INVESTMENTS

9 Months Ended

Sep. 30, 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-
		Amortized		Gross		Gross				Temporary
		Cost or		Unrealized		Unrealized		Fair		Impairments
(in millions)		Cost		Gains		Losses		Value		in AOCI(a)
September 30, 2014
Bonds available for sale:
U.S. government and government sponsored entities	$	2,638	$	180	$	(20)	$	2,798	$	-
Obligations of states, municipalities and political subdivisions		26,699		1,557		(84)		28,172		(11)
Non-U.S. governments		21,889		955		(182)		22,662		-
Corporate debt		139,166		10,222		(1,060)		148,328		73
Mortgage-backed, asset-backed and collateralized:
RMBS		35,511		3,507		(314)		38,704		1,862
CMBS		11,959		694		(111)		12,542		218
CDO/ABS		12,058		637		(115)		12,580		50
Total mortgage-backed, asset-backed and collateralized		59,528		4,838		(540)		63,826		2,130
Total bonds available for sale(b)		249,920		17,752		(1,886)		265,786		2,192
Equity securities available for sale:
Common stock		1,323		2,268		(19)		3,572		-
Preferred stock		24		5		-		29		-
Mutual funds		719		41		(17)		743		-
Total equity securities available for sale		2,066		2,314		(36)		4,344		-
Total	$	251,986	$	20,066	$	(1,922)	$	270,130	$	2,192
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 September 30,2014 and December 31,2013, bonds available for sale held by us that were below investment grade or not rated totaled $35.0 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 Months				12 Months or More				Total
				Gross				Gross				Gross
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in millions)		Value		Losses		Value		Losses		Value		Losses
September 30, 2014
Bonds available for sale:
U.S. government and government sponsored entities	$	491	$	5	$	303	$	15	$	794	$	20
Obligations of states, municipalities and political
subdivisions		924		20		1,183		64		2,107		84
Non-U.S. governments		2,074		34		2,213		148		4,287		182
Corporate debt		14,653		239		14,521		821		29,174		1,060
RMBS		3,849		72		4,432		242		8,281		314
CMBS		956		6		2,483		105		3,439		111
CDO/ABS		2,937		33		1,770		82		4,707		115
Total bonds available for sale		25,884		409		26,905		1,477		52,789		1,886
Equity securities available for sale:
Common stock		116		13		7		6		123		19
Preferred stock		5		-		-		-		5		-
Mutual funds		282		12		70		5		352		17
Total equity securities available for sale		403		25		77		11		480		36
Total	$	26,287	$	434	$	26,982	$	1,488	$	53,269	$	1,922
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 September 30,2014, we held 6,689 and 137individual fixed maturity and equity securities, respectively, that were in an unrealized loss position, of which 2,399individual fixed maturity securitieswere 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 September 30,2014because 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 Securities				Fixed Maturity Securities in a Loss
September 30, 2014	Available for Sale				Position Available for Sale
(in millions)		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	10,843	$	11,017	$	857	$	846
Due after one year through five years		50,274		52,949		7,038		6,926
Due after five years through ten years		65,793		69,252		14,788		14,353
Due after ten years		63,482		68,742		15,025		14,237
Mortgage-backed, asset-backed and collateralized		59,528		63,826		16,967		16,427
Total	$	249,920	$	265,786	$	54,675	$	52,789

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:

	Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013			2014					2013
		Gross		Gross		Gross		Gross		Gross		Gross		Gross		Gross
	Realized		Realized		Realized		Realized		Realized		Realized		Realized			Realized
(in millions)		Gains		Losses		Gains		Losses		Gains		Losses		Gains		Losses
Fixed maturity securities	$	118	$	21	$	516	$	26	$	528	$	65		$	2,216	$	153
Equity securities		33		4		18		6		102		10			101		15
Total	$	151	$	25	$	534	$	32	$	630	$	75		$	2,317	$	168

For the three- and nine-month periods ended September 30,2014, the aggregate fair value of available for sale securities sold was $4.2 billion and $16.2 billion, respectively, which resulted in net realized capital gains of $0.1 billion and $0.5 billion, respectively.

