3. 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, 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

13,684

765

14,449

Mortgage- and asset-backed securities

955

996

Public utilities

2,971

218

2,809

Sovereign and supranational

1,794

1,803

Banks/financial institutions

4,681

586

4,178

Other corporate

6,499

110

792

5,817

Total yen-denominated

30,584

1,119

1,651

30,052

Dollar-denominated:

U.S. government and agencies

1,336

428

1,764

Municipalities

1,055

108

1,154

Mortgage- and asset-backed securities

360

451

Public utilities

2,979

485

3,443

Sovereign and supranational

449

540

Banks/financial institutions

3,369

222

121

3,470

Other corporate

8,749

1,316

10,001

Total dollar-denominated

18,297

2,746

220

20,823

Total fixed maturities

48,881

3,865

1,871

50,875

Perpetual securities:

Yen-denominated:

Banks/financial institutions

6,798

982

5,893

Other corporate

349

317

Dollar-denominated:

Banks/financial institutions

357

320

Total perpetual securities

7,504

1,057

6,530

Equity securities

Total securities available for sale

56,407

3,952

2,930

57,429

September 30, 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

11,534

282

11,815

Municipalities

563

590

Mortgage- and asset-backed securities

138

143

Public utilities

6,735

142

367

6,510

Sovereign and supranational

4,392

132

171

4,353

Banks/financial institutions

12,565

149

1,242

11,472

Other corporate

5,424

126

322

5,228

Total yen-denominated

41,351

869

2,109

40,111

Total securities held to maturity

41,351

869

2,109

40,111


	December 31, 2010
(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	$	16,607	$	584	$	14	$	17,177
Mortgage- and asset-backed securities		1,224		35		15		1,244
Public utilities		2,554		117		80		2,591
Sovereign and supranational		903		47		12		938
Banks/financial institutions		5,927		152		1,177		4,902
Other corporate		5,733		136		457		5,412
Total yen-denominated		32,948		1,071		1,755		32,264
Dollar-denominated:
U.S. government and agencies		32		4		0		36
Municipalities		1,006		9		42		973
Mortgage- and asset-backed securities⁽¹⁾		485		90		13		562
Collateralized debt obligations		5		0		0		5
Public utilities		2,568		246		36		2,778
Sovereign and supranational		395		63		2		456
Banks/financial institutions		3,496		143		108		3,531
Other corporate		7,167		662		79		7,750
Total dollar-denominated		15,154		1,217		280		16,091
Total fixed maturities		48,102		2,288		2,035		48,355
Perpetual securities:
Yen-denominated:
Banks/financial institutions		7,080		172		533		6,719
Other corporate		328		15		0		343
Dollar-denominated:
Banks/financial institutions		419		61		30		450
Total perpetual securities		7,827		248		563		7,512
Equity securities		22		3		2		23
Total securities available for sale	$	55,951	$	2,539	$	2,600	$	55,890

⁽¹⁾

Includes $4 of other-than-temporary non-credit-related losses


	December 31, 2010
(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	$	344	$	4	$	4	$	344
Municipalities		407		18		2		423
Mortgage- and asset-backed securities		146		5		0		151
Public utilities		6,339		326		120		6,545
Sovereign and supranational		4,951		305		65		5,191
Banks/financial institutions		12,618		216		526		12,308
Other corporate		5,279		274		46		5,507
Total yen-denominated		30,084		1,148		763		30,469
Total securities held to maturity	$	30,084	$	1,148	$	763	$	30,469

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

Included in the available-for-sale fixed maturities portfolio are securities with embedded derivatives for which we have elected the fair value option. These securities were recorded at a fair value of $514 million at September 30, 2011, compared with $619 million at December 31, 2010, which reflects the sale of certain of these securities in the third quarter of 2011. We recognized investment losses of less than $1 million and investment gains of $12 million during the three- and nine-month periods ended September 30, 2011, respectively, compared with less than $1 million of losses during the three- and nine-month periods ended September 30, 2010, for the changes in fair value of these securities, which excludes the effects of foreign currency translation and additional fair value option elections.

