5. Investments

AFS Securities

See Note 1 in our 2012 Form 10-K for information regarding our accounting policy relating to AFS securities, 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 September 30, 2013
	Amortized		Gross Unrealized						Fair
	Cost		Gains		Losses		OTTI		Value
Fixed maturity securities:
Corporate bonds	$	64,933	$	4,739	$	1,056	$	91	$	68,525
U.S. government bonds		345		32		9		-		368
Foreign government bonds		523		53		-		-		576
Residential mortgage-backed securities ("RMBS")		4,396		294		1		39		4,650
Commercial mortgage-backed securities ("CMBS")		776		40		4		17		795
Collateralized debt obligations ("CDOs")		202		-		1		7		194
State and municipal bonds		3,654		346		24		-		3,976
Hybrid and redeemable preferred securities		1,027		89		65		-		1,051
VIEs' fixed maturity securities		681		18		-		-		699
Total fixed maturity securities		76,537		5,611		1,160		154		80,834
Equity securities		166		19		-		-		185
Total AFS securities	$	76,703	$	5,630	$	1,160	$	154	$	81,019



	As of December 31, 2012
	Amortized		Gross Unrealized						Fair
	Cost		Gains		Losses		OTTI		Value
Fixed maturity securities:
Corporate bonds	$	60,124	$	8,219	$	219	$	108	$	68,016
U.S. government bonds		383		59		-		-		442
Foreign government bonds		562		92		-		-		654
RMBS		5,763		471		3		60		6,171
CMBS		970		68		16		19		1,003
CDOs		189		2		3		8		180
State and municipal bonds		3,546		814		7		-		4,353
Hybrid and redeemable preferred securities		1,181		106		70		-		1,217
VIEs' fixed maturity securities		677		31		-		-		708
Total fixed maturity securities		73,395		9,862		318		195		82,744
Equity securities		137		22		2		-		157
Total AFS securities	$	73,532	$	9,884	$	320	$	195	$	82,901

The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of September 30, 2013, were as follows:



	Amortized		Fair
	Cost		Value
Due in one year or less	$	2,546	$	2,604
Due after one year through five years		13,947		15,116
Due after five years through ten years		25,054		26,239
Due after ten years		29,616		31,236
Subtotal		71,163		75,195
Mortgage-backed securities ("MBS")		5,172		5,445
CDOs		202		194
Total fixed maturity AFS securities	$	76,537	$	80,834

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 other comprehensive income (loss) (“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 September 30, 2013
	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	$	15,900		$	978	$	820		$	169	$	16,720		$	1,147
U.S. government bonds		145			9		-			-		145			9
RMBS		635			30		100			10		735			40
CMBS		117			19		29			2		146			21
CDOs		73			7		45			1		118			8
State and municipal bonds		303			18		22			6		325			24
Hybrid and redeemable
preferred securities		60			6		218			59		278			65
Total fixed maturity securities		17,233			1,067		1,234			247		18,467			1,314
Equity securities		-			-		-			-		-			-
Total AFS securities	$	17,233		$	1,067	$	1,234		$	247	$	18,467		$	1,314

Total number of AFS securities in an unrealized loss position															1,361



	As of December 31, 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	$	2,853		$	145	$	934		$	182	$	3,787		$	327
RMBS		272			39		199			24		471			63
CMBS		66			16		113			19		179			35
CDOs		10			8		53			3		63			11
State and municipal bonds		64			1		24			6		88			7
Hybrid and redeemable
preferred securities		71			3		293			67		364			70
Total fixed maturity securities		3,336			212		1,616			301		4,952			513
Equity securities		7			2		-			-		7			2
Total AFS securities	$	3,343		$	214	$	1,616		$	301	$	4,959		$	515

Total number of AFS securities in an unrealized loss position															626

For information regarding our investments in VIEs, see Note 4.

