3. INVESTMENTS

Net Investment Income

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


(In millions)	2011		2010		2009
Fixed-maturity securities	$	3,026	$	2,695	$	2,413
Perpetual securities		274		328		367
Equity securities and other		5		4		3
Short-term investments and cash equivalents		4		6		6
Gross investment income		3,309		3,033		2,789
Less investment expenses		29		26		24
Net investment income	$	3,280	$	3,007	$	2,765

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.

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

11,778

Mortgage- and asset-backed securities

912

954

Public utilities

3,850

226

3,683

Sovereign and supranational

1,704

1,775

Banks/financial institutions

4,312

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

Municipalities

1,060

107

1,159

Mortgage- and asset-backed securities

310

384

Public utilities

3,052

517

3,542

Sovereign and supranational

449

533

Banks/financial institutions

3,324

223

121

3,426

Other corporate

9,031

1,433

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

361

Dollar-denominated:

Banks/financial institutions

336

310

Total perpetual securities

6,897

175

633

6,439

Equity securities

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

19,071

Municipalities

553

584

Mortgage- and asset-backed securities

129

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


	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


	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 as of December 31, 2010 were securities with embedded derivatives for which we had elected the fair value option. These securities, recorded at a fair value of $619 million at December 31, 2010, were sold during 2011. We recognized investment gains of $12 million for the year ended December 31, 2011, compared with investment losses of $1 million and less than $1 million during the years ended December 31, 2010 and 2009, respectively, for the changes in fair value of these securities, which excluded the effects of foreign currency translation and additional fair value option elections.

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. 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. The securities transferred in the fourth quarter of 2011 included our investments in Israel Electric that had an aggregate amortized cost of $800 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. Three of these were investments in Greek financial institutions that, at the time of transfer, had an aggregate amortized cost of $998 million and an aggregate unrealized loss of $599 million. See the Investment Concentration Section below for a discussion of these financial institutions in Greece. Another of the reclassified investments was an investment in Greek sovereign debt that had an amortized cost of $178 million and an unrealized loss of $66 million at the time of transfer. This investment was sold at a pretax realized loss of $59 million prior to the end of the second quarter of 2010. The remaining two securities had an aggregate amortized cost of $267 million and an aggregate unrealized loss of $165 million at the time of the transfer.

During 2009, we reclassified 12 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 $1.3 billion and an aggregate unrealized loss of $548 million.

Contractual and Economic Maturities

The contractual maturities of our investments in fixed maturities at December 31, 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	$	1,877	$	1,902	$	12	$	12
Due after one year through five years		3,170		3,300		301		328
Due after five years through 10 years		3,855		4,086		890		1,020
Due after 10 years		26,418		26,905		7,491		8,544
Mortgage- and asset-backed securities		1,177		1,280		45		57
Total fixed maturities available for sale	$	36,497	$	37,473	$	8,739	$	9,961

Held to maturity:
Due in one year or less	$	488	$	495	$	0	$	0
Due after one year through five years		1,148		1,230		0		0
Due after five years through 10 years		3,539		3,855		0		0
Due after 10 years		41,704		40,668		0		0
Mortgage- and asset-backed securities		130		135		0		0
Total fixed maturities held to maturity	$	47,009	$	46,383	$	0	$	0

At December 31, 2011, the Parent Company had a portfolio of investment-grade available-for-sale fixed-maturity securities totaling $120 million at amortized cost and $138 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, 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	$	323	$	389	$	0	$	0
Due after one year through five years		1,876		1,953		5		5
Due after five years through 10 years		547		565		0		0
Due after 10 years		3,974		3,364		172		163
Total perpetual securities available for sale	$	6,720	$	6,271	$	177	$	168

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.

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

2011

2010

(In millions)

Credit
Rating

Amortized
Cost

Fair
Value

Credit
Rating

Amortized
Cost

Fair
Value

Japan National Government

AA-

$29,244

$30,145

16,342

16,861

Banks and Financial Institutions

Our second largest investment industry sector concentration as of December 31, 2011, 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, the more significant concentration of our credit risk by geographic region or country of issuer at December 31, 2011, based on amortized cost, was: Europe, excluding the United Kingdom (38%); United States (22%); United Kingdom (8%); Japan (9%); and other (23%).

