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INVESTMENTS
 3 Months Ended
Mar. 31, 2014
INVESTMENTS  
INVESTMENTS

6. INVESTMENTS

Securities Available for Sale

The following table presents the amortized cost or cost and fair value of our available for sale securities:

Other-Than-
AmortizedGrossGrossTemporary
Cost orUnrealizedUnrealizedFairImpairments
(in millions)CostGainsLossesValuein AOCI(a)
March 31, 2014
Bonds available for sale:
U.S. government and government sponsored entities$ 2,779$ 170$ (27)$ 2,922$ -
Obligations of states, municipalities and political subdivisions 29,402 1,384 (197) 30,589 (15)
Non-U.S. governments 21,317 826 (259) 21,884 -
Corporate debt 139,063 9,505 (1,577) 146,991 81
Mortgage-backed, asset-backed and collateralized:
RMBS 34,340 3,354 (390) 37,304 1,779
CMBS 11,661 637 (203) 12,095 168
CDO/ABS 10,638 649 (135) 11,152 40
Total mortgage-backed, asset-backed and collateralized 56,639 4,640 (728) 60,551 1,987
Total bonds available for sale(b) 249,200 16,525 (2,788) 262,937 2,053
Equity securities available for sale:
Common stock 1,287 1,806 (14) 3,079 -
Preferred stock 25 4 (1) 28 -
Mutual funds 764 22 (15) 771 -
Total equity securities available for sale 2,076 1,832 (30) 3,878 -
Total$ 251,276$ 18,357$ (2,818)$ 266,815$ 2,053
December 31, 2013
Bonds available for sale:
U.S. government and government sponsored entities$ 3,084$ 150$ (39)$ 3,195$ -
Obligations of states, municipalities and political subdivisions 28,704 1,122 (446) 29,380 (15)
Non-U.S. governments 22,045 822 (358) 22,509 -
Corporate debt 139,461 7,989 (2,898) 144,552 74
Mortgage-backed, asset-backed and collateralized:
RMBS 33,520 3,101 (473) 36,148 1,670
CMBS 11,216 558 (292) 11,482 125
CDO/ABS 10,501 649 (142) 11,008 62
Total mortgage-backed, asset-backed and collateralized 55,237 4,308 (907) 58,638 1,857
Total bonds available for sale(b) 248,531 14,391 (4,648) 258,274 1,916
Equity securities available for sale:
Common stock 1,280 1,953 (14) 3,219 -
Preferred stock 24 4 (1) 27 -
Mutual funds 422 12 (24) 410 -
Total equity securities available for sale 1,726 1,969 (39) 3,656 -
Total$ 250,257$ 16,360$ (4,687)$ 261,930$ 1,916

(a) Represents the amount of other-than-temporary impairments recognized in Accumulated other comprehensive income. Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

(b) At March 31, 2014 and December 31, 2013, bonds available for sale held by us that were below investment grade or not rated totaled $34.1 billion and $32.6 billion, respectively.

Securities Available for Sale in a Loss Position

The following table summarizes the fair value and gross unrealized losses on our available for sale securities, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position:

Less than 12 Months12 Months or MoreTotal
GrossGrossGross
FairUnrealizedFairUnrealizedFairUnrealized
(in millions)ValueLossesValueLossesValueLosses
March 31, 2014
Bonds available for sale:
U.S. government and government sponsored entities$ 683$ 21$ 75$ 6$ 758$ 27
Obligations of states, municipalities and political
subdivisions 3,806 131 562 66 4,368 197
Non-U.S. governments 4,049 144 796 115 4,845 259
Corporate debt 25,341 938 6,649 639 31,990 1,577
RMBS 8,100 283 1,391 107 9,491 390
CMBS 2,447 115 1,115 88 3,562 203
CDO/ABS 2,426 56 1,096 79 3,522 135
Total bonds available for sale 46,852 1,688 11,684 1,100 58,536 2,788
Equity securities available for sale:
Common stock 102 14 - - 102 14
Preferred stock 4 1 - - 4 1
Mutual funds 317 15 - - 317 15
Total equity securities available for sale 423 30 - - 423 30
Total$ 47,275$ 1,718$ 11,684$ 1,100$ 58,959$ 2,818
December 31, 2013
Bonds available for sale:
U.S. government and government sponsored entities$ 1,101$ 34$ 42$ 5$ 1,143$ 39
Obligations of states, municipalities and political
subdivisions 6,134 379 376 67 6,510 446
Non-U.S. governments 4,102 217 710 141 4,812 358
Corporate debt 38,495 2,251 4,926 647 43,421 2,898
RMBS 8,543 349 1,217 124 9,760 473
CMBS 3,191 176 1,215 116 4,406 292
CDO/ABS 2,845 62 915 80 3,760 142
Total bonds available for sale 64,411 3,468 9,401 1,180 73,812 4,648
Equity securities available for sale:
Common stock 96 14 - - 96 14
Preferred stock 5 1 - - 5 1
Mutual funds 369 24 - - 369 24
Total equity securities available for sale 470 39 - - 470 39
Total$ 64,881$ 3,507$ 9,401$ 1,180$ 74,282$ 4,687

