4. Investments

AFS Securities

See Note 1 in our 2016 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 March 31, 2017
	Amortized		Gross Unrealized							Fair
	Cost		Gains		Losses		OTTI (1)			Value
Fixed maturity securities:
Corporate bonds	$	74,509	$	5,036	$	771	$	(5	)	$	78,779
Asset-backed securities (“ABS”)		1,017		40		12		(17	)		1,062
U.S. government bonds		540		38		2		-			576
Foreign government bonds		398		58		-		-			456
Residential mortgage-backed securities (“RMBS”)		3,490		144		62		(9	)		3,581
Commercial mortgage-backed securities (“CMBS”)		423		7		4		(1	)		427
Collateralized loan obligations (“CLOs”)		772		3		3		(4	)		776
State and municipal bonds		4,101		743		18		-			4,826
Hybrid and redeemable preferred securities		584		75		40		-			619
Total fixed maturity securities		85,834		6,144		912		(36	)		91,102
Equity securities		263		16		3		-			276
Total AFS securities	$	86,097	$	6,160	$	915	$	(36	)	$	91,378



	As of December 31, 2016
	Amortized		Gross Unrealized							Fair
	Cost		Gains		Losses		OTTI (1)			Value
Fixed maturity securities:
Corporate bonds	$	73,275	$	4,754	$	970	$	(5	)	$	77,064
ABS		1,047		39		14		(13	)		1,085
U.S. government bonds		384		37		2		-			419
Foreign government bonds		449		58		1		-			506
RMBS		3,534		147		73		(6	)		3,614
CMBS		345		8		4		(1	)		350
CLOs		742		1		3		(4	)		744
State and municipal bonds		3,929		718		20		-			4,627
Hybrid and redeemable preferred securities		582		70		48		-			604
VIEs’ fixed maturity securities		200		-		-		-			200
Total fixed maturity securities		84,487		5,832		1,135		(29	)		89,213
Equity securities		260		19		4		-			275
Total AFS securities	$	84,747	$	5,851	$	1,139	$	(29	)	$	89,488

⁽¹⁾

Includes unrealized (gains) and losses on impaired securities related to changes in the fair value of such securities subsequent to the impairment measurement date.

The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of March 31, 2017, were as follows:



	Amortized		Fair
	Cost		Value
Due in one year or less	$	3,090	$	3,131
Due after one year through five years		18,673		19,611
Due after five years through ten years		17,275		17,719
Due after ten years		41,094		44,795
Subtotal		80,132		85,256
Structured securities (ABS, MBS, CLOs)		5,702		5,846
Total fixed maturity AFS securities	$	85,834	$	91,102

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 March 31, 2017
	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	$	14,068		$	471	$	2,790		$	302	$	16,858		$	773
ABS		121			4		270			22		391			26
U.S. government bonds		170			2		-			-		170			2
RMBS		996			52		325			15		1,321			67
CMBS		210			4		18			2		228			6
CLOs		277			3		21			-		298			3
State and municipal bonds		231			12		46			6		277			18
Hybrid and redeemable
preferred securities		56			3		141			37		197			40
Total fixed maturity securities		16,129			551		3,611			384		19,740			935
Equity securities		13			2		40			1		53			3
Total AFS securities	$	16,142		$	553	$	3,651		$	385	$	19,793		$	938

Total number of AFS securities in an unrealized loss position															1,584



	As of December 31, 2016
	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	$	15,820		$	569	$	3,187		$	403	$	19,007		$	972
ABS		201			4		298			25		499			29
U.S. government bonds		18			2		-			-		18			2
Foreign government bonds		29			1		-			-		29			1
RMBS		989			58		392			23		1,381			81
CMBS		190			4		19			2		209			6
CLOs		259			3		25			-		284			3
State and municipal bonds		227			12		47			8		274			20
Hybrid and redeemable
preferred securities		76			4		143			44		219			48
Total fixed maturity securities		17,809			657		4,111			505		21,920			1,162
Equity securities		4			2		44			2		48			4
Total AFS securities	$	17,813		$	659	$	4,155		$	507	$	21,968		$	1,166

Total number of AFS securities in an unrealized loss position															1,744

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

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 March 31, 2017
								Number
	Fair		Gross Unrealized					of
	Value		Losses		OTTI		Securities (1)
Less than six months	$	92	$	31	$	-			18
Six months or greater, but less than nine months		25		7		1			4
Twelve months or greater		265		105		9			52
Total	$	382	$	143	$	10			74



	As of December 31, 2016
								Number
	Fair		Gross Unrealized					of
	Value		Losses		OTTI		Securities (1)
Less than six months	$	174	$	52	$	2			19
Nine months or greater, but less than twelve months		1		1		-			2
Twelve months or greater		364		167		10			62
Total	$	539	$	220	$	12			83

⁽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 decreased by $228 million for the three months ended March 31, 2017. As discussed further below, we believe the unrealized loss position as of March 31, 2017, did not represent OTTI as (i) we did not intend to sell these fixed maturity AFS securities; (ii) it is not more likely than not that we will be required to sell these 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 March 31, 2017, 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 March 31, 2017, the unrealized losses associated with our corporate bond securities were attributable primarily to widening credit spreads and rising interest rates since purchase. We performed a detailed analysis of the financial performance of the underlying issuers and determined that we expected to recover the entire amortized cost for each temporarily-impaired security.