For the three- and nine-month periods ended September 30,2013, the aggregate fair value of available for sale securities sold was $8.4 billion and $27.7 billion, respectively, which resulted in net realized capital gains of $0.5 billion and $2.1 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:

		September 30, 2014				December 31, 2013
		Fair	Percent			Fair	Percent
(in millions)		Value	of Total			Value	of Total
Fixed maturity securities:
U.S. government and government sponsored entities	$	5,258	25	%	$	5,723	24	%
Obligations of states, municipalities and political subdivisions		122	1			121	1
Non-U.S. governments		2	-			2	-
Corporate debt		948	4			1,169	5
Mortgage-backed, asset-backed and collateralized:
RMBS		2,166	10			2,263	10
CMBS		1,220	6			1,353	6
CDO/ABS and other collateralized*		10,665	50			11,985	51
Total mortgage-backed, asset-backed and collateralized		14,051	66			15,601	67
Other		-	-			7	-
Total fixed maturity securities		20,381	96			22,623	97
Equity securities		766	4			834	3
Total	$	21,147	100	%	$	23,457	100	%

*Includes $0.9 billion and $1.0 billion of U.S. Government agency backed ABS at September 30,2014 and December 31,2013, respectively.

Net Investment Income

The following table presents the components of Net investment income:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions)		2014		2013		2014		2013
Fixed maturity securities, including short-term investments	$	3,022	$	3,005	$	9,264	$	8,969
Equity securities		135		98		67		123
Interest on mortgage and other loans		318		292		947		862
Alternative investments*		636		288		2,108		1,892
Real estate		25		32		86		99
Other investments		25		(22)		34		59
Total investment income		4,161		3,693		12,506		12,004
Investment expenses		133		120		398		423
Net investment income	$	4,028	$	3,573	$	12,108	$	11,581

*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				Nine Months Ended
	September 30,				September 30,
(in millions)		2014		2013		2014		2013
Sales of fixed maturity securities	$	97	$	490	$	463	$	2,063
Sales of equity securities		29		12		92		86
Other-than-temporary impairments:
Severity		-		-		-		(5)
Change in intent		(14)		(1)		(20)		(4)
Foreign currency declines		(3)		-		(13)		-
Issuer-specific credit events		(31)		(51)		(124)		(130)
Adverse projected cash flows		(2)		-		(7)		(7)
Provision for loan losses		(11)		(33)		9		(38)
Foreign exchange transactions		350		(276)		329		135
Derivative instruments		36		192		(302)		209
Impairments on investments in life settlements		(52)		(61)		(139)		(139)
Other		71		(20)		70		(27)
Net realized capital gains	$	470	$	252	$	358	$	2,143

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				Nine Months Ended
	September 30,				September 30,
(in millions)		2014		2013		2014		2013
Increase (decrease) in unrealized appreciation (depreciation) of investments:
Fixed maturity securities	$	(1,515)	$	(1,696)	$	6,123	$	(12,971)
Equity securities		303		189		348		180
Other investments		94		50		127		57
Total Increase (decrease) in unrealized appreciation (depreciation) of investments*	$	(1,118)	$	(1,457)	$	6,598	$	(12,734)

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

Evaluating Investmentsfor 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				Nine Months Ended
	September 30,				September 30,
(in millions)		2014		2013		2014		2013
Balance, beginning of period	$	3,166	$	4,236	$	3,872	$	5,164
Increases due to:
Credit impairments on new securities subject to impairment losses		13		6		35		33
Additional credit impairments on previously impaired securities		5		29		59		59
Reductions due to:
Credit impaired securities fully disposed for which there was no
prior intent or requirement to sell		(116)		(68)		(528)		(626)
Accretion on securities previously impaired due to credit*		(183)		(184)		(544)		(611)
Other		-		-		(9)		-
Balance, end of period	$	2,885	$	4,019	$	2,885	$	4,019

* 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)	$	29,851
Cash flows expected to be collected*		23,983
Recorded investment in acquired securities		15,896

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

(in millions)	September 30, 2014		December 31, 2013
Outstanding principal balance	$	16,883	$	14,741
Amortized cost		12,097		10,110
Fair value		13,489		11,338

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions)		2014		2013		2014		2013
Balance, beginning of period	$	7,042	$	5,901	$	6,940	$	4,766
Newly purchased PCI securities		358		202		1,127		1,308
Disposals		-		-		-		(60)
Accretion		(223)		(187)		(654)		(517)
Effect of changes in interest rate indices		(96)		282		(327)		388
Net reclassification from non-accretable difference,
including effects of prepayments		30		405		25		718
Balance, end of period	$	7,111	$	6,603	$	7,111	$	6,603

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 theDIB 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)		September 30, 2014		December 31, 2013
Securities available for sale	$	2,860	$	3,837
Other securities		2,187		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)		September 30, 2014		December 31, 2013
Securities collateral pledged to us	$	7,347	$	8,878
Amount sold or repledged by us		106		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 $6.2 billion and $6.7 billion at September 30,2014 and December 31,2013, respectively.

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 September 30,2014 and December 31,2013, respectively. In addition, our subsidiaries have pledged securities available for sale with a fair value of $530 million and $80 million at September 30,2014 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 $3.6 billion and $4.2 billion atSeptember 30,2014 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.