Invested Assets and Related Income

12 Months Ended

Dec. 31, 2011

Invested Assets and Related Income [Abstract]


(3)	Invested Assets and Related Income

(a) The amortized cost and fair value of fixed maturities and equity securities were as follows:


	December 31, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Appreciation		Depreciation		Value
	(in millions)
Fixed maturities
Tax exempt	$	18,786	$	1,462	$	37	$	20,211

Taxable
U.S. government and government agency and authority obligations		813		57		2		868
Corporate bonds		6,049		440		24		6,465
Foreign government and government agency obligations		6,409		416		2		6,823
Residential mortgage-backed securities		821		41		7		855
Commercial mortgage-backed securities		1,884		79		1		1,962

		15,976		1,033		36		16,973

Total fixed maturities	$	34,762	$	2,495	$	73	$	37,184

Equity securities	$	1,264	$	319	$	71	$	1,512


	December 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Appreciation		Depreciation		Value
	(in millions)
Fixed maturities
Tax exempt	$	19,072	$	824	$	122	$	19,774

Taxable
U.S. government and government agency and authority obligations		807		31		9		829
Corporate bonds		6,025		405		20		6,410
Foreign government and government agency obligations		6,176		237		14		6,399
Residential mortgage-backed securities		1,293		63		6		1,350
Commercial mortgage-backed securities		1,688		70		1		1,757

		15,989		806		50		16,745

Total fixed maturities	$	35,061	$	1,630	$	172	$	36,519

Equity securities	$	1,285	$	340	$	75	$	1,550

At December 31, 2011 and 2010, the gross unrealized depreciation of fixed maturities included $3 million and $4 million, respectively, of unrealized other-than-temporary impairment losses recognized in accumulated other comprehensive income.

At December 31, 2011, tax exempt fixed maturities consisted of $12,405 million of special revenue bonds, $2,614 million of municipal and political subdivision general obligation bonds, $2,548 million of state general obligation bonds and $2,644 million of pre-refunded bonds for which an irrevocable trust containing U.S. government or government agency obligations has been established to fund the remaining payment of principal and interest. The special revenue bonds are supported by income streams generated in a broad range of sectors, primarily electric utilities, water and sewer utilities, highways, hospitals, universities, airports and housing, as well as specifically pledged tax revenues. The special revenue bond holdings are well-diversified and spread relatively evenly over these sectors.

The following table summarizes the fair value and amortized cost for the tax exempt fixed maturities other than pre-refunded bonds held at December 31, 2011, for each state in which the Corporation’s aggregate investment was 5% or more of total tax exempt fixed maturities. The remainder of tax exempt fixed maturities were issued by a broad range of other states and municipalities and political subdivisions within those states. In the following table, “state” identifies the issuer or the location of the issuing municipality or political subdivision within a state.


	Fair Value
			Municipal
			and Political
	Special		Subdivision		State
	Revenue		General		General				Amortized
State	Bonds		Obligations		Obligations		Total		Cost
	(in millions)

Texas	$	1,035	$	1,156	$	275	$	2,466	$	2,269
New York		1,385		139		36		1,560		1,444
California		994		140		240		1,374		1,278
Illinois		617		486		74		1,177		1,102

At December 31, 2011, foreign government and government agency fixed maturities consisted of high quality fixed maturities primarily issued by national governments and, to a lesser extent, government agencies, regional governments and supranational organizations.

The following table summarizes the fair value and amortized cost for the foreign government and government agency fixed maturities held at December 31, 2011, for each country in which the Corporation’s aggregate investment was 5% or more of total foreign government and government agency fixed maturities. In the following table, “country” identifies the issuer or the location of the issuing government agency or regional government within a country.


	Fair		Amortized
Country	Value		Cost
	(in millions)

Canada	$	2,075	$	1,943
United Kingdom		1,275		1,145
Germany		897		855
Australia		623		579

At December 31, 2011, the foreign government and government agency fixed maturities also included $471 million of fixed maturities issued by supranational organizations.

The fair value and amortized cost of fixed maturities at December 31, 2011 by contractual maturity were as follows:


			Amortized
	Fair Value		Cost
	(in millions)

Due in one year or less	$	2,439	$	2,401
Due after one year through five years		11,916		11,279
Due after five years through ten years		12,356		11,215
Due after ten years		7,656		7,162

		34,367		32,057
Residential mortgage-backed securities		855		821
Commercial mortgage-backed securities		1,962		1,884

	$	37,184	$	34,762

Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations.

