INVESTMENTS

12 Months Ended

Dec. 31, 2012

Net Investment Income

The components of net investment income for the years ended December 31 were as follows:



(In millions)	2012			2011			2010
Fixed-maturity securities		$	3,248		$	3,026		$	2,695
Perpetual securities		253			274			328
Equity securities and other		17			5			4
Short-term investments and cash equivalents		2			4			6
Gross investment income		3,520			3,309			3,033
Less investment expenses		47			29			26
Net investment income		$	3,473		$	3,280		$	3,007

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 at December 31 are shown in the following tables.



	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		$	12,612		$	349		$	81		$	12,880
Mortgage- and asset-backed securities		746			40			1			785
Public utilities		3,608			116			72			3,652
Sovereign and supranational		1,404			71			0			1,475
Banks/financial institutions		3,455			233			180			3,508
Other corporate		5,656			241			153			5,744
Total yen-denominated		27,481			1,050			487			28,044
Dollar-denominated:
U.S. government and agencies		93			24			0			117
Municipalities		1,045			156			6			1,195
Mortgage- and asset-backed securities		188			58			0			246
Public utilities		4,204			658			17			4,845
Sovereign and supranational		476			123			2			597
Banks/financial institutions		3,626			506			6			4,126
Other corporate		16,300			1,878			95			18,083
Total dollar-denominated		25,932			3,403			126			29,209
Total fixed maturities		53,413			4,453			613			57,253
Perpetual securities:
Yen-denominated:
Banks/financial institutions		3,635			193			161			3,667
Other corporate		309			43			0			352
Dollar-denominated:
Banks/financial institutions		269			23			9			283
Total perpetual securities		4,213			259			170			4,302
Equity securities		20			4			1			23
Total securities available for sale		$	57,646		$	4,716		$	784		$	61,578



	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		$	32,043		$	356		$	67		$	32,332
Municipalities		492			30			2			520
Mortgage- and asset-backed securities		90			4			0			94
Public utilities		4,924			233			106			5,051
Sovereign and supranational		3,209			192			84			3,317
Banks/financial institutions		9,211			211			431			8,991
Other corporate		4,457			187			108			4,536
Total yen-denominated		54,426			1,213			798			54,841
Total securities held to maturity		$	54,426		$	1,213		$	798		$	54,841



	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



	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 fixed-maturity securities, perpetual securities and equity securities are described in Note 5.

During 2012, we reclassified seven 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 $1.2 billion and an aggregate unrealized loss of $290 million. During 2011, we reclassified 13 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 $2.5 billion and an aggregate unrealized loss of $334 million. During 2010, we reclassified six 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 $1.4 billion and an aggregate unrealized loss of $830 million.

Contractual and Economic Maturities

The contractual maturities of our investments in fixed maturities at December 31, 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		$	1,503		$	1,521		$	109		$	113
Due after one year through five years		2,195			2,300			292			330
Due after five years through 10 years		7,079			7,457			1,183			1,399
Due after 10 years		31,767			33,218			8,219			9,728
Mortgage- and asset-backed securities		892			976			43			55
Total fixed maturities available for sale		$	43,436		$	45,472		$	9,846		$	11,625
Held to maturity:
Due in one year or less		$	5,830		$	5,833		$	0		$	0
Due after one year through five years		679			736			0			0
Due after five years through 10 years		3,003			3,370			0			0
Due after 10 years		44,824			44,808			0			0
Mortgage- and asset-backed securities		90			94			0			0
Total fixed maturities held to maturity		$	54,426		$	54,841		$	0		$	0

At December 31, 2012, the Parent Company had a portfolio of investment-grade available-for-sale fixed-maturity securities totaling $131 million at amortized cost and $156 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 25^th 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 December 31, 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		$	289		$	292		$	0		$	0
Due after one year through five years		1,239			1,316			5			5
Due after five years through 10 years		309			352			0			0
Due after 10 years		2,212			2,167			159			170
Total perpetual securities available for sale		$	4,049		$	4,127		$	164		$	175

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 broad business and portfolio management objectives, asset/liability needs, portfolio diversification, and expected income.

Investment exposures that individually exceeded 10% of shareholders' equity as of December 31 were as follows:



	2012			2011
(In millions)	Credit Rating	Amortized Cost	Fair Value	Credit Rating	Amortized Cost	Fair Value
Japan National Government	AA	$44,081	$44,580	AA	$29,244	$30,145

Banks and Financial Institutions

After Japanese government bonds (JGBs), our second largest investment concentration as of December 31, 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.

