2,268		1,834		(434		)
Other subordinated - non-banks	BBB	345		371		26			344		361		17
Total		$	4,828	$	4,719	$	(109	)	$	6,897	$	6,439	$	(458	)

An aspect of our efforts during 2011 and the three- and nine-month periods ended September 30, 2012 to reduce risk in our investment portfolio included sales and impairments of certain investments in perpetual securities. With the exception of the Icelandic bank securities that we completely impaired in 2008, none of the perpetual securities we own were in default on interest and principal payments at September 30, 2012. During the second quarter of 2011, we wrote off accrued interest income and stopped accruing further interest income for certain Upper Tier II perpetual securities, which had a deferred coupon and were impaired during that quarter, and we recognized additional impairments on those securities in the third and fourth quarters of 2011. We collected the deferred coupon upon the sale of those securities as part of our derisking investment activities in the first quarter of 2012. Based on amortized cost as of September 30, 2012, the geographic breakdown of our perpetual securities by issuer was as follows: European countries, excluding the United Kingdom, (64%); the United Kingdom (11%); Japan (15%); and other (10%). To determine any credit-related declines in fair value, we perform a more focused review of the related issuer's credit ratings, financial statements and other available financial data, timeliness of payment, competitive environment and any other significant data related to the issuer. From that review, we evaluate the issuer's continued ability to service our investment.

We have determined that the majority of our unrealized losses in the perpetual security category was principally due to widening credit spreads, largely as the result of the contraction of liquidity in the capital markets. Based on our reviews, we concluded that the ability of the issuers to service our investments has not been compromised by these factors. Unrealized gains or losses related to prevailing interest rate environments are impacted by the remaining time to maturity of an investment. Assuming no credit-related factors develop, as the investments near economic maturity, the unrealized gains or losses can be expected to diminish. Based on our credit analyses, we believe that the issuers of our investments in this sector have the ability to service their obligations to us.

Variable Interest Entities (VIEs)

The following table details our investments in VIEs.

Investments in Variable Interest Entities



	September 30, 2012				December 31, 2011
(In millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
VIEs:
VIEs - consolidated	$	6,285	$	6,920	$	6,997	$	7,206
VIEs - not consolidated	13,340		13,976		13,753		13,714
Total VIEs	$	19,625	$	20,896	$	20,750	$	20,920

As a condition to our involvement or investment in a VIE, we enter into certain protective rights and covenants that preclude changes in the structure of the VIE that would alter the creditworthiness of our investment or our beneficial interest in the VIE.

Our involvement with all of the VIEs in which we have an interest is passive in nature, and we are not the arranger of these entities. We have not been involved in establishing these entities, except as it relates to our review and evaluation of the structure of these VIEs in the normal course of our investment decision-making process. Further, we are not, nor have we been, required to purchase any securities issued in the future by these VIEs.

Our ownership interest in the VIEs is limited to holding the obligations issued by them. All of the VIEs in which we invest are static with respect to funding and have no ongoing forms of funding after the initial funding date. We have no direct or contingent obligations to fund the limited activities of these VIEs, nor do we have any direct or indirect financial guarantees related to the limited activities of these VIEs. We have not provided any assistance or any other type of financing support to any of the VIEs we invest in, nor do we have any intention to do so in the future. The weighted-average lives of our notes are very similar to the underlying collateral held by these VIEs where applicable.

Our risk of loss related to our interests in any of our VIEs is limited to our investment in the debt securities issued by them.

VIEs-Consolidated

We are substantively the only investor in the consolidated VIEs listed in the table above. As the sole investor in these VIEs, we have the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and are therefore considered to be the primary beneficiary of the VIEs that we consolidate. We also participate in substantially all of the variability created by these VIEs. The activities of these VIEs are limited to holding debt and perpetual securities and interest rate, foreign currency, and/or credit default swaps (CDSs), as appropriate, and utilizing the cash flows from these securities to service our investment. Neither we nor any of our creditors are able to obtain the underlying collateral of the VIEs unless there is an event of default or other specified event. For those VIEs that contain a swap, we are not a direct counterparty to the swap contracts and have no control over them. Our loss exposure to these VIEs is limited to our original investment. Our consolidated VIEs do not rely on outside or ongoing sources of funding to support their activities beyond the underlying collateral and swap contracts, if applicable. With the exception of our investment in senior secured bank loans through unit trust structures that we began investing in during the second quarter of 2011, the underlying collateral assets and funding of our consolidated VIEs are generally static in nature and the underlying collateral and the reference corporate entities covered by any CDS contracts were all investment grade at the time of issuance.

We are exposed to credit losses within any consolidated collateralized debt obligations (CDOs) that could result in principal losses to our investments. We have mitigated our risk of credit loss through the structure of the VIE, which contractually requires the subordinated tranches within these VIEs to absorb the majority of the expected losses from the underlying credit default swaps. We currently own only senior mezzanine CDO tranches. Based on our statistical analysis models and the current subordination levels in our CDOs, each of these VIEs can sustain a reasonable number of defaults in the underlying reference entities in the CDSs with no loss to our investment.

VIEs-Not Consolidated

The VIEs that we are not required to consolidate are investments that are limited to loans in the form of debt obligations from the VIEs that are irrevocably and unconditionally guaranteed by their corporate parents. These VIEs are the primary financing vehicles used by their corporate sponsors to raise financing in the international capital markets. The variable interests created by these VIEs are principally or solely a result of the debt instruments issued by them. We do not have the power to direct the activities that most significantly impact the entity's economic performance, nor do we have (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. As such, we are not the primary beneficiary of these VIEs and are therefore not required to consolidate them. These VIE investments comprise securities from 156 separate issuers with an average credit rating of BBB.

Securities Lending

We lend fixed-maturity securities to financial institutions in short-term security-lending transactions. These short-term security-lending arrangements increase investment income with minimal risk. Our security lending policy requires that the fair value of the securities and/or unrestricted cash received as collateral be 102% or more of the fair value of the loaned securities. The following table presents our security loans outstanding and the corresponding collateral held:



(In millions)	September 30, 2012		December 31, 2011
Security loans outstanding, fair value	$	6,436	$	812
Cash collateral on loaned securities	6,591		838

The balance of our security loans outstanding was higher at September 30, 2012, compared with that at December 31, 2011, due to a six-month securities lending program that began in the third quarter of 2012. For this particular securities lending program, we invested the cash collateral in JGBs with maturities that correspond with the termination of the program.