Investments

3 Months Ended

Mar. 31, 2012

Investments

Investments

4.  Investments

Fair values

The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:

($ in millions)		Amortized		Gross unrealized				Fair
		cost		Gains		Losses		value
March 31, 2012
U.S. government and agencies	$	5,259	$	287	$	(5)	$	5,541
Municipal		12,970		864		(220)		13,614
Corporate		43,819		2,760		(248)		46,331
Foreign government		1,794		196		(1)		1,989
Residential mortgage-backed securities (“RMBS”)		3,959		126		(357)		3,728
Commercial mortgage-backed securities (“CMBS”)		1,864		63		(174)		1,753
Asset-backed securities (“ABS”)		4,372		108		(238)		4,242
Redeemable preferred stock		23		2		--		25
Total fixed income securities	$	74,060	$	4,406	$	(1,243)	$	77,223
December 31, 2011
U.S. government and agencies	$	5,966	$	349	$	--	$	6,315
Municipal		13,634		863		(256)		14,241
Corporate		41,217		2,743		(379)		43,581
Foreign government		1,866		216		(1)		2,081
RMBS		4,532		110		(521)		4,121
CMBS		1,962		48		(226)		1,784
ABS		4,180		73		(287)		3,966
Redeemable preferred stock		22		2		--		24
Total fixed income securities	$	73,379	$	4,404	$	(1,670)	$	76,113

Scheduled maturities

The scheduled maturities for fixed income securities are as follows as of March 31, 2012:

($ in millions)		Amortized		Fair
		cost		value
Due in one year or less	$	4,031	$	4,081
Due after one year through five years		20,971		21,893
Due after five years through ten years		23,172		24,703
Due after ten years		17,555		18,576
		65,729		69,253
RMBS and ABS		8,331		7,970
Total	$	74,060	$	77,223

Actual maturities may differ from those scheduled as a result of prepayments by the issuers.  Because of the potential for prepayment on RMBS and ABS, they are not categorized by contractual maturity.  CMBS are categorized by contractual maturity because they generally are not subject to prepayment risk.

Net investment income

Net investment income for the three months ended March 31 is as follows:

($ in millions)		2012		2011
Fixed income securities	$	806	$	900
Equity securities		21		19
Mortgage loans		93		89
Limited partnership interests (1)		109		10
Short-term investments		1		2
Other		30		11
Investment income, before expense		1,060		1,031
Investment expense		(49)		(49)
Net investment income	$	1,011	$	982

(1)  Income from limited partnership interests accounted for under the equity method of accounting (“EMA”) is reported in net investment income in 2012 and realized capital gains and losses in 2011.

Realized capital gains and losses

Realized capital gains and losses by asset type for the three months ended March 31 are as follows:

($ in millions)		2012		2011
Fixed income securities	$	(29)	$	(27)
Equity securities		159		122
Mortgage loans		(1)		(6)
Limited partnership interests (1)		10		68
Derivatives		21		(67)
Other		8		6
Realized capital gains and losses	$	168	$	96

(1)   Income from EMA limited partnerships is reported in net investment income in 2012 and realized capital gains and losses in 2011.

Realized capital gains and losses by transaction type for the three months ended March 31 are as follows:

($ in millions)		2012		2011
Impairment write-downs	$	(39)	$	(114)
Change in intent write-downs		(44)		(69)
Net other-than-temporary impairment losses recognized in earnings		(83)		(183)
Sales		229		283
Valuation of derivative instruments		11		22
Settlements of derivative instruments		11		(89)
EMA limited partnership income		--		63
Realized capital gains and losses	$	168	$	96

Gross gains of $115 million and $211 million and gross losses of $90 million and $88 million were realized on sales of fixed income securities during the three months ended March 31, 2012 and 2011, respectively.

