Investments

6 Months Ended

Jun. 30, 2012

Notes to Financial Statements [Abstract]

Investments

4. Investments

AFS Securities

Pursuant to the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards CodificationTM (“ASC”), we have categorized AFS securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3), as described in Note 1 in our 2011 Form 10-K, which also includes additional disclosures regarding our fair value measurements.

The amortized cost, gross unrealized gains, losses and OTTI and fair value of AFS securities (in millions) were as follows:

				As of June 30, 2012
				Amortized		Gross Unrealized						Fair
				Cost		Gains		Losses		OTTI		Value
Fixed maturity securities:
	Corporate bonds			$	57,342	$	7,068	$	393	$	103	$	63,914
	U.S. Government bonds				449		68		-		-		517
	Foreign government bonds				583		81		-		-		664
	Residential mortgage-backed securities ("RMBS")				6,808		522		41		92		7,197
	Commercial mortgage-backed securities ("CMBS")				1,304		71		43		25		1,307
	Collateralized debt obligations ("CDOs")				135		-		15		-		120
	State and municipal bonds				3,525		767		8		-		4,284
	Hybrid and redeemable preferred securities				1,248		63		123		-		1,188
	VIEs' fixed maturity securities				675		30		-		-		705
		Total fixed maturity securities			72,069		8,670		623		220		79,896
Equity securities					143		19		8		-		154
			Total AFS securities	$	72,212	$	8,689	$	631	$	220	$	80,050

				As of December 31, 2011
				Amortized		Gross Unrealized						Fair
				Cost		Gains		Losses		OTTI		Value
Fixed maturity securities:
	Corporate bonds			$	53,661	$	6,185	$	517	$	68	$	59,261
	U.S. Government bonds				439		55		-		-		494
	Foreign government bonds				668		65		-		-		733
	RMBS				7,690		548		73		126		8,039
	CMBS				1,642		73		106		9		1,600
	CDOs				121		-		19		-		102
	State and municipal bonds				3,490		566		9		-		4,047
	Hybrid and redeemable preferred securities				1,277		50		170		-		1,157
	VIEs' fixed maturity securities				673		27		-		-		700
		Total fixed maturity securities			69,661		7,569		894		203		76,133
Equity securities					135		16		12		-		139
			Total AFS securities	$	69,796	$	7,585	$	906	$	203	$	76,272

The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of June 30, 2012, were as follows:

			Amortized		Fair
			Cost		Value
Due in one year or less			$	2,931	$	2,989
Due after one year through five years				12,188		13,136
Due after five years through ten years				23,651		26,185
Due after ten years				25,052		28,962
	Subtotal			63,822		71,272
Mortgage-backed securities ("MBS")				8,112		8,504
CDOs				135		120
		Total fixed maturity AFS securities	$	72,069	$	79,896

Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.

The fair value and gross unrealized losses, including the portion of OTTI recognized in OCI, of AFS securities (dollars in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

					As of June 30, 2012
					Less Than or Equal				Greater Than
					to Twelve Months				Twelve Months				Total
							Gross				Gross				Gross
							Unrealized				Unrealized				Unrealized
					Fair		Losses and		Fair		Losses and		Fair		Losses and
					Value		OTTI		Value		OTTI		Value		OTTI
Fixed maturity securities:
	Corporate bonds				$	2,389	$	175	$	1,293	$	321	$	3,682	$	496
	RMBS					521		90		314		43		835		133
	CMBS					110		25		146		43		256		68
	CDOs					-		-		68		15		68		15
	State and municipal bonds					5		-		22		8		27		8
	Hybrid and redeemable
		preferred securities				125		4		425		119		550		123
			Total fixed maturity securities			3,150		294		2,268		549		5,418		843
Equity securities						10		1		4		7		14		8
				Total AFS securities	$	3,160	$	295	$	2,272	$	556	$	5,432	$	851
Total number of AFS securities in an unrealized loss position																734

