4. Investments

AFS Securities

Pursuant to the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification^TM(“ASC”), we have categorized AFS securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3), as described in Note 1 in our 2012 Form 10-K, which also includes additional disclosures regarding our fair value measurements.

The amortized cost, gross unrealized gains, losses and OTTI and fair value of AFS securities (in millions) were as follows:



	As of March 31, 2013
	Amortized		Gross Unrealized						Fair
	Cost		Gains		Losses		OTTI		Value
Fixed maturity securities:
Corporate bonds	$	62,030	$	7,574	$	238	$	92	$	69,274
U.S. government bonds		381		51		-		-		432
Foreign government bonds		546		80		-		-		626
Residential mortgage-backed securities ("RMBS")		5,200		429		-		43		5,586
Commercial mortgage-backed securities ("CMBS")		926		61		14		17		956
Collateralized debt obligations ("CDOs")		181		1		2		7		173
State and municipal bonds		3,625		810		5		-		4,430
Hybrid and redeemable preferred securities		1,189		113		68		-		1,234
VIEs' fixed maturity securities		679		29		-		-		708
Total fixed maturity securities		74,757		9,148		327		159		83,419
Equity securities		131		19		2		-		148
Total AFS securities	$	74,888	$	9,167	$	329	$	159	$	83,567



	As of December 31, 2012
	Amortized		Gross Unrealized						Fair
	Cost		Gains		Losses		OTTI		Value
Fixed maturity securities:
Corporate bonds	$	60,124	$	8,219	$	219	$	108	$	68,016
U.S. government bonds		383		59		-		-		442
Foreign government bonds		562		92		-		-		654
RMBS		5,763		471		3		60		6,171
CMBS		970		68		16		19		1,003
CDOs		189		2		3		8		180
State and municipal bonds		3,546		814		7		-		4,353
Hybrid and redeemable preferred securities		1,181		106		70		-		1,217
VIEs' fixed maturity securities		677		31		-		-		708
Total fixed maturity securities		73,395		9,862		318		195		82,744
Equity securities		137		22		2		-		157
Total AFS securities	$	73,352	$	9,884	$	320	$	195	$	82,901

The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of March 31, 2013, were as follows:



	Amortized Cost		Fair Value
Due in one year or less	$	2,468	$	2,518
Due after one year through five years		12,878		14,081
Due after five years through ten years		25,137		27,924
Due after ten years		27,967		32,181
Subtotal		68,450		76,704
Mortgage-backed securities ("MBS")		6,126		6,542
CDOs		181		173
Total fixed maturity AFS securities	$	74,757	$	83,419

Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.

The fair value and gross unrealized losses, including the portion of OTTI recognized in other comprehensive income (loss) (“OCI”), of AFS securities (dollars in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:



	As of March 31, 2013
	Less Than or Equal to Twelve Months				Greater Than Twelve Months				Total
	Fair Value		Gross Unrealized Losses and OTTI		Fair Value		Gross Unrealized Losses and OTTI		Fair Value		Gross Unrealized Losses and OTTI
Fixed maturity securities:
Corporate bonds	$	4,005	$	186	$	802	$	144	$	4,807	$	330
RMBS		350		27		161		16		511		43
CMBS		29		14		65		17		94		31
CDOs		9		7		51		2		60		9
State and municipal bonds		63		1		26		4		89		5
Hybrid and redeemable preferred securities		66		1		278		67		344		68
Total fixed maturity securities		4,522		236		1,383		250		5,905		486
Equity securities		7		2		-		-		7		2
Total AFS securities	$	4,529	$	238	$	1,383	$	250	$	5,912	$	488

Total number of AFS securities in an unrealized loss position												663



	As of December 31, 2012
	Less Than or Equal to Twelve Months				Greater Than Twelve Months				Total
	Fair Value		Gross Unrealized Losses and OTTI		Fair Value		Gross Unrealized Losses and OTTI		Fair Value		Gross Unrealized Losses and OTTI
Fixed maturity securities:
Corporate bonds	$	2,853	$	145	$	934	$	182	$	3,787	$	327
RMBS		272		39		199		24		471		63
CMBS		66		16		113		19		179		35
CDOs		10		8		53		3		63		11
State and municipal bonds		64		1		24		6		88		7
Hybrid and redeemable preferred securities		71		3		293		67		364		70
Total fixed maturity securities		3,336		212		1,616		301		4,952		513
Equity securities		7		2		-		-		7		2
Total AFS securities	$	3,343	$	214	$	1,616	$	301	$	4,959	$	515

Total number of AFS securities in an unrealized loss position												626

For information regarding our investments in VIEs, see Note 4.