Our total investments in the bank and financial institution sector as of December 31, including those classified as perpetual securities, were as follows:



	2012						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		$	16,292		14	%		$	20,025		20	%
Fair value		16,625			14			18,933			19
Perpetual securities:
Upper Tier II:
Amortized cost		$	2,825		3	%		$	4,285		5	%
Fair value		2,919			3			4,244			4
Tier I:
Amortized cost		1,079			1			2,268			2
Fair value		1,031			1			1,834			2
Total:
Amortized cost		$	20,196		18	%		$	26,578		27	%
Fair value		20,575			18			25,011			25

Derisking

During 2012, we continued our efforts of pursuing strategic investment activities to lower the risk profile of our investment portfolio. We 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 for the years ended December 31 follows:



(In millions)	2012			2011			2010
Realized investment gains (losses) on securities:
Fixed maturities:
Available for sale:
Gross gains from sales	$	427		$	992		$	117
Gross losses from sales	(48		)	(465		)	(212		)
Net gains (losses) from redemptions	2			69			1
Other-than-temporary impairment losses	(734		)	(1,335		)	(297		)
Held to maturity:
Net gains (losses) from redemptions	4			0			2
Total fixed maturities	(349		)	(739		)	(389		)
Perpetual securities:
Available for sale:
Gross gains from sales	127			102			133
Gross losses from sales	(98		)	(109		)	0
Net gains (losses) from redemptions	60			0			0
Other-than-temporary impairment losses	(243		)	(565		)	(160		)
Total perpetual securities	(154		)	(572		)	(27		)
Equity securities:
Gross losses from sales	0			0			(2		)
Other-than-temporary impairment losses	0			(1		)	(2		)
Total equity securities	0			(1		)	(4		)
Derivatives and other:
Derivative gains (losses)	151			(257		)	(1		)
Other	3			17			(1		)
Total derivatives and other	154			(240		)	(2		)
Total realized investment gains (losses)	$	(349	)	$	(1,552	)	$	(422	)

In 2012, sales and redemptions of securities generated a net realized investment gain, primarily due to the sale of Japanese Government Bonds (JGBs) in a bond-swap program executed in the third quarter of 2012 and sales related to our plan to reduce the risk exposure in our investment portfolio (see the Investments Concentrations section above for more information).

In 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 from the sale of U.S. Treasury securities and JGBs that were part of a bond-swap program.

In 2010, we recognized realized net investment gains from the sale and redemption of securities in the normal course of business.

Other-than-temporary Impairment

The fair values of our debt and perpetual security investments fluctuate based on changes in interest rates and credit spreads in the global financial markets. Fair values can also be heavily influenced by the values of the assets of the issuer and expected ultimate recovery values upon a default, bankruptcy or other financial restructuring. Credit spreads are most impacted by the general credit environment and global market liquidity. Interest rates are driven by numerous factors including: supply and demand, governmental monetary actions, expectations of inflation and economic growth, etc. We believe that fluctuations in the fair values of our investment securities related to changes in credit spreads or interest rates have little bearing on underlying credit quality of the issuer, and whether our investment is ultimately recoverable. Generally, we consider such declines in fair values 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 or interest rates. 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 reduce the book value of the investment to its fair value.

In addition to the usual investment risk associated with a debt instrument, our perpetual security holdings are largely issued by banks that are integral to the financial markets of the corresponding sovereign country of the issuer. As a result of the issuer's position within the economy of the sovereign country, our perpetual securities may be subject to a higher 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 preserve the issuer's capital. Beyond 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 been repositioning 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 for the years ended December 31.



