5. Investments

AFS Securities

See Note 1 in our 2017 Form 10-K for information regarding our accounting policy relating to AFS securities, which also includes additional disclosures regarding our fair value measurements. In addition, we adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, in 2018 that resulted in a new classification and measurement of our equity securities. See Note 2 for additional information.

The amortized cost, gross unrealized gains, losses and other-than-temporary impairment (“OTTI”) and fair value of AFS securities (in millions) were as follows:



	As of September 30, 2018
	Amortized		Gross Unrealized							Fair
	Cost		Gains		Losses		OTTI (1)			Value
Fixed maturity AFS securities:
Corporate bonds	$	78,496	$	3,299	$	1,724	$	(9	)	$	80,080
Asset-backed securities ("ABS")		934		41		7		(17	)		985
U.S. government bonds		392		23		6		-			409
Foreign government bonds		418		41		-		-			459
Residential mortgage-backed securities ("RMBS")		3,267		113		114		(21	)		3,287
Commercial mortgage-backed securities ("CMBS")		766		2		23		(3	)		748
Collateralized loan obligations ("CLOs")		1,371		-		14		(5	)		1,362
State and municipal bonds		4,588		656		26		-			5,218
Hybrid and redeemable preferred securities		576		62		25		-			613
Total AFS securities	$	90,808	$	4,237	$	1,939	$	(55	)	$	93,161



	As of December 31, 2017
	Amortized		Gross Unrealized							Fair
	Cost		Gains		Losses		OTTI (1)			Value
Fixed maturity AFS securities:
Corporate bonds	$	75,701	$	6,862	$	354	$	(7	)	$	82,216
ABS		903		51		7		(27	)		974
U.S. government bonds		527		41		1		-			567
Foreign government bonds		395		56		-		-			451
RMBS		3,327		155		39		(22	)		3,465
CMBS		590		10		2		(2	)		600
CLOs		803		2		2		(5	)		808
State and municipal bonds		4,172		953		6		-			5,119
Hybrid and redeemable preferred securities		575		87		22		-			640
Total fixed maturity securities		86,993		8,217		433		(63	)		94,840
Equity AFS securities		247		16		17		-			246
Total AFS securities	$	87,240	$	8,233	$	450	$	(63	)	$	95,086

⁽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 September 30, 2018, were as follows:



	Amortized		Fair
	Cost		Value
Due in one year or less	$	3,631	$	3,669
Due after one year through five years		17,430		17,509
Due after five years through ten years		17,493		17,440
Due after ten years		45,916		48,161
Subtotal		84,470		86,779
Structured securities (ABS, MBS, CLOs)		6,338		6,382
Total fixed maturity AFS securities	$	90,808	$	93,161

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, 2018
	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 AFS securities:
Corporate bonds	$	33,196		$	1,188	$	4,690		$	538	$	37,886		$	1,726
ABS		252			3		129			12		381			15
U.S. government bonds		169			4		18			2		187			6
RMBS		836			43		603			73		1,439			116
CMBS		624			18		57			5		681			23
CLOs		1,062			14		34			-		1,096			14
State and municipal bonds		724			15		75			11		799			26
Hybrid and redeemable
preferred securities		31			2		132			22		163			24
Total AFS securities	$	36,894		$	1,287	$	5,738		$	663	$	42,632		$	1,950

Total number of AFS securities in an unrealized loss position															3,480



	As of December 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 AFS securities:
Corporate bonds	$	4,854		$	68	$	4,893		$	288	$	9,747		$	356
ABS		62			1		151			15		213			16
U.S. government bonds		156			-		19			1		175			1
RMBS		302			4		641			36		943			40
CMBS		113			-		60			3		173			3
CLOs		281			2		72			-		353			2
State and municipal bonds		34			-		93			6		127			6
Hybrid and redeemable
preferred securities		20			-		126			22		146			22
Total fixed maturity securities		5,822			75		6,055			371		11,877			446
Equity AFS securities		22			14		8			3		30			17
Total AFS securities	$	5,844		$	89	$	6,063		$	374	$	11,907		$	463

Total number of AFS securities in an unrealized loss position															1,128

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, 2018
								Number
	Fair		Gross Unrealized					of
	Value		Losses		OTTI		Securities (1)
Less than six months	$	131	$	47	$	-			20
Six months or greater, but less than nine months		21		16		-			3
Nine months or greater, but less than twelve months		39		16		-			4
Twelve months or greater		123		50		8			29
Total	$	314	$	129	$	8			56



	As of December 31, 2017
								Number
	Fair		Gross Unrealized					of
	Value		Losses		OTTI		Securities (1)
Less than six months	$	156	$	57	$	1			26
Six months or greater, but less than nine months		2		1		-			4
Nine months or greater, but less than twelve months		15		8		-			7
Twelve months or greater		215		78		10			49
Total	$	388	$	144	$	11			86

⁽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 fixed maturity AFS securities increased by $1.5 billion for the nine months ended September 30, 2018. As discussed further below, we believe the unrealized loss position as of September 30, 2018, 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; and (iii) the estimated future cash flows were equal to or greater than the amortized cost basis of the debt securities.