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 2012 Form 10-K. Selected information for these securities in a gross unrealized loss position (in millions) was as follows:



	As of September 30, 2013
	Amortized		Fair		Unrealized
	Cost		Value		Loss
Total
AFS securities backed by pools of residential mortgages	$	1,285	$	1,163	$	122
AFS securities backed by pools of commercial mortgages		190		163		27
Total	$	1,475	$	1,326	$	149

Subject to Detailed Analysis
AFS securities backed by pools of residential mortgages	$	1,055	$	941	$	114
AFS securities backed by pools of commercial mortgages		34		24		10
Total	$	1,089	$	965	$	124



	As of December 31, 2012
	Amortized		Fair		Unrealized
	Cost		Value		Loss
Total
AFS securities backed by pools of residential mortgages	$	1,181	$	980	$	201
AFS securities backed by pools of commercial mortgages		236		192		44
Total	$	1,417	$	1,172	$	245

Subject to Detailed Analysis
AFS securities backed by pools of residential mortgages	$	1,173	$	972	$	201
AFS securities backed by pools of commercial mortgages		56		40		16
Total	$	1,229	$	1,012	$	217

For the nine months ended September 30, 2013 and 2012, we recorded OTTI for AFS securities backed by pools of residential and commercial mortgages of $23 million and $6 million, pre-tax, respectively, and before associated amortization expense for deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”), of which $1 million and $(31) million, respectively, was recognized in OCI and $22 million and $37 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 September 30, 2013
								Number
	Fair		Gross Unrealized					of
	Value		Losses		OTTI		Securities⁽¹⁾
Less than six months	$	231	$	61	$	5			22
Six months or greater, but less than nine months		21		17		-			5
Nine months or greater, but less than twelve months		-		-		-			6
Twelve months or greater		249		87		87			84
Total	$	501	$	165	$	92			117



	As of December 31, 2012
								Number
	Fair		Gross Unrealized					of
	Value		Losses		OTTI		Securities ⁽¹⁾
Less than six months	$	34	$	9	$	1			14
Nine months or greater, but less than twelve months		15		10		-			3
Twelve months or greater		395		179		128			131
Total	$	444	$	198	$	129			148

⁽¹⁾	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, including the portion of OTTI recognized in OCI, on AFS securities increased by $799 million for the nine months ended September 30, 2013. As discussed further below, we believe the unrealized loss position as of September 30, 2013, did not represent OTTI as (i) we did not intend to sell the fixed maturity AFS securities; (ii) 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; (iii) the estimated future cash flows were equal to or greater than the amortized cost basis of the debt securities; and (iv) 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 September 30, 2013, management believes we have 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 September 30, 2013, 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 September 30, 2013, the unrealized losses associated with our MBS and CDOs were attributable primarily to collateral losses and credit spreads. We assessed our MBS and CDOs for credit impairment using a cash flow model that incorporates key assumptions including 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 temporarily-impaired security.

As of September 30, 2013, 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 that 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 Nine
	Months Ended				Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Balance as of beginning-of-period	$	413	$	415	$	424	$	390
Increases attributable to:
Credit losses on securities for which an OTTI was not
previously recognized		6		19		26		74
Credit losses on securities for which an OTTI was
previously recognized		16		18		37		60
Decreases attributable to:
Securities sold		(16)		(19)		(68)		(91)
Balance as of end-of-period	$	419	$	433	$	419	$	433

During the nine months ended September 30, 2013 and 2012, 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; 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) for which a portion related to other factors was recognized in OCI (in millions), were as follows:



	As of September 30, 2013
			Gross Unrealized						OTTI in
	Amortized				Losses and		Fair		Credit
	Cost		Gains		OTTI		Value		Losses
Corporate bonds	$	271	$	17	$	60	$	228	$	122
RMBS		582		18		23		577		189
CMBS		37		3		13		27		108
Total	$	890	$	38	$	96	$	832	$	419



	As of December 31, 2012
			Gross Unrealized						OTTI in
	Amortized				Losses and		Fair		Credit
	Cost		Gains		OTTI		Value		Losses
Corporate bonds	$	299	$	4	$	98	$	205	$	104
RMBS		636		22		40		618		227
CMBS		41		1		16		26		93
Total	$	976	$	27	$	154	$	849	$	424

Mortgage Loans on Real Estate

See Note 1 in our 2012 Form 10-K for information regarding our accounting policy relating to 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 32% of mortgage loans on real estate as of September 30, 2013, and December 31, 2012.