Other-than-temporary impairment losses by asset type for the three months ended March 31 are as follows:

($ in millions)		2012						2011
		Gross		Included in OCI		Net		Gross		Included in OCI		Net
Fixed income securities:
Municipal	$	(1)	$	--	$	(1)	$	(27)	$	(2)	$	(29)
Corporate		(18)		--		(18)		(5)		1		(4)
Foreign government		--		--		--		(1)		--		(1)
RMBS		(43)		4		(39)		(72)		(25)		(97)
CMBS		(6)		--		(6)		(16)		(4)		(20)
ABS		--		--		--		(7)		3		(4)
Total fixed income securities		(68)		4		(64)		(128)		(27)		(155)
Equity securities		(16)		--		(16)		(20)		--		(20)
Mortgage loans		(3)		--		(3)		(6)		--		(6)
Limited partnership interests		(2)		--		(2)		(1)		--		(1)
Other		2		--		2		(1)		--		(1)
Other-than-temporary impairment losses	$	(87)	$	4	$	(83)	$	(156)	$	(27)	$	(183)

The total amount of other-than-temporary impairment losses included in accumulated other comprehensive income at the time of impairment for fixed income securities, which were not included in earnings, are presented in the following table.  The amount excludes $225 million and $172 million as of March 31, 2012 and December 31, 2011, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.

($ in millions)		March 31, 2012		December 31, 2011
Municipal	$	(11)	$	(11)
Corporate		(35)		(35)
RMBS		(292)		(353)
CMBS		(20)		(19)
ABS		(21)		(21)
Total	$	(379)	$	(439)

Rollforwards of the cumulative credit losses recognized in earnings for fixed income securities held as of the end of the period are as follows:

($ in millions)		Three months ended March 31
		2012		2011
Beginning balance	$	(944)	$	(1,046)
Additional credit loss for securities previously other-than-temporarily impaired		(20)		(59)
Additional credit loss for securities not previously other-than-temporarily impaired		(9)		(27)
Reduction in credit loss for securities disposed or collected		146		153
Reduction in credit loss for securities the Company has made the decision to sell or more likely than not will be required to sell		7		15
Change in credit loss due to accretion of increase in cash flows		--		1
Ending balance	$	(820)	$	(963)

The Company uses its best estimate of future cash flows expected to be collected from the fixed income security, discounted at the security’s original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists.  The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security.  All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected.  That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration, available reserves or escrows, current subordination levels, third party guarantees and other credit enhancements.  Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered.  The estimated fair value of collateral will be used to estimate recovery value if the Company determines that the security is dependent on the liquidation of collateral for ultimate settlement.  If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings.  The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income.  If the Company determines that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.

Unrealized net capital gains and losses

Unrealized net capital gains and losses included in accumulated other comprehensive income are as follows:

($ in millions)		Fair		Gross unrealized			Unrealized net
March 31, 2012		value		Gains		Losses	gains (losses)
Fixed income securities	$	77,223	$	4,406	$	(1,243)	$	3,163
Equity securities		3,847		464		(47)		417
Short-term investments		1,886		--		--		--
Derivative instruments (1)		(16)		2		(23)		(21)
EMA limited partnerships (2)								1
Unrealized net capital gains and losses, pre-tax								3,560
Amounts recognized for:
Insurance reserves (3)								(443)
DAC and DSI (4)								(230)
Amounts recognized								(673)
Deferred income taxes								(1,013)
Unrealized net capital gains and losses, after-tax							$	1,874

(1)  Included in the fair value of derivative instruments are $(10) million classified as assets and $6 million classified as liabilities.

(2)  Unrealized net capital gains and losses for limited partnership interests represent the Company’s share of EMA limited partnerships’ other comprehensive income.  Fair value and gross gains and losses are not applicable.

(3)   The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency.  Although the Company evaluates premium deficiencies on the combined performance of life insurance and immediate annuities with life contingencies, the adjustment primarily relates to structured settlement annuities with life contingencies, in addition to annuity buy-outs and certain payout annuities with life contingencies.

(4)  The DAC and DSI adjustment balance represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized.