Based upon this evaluation as of September 30, 2018, 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, 2018, 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 September 30, 2018, 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 September 30, 2018, 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						For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Balance as of beginning-of-period	$	375		$	390		$	378		$	430
Increases attributable to:
Credit losses on securities for which an
OTTI was not previously recognized		2			8			4			13
Credit losses on securities for which an
OTTI was previously recognized		-			1			1			4
Decreases attributable to:
Securities sold, paid down or matured		(5	)		(21	)		(11	)		(69	)
Balance as of end-of-period	$	372		$	378		$	372		$	378

During the nine months ended September 30, 2018 and 2017, 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 fixed maturity AFS securities.

Mortgage Loans on Real Estate

See Note 1 in our 2017 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, which accounted for 22% and 21% of mortgage loans on real estate as of September 30, 2018, and December 31, 2017, respectively, and Texas which accounted for 12% of mortgage loans on real estate as of September 30, 2018, and December 31, 2017.

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,
		2018				2017
Current		$	12,578			$	10,762
60 to 90 days past due			-				-
Greater than 90 days past due			1				3
Valuation allowance associated with impaired mortgage loans on real estate			(1	)			(3	)
Unamortized premium (discount)			(17	)			-
Total carrying value		$	12,561			$	10,762

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,
		2018				2017
Number of impaired mortgage loans on real estate		1				3

Principal balance of impaired mortgage loans on real estate		$	4			$	11
Valuation allowance associated with impaired mortgage loans on real estate			(1	)			(3	)
Carrying value of impaired mortgage loans on real estate		$	3			$	8

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



	For the Three					For the Nine
	Months Ended					Months Ended
	September 30,					September 30,
	2018			2017		2018			2017
Balance as of beginning-of-period	$	2		$	2	$	3		$	2
Additions		-			-		-			-
Charge-offs, net of recoveries		(1	)		-		(2	)		-
Balance as of end-of-period	$	1		$	2	$	1		$	2

Additional information related to 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,
	2018		2017		2018		2017
Average carrying value for impaired mortgage loans on real estate	$	5	$	5	$	6	$	5
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 2017 Form 10-K, we use the loan-to-value and debt-service coverage ratios as credit quality indicators for our mortgage loans on real estate, which were as follows (dollars in millions):



	As of September 30, 2018				As of December 31, 2017
				Debt-				Debt-
				Service				Service
	Carrying		% of	Coverage	Carrying		% of	Coverage
Loan-to-Value Ratio	Value		Total	Ratio	Value		Total	Ratio
Less than 65%	$	11,297	89.9%	2.30	$	9,642	89.6%	2.26
65% to 74%		1,187	9.5%	1.79		1,000	9.3%	1.94
75% to 100%		74	0.6%	0.95		112	1.0%	0.97
Greater than 100%		3	0.0%	0.21		8	0.1%	0.82
Total mortgage loans on real estate	$	12,561	100.0%		$	10,762	100.0%

Alternative Investments

As of September 30, 2018, and December 31, 2017, alternative investments included investments in 239 and 224 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						For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Fixed maturity AFS securities: (1)
Gross gains	$	14		$	7		$	30		$	19
Gross losses		(21	)		(22	)		(65	)		(47	)
Equity AFS securities:
Gross gains		-			1			-			2
Gain (loss) on other investments (2)		1			-			6			(6	)
Associated amortization of DAC, VOBA, DSI and DFEL
and changes in other contract holder funds		(5	)		(5	)		(16	)		(17	)
Total realized gain (loss) related to certain investments, pre-tax	$	(11	)	$	(19	)	$	(45	)	$	(49	)

⁽¹⁾

These amounts are represented net of related fair value hedging activity. See Note 6 for more information.

⁽²⁾

Includes market adjustments on equity securities still held of less than $1 million and $2 million for the three and nine months ended September 30, 2018, respectively.