					As of December 31, 2011
					Less Than or Equal				Greater Than
					to Twelve Months				Twelve Months				Total
							Gross				Gross				Gross
							Unrealized				Unrealized				Unrealized
					Fair		Losses and		Fair		Losses and		Fair		Losses and
					Value		OTTI		Value		OTTI		Value		OTTI
Fixed maturity securities:
	Corporate bonds				$	2,848	$	162	$	1,452	$	423	$	4,300	$	585
	RMBS					565		125		429		74		994		199
	CMBS					178		15		146		100		324		115
	CDOs					9		1		80		18		89		19
	State and municipal bonds					31		-		30		9		61		9
	Hybrid and redeemable
		preferred securities				324		23		353		147		677		170
			Total fixed maturity securities			3,955		326		2,490		771		6,445		1,097
Equity securities						38		12		-		-		38		12
				Total AFS securities	$	3,993	$	338	$	2,490	$	771	$	6,483	$	1,109
Total number of AFS securities in an unrealized loss position																897

For information regarding our investments in VIEs, see Note 3.

We perform detailed analysis on the AFS securities backed by pools of residential and commercial mortgages that are most at risk of impairment based on factors discussed in Note 1 in our 2011 Form 10-K. Selected information for these securities in a gross unrealized loss position (in millions) was as follows:

		As of June 30, 2012
		Amortized		Fair		Unrealized
		Cost		Value		Loss
Total
AFS securities backed by pools of residential mortgages		$	1,734	$	1,363	$	371
AFS securities backed by pools of commercial mortgages			355		274		81
	Total	$	2,089	$	1,637	$	452
Subject to Detailed Analysis
AFS securities backed by pools of residential mortgages		$	1,724	$	1,353	$	371
AFS securities backed by pools of commercial mortgages			79		42		37
	Total	$	1,803	$	1,395	$	408

		As of December 31, 2011
		Amortized		Fair		Unrealized
		Cost		Value		Loss
Total
AFS securities backed by pools of residential mortgages		$	2,023	$	1,553	$	470
AFS securities backed by pools of commercial mortgages			472		344		128
	Total	$	2,495	$	1,897	$	598
Subject to Detailed Analysis
AFS securities backed by pools of residential mortgages		$	2,015	$	1,545	$	470
AFS securities backed by pools of commercial mortgages			126		61		65
	Total	$	2,141	$	1,606	$	535

For the sixmonths ended June 30, 2012 and 2011, we recorded OTTI for AFS securities backed by pools of residential and commercial mortgages of $34 million and $44 million, pre-tax,respectively, and before associated amortization expense for DAC, value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”), of which $(3) million and $4 million, respectively, was recognized in OCI and $37 millionand $40 million, respectively, was recognized in net income (loss).

The fair value, gross unrealized losses, the portion of OTTI recognized in OCI (in millions) and number of AFS securities where the fair value had declined and remained below amortized cost by greater than 20% were as follows:

		As of June 30, 2012
								Number
		Fair		Gross Unrealized				of
		Value		Losses		OTTI		Securities (1)
Less than six months		$	115	$	41	$	2		25
Six months or greater, but less than nine months			13		4		1		4
Nine months or greater, but less than twelve months			104		40		12		17
Twelve months or greater			584		342		165		167
	Total	$	816	$	427	$	180		213

		As of December 31, 2011
								Number
		Fair		Gross Unrealized				of
		Value		Losses		OTTI		Securities (1)
Less than six months		$	385	$	125	$	31		56
Six months or greater, but less than nine months			53		30		12		18
Nine months or greater, but less than twelve months			2		-		1		7
Twelve months or greater			615		470		111		175
	Total	$	1,055	$	625	$	155		256

• We may reflect a security in more than one aging category based on various purchase dates.