The Corporation’s equity securities comprise a diversified portfolio of primarily U.S. publicly-traded common stocks.

The Corporation is involved in the normal course of business with variable interest entities (VIEs) primarily as a passive investor in residential mortgage-backed securities, commercial mortgage-backed securities and private equity limited partnerships issued by third party VIEs. The Corporation is not the primary beneficiary of these VIEs. The Corporation’s maximum exposure to loss with respect to these investments is limited to the investment carrying values included in the Corporation’s consolidated balance sheet and any unfunded partnership commitments.

(b) The components of unrealized appreciation or depreciation, including unrealized other-than-temporary impairment losses, of investments carried at fair value were as follows:


	December 31
	2011		2010
	(in millions)

Fixed maturities
Gross unrealized appreciation	$	2,495	$	1,630
Gross unrealized depreciation		73		172

		2,422		1,458

Equity securities
Gross unrealized appreciation		319		340
Gross unrealized depreciation		71		75

		248		265

		2,670		1,723
Deferred income tax liability		934		603

	$	1,736	$	1,120

When the fair value of an investment is lower than its cost, an assessment is made to determine whether the decline is temporary or other than temporary. The assessment of other-than-temporary impairment of fixed maturities and equity securities is based on both quantitative criteria and qualitative information and also considers a number of other factors including, but not limited to, the length of time and the extent to which the fair value has been less than the cost, the financial condition and near term prospects of the issuer, whether the issuer is current on contractually obligated interest and principal payments, general market conditions and industry or sector specific factors.

In determining whether fixed maturities are other than temporarily impaired, prior to April 1, 2009, the Corporation considered many factors including its intent and ability to hold a security for a period of time sufficient to allow for the recovery of the security’s cost. When an impairment was deemed other than temporary, the security was written down to fair value and the entire writedown was included in net income as a realized investment loss. Effective April 1, 2009, the Corporation adopted new guidance that modified the guidance on the recognition and presentation of other-than-temporary impairments of debt securities. Under this guidance, the Corporation is required to recognize an other-than-temporary impairment loss when it concludes it has the intent to sell or it is more likely than not it will be required to sell an impaired fixed maturity before the security recovers to its amortized cost value or it is likely it will not recover the entire amortized cost value of an impaired debt security. If the Corporation has the intent to sell or it is more likely than not that the Corporation will be required to sell an impaired fixed maturity before the security recovers to its amortized cost value, the security is written down to fair value and the entire amount of the writedown is included in net income as a realized investment loss. For all other impaired fixed maturities, the impairment loss is separated into the amount representing the credit loss and the amount representing the loss related to all other factors. The amount of the impairment loss that represents the credit loss is included in net income as a realized investment loss and the amount of the impairment loss that relates to all other factors is included in other comprehensive income.

For fixed maturities, the split between the amount of other-than-temporary impairment losses that represents credit losses and the amount that relates to all other factors is principally based on assumptions regarding the amount and timing of projected cash flows. For fixed maturities other than mortgage-backed securities, cash flow estimates are based on assumptions regarding the probability of default and estimates regarding the timing and amount of recoveries associated with a default. For mortgage-backed securities, cash flow estimates are based on assumptions regarding future prepayment rates, default rates, loss severity and timing of recoveries. The Corporation has developed the estimates of projected cash flows using information based on historical market data, industry analyst reports and forecasts and other data relevant to the collectability of a security.

In determining whether equity securities are other than temporarily impaired, the Corporation considers its intent and ability to hold a security for a period of time sufficient to allow for the recovery of cost. If the decline in the fair value of an equity security is deemed to be other than temporary, the security is written down to fair value and the amount of the writedown is included in net income as a realized investment loss.

The following table summarizes, for all investment securities in an unrealized loss position at December 31, 2011, the aggregate fair value and gross unrealized depreciation, including unrealized other-than-temporary impairment losses, by investment category and length of time that individual securities have continuously been in an unrealized loss position.