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



		As of			As of
	September 30,			December 31,
		2013			2012
Current		$	7,117		$	7,011
60 to 90 days past due			-			8
Greater than 90 days past due			13			24
Valuation allowance associated with impaired mortgage loans on real estate			(9)			(21)
Unamortized premium (discount)			6			7
Total carrying value		$	7,127		$	7,029

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
	September 30,			December 31,
		2013			2012
Number of impaired mortgage loans on real estate		4			10

Principal balance of impaired mortgage loans on real estate		$	37		$	75
Valuation allowance associated with impaired mortgage loans on real estate			(9)			(21)
Carrying value of impaired mortgage loans on real estate		$	28		$	54

The changes in the valuation allowance associated with impaired mortgage loans on real estate (in millions) were as follows:



		As of			As of
	September 30,			December 31,
		2013			2012
Balance as of beginning-of-year		$	21		$	31
Additions			3			14
Charge-offs, net of recoveries			(15)			(24)
Balance as of end-of-period		$	9		$	21

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



	For the Three				For the Nine
	Months Ended				Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Average carrying value for impaired mortgage loans on real estate	$	31	$	42	$	37	$	52
Interest income recognized on impaired mortgage loans on real estate		-		1		1		1
Interest income collected on impaired mortgage loans on real estate		-		1		1		1

As described in Note 1 in our 2012 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 September 30, 2013				As of December 31, 2012
				Debt-				Debt-
				Service				Service
	Principal		% of	Coverage	Principal		% of	Coverage
	Amount		Total	Ratio	Amount		Total	Ratio
Less than 65%	$	5,958	83.6%	1.79	$	5,677	80.6%	1.68
65% to 74%		723	10.1%	1.42		897	12.7%	1.39
75% to 100%		404	5.7%	0.83		386	5.5%	0.84
Greater than 100%		45	0.6%	0.66		83	1.2%	0.66
Total mortgage loans on real estate	$	7,130	100.0%		$	7,043	100.0%

Alternative Investments

As of September 30, 2013, and December 31, 2012, alternative investments included investments in 108 and 98 different partnerships, respectively, and the portfolio represented approximately 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 Nine
	Months Ended				Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Fixed maturity AFS securities:
Gross gains	$	5	$	4	$	17	$	12
Gross losses		(28)		(49)		(73)		(161)
Equity AFS securities:
Gross gains		1		-		7		1
Gross losses		(1)		-		(2)		-
Gain (loss) on other investments		(2)		(10)		(3)		(8)
Associated amortization of DAC, VOBA, DSI and DFEL
and changes in other contract holder funds		(8)		1		(19)		3
Total realized gain (loss) related to certain investments	$	(33)	$	(54)	$	(73)	$	(153)

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 Nine
	Months Ended				Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
OTTI Recognized in Net Income (Loss)
Corporate bonds	$	(11)	$	(5)	$	(21)	$	(34)
RMBS		(10)		(16)		(25)		(48)
CMBS		(1)		(14)		(15)		(50)
CDOs		-		(2)		(1)		(2)
Total fixed maturity securities		(22)		(37)		(62)		(134)
Equity securities		(1)		-		(1)		-
Gross OTTI recognized in net income (loss)		(23)		(37)		(63)		(134)
Associated amortization of DAC, VOBA, DSI, and DFEL		4		5		11		22
Net OTTI recognized in net income (loss), pre-tax	$	(19)	$	(32)	$	(52)	$	(112)
						.
Portion of OTTI Recognized in OCI
Gross OTTI recognized in OCI	$	4	$	17	$	10	$	96
Change in DAC, VOBA, DSI and DFEL		(1)		(2)		(1)		(14)
Net portion of OTTI recognized in OCI, pre-tax	$	3	$	15	$	9	$	82