At March 31, 2014, we held 6,426 and 126 individual fixed maturity and equity securities, respectively, that were in an unrealized loss position, of which 1,008 individual fixed maturity securities were in a continuous unrealized loss position for longer than 12 months. We did not recognize the unrealized losses in earnings on these fixed maturity securities at March 31, 2014 because we neither intend to sell the securities nor do we believe that it is more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. For fixed maturity securities with significant declines, we performed fundamental credit analyses on a security-by-security basis, which included consideration of credit enhancements, expected defaults on underlying collateral, review of relevant industry analyst reports and forecasts and other available market data.

Contractual Maturities of Fixed Maturity Securities Available for Sale

The following table presents the amortized cost and fair value of fixed maturity securities available for sale by contractual maturity:

Total Fixed Maturity SecuritiesFixed Maturity Securities in a Loss
March 31, 2014Available for Sale Position Available for Sale
(in millions)Amortized CostFair Value Amortized CostFair Value
Due in one year or less$ 10,275$ 10,455$ 830$ 817
Due after one year through five years 50,565 53,380 6,918 6,799
Due after five years through ten years 68,663 71,911 15,703 15,099
Due after ten years 63,058 66,640 20,570 19,246
Mortgage-backed, asset-backed and collateralized 56,639 60,551 17,303 16,575
Total$ 249,200$ 262,937$ 61,324$ 58,536

Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.

The following table presents the gross realized gains and gross realized losses from sales or maturities of our available for sale securities:

20142013
GrossGrossGrossGross
Three Months Ended March 31,RealizedRealizedRealizedRealized
(in millions)GainsLossesGainsLosses
Fixed maturity securities$ 216$ 31$ 371$ 71
Equity securities 30 2 37 3
Total$ 246$ 33$ 408$ 74

For the first quarters of 2014 and 2013, the aggregate fair value of available for sale securities sold was $6.1 billion and $7.0 billion, respectively, which resulted in net realized capital gains of $0.2 billion and $0.3 billion, respectively.

Other Securities Measured at Fair Value

The following table presents the fair value of other securities measured at fair value based on our election of the fair value option:

March 31, 2014December 31, 2013
FairPercentFairPercent
(in millions) Value of TotalValue of Total
Fixed maturity securities:
U.S. government and government sponsored entities$ 5,394 24%$ 5,723 24%
Obligations of states, municipalities and political subdivisions 122 1 121 1
Non-U.S. governments 2 - 2 -
Corporate debt 1,108 5 1,169 5
Mortgage-backed, asset-backed and collateralized:
RMBS 2,351 10 2,263 10
CMBS 1,278 6 1,353 6
CDO/ABS and other collateralized* 11,456 51 11,985 51
Total mortgage-backed, asset-backed and collateralized 15,085 67 15,601 67
Other 7 - 7 -
Total fixed maturity securities 21,718 97 22,623 97
Equity securities 725 3 834 3
Total $ 22,443 100%$ 23,457 100%

* Includes $1.0 billion of U.S. Government agency backed ABS at both March 31, 2014 and December 31, 2013.