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, were as follows:



	For the Three						For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
OTTI Recognized in Net Income (Loss)
Fixed maturity AFS securities:
Corporate bonds	$	(2	)	$	(8	)	$	(4	)	$	(13	)
ABS		-			(1	)		-			(2	)
RMBS		-			-			(1	)		(1	)
State and municipal bonds		-			-			-			(1	)
Gross OTTI recognized in net income (loss)		(2	)		(9	)		(5	)		(17	)
Associated amortization of DAC, VOBA, DSI and DFEL		-			1			-			1
Net OTTI recognized in net income (loss), pre-tax	$	(2	)	$	(8	)	$	(5	)	$	(16	)

We recognized less than $1 million of OTTI in OCI for the three and nine months ended September 30, 2018. We recognized $1 million of OTTI in OCI for the three and nine months ended September 30, 2017.

Determination of Credit Losses on Corporate Bonds and ABS

As of September 30, 2018, and December 31, 2017, 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 September 30, 2018, and December 31, 2017, 96% of the fair value of our corporate bond portfolio was rated investment grade. As of September 30, 2018, and December 31, 2017, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $3.2 billion and $3.5 billion, respectively, and a fair value of $3.1 billion and $3.5 billion, respectively. As of September 30, 2018, and December 31, 2017, 98% of the fair value of our ABS portfolio was rated investment grade. As of September 30, 2018, and December 31, 2017, the portion of our ABS portfolio rated below investment grade had an amortized cost of $46 million and a fair value of $43 million. Based upon the analysis discussed above, we believe as of September 30, 2018, and December 31, 2017, that we would recover the amortized cost of each investment grade corporate bond and ABS security.

Determination of Credit Losses on MBS

As of September 30, 2018, and December 31, 2017, 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 September 30, 2018				As of December 31, 2017
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Collateral payable for derivative investments (1)	$	366	$	366	$	765	$	765
Securities pledged under securities lending agreements (2)		117		113		222		213
Securities pledged under repurchase agreements (3)		149		185		530		588
Investments pledged for Federal Home Loan Bank of
Indianapolis (“FHLBI”) (4)		3,580		5,413		2,900		4,235
Total payables for collateral on investments	$	4,212	$	6,077	$	4,417	$	5,801

⁽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 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 generally obtain collateral in an amount between 80% 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 Nine
	Months Ended
	September 30,
	2018			2017
Collateral payable for derivative investments	$	(399	)	$	41
Securities pledged under securities lending agreements		(105	)		(16	)
Securities pledged under repurchase agreements		(381	)		(2	)
Investments pledged for FHLBI		680			(50	)
Total increase (decrease) in payables for collateral on investments	$	(205	)	$	(27	)

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 (in millions) were as follows:



	As of September 30, 2018
	Overnight and Continuous		Up to 30 Days		30 - 90 Days		Greater Than 90 Days		Total
Repurchase Agreements
Corporate bonds	$	-	$	-	$	-	$	149	$	149
Total		-		-		-		149		149
Securities Lending
Corporate bonds		117		-		-		-		117
Total		117		-		-		-		117
Total gross secured borrowings	$	117	$	-	$	-	$	149	$	266


	As of December 31, 2017
	Overnight and Continuous		Up to 30 Days		30 - 90 Days		Greater Than 90 Days		Total
Repurchase Agreements
Corporate bonds	$	-	$	100	$	280	$	150	$	530
Total		-		100		280		150		530
Securities Lending
Corporate bonds		222		-		-		-		222
Total		222		-		-		-		222
Total gross secured borrowings	$	222	$	100	$	280	$	150	$	752

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 September 30, 2018, the fair value of all collateral received that we are permitted to sell or re-pledge was $528 million. As of September 30, 2018, we have re-pledged $502 million of this collateral to cover initial margin on certain derivative investments.

Investment Commitments

As of September 30, 2018, our investment commitments were $1.5 billion, which included $815 million of LPs, $379 million of mortgage loans on real estate and $334 million of private placement securities.

Concentrations of Financial Instruments

As of September 30, 2018, and December 31, 2017, 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 $1.3 billion, respectively, or 1% of our invested assets portfolio, and our investments in securities issued by the Federal National Mortgage Association with a fair value of $1.2 billion and $1.0 billion, respectively, or 1% of our invested assets portfolio. These concentrations include fixed maturity AFS, trading and equity securities.

As of September 30, 2018, our most significant investments in one industry were our investments in securities in the consumer non-cyclical industry and the financial services industry with a fair value of $14.5 billion and $13.7 billion, respectively, or 13% and 12%, respectively, of our invested assets portfolio. As of December 31, 2017, our most significant investments in one industry were our investments in securities in the consumer non-cyclical industry and the utilities industry with a fair value of $15.0 billion and $14.3 billion, respectively, or 13% of our invested assets portfolio. These concentrations include fixed maturity AFS, trading and equity securities.