		Fair		Gross unrealized			Unrealized net
December 31, 2011		value		Gains		Losses	gains (losses)
Fixed income securities	$	76,113	$	4,404	$	(1,670)	$	2,734
Equity securities		4,363		369		(209)		160
Short-term investments		1,291		--		--		--
Derivative instruments (1)		(12)		3		(20)		(17)
EMA limited partnerships								2
Unrealized net capital gains and losses, pre-tax								2,879
Amounts recognized for:
Insurance reserves								(594)
DAC and DSI								(124)
Amounts recognized								(718)
Deferred income taxes								(761)
Unrealized net capital gains and losses, after-tax							$	1,400

(1)  Included in the fair value of derivative instruments are $(5) million classified as assets and $7 million classified as liabilities.

Change in unrealized net capital gains and losses

The change in unrealized net capital gains and losses for the three months ended March 31, 2012 is as follows:

($ in millions)
Fixed income securities	$	429
Equity securities		257
Derivative instruments		(4)
EMA limited partnerships		(1)
Total		681
Amounts recognized for:
Insurance reserves		151
DAC and DSI		(106)
Amounts recognized		45
Deferred income taxes		(252)
Increase in unrealized net capital gains and losses	$	474

Portfolio monitoring

The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired.

For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made the decision to sell or whether it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes.  If a security meets either of these criteria, the security’s decline in fair value is considered other than temporary and is recorded in earnings.

If the Company has not made the decision to sell the fixed income security and it is not more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company evaluates whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security.  The Company calculates the estimated recovery value by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, and compares this to the amortized cost of the security.  If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income.

For equity securities, the Company considers various factors, including whether it has the intent and ability to hold the equity security for a period of time sufficient to recover its cost basis.  Where the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the equity security’s decline in fair value is considered other than temporary and is recorded in earnings.  For equity securities managed by a third party, the Company has contractually retained its decision making authority as it pertains to selling equity securities that are in an unrealized loss position.

The Company’s portfolio monitoring process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its amortized cost (for fixed income securities) or cost (for equity securities) is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which the Company may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security. Inherent in the Company’s evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer.  Some of the factors that may be considered in evaluating whether a decline in fair value is other than temporary are: 1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; 2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and 3) the length of time and extent to which the fair value has been less than amortized cost or cost.

The following table summarizes the gross unrealized losses and fair value of fixed income and equity securities by the length of time that individual securities have been in a continuous unrealized loss position.

($ in millions)	Less than 12 months					12 months or more						Total
	Number		Fair		Unrealized	Number		Fair		Unrealized		unrealized
	of issues		value		losses	of issues		value		losses		losses
March 31, 2012
Fixed income securities
U.S. government and agencies	16	$	996	$	(5)	--	$	--	$	--	$	(5)
Municipal	92		589		(11)	193		1,448		(209)		(220)
Corporate	263		3,521		(82)	95		1,208		(166)		(248)
Foreign government	23		78		(1)	1		1		--		(1)
RMBS	337		146		(3)	267		1,089		(354)		(357)
CMBS	28		255		(27)	61		434		(147)		(174)
ABS	58		751		(14)	97		975		(224)		(238)
Redeemable preferred stock	1		--		--	--		--		--		--
Total fixed income securities	818		6,336		(143)	714		5,155		(1,100)		(1,243)
Equity securities	852		362		(42)	62		33		(5)		(47)
Total fixed income and equity securities	1,670	$	6,698	$	(185)	776	$	5,188	$	(1,105)	$	(1,290)
Investment grade fixed income securities	679	$	5,144	$	(94)	429	$	3,190	$	(472)	$	(566)
Below investment grade fixed income securities	139		1,192		(49)	285		1,965		(628)		(677)
Total fixed income securities	818	$	6,336	$	(143)	714	$	5,155	$	(1,100)	$	(1,243)
December 31, 2011
Fixed income securities
U.S. government and agencies	4	$	61	$	--	--	$	--	$	--	$	--
Municipal	29		135		(11)	303		1,886		(245)		(256)
Corporate	307		3,439		(113)	105		1,273		(266)		(379)
Foreign government	11		85		(1)	1		1		--		(1)
RMBS	321		373		(11)	294		1,182		(510)		(521)
CMBS	47		378		(49)	68		489		(177)		(226)
ABS	89		960		(17)	108		1,020		(270)		(287)
Redeemable preferred stock	1		--		--	--		--		--		--
Total fixed income securities	809		5,431		(202)	879		5,851		(1,468)		(1,670)
Equity securities	1,397		2,120		(203)	32		30		(6)		(209)
Total fixed income and equity securities	2,206	$	7,551	$	(405)	911	$	5,881	$	(1,474)	$	(1,879)
Investment grade fixed income securities	665	$	4,480	$	(145)	555	$	3,773	$	(700)	$	(845)
Below investment grade fixed income securities	144		951		(57)	324		2,078		(768)		(825)
Total fixed income securities	809	$	5,431	$	(202)	879	$	5,851	$	(1,468)	$	(1,670)