Net Investment Income

The following table presents the components of Net investment income:

Three Months Ended March 31,
(in millions)20142013
Fixed maturity securities, including short-term investments$ 3,131$ 3,045
Equity securities (85) 37
Interest on mortgage and other loans 318 280
Alternative investments* 925 866
Real estate 28 31
Other investments 11 53
Total investment income 4,328 4,312
Investment expenses 132 148
Net investment income$ 4,196$ 4,164

* Includes hedge funds, private equity funds, affordable housing partnerships, investments in life settlements and other investment partnerships.

Net Realized Capital Gains and Losses

The following table presents the components of Net realized capital gains (losses):

Three Months Ended March 31,
(in millions)20142013
Sales of fixed maturity securities$ 185$ 300
Sales of equity securities 28 34
Other-than-temporary impairments:
Severity - (2)
Change in intent (5) (3)
Foreign currency declines (4) -
Issuer-specific credit events (68) (63)
Adverse projected cash flows (1) (6)
Provision for loan losses 5 (3)
Foreign exchange transactions 26 329
Derivative instruments (350) (271)
Impairments on investments in life settlements (42) (43)
Other 13 28
Net realized capital gains (losses)$ (213)$ 300

Change in Unrealized Appreciation (Depreciation) of Investments

The following table presents the increase (decrease) in unrealized appreciation (depreciation) of our available for sale securities and other investments:

Three Months Ended March 31,
(in millions)20142013
Increase (decrease) in unrealized appreciation (depreciation) of investments:
Fixed maturity securities$ 3,994$ (1,152)
Equity securities (128) 7
Other investments 73 (48)
Total increase (decrease) in unrealized appreciation (depreciation) of investments*$ 3,939$ (1,193)

* Excludes net unrealized gains attributable to businesses held for sale.

Evaluating Investments for Other-Than-Temporary Impairments

For a discussion of our policy for evaluating investments for other-than-temporary impairments, see Note 6 to the Consolidated Financial Statements in the 2013 Annual Report.

Credit Impairments

The following table presents a rollforward of the cumulative credit losses in other-than-temporary impairments recognized in earnings for available for sale fixed maturity securities:

Three Months Ended March 31,
(in millions)20142013
Balance, beginning of year$ 3,872$ 5,164
Increases due to:
Credit impairments on new securities subject to impairment losses 9 17
Additional credit impairments on previously impaired securities 36 18
Reductions due to:
Credit impaired securities fully disposed for which there was no
prior intent or requirement to sell - (391)
Credit impaired securities for which there is a current intent or
anticipated requirement to sell - -
Accretion on securities previously impaired due to credit* (188) (205)
Hybrid securities with embedded credit derivatives reclassified
to other bond securities - -
Other (9) -
Balance, end of period$ 3,720$ 4,603

* Represents both accretion recognized due to changes in cash flows expected to be collected over the remaining expected term of the credit impaired securities and the accretion due to the passage of time.

Purchased Credit Impaired (PCI) Securities

We purchase certain RMBS securities that have experienced deterioration in credit quality since their issuance. We determine, based on our expectations as to the timing and amount of cash flows expected to be received, whether it is probable at acquisition that we will not collect all contractually required payments for these PCI securities, including both principal and interest after considering the effects of prepayments. At acquisition, the timing and amount of the undiscounted future cash flows expected to be received on each PCI security is determined based on our best estimate using key assumptions, such as interest rates, default rates and prepayment speeds. At acquisition, the difference between the undiscounted expected future cash flows of the PCI securities and the recorded investment in the securities represents the initial accretable yield, which is accreted into net investment income over their remaining lives on a level-yield basis. Additionally, the difference between the contractually required payments on the PCI securities and the undiscounted expected future cash flows represents the non-accretable difference at acquisition. The accretable yield and the non-accretable difference will change over time, based on actual payments received and changes in estimates of undiscounted expected future cash flows, which are discussed further below.

On a quarterly basis, the undiscounted expected future cash flows associated with PCI securities are re-evaluated based on updates to key assumptions. Declines in undiscounted expected future cash flows due to further credit deterioration as well as changes in the expected timing of the cash flows can result in the recognition of an other-than-temporary impairment charge, as PCI securities are subject to our policy for evaluating investments for other-than-temporary impairment. Changes to undiscounted expected future cash flows due solely to the changes in the contractual benchmark interest rates on variable rate PCI securities will change the accretable yield prospectively. Significant increases in undiscounted expected future cash flows for reasons other than interest rate changes are recognized prospectively as adjustments to the accretable yield.