	Less Than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Depreciation		Value		Depreciation		Value		Depreciation
					(in millions)

Fixed maturities
Tax exempt	$	81	$	1	$	240	$	36	$	321	$	37

Taxable
U.S. government and government agency and authority obligations		19		1		18		1		37		2
Corporate bonds		489		14		176		10		665		24
Foreign government and government agency obligations		499		1		21		1		520		2
Residential mortgage-backed securities		77		2		22		5		99		7
Commercial mortgage-backed securities		34		1		—		—		34		1

		1,118		19		237		17		1,355		36

Total fixed maturities		1,199		20		477		53		1,676		73

Equity securities		231		45		199		26		430		71

	$	1,430	$	65	$	676	$	79	$	2,106	$	144

At December 31, 2011, approximately 380 individual fixed maturity and equity securities were in an unrealized loss position, of which approximately 345 were fixed maturities. The Corporation does not have the intent to sell and it is not more likely than not that the Corporation will be required to sell these fixed maturities before the securities recover to their amortized cost value. In addition, the Corporation believes that none of the declines in the fair values of these fixed maturities relate to credit losses. The Corporation has the intent and ability to hold the equity securities in an unrealized loss position for a period of time sufficient to allow for the recovery of cost. The Corporation believes that none of the declines in the fair value of these fixed maturities and equity securities were other than temporary at December 31, 2011.

The following table summarizes, for all investment securities in an unrealized loss position at December 31, 2010, the aggregate fair value and gross unrealized depreciation, including unrealized other-than-temporary impairment losses, by investment category and length of time that individual securities have continuously been in an unrealized loss position.


	Less Than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Depreciation		Value		Depreciation		Value		Depreciation
					(in millions)

Fixed maturities
Tax exempt	$	2,498	$	79	$	284	$	43	$	2,782	$	122

Taxable
U.S. government and government agency and authority obligations		111		3		45		6		156		9
Corporate bonds		448		11		166		9		614		20
Foreign government and government agency obligations		1,016		13		27		1		1,043		14
Residential mortgage-backed securities		9		1		41		5		50		6
Commercial mortgage-backed securities		38		1		—		—		38		1

		1,622		29		279		21		1,901		50

Total fixed maturities		4,120		108		563		64		4,683		172

Equity securities		69		14		299		61		368		75

	$	4,189	$	122	$	862	$	125	$	5,051	$	247

The change in unrealized appreciation or depreciation of investments carried at fair value, including the change in unrealized other-than-temporary impairment losses and the cumulative effect adjustment of $30 million as a result of adopting new guidance related to the recognition and presentation of other-than-temporary impairments during 2009 was as follows:


	Years Ended December 31
	2011			2010		2009
	(in millions)

Change in unrealized appreciation of fixed maturities	$	964		$	70	$	1,524
Change in unrealized appreciation of equity securities		(17	)		47		302

		947			117		1,826
Deferred income tax		331			41		639

	$	616		$	76	$	1,187


	Years Ended December 31
	2011		2010		2009
	(in millions)

Fixed maturities	$	1,549	$	1,564	$	1,548
Equity securities		34		47		35
Short term investments		16		9		21
Other		45		45		45

Gross investment income		1,644		1,665		1,649
Investment expenses		39		35		39

	$	1,605	$	1,630	$	1,610

(d) Realized investment gains and losses were as follows:


	Years Ended December 31
	2011			2010			2009
	(in millions)

Fixed maturities
Gross realized gains	$	70		$	98		$	110
Gross realized losses		(39	)		(26	)		(38	)
Other-than-temporary impairment losses		(1	)		(5	)		(23	)

		30			67			49

Equity securities
Gross realized gains		74			50			84
Gross realized losses		(1	)		(1	)		—
Other-than-temporary impairment losses		(22	)		(6	)		(89	)

		51			43			(5	)

Other invested assets		207			316			(21	)

	$	288		$	426		$	23

(e) As of December 31, 2011 and 2010, fixed maturities still held by the Corporation for which a portion of their other-than-temporary impairment losses were recognized in other comprehensive income had cumulative credit-related losses of $20 million and $21 million, respectively, recognized in net income.

(f) Excluding U.S. government and government sponsored enterprise obligations, the Corporation’s exposure to investments issued by a single issuer that equals or exceeds 10% of total shareholders’ equity was its holdings in government and government guaranteed obligations of Canada, which had a fair value of $1.6 billion at December 31, 2011.