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


	2011					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	$	20,025		20	%	$	22,041		26	%
Fair value		18,933		19			20,741		24
Perpetual Securities:
Upper Tier II:
Amortized cost	$	4,285		5	%	$	4,957		6	%
Fair value		4,244		4			4,748		5
Tier I:
Amortized cost		2,268		2			2,542		3
Fair value		1,834		2			2,421		3
Total:
Amortized cost	$	26,578		27	%	$	29,540		35	%
Fair value		25,011		25			27,910		32

Derisking

During 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, certain perpetual securities, and investments in certain banks or financial institutions. 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)	2011			2010			2009
Realized investment gains (losses) on securities:
Fixed maturities:
Available for sale:
Gross gains from sales	$	992		$	117		$	258
Gross losses from sales		(465	)		(212	)		(18	)
Net gains (losses) from redemptions		69			1			1
Other-than-temporary impairment losses		(1,335	)		(297	)		(630	)
Held to maturity:
Net gains (losses) from redemptions		0			2			1
Total fixed maturities		(739	)		(389	)		(388	)
Perpetual securities:
Available for sale:
Gross gains from sales		102			133			4
Gross losses from sales		(109	)		0			(101	)
Other-than-temporary impairment losses		(565	)		(160	)		(729	)
Total perpetual securities		(572	)		(27	)		(826	)
Equity securities:
Gross losses from sales		0			(2	)		0
Other-than-temporary impairment losses		(1	)		(2	)		(2	)
Total equity securities		(1	)		(4	)		(2	)
Other assets:
Derivative gains (losses)		(257	)		(1	)		0
Other		17			(1	)		4
Total other assets		(240	)		(2	)		4
Total realized investment gains (losses)	$	(1,552	)	$	(422	)	$	(1,212	)

In 2011, we recognized other-than-temporary impairment losses and realized 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). The sales losses were more than offset by the investment gains generated from the sale of U.S. Treasury strips and Japanese Government bonds (JGBs) that were part of a bond-swap program.

In 2010, we recognized other-than-temporary impairment losses and realized net investment gains from the sale and redemption of securities in the normal course of business.

In 2009, we recognized other-than-temporary impairment losses and realized pretax investment losses from the exchange of certain perpetual security investments into fixed-maturity securities. The losses were partially offset by pretax investment gains that were generated primarily from a bond-swap program that took advantage of tax loss carryforwards.

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.

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.

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, decisions to reposition our security portfolio and sales of securities to meet cash flow needs. 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 years prior to 2011, provided that our credit review process resulted in a conclusion that we would collect all of our cash flows and recover our investment in an issuer and the investment was within our investment risk exposure guidelines, we generally did not sell investments prior to their maturity. However, in 2011, we determined that certain securities were no longer within our investment risk exposure guidelines and 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 for the years ended December 31.


(In millions)	2011			2010			2009
Perpetual securities	$	565		$	160		$	729
Corporate bonds		1,316			285			458
Collateralized debt obligations		0			0			148
Mortgage- and asset-backed securities		17			12			24
Municipalities		2			0			0
Equity securities		1			2			2
Total other-than-temporary impairment losses realized	$	1,901	*⁽¹⁾*	$	459	⁽²⁾	$	1,361	⁽²⁾

⁽¹⁾

Includes $1.3 billion for credit-related impairments and $615 million from change in intent to sell securities

⁽²⁾

Consisted completely of credit-related impairments

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 portion of the impairment that was credit-related was recognized in earnings, and the portion that was non-credit related was recorded in other comprehensive income. For those securities that were still held at the end of the reporting period which have had other-than-temporary impairments with credit-related and non-credit-related components, the following table summarizes the cumulative credit-related impairment losses that were recognized in earnings during the years ended December 31.


(In millions)	2011			2010			2009
Cumulative credit loss impairments, beginning of period	$	13		$	24		$	0
Credit losses on securities for which an other-than-temporary impairment was not previously recognized		0			0			24
Credit losses on securities for which an other-than-temporary impairment was previously recognized		0			1			0
Securities sold during period		(13	)		(12	)		0
Cumulative credit loss impairments, end of period	$	0		$	13		$	24

Unrealized Investment Gains and Losses

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


(In millions)	2011			2010			2009
Changes in unrealized gains (losses):
Debt securities:
Available for sale	$	1,963		$	1,105		$	170
Transferred to held to maturity		(101	)		(12	)		(31	)
Perpetual securities:
Available for sale		(143	)		(24	)		736
Equity securities		2			(1	)		(1	)
Total change in unrealized gains (losses)	$	1,721		$	1,068		$	874