We perform detailed analysis on the AFS securities backed by pools of residential and commercial mortgages that are most at risk of impairment based on factors discussed in Note 1 in our 2012 Form 10-K. Selected information for these securities in a gross unrealized loss position (in millions) was as follows:



	As of March 31, 2013
	Amortized Cost		Fair Value		Unrealized Loss
Total
AFS securities backed by pools of residential mortgages	$	1,107	$	956	$	151
AFS securities backed by pools of commercial mortgages		148		109		39
Total	$	1,255	$	1,065	$	190

Subject to Detailed Analysis
AFS securities backed by pools of residential mortgages	$	1,022	$	872	$	150
AFS securities backed by pools of commercial mortgages		44		33		11
Total	$	1,066	$	905	$	161



	As of December 31, 2012
	Amortized Cost		Fair Value		Unrealized Loss
Total
AFS securities backed by pools of residential mortgages	$	1,181	$	980	$	201
AFS securities backed by pools of commercial mortgages		236		192		44
Total	$	1,417	$	1,172	$	245

Subject to Detailed Analysis
AFS securities backed by pools of residential mortgages	$	1,173	$	972	$	201
AFS securities backed by pools of commercial mortgages		56		40		16
Total	$	1,229	$	1,012	$	217

For the three months ended March 31, 2013 and 2012, we recorded OTTI for AFS securities backed by pools of residential and commercial mortgages of $16million and $21 million, pre-tax, respectively, and before associated amortization expense for deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”), of which $(33) million and $(21) million, respectively, was recognized in OCI and $17 million and $42 million, respectively, was recognized in net income (loss).

The fair value, gross unrealized losses, the portion of OTTI recognized in OCI (in millions) and number of AFS securities where the fair value had declined and remained below amortized cost by greater than 20% were as follows:



	As of March 31, 2013
			Gross Unrealized				Number of
	Fair Value		Losses		OTTI		Securities⁽¹⁾
Less than six months	$	46	$	22	$	3		16
Twelve months or greater		357		143		106		118
Total	$	403	$	165	$	109		134



	As of December 31, 2012
			Gross Unrealized				Number of
	Fair Value		Losses		OTTI		Securities⁽¹⁾
Less than six months	$	34	$	9	$	1		14
Nine months or greater, but less than twelve months		15		10		-		3
Twelve months or greater		395		179		128		131
Total	$	444	$	198	$	129		148

⁽¹⁾	We may reflect a security in more than one aging category based on various purchase dates.

We regularly review our investment holdings for OTTI. Our gross unrealized losses, including the portion of OTTI recognized in OCI on AFS securities decreased $27 million for the three months ended March 31, 2013. As discussed further below, we believe the unrealized loss position as of March 31, 2013, did not represent OTTI as (i) we did not intend to sell these fixed maturity AFS securities; (ii) it is not more likely than not that we will be required to sell the fixed maturity AFS securities before recovery of their amortized cost basis; (iii) the estimated future cash flows were equal to or greater than the amortized cost basis of the debt securities; (iv) and we had the ability and intent to hold the equity AFS securities for a period of time sufficient for recovery.

Based upon this evaluation as of March 31, 2013, management believes we have the ability to generate adequate amounts of cash from our normal operations (e.g., insurance premiums and fees and investment income) to meet cash requirements with a prudent margin of safety without requiring the sale of our temporarily-impaired securities.