As of March 31, 2012, $505 million of unrealized losses are related to securities with an unrealized loss position less than 20% of amortized cost or cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired.  Of the $505 million, $325 million are related to unrealized losses on investment grade fixed income securities.  Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from Standard & Poor’s (“S&P”), Fitch, Dominion or Realpoint, a rating of aaa, aa, a or bbb from A.M. Best, or a comparable internal rating if an externally provided rating is not available.  Unrealized losses on investment grade securities are principally related to widening credit spreads or rising interest rates since the time of initial purchase.

As of March 31, 2012, the remaining $785 million of unrealized losses are related to securities in unrealized loss positions greater than or equal to 20% of amortized cost or cost.  Investment grade fixed income securities comprising $241 million of these unrealized losses were evaluated based on factors such as expected cash flows and the financial condition and near-term and long-term prospects of the issue or issuer and were determined to have adequate resources to fulfill contractual obligations.  Of the $785 million, $528 million are related to below investment grade fixed income securities and $16 million are related to equity securities.  Of these amounts, $409 million of the below investment grade fixed income securities had been in an unrealized loss position greater than or equal to 20% of amortized cost for a period of twelve or more consecutive months as of March 31, 2012.  Unrealized losses on below investment grade securities are principally related to RMBS, CMBS and ABS and were the result of wider credit spreads resulting from higher risk premiums since the time of initial purchase, largely due to macroeconomic conditions and credit market deterioration, including the impact of lower real estate valuations.

RMBS, CMBS and ABS in an unrealized loss position were evaluated based on actual and projected collateral losses relative to the securities’ positions in the respective securitization trusts, security specific expectations of cash flows, and credit ratings.  This evaluation also takes into consideration credit enhancement, measured in terms of (i) subordination from other classes of securities in the trust that are contractually obligated to absorb losses before the class of security the Company owns, (ii) the expected impact of other structural features embedded in the securitization trust beneficial to the class of securities the Company owns, such as overcollateralization and excess spread, and (iii) for RMBS and ABS in an unrealized loss position, credit enhancements from reliable bond insurers, where applicable.  Municipal bonds in an unrealized loss position were evaluated based on the quality of the underlying securities.  Unrealized losses on equity securities are primarily related to temporary equity market fluctuations of securities that are expected to recover.

As of March 31, 2012, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis.  As of March 31, 2012, the Company had the intent and ability to hold equity securities with unrealized losses for a period of time sufficient for them to recover.

Limited partnerships

As of March 31, 2012 and December 31, 2011, the carrying value of equity method limited partnerships totaled $3.36 billion and $3.13 billion, respectively.  The Company recognizes an impairment loss for equity method limited partnerships when evidence demonstrates that the loss is other than temporary.  Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.  The Company had no write-downs related to equity method limited partnerships for the three months ended March 31, 2012 and 2011.