(In millions)	2012			2011			2010
Perpetual securities	$	243		$	565		$	160
Corporate bonds	345			1,316			285
Mortgage- and asset-backed securities	3			17			12
Municipalities	0			2			0
Sovereign and supranational	386			0			0
Equity securities	0			1			2
Total other-than-temporary impairment losses realized	$	977	⁽¹⁾	$	1,901	⁽¹⁾	$	459	⁽²⁾

⁽¹⁾Includes $597 and $1,286 for the years ended December 31, 2012 and 2011, respectively, for credit-related impairments;

$353 and $615 for the years ended December 31, 2012 and 2011, respectively, from change in intent to sell securities;

and $27 for the year ended December 31, 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

Information regarding changes in unrealized gains and losses from investments for the years ended December 31 follows:



(In millions)	2012				2011				2010
Changes in unrealized gains (losses):
Fixed maturities:
Available for sale		$	1,624			$	1,963			$	1,105
Transferred to held to maturity		(14		)		(101		)		(12		)
Perpetual securities:
Available for sale		547				(143		)		(24		)
Equity securities		0				2				(1		)
Total change in unrealized gains (losses)		$	2,157			$	1,721			$	1,068

Effect on Shareholders' Equity

The net effect on shareholders' equity of unrealized gains and losses from investment securities at December 31 was as follows:



(In millions)	2012				2011
Unrealized gains (losses) on securities available for sale		$	3,932			$	1,761
Unamortized unrealized gains on securities transferred to held to maturity		20				34
Deferred income taxes		(1,382		)		(652		)
Shareholders’ equity, unrealized gains (losses) on investment securities		$	2,570			$	1,143

Gross Unrealized Loss Aging

The following tables show the fair values and gross unrealized losses of our available-for-sale and held-to-maturity investments that were in an unrealized loss position, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31.



	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		$	17,342		$	148		$	17,342		$	148		$	0		$	0
Municipalities:
Dollar-denominated		34			6			1			0			33			6
Yen-denominated		56			2			56			2			0			0
Mortgage- and asset- backed securities:
Dollar-denominated		10			0			10			0			0			0
Yen-denominated		136			1			0			0			136			1
Public utilities:
Dollar-denominated		736			17			736			17			0			0
Yen-denominated		3,920			178			1,339			31			2,581			147
Sovereign and supranational:
Dollar-denominated		31			2			0			0			31			2
Yen-denominated		1,244			84			507			13			737			71
Banks/financial institutions:
Dollar-denominated		276			6			180			3			96			3
Yen-denominated		6,918			611			1,935			28			4,983			583
Other corporate:
Dollar-denominated		4,534			95			4,404			86			130			9
Yen-denominated		4,013			261			1,635			40			2,378			221
Total fixed maturities		39,250			1,411			28,145			368			11,105			1,043
Perpetual securities:
Dollar-denominated		136			9			120			0			16			9
Yen-denominated		1,315			161			0			0			1,315			161
Total perpetual securities		1,451			170			120			0			1,331			170
Equity securities		6			1			3			0			3			1
Total		$	40,707		$	1,582		$	28,268		$	368		$	12,439		$	1,214



	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 general market changes in foreign exchange rates or the levels of credit spreads or interest rates rather than specific concerns with the issuer's ability to pay interest and repay principal. The following summarizes our evaluation of investment categories with significant unrealized losses and securities that were rated below investment grade as of December 31, 2012.

General Review of Credit Considerations

For any significant declines in fair value, we perform a more focused review of the related issuers' credit profile. We evaluate their ratings from the Nationally Recognized Statistical Rating Organizations (NRSROs), their assets, business profile including industry dynamics and competitive positioning, financial statements and other available financial data. We utilize information available in the public domain as well as consultations with issuers themselves. For non-corporate issuers, the analysis will focus on all sources of credit support including macro-economic variables and issuer specific factors. From these reviews, we evaluate the issuer's continued ability to service our investment through their payment of interest and principal.

Public Utilities

As of December 31, 2012, 69% of the unrealized losses on investments in the public utilities sector were related to investments that were investment grade, compared with 77% at December 31, 2011. We have determined that the majority of the unrealized losses on the investments in the public utilities sector as of December 31, 2012 were caused by general market changes. 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 December 31, 2012, 96% 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. We have determined that the majority of the unrealized losses on the investments in the sovereign and supranational sector as of December 31, 2012 were caused by general market changes. 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.

Banks and Financial Institutions

Our efforts during 2011 and 2012 to reduce the 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 at December 31.



	2012						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		18	%		39	%		37	%		44	%
Perpetual securities:
Upper Tier II		2			4			4			6
Tier I		2			7			5			12
Total perpetual securities		4			11			9			18
Total		22	%		50	%		46	%		62	%

As of December 31, 2012, 81% of the $787 million in unrealized losses on investments in the bank and financial institution sector, including perpetual securities, were related to investments that were investment grade, compared with 80% at December 31, 2011. Of the $8.6 billion in investments, at fair value, in the bank and financial institution sector in an unrealized loss position at December 31, 2012, only $608 million, which had $146 million in unrealized losses, was below investment grade. Two issuers of investments comprised more than 99% of the $146 million unrealized loss.