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’ credit worthiness. 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 in the first quarter of 2011 included our investments in the Republic of Tunisia that had an aggregate amortized cost of $769 million and four securities associated with financial institutions in Portugal and Ireland with an aggregate amortized cost of $631 million. See the Investment Concentration section below for a discussion of these financial institutions in Portugal and Ireland.

During the third quarter of 2010, we reclassified two investments from the held-to-maturity portfolio to the available-for-sale portfolio as a result of downgrades of the issuers’ credit rating. At the time of the transfer, these investments had an aggregate amortized cost of $267 million and an aggregate unrealized loss of $165 million. During the second quarter of 2010, we reclassified four investments from the held-to-maturity portfolio to the available-for-sale portfolio as a result of significant downgrades of the issuers’ credit rating. At the time of transfer, the securities had an aggregate amortized cost of $1.2 billion and an aggregate unrealized loss of $665 million. We did not reclassify any investments from the held-to-maturity portfolio to the available-for-sale portfolio during the first quarter of 2010.

Contractual and Economic Maturities

The contractual maturities of our investments in fixed maturities at September 30, 2011, 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	$	1,832	$	1,873	$	36	$	37
Due after one year through five years		3,558		3,716		267		291
Due after five years through 10 years		3,778		4,028		897		1,027
Due after 10 years		29,593		29,838		7,485		8,478
Mortgage- and asset-backed securities		1,268		1,389		47		59
Total fixed maturities available for sale	$	40,029	$	40,844	$	8,732	$	9,892

Held to maturity:
Due in one year or less	$	360	$	364	$	0	$	0
Due after one year through five years		1,301		1,389		0		0
Due after five years through 10 years		3,590		3,855		0		0
Due after 10 years		35,962		34,360		0		0
Mortgage- and asset-backed securities		138		143		0		0
Total fixed maturities held to maturity	$	41,351	$	40,111	$	0	$	0

At September 30, 2011, the Parent Company had a portfolio of investment-grade available-for-sale fixed-maturity securities totaling $120 million at amortized cost and $139 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 September 30, 2011, were as follows:


	Aflac Japan				Aflac U.S.
(In millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	458	$	524	$	0	$	0
Due after one year through five years		1,707		1,611		5		5
Due after five years through 10 years		749		691		0		0
Due after 10 years		4,413		3,539		172		160
Total perpetual securities available for sale	$	7,327	$	6,365	$	177	$	165

Investment Concentrations

Our investment discipline begins with a top-down approach for each investment opportunity we consider. Consistent with that approach, we first approve each country in which we invest. In our approach to sovereign analysis, we consider the political, legal and financial context of the sovereign entity in which an issuer is domiciled and operates. Next we approve the issuer’s industry sector, including such factors as the stability of results and the importance of the sector to the overall economy. Specific credit names within approved countries and industry sectors are evaluated for their market position and specific strengths and potential weaknesses. Structures in which we invest are chosen for specific portfolio management purposes, including asset/liability management, portfolio diversification and net investment income.

Banks and Financial Institutions

Our largest investment industry sector concentration is 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, the more significant concentration of our credit risk by geographic region or country of issuer at September 30, 2011, based on amortized cost, was: Europe, excluding the United Kingdom (42%); United States (22%); United Kingdom (8%); Japan (8%); and other (20%).

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


	September 30, 2011			December 31, 2010
	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	$	20,615	21 %	$	22,041	26 %
Fair value		19,120	20		20,741	24
Perpetual Securities:
Upper Tier II:
Amortized cost	$	4,637	5 %	$	4,957	6 %
Fair value		4,222	4		4,748	5
Tier I:
Amortized cost		2,518	2		2,542	3
Fair value		1,991	2		2,421	3

Total:
Amortized cost	$	27,770	28 %	$	29,540	35 %
Fair value		25,333	26		27,910	32

Investments in Greece, Ireland, Italy, Portugal and Spain

Our investment exposure to sovereign debt and financial institutions in Greece, Ireland, Italy, Portugal and Spain was as follows:


	September 30, 2011					December 31, 2010
(In millions)	Amortized Cost			Fair Value		Amortized Cost			Fair Value
Sovereign:
Italy	$	326		$	313	$	307		$	306
Spain		776			782		730			782
Total	$	1,102		$	1,095	$	1,037		$	1,088

Banks and financial institutions:
Greece	$	0		$	0	$	1,152		$	391
Ireland		552			330		710			659
Italy		196			187		184			183
Portugal		0			0		859			770
Spain		553			466		526			503
Total	$	1,301	⁽¹⁾	$	983	$	3,431	⁽¹⁾	$	2,506

⁽¹⁾

Represents 5% in 2011 and 12% in 2010 of total investments in the banks and financial institutions sector, and 1% in 2011 and 4% in 2010 of total investments in debt and perpetual securities

Any increases in amortized cost for these peripheral Eurozone investments were due to the strengthening of the yen against the U.S. dollar.

Ireland

During the second quarter of 2011, we sold our holdings in Irish Life and Permanent PLC, which were below-investment-grade perpetual securities that had previously been impaired, at a pretax loss of $74 million ($48 million after-tax). This followed the sale of another of our impaired below-investment-grade Irish financial institution securities in the first quarter of 2011 at a $2 million pretax gain. As of September 30, 2011, senior securities included in the table above issued by an Irish financial institution with amortized cost and fair value totaling $261 million and $100 million, respectively, were rated below investment grade. We believe that these unrealized losses were more closely linked to the Irish government’s aggressive approach to addressing its debt burden, which included at one point potentially imposing losses on senior debt holders of certain non-viable Irish banks. As recently as the end of September 2011, the Irish Finance Minister and other officials have stated that they do not support burden-sharing for senior bank debt holdings such as ours. This Irish bank is current on its obligation to us, and we believe it has the ability to meet its obligations to us. In addition, as of September 30, 2011, we had the intent to hold this investment to recovery in value. As a result, we did not recognize an other-than-temporary impairment for this investment as of September 30, 2011.

Greece

During the second quarter of 2010, our investments in Greek financial institutions, Alpha Bank, EFG Eurobank Ergasias, and National Bank of Greece (NBG), all of which were Lower Tier II subordinated debt, were downgraded to below investment grade. As a result of the downgrades, we reclassified these investments from held to maturity to available for sale. At that time, we believed the downgrade of the Greek banks was largely related to the problems of the Greek government and its poor fiscal management, rather than the banks’ specific credit profiles. The three Greek bank issuers that comprised our Greek financial institution holdings had, on average, Tier I capital ratios higher than their peers in other troubled European sovereigns. Their capital was at a level that we felt could sustain deterioration in assets and operations that accompany economic conditions, such as those that the Greek economy was encountering in 2010 and those expected in the next few years. All three Greek banks had sufficient capital under the stress testing applied by the Committee of European Banking Supervisors (CEBS) in July 2010. However, the problems of the Greek government and related ratings downgrades have caused a decline in the confidence of depositors and capital market participants in the Greek banking system. As a result, the banks have significantly relied upon the European Central Bank (ECB) for liquidity via posting of collateral, which tends to be in the form of Greek Government Bonds (GGBs) or debt guaranteed by the sovereign. As of December 31, 2010, all of the Greek banks were current on their obligations to us. While these financial institutions have significant investments in GGBs, as of December 31, 2010, we believed that these institutions would be solvent even if there were a future restructuring of GGBs and they would have the ability to meet their obligations to us. In addition, as of December 31, 2010, we had the intent to hold these investments to recovery in value. As a result, we did not recognize an other-than-temporary impairment for these investments as of December 31, 2010.