As of March 31, 2012 and December 31, 2011, the carrying value for cost method limited partnerships was $1.28 billion and $1.57 billion, respectively.  To determine if an other-than-temporary impairment has occurred, the Company evaluates whether an impairment indicator has occurred in the period that may have a significant adverse effect on the carrying value of the investment.  Impairment indicators may include: significantly reduced valuations of the investments held by the limited partnerships; actual recent cash flows received being significantly less than expected cash flows; reduced valuations based on financing completed at a lower value; completed sale of a material underlying investment at a price significantly lower than expected; or any other adverse events since the last financial statements received that might affect the fair value of the investee’s capital.  Additionally, the Company’s portfolio monitoring process includes a quarterly review of all cost method limited partnerships to identify instances where the net asset value is below established thresholds for certain periods of time, as well as investments that are performing below expectations, for further impairment consideration.  If a cost method limited partnership is other-than-temporarily impaired, the carrying value is written down to fair value, generally estimated to be equivalent to the reported net asset value of the underlying funds.  The Company had write-downs related to cost method limited partnerships for the three months ended March 31, 2012 and 2011 of $2 million and $1 million, respectively.

Mortgage loans

Mortgage loans are evaluated for impairment on a specific loan basis through a quarterly credit monitoring process and review of key credit quality indicators.  Mortgage loans are considered impaired when it is probable that the Company will not collect the contractual principal and interest.  Valuation allowances are established for impaired loans to reduce the carrying value to the fair value of the collateral less costs to sell or the present value of the loan’s expected future repayment cash flows discounted at the loan’s original effective interest rate.  Impaired mortgage loans may not have a valuation allowance when the fair value of the collateral less costs to sell is higher than the carrying value.  Mortgage loan valuation allowances are charged off when there is no reasonable expectation of recovery.  The impairment evaluation is non-statistical in respect to the aggregate portfolio but considers facts and circumstances attributable to each loan.  It is not considered probable that additional impairment losses, beyond those identified on a specific loan basis, have been incurred as of March 31, 2012.

Accrual of income is suspended for mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable.  Cash receipts on mortgage loans on nonaccrual status are generally recorded as a reduction of carrying value.

Debt service coverage ratio is considered a key credit quality indicator when mortgage loans are evaluated for impairment.  Debt service coverage ratio represents the amount of estimated cash flows from the property available to the borrower to meet principal and interest payment obligations.  Debt service coverage ratio estimates are updated annually or more frequently if conditions are warranted based on the Company’s credit monitoring process.

The following table reflects the carrying value of non-impaired fixed rate and variable rate mortgage loans summarized by debt service coverage ratio distribution:

($ in millions)		March 31, 2012						December 31, 2011
Debt service coverage ratio distribution		Fixed rate mortgage loans		Variable rate mortgage loans		Total		Fixed rate mortgage loans		Variable rate mortgage loans		Total
Below 1.0	$	289	$	--	$	289	$	345	$	--	$	345
1.0 - 1.25		1,536		44		1,580		1,527		44		1,571
1.26 - 1.50		1,660		23		1,683		1,573		24		1,597
Above 1.50		3,220		168		3,388		3,214		168		3,382
Total non-impaired mortgage loans	$	6,705	$	235	$	6,940	$	6,659	$	236	$	6,895

Mortgage loans with a debt service coverage ratio below 1.0 that are not considered impaired primarily relate to instances where the borrower has the financial capacity to fund the revenue shortfalls from the properties for the foreseeable term, the decrease in cash flows from the properties is considered temporary, or there are other risk mitigating circumstances such as additional collateral, escrow balances or borrower guarantees.

The net carrying value of impaired mortgage loans is as follows:

($ in millions)		March 31, 2012		December 31, 2011
Impaired mortgage loans with a valuation allowance	$	227	$	244
Impaired mortgage loans without a valuation allowance		--		--
Total impaired mortgage loans	$	227	$	244
Valuation allowance on impaired mortgage loans	$	60	$	63

The average balance of impaired loans was $236 million and $180 million for the three months ended March 31, 2012 and 2011, respectively.

The rollforward of the valuation allowance on impaired mortgage loans for the three months ended March 31 is as follows:

($ in millions)		2012		2011
Beginning balance	$	63	$	84
Net increase in valuation allowance		3		6
Charge offs		(6)		(13)
Ending balance	$	60	$	77

The carrying value of past due mortgage loans is as follows:

($ in millions)		March 31, 2012		December 31, 2011
Less than 90 days past due	$	--	$	--
90 days or greater past due		68		43
Total past due		68		43
Current loans		7,099		7,096
Total mortgage loans	$	7,167	$	7,139