As of March 31, 2017, the unrealized losses associated with our mortgage-backed securities (“MBS”) and ABS were attributable primarily to widening credit spreads and rising interest rates since purchase. We assessed 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 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 of each temporarily-impaired security.

As of March 31, 2017, 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 underlying issuers. For our hybrid and redeemable preferred securities, we evaluated the financial performance of the underlying issuers based upon credit performance and investment ratings and determined that we expected to recover the entire amortized cost of each temporarily-impaired 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
	Months Ended
	March 31,
	2017			2016
Balance as of beginning-of-year	$	430		$	382
Increases attributable to:
Credit losses on securities for which an OTTI was not previously recognized		1			35
Credit losses on securities for which an OTTI was previously recognized		3			5
Decreases attributable to:
Securities sold, paid down or matured		(41	)		(9	)
Balance as of end-of-period	$	393		$	413

During the three months ended March 31, 2017 and 2016, 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 March 31, 2017
			Net
			Unrealized				OTTI in
	Amortized		Gain/(Loss)		Fair		Credit
	Cost		Position		Value		Losses
Corporate bonds	$	20	$	5	$	25	$	39
ABS		205		17		222		112
RMBS		312		9		321		195
CMBS		22		1		23		39
CLOs		11		4		15		5
State and municipal bonds		1		-		1		3
Total	$	571	$	36	$	607	$	393



	As of December 31, 2016
			Net
			Unrealized				OTTI in
	Amortized		Gain/(Loss)		Fair		Credit
	Cost		Position		Value		Losses
Corporate bonds	$	80	$	5	$	85	$	77
ABS		212		13		225		112
RMBS		332		6		338		194
CMBS		29		1		30		39
CLOs		11		4		15		5
State and municipal bonds		2		-		2		3
Total	$	666	$	29	$	695	$	430

Mortgage Loans on Real Estate

See Note 1 in our 2016 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 20% and 11%, respectively, of mortgage loans on real estate as of March 31, 2017, and December 31, 2016.

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



		As of				As of
	March 31,				December 31,
		2017				2016
Current		$	10,000			$	9,888
60 to 90 days past due			-				-
Greater than 90 days past due			2				2
Valuation allowance associated with impaired mortgage loans on real estate			(2	)			(2	)
Unamortized premium (discount)			1				1
Total carrying value		$	10,001			$	9,889

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
	March 31,				December 31,
		2017				2016
Number of impaired mortgage loans on real estate		2				2

Principal balance of impaired mortgage loans on real estate		$	7			$	7
Valuation allowance associated with impaired mortgage loans on real estate			(2	)			(2	)
Carrying value of impaired mortgage loans on real estate		$	5			$	5

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



	For the Three
	Months Ended
	March 31,
	2017		2016
Balance as of beginning-of-year	$	2	$	2
Additions		-		-
Charge-offs, net of recoveries		-		-
Balance as of end-of-period	$	2	$	2

Additional information related to impaired mortgage loans on real estate (in millions) was as follows:



	For the Three
	Months Ended
	March 31,
	2017		2016
Average carrying value for impaired mortgage loans on real estate	$	5	$	6
Interest income recognized on impaired mortgage loans on real estate		-		-
Interest income collected on impaired mortgage loans on real estate		-		-

As described in Note 1 in our 2016 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 March 31, 2017				As of December 31, 2016
				Debt-				Debt-
				Service				Service
	Carrying		% of	Coverage	Carrying		% of	Coverage
Loan-to-Value Ratio	Value		Total	Ratio	Value		Total	Ratio
Less than 65%	$	8,873	88.7%	2.16	$	8,709	88.0%	2.16
65% to 74%		968	9.7%	1.89		1,009	10.2%	1.87
75% to 100%		155	1.5%	0.82		166	1.7%	0.82
Greater than 100%		5	0.1%	1.04		5	0.1%	1.04
Total mortgage loans on real estate	$	10,001	100.0%		$	9,889	100.0%

Alternative Investments

As of March 31, 2017, and December 31, 2016, alternative investments included investments in 199 and 202 different partnerships, respectively, and the portfolios 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
	Months Ended
	March 31,
	2017			2016
Fixed maturity AFS securities: (1)
Gross gains	$	8		$	54
Gross losses		(12	)		(98	)
Equity AFS securities:
Gross gains		1			-
Gross losses		-			-
Gain (loss) on other investments		(3	)		(60	)
Associated amortization of DAC, VOBA, DSI and DFEL
and changes in other contract holder funds		(7	)		(3	)
Total realized gain (loss) related to certain investments, pre-tax	$	(13	)	$	(107	)

⁽¹⁾

These amounts are represented net of related fair value hedging activity. See Note 5 for more information.