Based on our credit analysis, we have determined that the majority of the unrealized losses on the investments in this sector as of December 31, 2012 were caused by wider credit spreads, the downturn in the global economic environment and, to a lesser extent, changes in foreign exchange rates. Further, 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

As of December 31, 2012, 72% of the unrealized losses on investments in the other corporate sector were related to investments that were investment grade, compared with 73% at December 31, 2011. We have determined that the majority of the unrealized losses on the investments in the other corporate sector as of December 31, 2012 were caused by general market changes. 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 December 31, 2012, 100% of the unrealized losses on investments in perpetual securities were 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 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 as of December 31 were as follows:

Perpetual Securities



		2012										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		460			488			28				2,108			2,046			(62		)
	BBB		2,077			2,129			52				1,791			1,804			13
	BB or lower		288			302			14				190			190			0
Total Upper Tier II			2,825			2,919			94				4,285			4,244			(41		)
Tier I:
	A		0			0			0				0			0			0
	BBB		966			904			(62		)		1,684			1,417			(267		)
	BB or lower		113			127			14				584			417			(167		)
Total Tier I			1,079			1,031			(48		)		2,268			1,834			(434		)
Other subordinated - non-banks	BBB		309			352			43				344			361			17
Total			$	4,213		$	4,302		$	89			$	6,897		$	6,439		$	(458	)

An aspect of our efforts during 2011 and 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 December 31, 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.

During 2012, our aggregate holdings in perpetual securities moved from a unrealized loss of $458 million to an unrealized gain of $89 million. This is due in part to the sales and impairments mentioned above plus a general improvement in market pricing for most perpetual securities. For those securities with unrealized losses as of December 31, 2012, we believe the losses are principally due to a temporary widening of the applicable discount rate through a combination of interest rates and/or credit spreads. Based on our reviews, we do not believe the ability of these issuers to service our investments has been compromised. Assuming no unforeseen credit factors develop, as the investments near their expected economic maturity, the unrealized gains or losses should diminish. Based on our analysis, we believe the issuers of our holdings in this sector have the ability to service their obligations to us.

VIEs

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

The following table presents the amortized cost, fair value and balance sheet caption in which the assets and liabilities of consolidated VIEs are reported as of December 31.

Investments in Consolidated Variable Interest Entities



	2012						2011
(In millions)	Amortized Cost			Fair Value			Amortized Cost			Fair Value
Assets:
Fixed maturities, available for sale		$	5,058		$	5,787		$	4,822		$	5,350
Perpetual securities, available for sale		559			574			1,532			1,290
Fixed maturities, held to maturity		289			287			643			566
Other assets		191			191			375			375
Total assets of consolidated VIEs		$	6,097		$	6,839		$	7,372		$	7,581
Liabilities:
Other liabilities		$	399		$	399		$	531		$	531
Total liabilities of consolidated VIEs		$	399		$	399		$	531		$	531

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 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, 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 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 table below reflects the amortized cost, fair value and balance sheet caption in which our investment in VIEs not consolidated are reported as of December 31.

Investments in Variable Interest Entities Not Consolidated



	2012						2011
(In millions)	Amortized Cost			Fair Value			Amortized Cost			Fair Value
Assets:
Fixed maturities, available for sale		$	7,738		$	8,350		$	7,190		$	7,239
Perpetual securities, available for sale		736			751			1,315			1,364
Fixed maturities, held to maturity		3,829			3,922			5,248			5,111
Total investments in VIEs not consolidated		$	12,303		$	13,023		$	13,753		$	13,714

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 153 separate issuers with an average credit rating of BBB.

Securities Lending and Pledged Securities

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 as of December 31:



(In millions)	2012			2011
Security loans outstanding, fair value		$	6,122		$	812
Cash collateral on loaned securities		6,277			838

The balance of our security loans outstanding was higher at December 31, 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 cash collateral in JGBs with maturities that correspond with the termination of the program. At December 31, 2012, debt securities with a fair value of $18 million were on deposit with regulatory authorities in the United States and Japan. We retain ownership of all securities on deposit and receive the related investment income.

For general information regarding our investment accounting policies, see Note 1.