Subsequent to December 31, 2010, Greece remained under pressure, which also continued to weigh on the Greek banks. Skepticism over the rigor of the capital stress test applied by the CEBS in July 2010 grew, as did fears of contagion as Ireland accepted a European Union-International Monetary Fund (EU-IMF) bailout program. On February 18, 2011, NBG announced its proposal for a “friendly merger” with Alpha Bank, but Alpha Bank rejected this proposal. However, this proposal highlighted risks that accompany consolidation among the top three banks in Greece. While the proposal could have created a national champion in Greek banking, it also would have concentrated ownership of GGBs in the combined entity and formed a very low-rated entity among our top ten largest investment holdings. Two rating agencies downgraded the Greek banks subsequent to downgrading the sovereign during the first quarter of 2011 (on January 17, 2011, and March 9, 2011). In the latter action, the rating agency lowered the ratings indicative of the banks’ intrinsic financial strength due to the persistent pressure on liquidity, asset quality and material exposure to GGBs. In light of the above increased risks and, in particular, the March 9, 2011 downgrade, we no longer supported our previous intent to hold our Greek bank investments to recovery in value. In March 2011, we sold our investment in Alpha Bank and recognized an investment loss of $177 million ($115 million after-tax). In the first quarter of 2011, we recognized other-than-temporary impairment losses of $397 million ($258 million after-tax) for the remaining two Greek bank holdings. In the second quarter of 2011, we sold our investment in EFG Eurobank Ergasias for $2 million more than its recorded impaired value, and we sold our remaining Greek bank investment, NBG, for $47 million less than its recorded impaired value.

Portugal

As of December 31, 2010 and the end of first quarter 2011, the issuers of our Portuguese bank and financial investments, Banco BPI S.A., Caixa Geral de Depositos S.A., and Banco Espirito Santo S.A., were current on their obligations to us, were profitable and had adequate Tier I capital ratios. During the first quarter of 2011, these investments were downgraded to below-investment-grade. However, at that time we believed that these ratings and the unrealized loss position of the investments were the result of the fiscal problems in the Eurozone region rather than the banks’ specific credit profiles. We believed that Portugal’s financial institutions were stronger than their other Eurozone peers and had not required much state support. It was challenging to separate the difficulties of the sovereign from the banks since the banks’ sources of liquidity are limited due to the financial situation of the sovereign. We believed the government of Portugal had exercised more prudent fiscal policies and was in a better financial situation than some of its other Eurozone peers. However, on May 16, 2011 when the European Union officially announced a fiscal support package for Portugal, there was an increase in risk that Portugal could experience a stressed economic environment similar to that experienced in Greece and Ireland. We believed the terms of this fiscal support package could result in liquidity constraints on the banks and there could be a need for the banks to improve their liquidity and core capital. Such a situation could negatively impact our Lower Tier II securities and our ability to recover full principal and interest. Due to the reasonably possible risk that our Portuguese bank holdings could suffer further negative declines, we no longer supported our previous intent to hold our Portuguese bank investments to recovery in value and concluded that we would take steps to reduce our exposure in the region. In the second quarter of 2011, we sold our investment in Banco BPI, S.A. at a loss of $99 million ($64 million after-tax), and we recognized other-than-temporary impairment losses of $112 million ($73 million after-tax) and $163 million ($106 million after-tax) on our investments in Caixa Geral de Depositos S.A. and Banco Espirito Santo S.A., respectively. In the third quarter of 2011, we sold our investments in Caixa Geral de Depositos S.A. and Banco Espirito Santo S.A., our remaining Portuguese bank investments, at gains of $52 million ($34 million after-tax) and $54 million ($35 million after-tax), respectively.

With the exception of the securities discussed above, all other securities included in the table above were rated investment grade as of September 30, 2011. In October 2011, one of our sovereign investments in Spain which had an amortized cost and fair value of $130 million and $136 million at September 30, 2011, respectively, was downgraded to below investment grade due to a decline in creditworthiness of the issuer. We intend to exercise our option to put this investment to the issuer at par due to its below-investment-grade rating.