Determination of Credit Losses on Corporate Bonds and CDOs

As of September 30, 2013, and December 31, 2012, 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 September 30, 2013, and December 31, 2012, 96% of the fair value of our corporate bond portfolio was rated investment grade. As of September 30, 2013, and December 31, 2012, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $3.1 billion and $3.0 billion, respectively, and a fair value of $3.0 billion and $2.9 billion, respectively. As of September 30, 2013, and December 31, 2012, 94% and 93% respectively, of the fair value of our CDO portfolio was rated investment grade. As of September 30, 2013, and December 31, 2012, the portion of our CDO portfolio rated below investment grade had an amortized cost of $18 million and $21 million, respectively, and fair value of $12 million and $13 million, respectively. Based upon the analysis discussed above, we believe as of September 30, 2013, and December 31, 2012, that we would recover the amortized cost of each investment grade corporate bond and CDO security.

Determination of Credit Losses on MBS

As of September 30, 2013, and December 31, 2012, default rates were projected by considering underlying MBS loan performance and collateral type. Projected default rates on existing delinquencies vary between approximately 10% 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 in the pool (delinquent loans, foreclosure and real estate owned and new delinquencies from currently performing loans) and the associated loan-level loss severities.

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 adjusted by housing price assumptions. With the default rate timing curve and loan-level severity, we derive the future expected credit losses.

Payables for Collateral on Investments

The carrying value 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 September 30, 2013				As of December 31, 2012
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Collateral payable held for derivative investments ⁽¹⁾	$	957	$	957	$	2,567	$	2,567
Securities pledged under securities lending agreements ⁽²⁾		180		173		197		189
Securities pledged under reverse repurchase agreements ⁽³⁾		530		552		280		294
Securities pledged for Term Asset-Backed Securities
Loan Facility ("TALF") ⁽⁴⁾		36		50		37		52
Investments pledged for Federal Home Loan Bank of
Indianapolis ("FHLBI")⁽⁵⁾		1,850		3,080		1,100		1,936
Total payables for collateral on investments	$	3,553	$	4,812	$	4,181	$	5,038

⁽¹⁾

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.

⁽²⁾

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.

⁽³⁾

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.

⁽⁴⁾

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.

⁽⁵⁾

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.

For information related to balance sheet offsetting of our securities lending and reverse repurchase agreements, see Note 6.

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



	For the Nine
	Months Ended
	September 30,
	2013		2012
Collateral payable held for derivative investments	$	(1,610)	$	(27)
Securities pledged under securities lending agreements		(17)		(4)
Securities pledged under reverse repurchase agreements		250		-
Securities pledged for TALF		(1)		(136)
Investments pledged for FHLBI		750		1,000
Total increase (decrease) in payables for collateral on investments	$	(628)	$	833

Investment Commitments

As of September 30, 2013, our investment commitments were $1.2 billion, which included $389 million of LPs, $517 million of private placement securities and $285 million of mortgage loans on real estate.

Concentrations of Financial Instruments

As of September 30, 2013, and December 31, 2012, 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 $2.8 billion and $3.8 billion, respectively, or 3% and 4% of our invested assets portfolio, respectively, and our investments in securities issued by Fannie Mae with a fair value of $1.8 billion and $2.2 billion, respectively, or 2% of our invested assets portfolio. These investments are included in corporate bonds in the tables above.

As of September 30, 2013, and December 31, 2012, our most significant investments in one industry were our investment securities in the electric industry with a fair value of $8.7 billion, or 9% of our invested assets portfolio, and our investment securities in the banking industry with a fair value of $4.9 billion, or 5% of our invested assets portfolio. 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.