We regularly review our investment holdings for OTTI. Our gross unrealized losses on AFS securities decreased $258millionfor the six months ended June 30, 2012. As discussed further below, we believe the unrealized loss position as of June 30, 2012,did not represent OTTI as we did not intend to sell these fixed maturity AFS securities, it is not more likely than not that we will be required to sell the fixed maturity AFS securities before recovery of their amortized cost basis, the estimated future cash flows were equal to or greater than the amortized cost basis of the debt securities, or we had the ability and intent to hold the equity AFS securities for a period of time sufficient for recovery.

Based upon this evaluation as of June 30, 2012, management believed we had the ability to generate adequate amounts of cash from our normal operations (e.g., insurance premiums and fees and investment income) to meet cash requirements with a prudent margin of safety without requiring the sale of our temporarily-impaired securities.

As of June 30, 2012, the unrealized losses associated with our corporate bond securities were attributable primarily to securities that were backed by commercial loans and individual issuer companies. For our corporate bond securities with commercial loans as the underlying collateral, we evaluated the projected credit losses in the underlying collateral and concluded that we had sufficient subordination or other credit enhancement when compared with our estimate of credit losses for the individual security and we expected to recover the entire amortized cost for each security. For individual issuers, we performed detailed analysis of the financial performance of the issuer and determined that we expected to recover the entire amortized cost for each security.

As of June 30, 2012, the unrealized losses associated with our MBS and CDOs were attributable primarily to collateral losses and credit spreads. We assessed for credit impairment using a cash flow model as discussed above. The key assumptions included default rates, severities and prepayment rates. We estimated losses for a security by forecasting the underlying loans in each transaction. The forecasted loan performance was used to project cash flows to the various tranches in the structure, as applicable. Our forecasted cash flows also considered, as applicable, independent industry analyst reports and forecasts, sector credit ratings and other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our subordination or other credit enhancement, we expected to recover the entire amortized cost basis of each security.

As of June 30, 2012, the unrealized losses associated with our hybrid and redeemable preferred securities were attributable primarily to wider credit spreads caused by illiquidity in the market and subordination within the capital structure, as well as credit risk of specific issuers. For our hybrid and redeemable preferred securities, we evaluated the financial performance of the issuer based upon credit performance and investment ratings and determined we expected to recover the entire amortized cost of each security.

Changes in the amount of credit loss of OTTI recognized in net income (loss) where the portion related to other factors was recognized in OCI (in millions) on fixed maturity AFS securities were as follows:

				For the Three				For the Six
				Months Ended				Months Ended
				June 30,				June 30,
				2012		2011		2012		2011
Balance as of beginning-of-period				$	410	$	352	$	390	$	319
Increases attributable to:
	Credit losses on securities for which an OTTI was not previously
		recognized			21		3		56		29
	Credit losses on securities for which an OTTI was previously
		recognized			19		19		42		40
Decreases attributable to:
	Securities sold				(35)		(34)		(73)		(48)
			Balance as of end-of-period	$	415	$	340	$	415	$	340

During 2012 and 2011, we recorded credit losses on securities for which an OTTI was not previously recognized as we determined the cash flows expected to be collected would not be sufficient to recover the entire amortized cost basis of the debt security. The credit losses we recorded on securities for which an OTTI was not previously recognized were attributable primarily to one or a combination of the following reasons:

• Failure of the issuer of the security to make scheduled payments;
• Deterioration of creditworthiness of the issuer;
• Deterioration of conditions specifically related to the security;
• Deterioration of fundamentals of the industry in which the issuer operates;
• Deterioration of fundamentals in the economy including, but not limited to, higher unemployment and lower housing prices; and
• Deterioration of the rating of the security by a rating agency.

We recognize the OTTI attributed to the noncredit portion as a separate component in OCI referred to as unrealized OTTI on AFS securities.