Derisking

During the first nine months of 2011, we pursued strategic investment activities to lower the risk profile of our investment portfolio. Our primary focus was on reducing our exposure to peripheral Eurozone investments (discussed in the preceding section), certain perpetual securities, and investments in certain banks or financial institutions. As a result of these derisking activities, we have no direct sovereign or financial investment exposure in Greece or Portugal, and we have only senior indebtedness in Ireland. We believe that we substantially completed our investment derisking activities from a realized investment loss perspective as of the end of the second quarter of 2011, however the activity in the third quarter of 2011 reflected our ongoing effort to reduce our investment risk exposure. 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)	2011			2010			2011			2010
Realized investment gains (losses) on securities:
Fixed maturities:
Available for sale:
Gross gains from sales	$	354		$	25		$	458		$	75
Gross losses from sales		(56	)		(17	)		(375	)		(207	)
Net gains (losses) from redemptions		9			0			15			1
Other-than-temporary impairment losses		(44	)		(12	)		(793	)		(12	)
Total debt securities		263			(4	)		(695	)		(143	)
Perpetual securities:
Available for sale:
Gross gains from sales		0			0			54			133
Gross losses from sales		0			0			(109	)		0
Other-than-temporary impairment losses		(122	)		0			(306	)		(41	)
Total perpetual securities		(122	)		0			(361	)		92
Equity securities:
Gross losses from sales		0			0			0			(2	)
Other-than-temporary impairment losses		0			(1	)		(1	)		(2	)
Total equity securities		0			(1	)		(1	)		(4	)
Other assets:
Derivative gains (losses)		(224	)		14			(291	)		(72	)
Other		0			0			18			0
Total other assets		(224	)		14			(273	)		(72	)
Total realized investment gains (losses)	$	(83	)	$	9		$	(1,330	)	$	(127	)

During the three-month period ended September 30, 2011, net investment gains from securities sold or redeemed resulted primarily from the sale of our two remaining investments in Portuguese financial institutions; a portion of our U.S. Treasury holdings; and various Japanese National Government bonds (JGBs) that were part of a swap program.

During the nine-month period ended September 30, 2011, we recognized other-than-temporary impairments and realized net investment losses from the sale of securities, primarily a result of an implemented plan to reduce the risk exposure in our investment portfolio coupled with the continued decline in the credit worthiness of certain issuers (see the Investment Concentrations section above for more information). However, those 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 as discussed above.

A valuation allowance of $19 million was recorded in the second quarter of 2011 related to the deferred tax assets associated with our realized investment losses. However, we released $17 million of this valuation allowance in the third quarter of 2011, resulting in a remaining valuation allowance of $2 million as of September 30, 2011.

During the three- and nine-month periods ended September 30, 2010, the sale and redemption of securities occurred in the normal course of business.

Other-than-temporary Impairment

The fair value of our debt and perpetual security investments fluctuates based on changes in credit spreads in the global financial markets. Credit spreads are most impacted by market rates of interest, 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 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. The determination of whether an impairment is other than temporary is subjective and involves the consideration of various factors and circumstances, which includes but is not limited to the following:

—

issuer financial condition, including profitability and cash flows

—

credit status of the issuer

—

the issuer’s specific and general competitive environment

—

published reports

—

general economic environment

—

regulatory, legislative and political environment

—

the severity of the decline in fair value

—

the length of time the fair value is below cost

—

other factors as may become available from time to time

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 impair the fair value of the securities and increase our regulatory capital requirements. We take factors such as these into account in our credit review process.

Another factor we consider in determining whether an impairment is other than temporary is an evaluation of our intent or requirement to sell the security prior to recovery of its amortized cost. 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 liquidating any of our investments prior to their maturity. In addition, provided that our credit review process results in a conclusion that we will collect all of our cash flows and recover our investment in an issuer and the investment is within our investment risk exposure guidelines, we generally do not sell investments prior to their maturity.

The majority of our investments are evaluated for other-than-temporary impairment using our debt impairment model. Our debt impairment model focuses on the ultimate collection of the cash flows from our investments. Our investments in perpetual securities that are rated below investment grade are evaluated for other-than-temporary impairment under our equity impairment model in addition to our debt impairment model. Our equity impairment model focuses on the severity of a security’s decline in fair value coupled with the length of time the fair value of the security has been below amortized cost.

