Invested Assets and Related Income

12 Months Ended

Dec. 31, 2012

Invested Assets and Related Income

(3)  Invested Assets and Related Income

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

	December 31, 2012
	Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Fair Value
	(in millions)
Fixed maturities
Tax exempt	$	18,410	$	1,522	$	19	$	19,913
Taxable
U.S. government and government agency and authority obligations		973		66		—		1,039
Corporate bonds		7,331		609		3		7,937
Foreign government and government agency obligations		6,614		395		1		7,008
Residential mortgage-backed securities		421		36		2		455
Commercial mortgage-backed securities		1,649		76		1		1,724
		16,988		1,182		7		18,163
Total fixed maturities	$	35,398	$	2,704	$	26	$	38,076
Equity securities	$	1,244	$	453	$	34	$	1,663

	December 31, 2011
	Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Fair 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

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

The following table summarizes the fair value of the tax exempt fixed maturities at December 31, 2012 and 2011:

	2012		2011
	(in millions)
Special revenue bonds	$	12,233	$	12,405
Municipal and political subdivision general obligation bonds		2,505		2,614
State general obligation bonds		2,246		2,548
Pre-refunded bonds		2,929		2,644
	$	19,913	$	20,211

Special revenue bonds are supported by income streams generated in a broad range of sectors, primarily hospitals, water and sewer utilities, electric utilities, highways, airports, universities and housing, as well as specifically pledged tax revenues. The special revenue bond holdings are well-diversified and spread relatively evenly over these sectors. An irrevocable trust containing U.S. government or government agency obligations has been established to fund the remaining principal and interest payments of the pre-refunded bonds.

The following table summarizes the fair value and amortized cost of the tax exempt fixed maturities other than pre-refunded bonds held at December 31, 2012 and 2011, for the five states having the largest concentration of issuers within the tax exempt fixed maturity portfolio. 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.

	December 31, 2012
	Fair Value
State	Special Revenue Bonds		Municipal and  Political Subdivision General Obligations		State General Obligations		Total		Amortized Cost
	(in millions)
Texas	$	1,041	$	1,053	$	267	$	2,361	$	2,171
New York		1,401		169		33		1,603		1,487
Illinois		683		518		59		1,260		1,161
California		888		107		194		1,189		1,089
Florida		771		27		114		912		844

	December 31, 2011
	Fair Value
State	Special Revenue Bonds		Municipal and Political Subdivision General Obligations		State General Obligations		Total		Amortized 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
Florida		726		12		139		877		825

At December 31, 2012 and 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 of the foreign government and government agency fixed maturities held at December 31, 2012 and 2011, for the five countries having the largest concentration of issuers within the foreign government and government agency fixed maturity portfolio. In the following table, “country” identifies the issuer or the location of the issuing government agency or regional government within a country.

	2012				2011
Country	Fair Value		Amortized Cost		Fair Value		Amortized Cost
	(in millions)
Canada	$	2,157	$	2,060	$	2,075	$	1,943
Germany		1,127		1,070		897		855
United Kingdom		1,024		939		1,275		1,145
Australia		742		663		623		579
Brazil		310		310		334		334

At December 31, 2012 and 2011, the foreign government and government agency fixed maturities also included $517 million and $471 million, respectively, of fixed maturities issued by supranational organizations.

The fair value and amortized cost of fixed maturities at December 31, 2012 by contractual maturity were as follows:

	Fair Value		Amortized Cost
	(in millions)
Due in one year or less	$	2,213	$	2,185
Due after one year through five years		14,212		13,439
Due after five years through ten years		11,594		10,470
Due after ten years		7,878		7,234
		35,897		33,328
Residential mortgage-backed securities		455		421
Commercial mortgage-backed securities		1,724		1,649
	$	38,076	$	35,398

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
	2012		2011
	(in millions)
Fixed maturities
Gross unrealized appreciation	$	2,704	$	2,495
Gross unrealized depreciation		26		73
		2,678		2,422
Equity securities
Gross unrealized appreciation		453		319
Gross unrealized depreciation		34		71
		419		248
		3,097		2,670
Deferred income tax liability		1,084		934
	$	2,013	$	1,736

The following table summarizes, for all investment securities in an unrealized loss position at December 31, 2012, 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
	Fair Value		Gross Unrealized Depreciation		Fair Value		Gross Unrealized Depreciation		Fair Value		Gross Unrealized Depreciation
	(in millions)
Fixed maturities
Tax exempt	$	344	$	6	$	104	$	13	$	448	$	19
Taxable
U.S. government and government agency and authority obligations		28		—		20		—		48		—
Corporate bonds		289		2		14		1		303		3
Foreign government and government agency obligations		429		1		13		—		442		1
Residential mortgage-backed securities		1		—		19		2		20		2
Commercial mortgage-backed securities		105		1		3		—		108		1
		852		4		69		3		921		7
Total fixed maturities		1,196		10		173		16		1,369		26
Equity securities		182		21		63		13		245		34
	$	1,378	$	31	$	236	$	29	$	1,614	$	60

At December 31, 2012, approximately 250 individual fixed maturities and 30 individual equity securities were in an unrealized loss position. 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, 2012.

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
	Fair Value		Gross Unrealized Depreciation		Fair Value		Gross Unrealized Depreciation		Fair Value		Gross Unrealized 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

The change in unrealized appreciation or depreciation of investments carried at fair value, including the change in unrealized other-than-temporary impairment losses, was as follows:

	Years Ended December 31
	2012		2011			2010
	(in millions)
Change in unrealized appreciation of fixed maturities	$	256	$	964		$	70
Change in unrealized appreciation of equity securities		171		(17	)		47
		427		947			117
Deferred income tax		150		331			41
	$	277	$	616		$	76

(c)  The sources of net investment income were as follows:

	Years Ended December 31
	2012		2011		2010
	(in millions)
Fixed maturities	$	1,465	$	1,549	$	1,564
Equity securities		40		34		47
Short term investments		18		16		9
Other		33		45		45
Gross investment income		1,556		1,644		1,665
Investment expenses		38		39		35
	$	1,518	$	1,605	$	1,630

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

	Years Ended December 31
	2012			2011			2010
	(in millions)
Fixed maturities
Gross realized gains	$	124		$	70		$	98
Gross realized losses		(20	)		(39	)		(26	)
Other-than-temporary impairment losses		(5	)		(1	)		(5	)
		99			30			67
Equity securities
Gross realized gains		68			74			50
Gross realized losses		—			(1	)		(1	)
Other-than-temporary impairment losses		(40	)		(22	)		(6	)
		28			51			43
Other invested assets		66			207			316
	$	193		$	288		$	426

(e)  As of December 31, 2012 and 2011, 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 $22 million and $20 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 $1.5 billion and $1.6 billion at December 31, 2012 and 2011, respectively.