Details of the amount of credit loss of OTTI recognized in net income (loss) where the portion related to other factors was recognized in OCI (in millions), were as follows:

		As of June 30, 2012
				Gross Unrealized						OTTI in
		Amortized				Losses and		Fair		Credit
		Cost		Gains		OTTI		Value		Losses
Corporate bonds		$	239	$	1	$	104	$	136	$	73
RMBS			697		5		91		611		268
CMBS			46		-		24		22		74
	Total	$	982	$	6	$	219	$	769	$	415

		As of December 31, 2011
				Gross Unrealized						OTTI in
		Amortized				Losses and		Fair		Credit
		Cost		Gains		OTTI		Value		Losses
Corporate bonds		$	169	$	1	$	67	$	103	$	51
RMBS			690		1		128		563		301
CMBS			17		-		10		7		38
	Total	$	876	$	2	$	205	$	673	$	390

Mortgage Loans on Real Estate

Mortgage loans on real estate principally involve commercial real estate. The commercial loans are geographically diversified throughout the U.S. with the largest concentrations in California and Texas, which accounted for 31% and 32% of mortgage loans on real estate as of June 30, 2012, and December 31, 2011, respectively.

The following provides the current and past due composition of our mortgage loans on real estate (in millions):

			As of			As of
		June 30,			December 31,
			2012			2011
Current			$	6,736		$	6,858
60 to 90 days past due				3			26
Greater than 90 days past due				80			76
Valuation allowance associated with impaired mortgage loans on real estate				(26)			(31)
Unamortized premium (discount)				11			13
	Total carrying value		$	6,804		$	6,942

The number of impaired mortgage loans on real estate, each of which had an associated specific valuation allowance, and the carrying value of impaired mortgage loans on real estate (dollars in millions) were as follows:

			As of			As of
		June 30,			December 31,
			2012			2011
Number of impaired mortgage loans on real estate			9			12
Principal balance of impaired mortgage loans on real estate			$	66		$	100
Valuation allowance associated with impaired mortgage loans on real estate				(26)			(31)
	Carrying value of impaired mortgage loans on real estate		$	40		$	69

The average carrying value on the impaired mortgage loans on real estate (in millions) was as follows:

	For the Three				For the Six
	Months Ended				Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Average carrying value for impaired mortgage loans on real estate	$	49	$	53	$	56	$	54
Interest income recognized on impaired mortgage loans on real estate		-		-		-		1
Interest income collected on impaired mortgage loans on real estate		-		1		-		2

As described in Note 1 in our 2011 Form 10-K, we use the loan-to-value and debt-service coverage ratios as credit quality indicators for our mortgage loans, which were as follows (dollars in millions):

		As of June 30, 2012					As of December 31, 2011
						Debt-					Debt-
						Service					Service
		Principal		% of		Coverage	Principal		% of		Coverage
Loan-to-Value		Amount		Total		Ratio	Amount		Total		Ratio
Less than 65%		$	5,395	79.1	%	1.63	$	5,338	76.7	%	1.61
65% to 74%			1,008	14.8	%	1.41		1,198	17.2	%	1.37
75% to 100%			334	4.9	%	0.90		308	4.4	%	0.92
Greater than 100%			82	1.2	%	0.32		116	1.7	%	0.36
	Total mortgage loans on real estate	$	6,819	100.0	%		$	6,960	100.0	%

Alternative Investments 

As of June 30, 2012, and December 31, 2011, alternative investments included investments in 97 and 96 different partnerships, respectively, and the portfolio represented less than 1% of our overall invested assets.

Realized Gain (Loss) Related to Certain Investments

The detail of the realized gain (loss) related to certain investments (in millions) was as follows:

			For the Three				For the Six
			Months Ended				Months Ended
			June 30,				June 30,
			2012		2011		2012		2011
Fixed maturity AFS securities:
	Gross gains		$	3	$	31	$	8	$	67
	Gross losses			(49)		(51)		(112)		(114)
Equity AFS securities:
	Gross gains			-		1		1		9
Gain (loss) on other investments				(5)		(8)		2		5
Associated amortization of DAC, VOBA, DSI and DFEL
	and changes in other contract holder funds			-		(5)		2		(14)
		Total realized gain (loss) related to certain investments	$	(51)	$	(32)	$	(99)	$	(47)