The following table details our pretax other-than-temporary impairment losses by investment category.


	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions)	2011		2010		2011		2010
Perpetual securities	$	122	$	0	$	306	$	41
Corporate bonds		43		0		783		0
Mortgage- and asset-backed securities		1		12		9		12
Municipalities		0		0		1		0
Equity securities		0		1		1		2
Total other-than-temporary impairment losses realized	$	166	$	13	$	1,100	$	55

We apply the debt security impairment model to our perpetual securities provided there has been no evidence of deterioration in credit of the issuer, such as a downgrade of the rating of a perpetual security to below investment grade. Subsequent to our initial investment, the perpetual securities of five issuers we own had been downgraded to below investment grade as of September 30, 2011. As a result of these downgrades, we were required to evaluate these securities for other-than-temporary impairment using the equity security impairment model in addition to the debt security impairment model. Use of the equity security model limits the forecasted recovery period that can be used in the impairment evaluation and, accordingly, affects both the recognition and measurement of other-than-temporary impairment losses. The impairment losses recognized on perpetual securities in the three- and nine-month periods ended September 30, 2011 were the result of our reconsideration of our intent to hold certain perpetual securities until recovery in value or our evaluation of the issuers’ creditworthiness. We did not recognize any other-than-temporary impairment losses on perpetual securities during the three-month period ended September 30, 2010; however, the impairment losses recognized on perpetual securities during the nine-month period ended September 30, 2010 were the result of evaluation under our equity impairment model.

Certain of our mortgage- and asset-backed securities had other-than-temporary impairments recognized prior to 2010 that had credit-related and non-credit-related components. The following table summarizes cumulative credit-related impairment losses on the securities still held at the end of the reporting period, for which other-than-temporary losses have been recognized and only the amount related to credit loss was recognized in earnings.


	Three Months Ended September 30,					Nine Months Ended September 30,
(In millions)	2011			2010		2011		2010
Cumulative credit loss impairments, beginning of period	$	4		$	13	$	13	$	24
Credit losses on securities for which an other-than-temporary impairment was previously recognized		0			1		0		1
Securities sold during period		(4	)		(1)		(13)		(12)
Cumulative credit loss impairments, end of period	$	0		$	13	$	0	$	13

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, 2011			December 31, 2010
Unrealized gains (losses) on securities available for sale	$	1,022		$	(61)
Unamortized unrealized gains on securities transferred to held to maturity		99			135
Deferred income taxes		(419	)		(41)
Shareholders’ equity, unrealized gains (losses) on investment securities	$	702		$	33

Gross Unrealized Loss Aging

The following tables show the fair value and gross unrealized losses, including the portion of other-than-temporary impairment recognized in accumulated other comprehensive income, 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, 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

110

Municipalities:

Dollar-denominated

Yen-denominated

Mortgage- and asset- backed securities:

Yen-denominated

154

Public utilities:

Dollar-denominated

315

264

Yen-denominated

6,286

585

3,759

185

2,527

400

Sovereign and supranational:

Dollar-denominated

Yen-denominated

2,829

225

1,223

1,606

155

Banks/financial institutions:

Dollar-denominated

900

121

503

397

Yen-denominated

11,445

1,828

2,491

138

8,954

1,690

Other corporate:

Dollar-denominated

953

769

184

Yen-denominated

7,218

1,114

3,833

272

3,385

842

Total fixed maturities

30,368

3,980

12,901

780

17,467

3,200

Perpetual securities:

Dollar-denominated

243

164

Yen-denominated

4,774

1,014

2,557

221

2,217

793

Total perpetual securities

5,017

1,057

2,721

230

2,296

827

Equity securities

Total

35,395

5,039

15,630

1,011

19,765

4,028


					December 31, 2010
	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	$	1,634	$	18	$	1,634	$	18	$	0	$	0
Municipalities:
Dollar-denominated		682		42		632		28		50		14
Yen-denominated		59		2		0		0		59		2
Mortgage- and asset- backed securities:
Dollar-denominated		78		13		20		0		58		13
Yen-denominated		415		15		415		15		0		0
Public utilities:
Dollar-denominated		556		36		498		28		58		8
Yen-denominated		2,877		200		766		47		2,111		153
Sovereign and supranational:
Dollar-denominated		45		2		12		0		33		2
Yen-denominated		1,579		77		428		1		1,151		76
Banks/financial institutions:
Dollar-denominated		1,484		108		753		22		731		86
Yen-denominated		10,609		1,703		1,506		40		9,103		1,663
Other corporate:
Dollar-denominated		1,741		79		1,456		52		285		27
Yen-denominated		4,503		503		507		45		3,996		458
Total fixed maturities		26,262		2,798		8,627		296		17,635		2,502
Perpetual securities:
Dollar-denominated		208		30		149		19		59		11
Yen-denominated		4,171		533		1,793		119		2,378		414
Total perpetual securities		4,379		563		1,942		138		2,437		425
Equity securities		13		2		13		1		0		1
Total	$	30,654	$	3,363	$	10,582	$	435	$	20,072	$	2,928

Analysis of Securities in Unrealized Loss Positions

The unrealized losses on our investments have been primarily related to changes in risk-free interest rates, foreign exchange rates or the general widening of credit spreads rather than specific issuer credit-related events. In addition, because we do not intend to sell and do not believe it is likely that we will be required to sell these investments before a recovery of fair value to amortized cost, we do not consider any of these investments to be other-than-temporarily impaired as of and for the nine-month period ended September 30, 2011. The following summarizes our evaluation of investment categories with significant unrealized losses and securities that were rated below investment grade. All other investment categories with securities in an unrealized loss position that are not specifically discussed below were composed of investment grade fixed maturities at September 30, 2011.

Municipalities

As of September 30, 2011, 59% of the unrealized losses on investment securities in the municipalities sector were related to investments that were investment grade, compared with 82% at December 31, 2010. We have determined that the majority of the unrealized losses on the investments in this sector was caused by widening credit spreads. However, we have determined that the ability of the issuers to service our investments has not been compromised. 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.

Public Utilities

As of September 30, 2011, 98% of the unrealized losses on investments in the public utilities sector were related to investments that were investment grade, compared with 100% at December 31, 2010. 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 issuers’ continued ability to service our investments. We have determined that the majority of the unrealized losses on the investments in the public utilities sector was caused by a decline in creditworthiness of a couple issuers in this sector. Also impacting the unrealized losses in the public utilities sector was widening credit spreads. Based on our credit analysis, we believe that our investments in this sector have the ability to service their obligations to us.

Sovereign and Supranational

As of September 30, 2011, 90% 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, 2010. For any credit-related declines in fair value, we perform a more focused review of the related issuers’ 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 issuers. From those reviews, we evaluate the issuers’ 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 a decline in creditworthiness of certain issuers in this sector. Also impacting the unrealized losses in the sovereign and supranational sector was widening credit spreads. Based on our credit analysis, we believe that our investments in this sector have the ability to service their obligations to us.

Bank and Financial Institution Investments

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 and their respective unrealized losses as a percentage of total unrealized losses.


	September 30, 2011		December 31, 2010
	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	35 %	39 %	39 %	54 %
Perpetual securities:
Upper Tier II	9	10	9	10
Tier I	4	10	5	7
Total perpetual securities	13	20	14	17
Total	48 %	59 %	53 %	71 %

As of September 30, 2011, 83% of the $3.0 billion 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 53% at December 31, 2010. This improvement is primarily due to the recognition of other-than-temporary impairments and sales of bank and financial institution securities during the first nine months of 2011. Of the $17.0 billion in investments, at fair value, in the bank and financial institution sector in an unrealized loss position at September 30, 2011, only $1.1 billion ($.5 billion in unrealized losses) were below investment grade. Four issuers of investments comprised nearly 99% of the $.5 billion unrealized loss. The remaining investments that comprised the unrealized loss were divided among five issuers with average unrealized losses per issuer of less than $1 million. We conduct our own independent credit analysis for investments in the bank and financial sector. Our assessment includes analysis of financial information, 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 our investments in this sector have the ability to service their obligations to us.