The following tables present information on our PCI securities, which are included in bonds available for sale:

(in millions)At Date of Acquisition
Contractually required payments (principal and interest)$ 27,484
Cash flows expected to be collected* 21,919
Recorded investment in acquired securities 14,437

* Represents undiscounted expected cash flows, including both principal and interest.

(in millions)March 31, 2014December 31, 2013
Outstanding principal balance$ 15,923$ 14,741
Amortized cost 11,235 10,110
Fair value 12,547 11,338

The following table presents activity for the accretable yield on PCI securities:

Three Months Ended March 31,
(in millions)20142013
Balance, beginning of period$ 6,940$ 4,766
Newly purchased PCI securities 522 345
Disposals - (60)
Accretion (212) (160)
Effect of changes in interest rate indices (59) 84
Net reclassification from non-accretable difference,
including effects of prepayments (21) 139
Balance, end of period$ 7,170$ 5,114

Pledged Investments

Secured Financing and Similar Arrangements

We enter into financing transactions whereby certain securities are transferred to financial institutions in exchange for cash or other liquid collateral. Securities transferred by us under these financing transactions may be sold or repledged by the counterparties. As collateral for the securities transferred by us, counterparties transfer assets to us, such as cash or high quality fixed maturity securities. Collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the transferred securities during the life of the transactions. Where we receive fixed maturity securities as collateral, we do not have the right to sell or repledge the collateral unless an event of default occurs by the counterparties. At the termination of the transactions, we and our counterparties are obligated to return the collateral provided and the securities transferred, respectively. We treat these transactions as secured financing arrangements.

Secured financing transactions also include securities sold under agreements to repurchase (repurchase agreements), in which we transfer securities in exchange for cash, with an agreement by us to repurchase the same or substantially similar securities. In the majority of these repurchase agreements, the securities transferred by us may be sold or repledged by the counterparties. Repurchase agreements entered into by DIB are carried at fair value based on market-observable interest rates. All other repurchase agreements are recorded at their contracted repurchase amounts plus accrued interest.

The following table presents the fair value of securities pledged to counterparties under secured financing transactions:

(in millions)March 31, 2014December 31, 2013
Securities available for sale$ 2,402$ 3,907
Other securities 2,722 2,766

We also enter into agreements in which securities are purchased by us under agreements to resell (reverse repurchase agreements), which are accounted for as secured financing transactions and reported as short-term investments or other assets, depending on their terms. These agreements are recorded at their contracted resale amounts plus accrued interest, other than those that are accounted for at fair value. Such agreements entered into by the DIB are carried at fair value based on market observable interest rates. In all reverse repurchase transactions, we take possession of or obtain a security interest in the related securities, and we have the right to sell or repledge this collateral received.

The following table presents information on the fair value of securities pledged to us under reverse repurchase agreements:

(in millions)March 31, 2014December 31, 2013
Securities collateral pledged to us$ 8,166$ 8,878
Amount repledged by us 66 71

Insurance - Statutory and Other Deposits

Total carrying values of cash and securities deposited by our insurance subsidiaries under requirements of regulatory authorities or other insurance-related arrangements, including certain annuity-related obligations and certain reinsurance treaties, were $6.7 billion at both March 31, 2014 and December 31, 2013.

Other Pledges

Certain of our subsidiaries are members of Federal Home Loan Banks (FHLBs) and such membership requires the members to own stock in these FHLBs. We owned an aggregate of $53 million and $57 million of stock in FHLBs at March 31, 2014 and December 31, 2013, respectively. In addition, our subsidiaries have pledged securities available for sale with a fair value of $529 million and $80 million at March 31, 2014 and December 31, 2013, respectively, associated with advances from the FHLBs.

Certain GIAs have provisions that require collateral to be posted or payments to be made by us upon a downgrade of our long-term debt ratings. The actual amount of collateral required to be posted to the counterparties in the event of such downgrades, and the aggregate amount of payments that we could be required to make, depend on market conditions, the fair value of outstanding affected transactions and other factors prevailing at and after the time of the downgrade. The fair value of securities pledged as collateral with respect to these obligations approximated $3.8 billion and $4.2 billion at March 31, 2014 and December 31, 2013, respectively. This collateral primarily consists of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.