Details underlying write-downs taken as a result of OTTI (in millions) that were recognized in net income (loss) and included in realized gain (loss) on AFS securities above, and the portion of OTTI recognized in OCI (in millions) were as follows:

			For the Three				For the Six
			Months Ended				Months Ended
			June 30,				June 30,
			2012		2011		2012		2011
OTTI Recognized in Net Income (Loss)
Corporate bonds			$	(10)	$	(2)	$	(29)	$	(6)
RMBS				(14)		(23)		(32)		(43)
CMBS				(16)		(15)		(36)		(39)
CDOs				-		-		-		(1)
Hybrid and redeemable preferred securities				-		-		-		(2)
	Gross OTTI recognized in net income (loss)			(40)		(40)		(97)		(91)
	Associated amortization of DAC, VOBA, DSI and DFEL			7		9		17		19
		Net OTTI recognized in net income (loss), pre-tax	$	(33)	$	(31)	$	(80)	$	(72)
Portion of OTTI Recognized in OCI
Gross OTTI recognized in OCI			$	21	$	19	$	79	$	27
Change in DAC, VOBA, DSI and DFEL				(4)		(3)		(12)		(8)
	Net portion of OTTI recognized in OCI, pre-tax		$	17	$	16	$	67	$	19

Determination of Credit Losses on Corporate Bonds and CDOs

As of June 30, 2012, and December 31, 2011, we reviewed our corporate bond and CDO portfolios for potential shortfall in contractual principal and interest based on numerous subjective and objective inputs. The factors used to determine the amount of credit loss for each individual security, include, but are not limited to, near term risk, substantial discrepancy between book and market value, sector or company-specific volatility, negative operating trends and trading levels wider than peers.

Credit ratings express opinions about the credit quality of a security. Securities rated investment grade, that is those rated BBB- or higher by Standard & Poor's (“S&P”) Rating Services or Baa3 or higher by Moody's Investors Service (“Moody's”), are generally considered by the rating agencies and market participants to be low credit risk. As of June 30, 2012, and December 31, 2011, 96%of the fair value of our corporate bond portfolio was rated investment grade. As of June 30, 2012, and December 31, 2011, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $2.7billionand $2.6 billionand a fair value of $2.5 billion and $2.4billion, respectively. As of June 30, 2012, and December 31, 2011,98% and 97%, respectively,of the fair value of our CDO portfolio was rated investment grade. As of June 30, 2012, and December 31, 2011, the portion of our CDO portfolio rated below investment grade had an amortized costand fair value of $3 million. Based upon the analysis discussed above, we believed as of June 30, 2012, and December 31, 2011, that we would recover the amortized cost of each investment grade corporate bond and CDO security.

For securities where we recorded an OTTI recognized in net income (loss) for the six months ended June 30, 2012 and 2011, the recovery as a percentage of amortized cost was 92% and 98%, respectively, for corporate bondsand 0%for CDOs.

Determination of Credit Losses on MBS

As of June 30, 2012, and December 31, 2011, default rates were projected by considering underlying MBS loan performance and collateral type. Projected default rates on existing delinquencies vary between 25% to 100% depending on loan type and severity of delinquency status.  In addition, we estimate the potential contributions of currently performing loans that may become delinquent in the future based on the change in delinquencies and loan liquidations experienced in the recent history. Finally, we develop a default rate timing curve by aggregating the defaults for all loans (delinquent loans, foreclosure and real estate owned and new delinquencies from currently performing loans) in the pool to project the future expected cash flows. 

We use certain available loan characteristics such as lien status, loan sizes and occupancy to estimate the loss severity of loans. Second lien loans are assigned 100% severity, if defaulted.  For first lien loans, we assume a minimum of 30% severity with higher severity assumed for investor properties and further housing price depreciation.