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)	2011			2010
Unrealized gains (losses) on securities available for sale	$	1,761		$	(61	)
Unamortized unrealized gains on securities transferred to held to maturity		34			135
Deferred income taxes		(652	)		(41	)
Shareholders' equity, unrealized gains (losses) on investment securities	$	1,143		$	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 at 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

859

Municipalities:

Dollar-denominated

Yen-denominated

Mortgage- and asset- backed securities:

Yen-denominated

151

Public utilities:

Dollar-denominated

295

110

185

Yen-denominated

4,995

392

2,404

141

2,591

251

Sovereign and supranational:

Dollar-denominated

Yen-denominated

2,349

199

749

1,600

137

Banks/financial institutions:

Dollar-denominated

770

121

391

379

Yen-denominated

10,175

1,438

1,639

8,536

1,392

Other corporate:

Dollar-denominated

834

639

195

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

109

108

Yen-denominated

2,290

604

630

1,660

535

Total perpetual securities

2,507

633

739

1,768

560

Equity securities

Total

29,310

3,536

10,115

523

19,195

3,013


	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 year ended December 31, 2011. The following summarizes our evaluation of investment categories with significant unrealized losses and securities that were rated below investment grade as of December 31, 2011.

Public Utilities

As of December 31, 2011, 77% of the unrealized losses on investments in the public utilities sector was 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.

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 at December 31.


	2011						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		37	%		44	%		39	%		54	%
Perpetual securities:
Upper Tier II		4			6			9			10
Tier I		5			12			5			7
Total perpetual securities		9			18			14			17
Total		46	%		62	%		53	%		71	%

As of December 31, 2011, 80% of the $2.2 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 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 2011. Of the $14 billion in investments, at fair value, in the bank and financial institution sector in an unrealized loss position at December 31, 2011, only $1.1 billion ($.4 billion in unrealized losses) was below investment grade. Five issuers of investments comprised over 99% of the $.4 billion unrealized loss. We conduct our own independent credit analysis for investments in the bank and financial institution 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 December 31, 2011, 73% of the unrealized losses on investments in the other corporate sector was related to investments that were investment grade, compared with 51% 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 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

As of December 31, 2011, 73% of the unrealized losses on investments in perpetual securities was 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 as of December 31 were as follows:


Perpetual Securities
		2011							2010
(In millions)	Credit Rating	Amortized Cost		Fair Value		Unrealized Gain (Loss)			Amortized Cost		Fair Value		Unrealized Gain (Loss)
Upper Tier II:
	AA	$	196	$	204	$	8		$	190	$	201	$	11
	A		2,108		2,046		(62	)		3,279		3,250		(29	)
	BBB		1,791		1,804		13			946		821		(125	)
	BB or lower		190		190		0			542		476		(66	)
Total Upper Tier II			4,285		4,244		(41	)		4,957		4,748		(209	)
Tier I:
	A		0		0		0			632		568		(64	)
	BBB		1,684		1,417		(267	)		1,386		1,296		(90	)
	BB or lower		584		417		(167	)		524		557		33
Total Tier I			2,268		1,834		(434	)		2,542		2,421		(121	)
Other subordinated - non-banks	BBB		344		361		17			328		343		15
Total		$	6,897	$	6,439	$	(458	)	$	7,827	$	7,512	$	(315	)

As discussed previously in the Investments Concentration section, an aspect of our efforts during 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 December 31, 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 additional impairments on those securities in the third and fourth quarters of 2011. Based on amortized cost as of December 31, 2011, the geographic breakdown of our perpetual securities by issuer was as follows: European countries, excluding the United Kingdom (69%); the United Kingdom (9%); Japan (15%); and other (7%). 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 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 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 obligations 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, has resulted in the consolidation of additional VIE investments.

The following table details our investments in VIEs as of December 31.

Investments in Variable Interest Entities


	2011				2010
(In millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
VIEs:
Consolidated:
Total VIEs consolidated	$	6,997	$	7,206	$	7,201	$	7,363
Not consolidated:
CDOs		0		0		5		5
Other		13,753		13,714		13,914		13,214
Total VIEs not consolidated		13,753		13,714		13,919		13,219
Total VIEs	$	20,750	$	20,920	$	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 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)	2011		2010
Security loans outstanding, fair value	$	812	$	186
Cash collateral on loaned securities		838		191

At December 31, 2011, debt securities with a fair value of $20 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.