Other Corporate Investments

As of September 30, 2011, 67% of the unrealized losses on investments in the other corporate sector were related to investments that were investment grade, compared with 51% at December 31, 2010. For any credit-related declines in market value, we perform a more focused review of the related issuers’ credit ratings, financial statements and other available financial data, timeliness of payment, competitive environment and any other significant data related to the issuers. From those reviews, we evaluate the issuers’ continued ability to service our investments. We have determined that the majority of the unrealized losses on the investments in the other corporate sector was caused by widening credit spreads. Also impacting the unrealized losses in this sector is the decline in creditworthiness of certain issuers in the other corporate sector. Based on our credit analysis, we believe that our investments in this sector have the ability to service their obligation to us.

Perpetual Securities

At September 30, 2011, 84% of the unrealized losses on investments in perpetual securities were related to investments that were investment grade, compared with 83% at December 31, 2010. 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, 2011							December 31, 2010
(In millions)	Credit Rating	Amortized Cost		Fair Value		Unrealized Gain (Loss)			Amortized Cost		Fair Value		Unrealized Gain (Loss)
Upper Tier II:
	AA	$	197	$	195	$	(2	)	$	190	$	201	$	11
	A		3,352		2,977		(375	)		3,279		3,250		(29	)
	BBB		1,174		1,104		(70	)		1,274		1,164		(110	)
	BB or lower		263		263		0			542		476		(66	)
Total Upper Tier II			4,986		4,539		(447	)		5,285		5,091		(194	)
Tier I:
	A		628		468		(160	)		632		568		(64	)
	BBB		1,175		974		(201	)		1,386		1,296		(90	)
	BB or lower		715		549		(166	)		524		557		33
Total Tier I			2,518		1,991		(527	)		2,542		2,421		(121	)
Total		$	7,504	$	6,530	$	(974	)	$	7,827	$	7,512	$	(315	)

As discussed previously in the Investments Concentration section, an aspect of our efforts during the first nine months of 2011 to reduce risk in our investment portfolio included sales 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, 2011. During the second quarter of 2011, we wrote off accrued interest income and stopped accruing further interest income for the Dexia S.A. Upper Tier II perpetual securities which have a deferred coupon and were impaired during that quarter. We recognized an additional impairment on those securities in the third quarter of 2011. Based on amortized cost as of September 30, 2011, the geographic breakdown of our perpetual securities by issuer was as follows: European countries, excluding the United Kingdom, (70%); the United Kingdom (10%); Japan (14%); and other (6%). 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 those reviews, 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 has been 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 investment 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 our investments in this sector have the ability to service their obligation to us.

Variable Interest Entities (VIEs)

As discussed in Note 1, effective January 1, 2010, we have consolidated all of the components of each former QSPE investment, including a fixed-maturity or perpetual investment and a corresponding derivative transaction. Our risk of loss over the life of each investment is limited to the amount of our original investment. In addition, new criteria for determining the primary beneficiary of a VIE that was effective January 1, 2010, resulted in the consolidation of additional VIE investments. The following table details our investments in VIEs.

Investments in Variable Interest Entities


	September 30, 2011				December 31, 2010
(In millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
VIEs:
Consolidated:
Total VIEs consolidated	$	7,189	$	7,214	$	7,201	$	7,363
Not consolidated:
CDOs		0		0		5		5
Other		13,948		13,626		13,914		13,214
Total VIEs not consolidated		13,948		13,626		13,919		13,219
Total VIEs	$	21,137	$	20,840	$	21,120	$	20,582

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 have not been nor are we 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 a unit trust structure 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 CDO tranches. Based on our statistical analysis models, each of these VIEs can sustain a reasonable number of defaults in the underlying reference corporate 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 are comprised of securities from 161 separate issuers which have an average credit rating of A.

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, 2011		December 31, 2010
Security loans outstanding, fair value	$	839	$	186
Cash collateral on loaned securities		858		191