Payables for Collateral on Investments

The carrying values of the payables for collateral on investments (in millions) included on our Consolidated Balance Sheets and the fair value of the related investments or collateral consisted of the following:

			As of June 30, 2012				As of December 31, 2011
			Carrying		Fair		Carrying		Fair
			Value		Value		Value		Value
Collateral payable held for derivative investments (1)			$	3,441	$	3,441	$	2,980	$	2,980
Securities pledged under securities lending agreements (2)				200		194		200		193
Securities pledged under reverse repurchase agreements (3)				280		293		280		294
Securities pledged for Term Asset-Backed Securities
	Loan Facility ("TALF") (4)			49		66		173		199
Investments pledged for Federal Home Loan Bank of
	Indianapolis ("FHLBI") (5)			1,100		2,013		100		142
		Total payables for collateral on investments	$	5,070	$	6,007	$	3,733	$	3,808

• We obtain collateral based upon contractual provisions with our counterparties. These agreements take into consideration the counterparties' credit rating as compared to ours, the fair value of the derivative investments and specified thresholds that if exceeded result in the receipt of cash that is typically invested in cash and invested cash. See Note 6 for details about maximum collateral potentially required to post on our credit default swaps.
• Our pledged securities under securities lending agreements are included in fixed maturity AFS securities on our Consolidated Balance Sheets. We generally obtain collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. We value collateral daily and obtain additional collateral when deemed appropriate. The cash received in our securities lending program is typically invested in cash and invested cash or fixed maturity AFS securities.
• Our pledged securities under reverse repurchase agreements are included in fixed maturity AFS securities on our Consolidated Balance Sheets. We obtain collateral in an amount equal to 95% of the fair value of the securities, and our agreements with third parties contain contractual provisions to allow for additional collateral to be obtained when necessary. The cash received in our reverse repurchase program is typically invested in fixed maturity AFS securities.
• Our pledged securities for TALF are included in fixed maturity AFS securities on our Consolidated Balance Sheets. We obtain collateral in an amount that has typically averaged 90% of the fair value of the TALF securities. The cash received in these transactions is invested in fixed maturity AFS securities.
• Our pledged investments for FHLBI are included in fixed maturity AFS securities and mortgage loans on real estate on our Consolidated Balance Sheets.  The collateral requirements are generally 105% to 115% of the fair value for fixed maturity AFS securities and 155% to 175% of the fair value for mortgage loans on real estate.  The cash received in these transactions is primarily invested in cash and invested cash or fixed maturity AFS securities.

Increase (decrease) in payables for collateral on investments (in millions) included on the Consolidated Statements of Cash Flows consisted of the following:

		For the Six
		Months Ended
		June 30,
		2012		2011
Collateral payable held for derivative investments		$	461	$	223
Securities pledged under securities lending agreements			-		1
Securities pledged for TALF			(124)		(78)
Investments pledged for FHLBI			1,000		-
	Total increase (decrease) in payables for collateral on investments	$	1,337	$	146

Investment Commitments

As of June 30, 2012, our investment commitments were $754million, which included $233 million of limited partnerships (“LPs”),$339million of private placements and $182 million of mortgage loans on real estate.

Concentrations of Financial Instruments

As of June 30, 2012, and December 31, 2011, our most significant investments in one issuer were our investments in securities issued by the Federal Home Loan Mortgage Corporation with a fair value of $4.5 billion and $5.0 billion, respectively, or 5%of our invested assets portfolioand our investments in securities issued by Fannie Mae with a fair value of $2.5 billion and $2.6 billion, respectively, or 3%of our invested assets portfolio. These investments are included in corporate bonds in the tables above.

As of June 30, 2012, and December 31, 2011, our most significant investments in one industry were our investment securities in the electric industry with a fair value of $8.1 billion and $7.7 billion, respectively, or 8%of our invested assets portfolio,and our investment securities in the collateralized mortgage obligationsindustry with a fair value of $5.0 billion and $5.6 billion,or 5% and 6%of our invested assets portfolio, respectively.We utilized the industry classifications to obtain the concentration of financial instruments amount; as such, this amount will not agree to the AFS securities table above.