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
	Months Ended
	March 31,
	2017			2016
OTTI Recognized in Net Income (Loss)
Fixed maturity securities:
Corporate bonds	$	(2	)	$	(36	)
ABS		(1	)		(2	)
RMBS		(1	)		(2	)
Gross OTTI recognized in net income (loss)		(4	)		(40	)
Associated amortization of DAC, VOBA, DSI and DFEL		-			4
Net OTTI recognized in net income (loss), pre-tax	$	(4	)	$	(36	)

Portion of OTTI Recognized in OCI
Gross OTTI recognized in OCI	$	-		$	26
Change in DAC, VOBA, DSI and DFEL		-			(6	)
Net portion of OTTI recognized in OCI, pre-tax	$	-		$	20

Determination of Credit Losses on Corporate Bonds and ABS

As of March 31, 2017, and December 31, 2016, we reviewed our corporate bond and ABS 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 March 31, 2017, and December 31, 2016, 96% and 95%, respectively, of the fair value of our corporate bond portfolio was rated investment grade. As of March 31, 2017, and December 31, 2016, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $3.6 billion and $3.8 billion, respectively, and a fair value of $3.5 billion and $3.7 billion, respectively. As of March 31, 2017, and December 31, 2016, 96% of the fair value of our ABS portfolio was rated investment grade. As of March 31, 2017, and December 31, 2016, the portion of our ABS portfolio rated below investment grade had an amortized cost of $87 million and $91 million, respectively, and a fair value of $74 million and $75 million, respectively. Based upon the analysis discussed above, we believe as of March 31, 2017, and December 31, 2016, that we would recover the amortized cost of each fixed maturity security.

Determination of Credit Losses on MBS

As of March 31, 2017, and December 31, 2016, default rates were projected by considering underlying MBS loan performance and collateral type. Projected default rates on existing delinquencies vary between 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 loss 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 March 31, 2017				As of December 31, 2016
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Collateral payable for derivative investments (1)	$	923	$	923	$	894	$	894
Securities pledged under securities lending agreements (2)		127		123		216		209
Securities pledged under repurchase agreements (3)		536		588		535		589
Investments pledged for Federal Home Loan Bank of
Indianapolis (“FHLBI”) (4)		3,500		5,205		3,350		4,947
Total payables for collateral on investments	$	5,086	$	6,839	$	4,995	$	6,639

⁽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 5 for additional information.

⁽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 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 repurchase program is typically invested in fixed maturity AFS securities.

⁽⁴⁾

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) consisted of the following:



	For the Three
	Months Ended
	March 31,
	2017			2016
Collateral payable for derivative investments	$	29		$	772
Securities pledged under securities lending agreements		(89	)		4
Securities pledged under repurchase agreements		1			(166	)
Investments pledged for FHLBI		150			(250	)
Total increase (decrease) in payables for collateral on investments	$	91		$	360

We have elected not to offset our repurchase agreements and securities lending transactions in our financial statements. The remaining contractual maturities of repurchase agreements and securities lending transactions accounted for as secured borrowings were as follows:



	As of March 31, 2017
	Overnight and Continuous		Up to 30 Days		30 - 90 Days		Greater Than 90 Days		Total
Repurchase Agreements
Corporate bonds	$	-	$	-	$	386	$	150	$	536
Total		-		-		386		150		536
Securities Lending
Corporate bonds		127		-		-		-		127
Total		127		-		-		-		127
Total gross secured borrowings	$	127	$	-	$	386	$	150	$	663


	As of December 31, 2016
	Overnight and Continuous		Up to 30 Days		30 - 90 Days		Greater Than 90 Days		Total
Repurchase Agreements
Corporate bonds	$	-	$	-	$	389	$	146	$	535
Total		-		-		389		146		535
Securities Lending
Corporate bonds		212		-		-		-		212
Foreign government bonds		4		-		-		-		4
Total		216		-		-		-		216
Total gross secured borrowings	$	216	$	-	$	389	$	146	$	751

We accept collateral in the form of securities in connection with repurchase agreements. In instances where we are permitted to sell or re-pledge the securities received, we report the fair value of the collateral received and a related obligation to return the collateral in the financial statements. In addition, we receive securities in connection with securities borrowing agreements, which we are permitted to sell or re-pledge. As of March 31, 2017, the fair value of all collateral received that we are permitted to sell or re-pledge was $176 million. As of March 31, 2017, we have not sold or re-pledged this collateral.

Investment Commitments

As of March 31, 2017, our investment commitments were $1.3 billion, which included $735 million of LPs, $340 million of mortgage loans on real estate and $228 million of private placement securities.

Concentrations of Financial Instruments

As of March 31, 2017, and December 31, 2016, 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 $1.4 billion and $1.5 billion, respectively, or 1% of our invested assets portfolio, and our investments in securities issued by Federal National Mortgage Association with a fair value of $1.1 billion, or 1% of our invested assets portfolio. These concentrations include both AFS and trading securities.

As of March 31, 2017, and December 31, 2016, our most significant investments in one industry were our investment securities in the consumer non-cyclical industry with a fair value of $14.2 billion and $13.7 billion, respectively, or 13% of our invested assets portfolio, and our investment securities in the utilities industry with a fair value of $13.4 billion and $13.2 billion, respectively, or 12% of our invested assets portfolio. These concentrations include both AFS and trading securities.