As of March 31, 2013, the unrealized losses associated with our corporate bond securities were attributable primarily to securities that were backed by commercial loans and individual issuer companies. For our corporate bond securities with commercial loans as the underlying collateral, we evaluated the projected credit losses in the underlying collateral and concluded that we had sufficient subordination or other credit enhancement when compared with our estimate of credit losses for the individual security and we expected to recover the entire amortized cost for each security. For individual issuers, we performed detailed analysis of the financial performance of the issuer and determined that we expected to recover the entire amortized cost for each security.

As of March 31, 2013, the unrealized losses associated with our MBS and CDOs were attributable primarily to collateral losses and credit spreads. We assessed for credit impairment using a cash flow model which incorporates key assumptions including default rates, severities and prepayment rates. We estimated losses for a security by forecasting the underlying loans in each transaction. The forecasted loan performance was used to project cash flows to the various tranches in the structure, as applicable. Our forecasted cash flows also considered, as applicable, independent industry analyst reports and forecasts, sector credit ratings and other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our subordination or other credit enhancement, we expected to recover the entire amortized cost basis of each temporarily-impaired security.

As of March 31, 2013, the unrealized losses associated with our hybrid and redeemable preferred securities were attributable primarily to wider credit spreads caused by illiquidity in the market and subordination within the capital structure, as well as credit risk of specific issuers. For our hybrid and redeemable preferred securities, we evaluated the financial performance of the issuer based upon credit performance and investment ratings and determined that we expected to recover the entire amortized cost of each security.

Changes in the amount of credit loss of OTTI recognized in net income (loss) where the portion related to other factors was recognized in OCI (in millions) on fixed maturity AFS securities were as follows:



	For the Three Months Ended March 31,
	2013		2012
Balance as of beginning-of-period	$	424	$	390
Increases attributable to:
Credit losses on securities for which an OTTI was not previously recognized		1		34
Credit losses on securities for which an OTTI was previously recognized		16		23
Decreases attributable to:
Securities sold		(4)		(37)
Balance as of end-of-period	$	437	$	410

During the three months ended March 31, 2013 and 2012, we recorded credit losses on securities for which an OTTI was not previously recognized as we determined the cash flows expected to be collected would not be sufficient to recover the entire amortized cost basis of the debt security. The credit losses we recorded on securities for which an OTTI was not previously recognized were attributable primarily to one or a combination of the following reasons:

·	Failure of the issuer of the security to make scheduled payments;

·	Deterioration of creditworthiness of the issuer;

·	Deterioration of conditions specifically related to the security;

·	Deterioration of fundamentals of the industry in which the issuer operates;

·	Deterioration of fundamentals in the economy including, but not limited to, higher unemployment and lower housing prices; and

·	Deterioration of the rating of the security by a rating agency.

We recognize the OTTI attributed to the noncredit portion as a separate component in OCI referred to as unrealized OTTI on AFS securities.

Details of the amount of credit loss of OTTI recognized in net income (loss) for which a portion related to other factors was recognized in OCI (in millions), were as follows:



	As of March 31, 2013
			Gross Unrealized
	Amortized Cost		Gains		Losses and OTTI		Fair Value		OTTI in Credit Losses
Corporate bonds	$	290	$	9	$	86	$	213	$	108
RMBS		630		25		28		627		234
CMBS		38		3		14		27		95
Total	$	958	$	37	$	128	$	867	$	437



	As of December 31, 2012
			Gross Unrealized
	Amortized Cost		Gains		Losses and OTTI		Fair Value		OTTI in Credit Losses
Corporate bonds	$	299	$	4	$	98	$	205	$	104
RMBS		636		22		40		618		227
CMBS		41		1		16		26		93
Total	$	976	$	27	$	154	$	849	$	424

Mortgage Loans on Real Estate

Mortgage loans on real estate principally involve commercial real estate. The commercial loans are geographically diversified throughout the U.S. with the largest concentrations in California and Texas, which accounted for 32% of mortgage loans on real estate as of March 31, 2013, and December 31, 2012.

The following provides the current and past due composition of our mortgage loans on real estate (in millions):



	As of March 31, 2013		As of December 31, 20132
Current	$	7,047	$	7,011
60 to 90 days past due		8		8
Greater than 90 days past due		3		24
Valuation allowance associated with impaired mortgage loans on real estate		(8)		(21)
Unamortized premium (discount)		7		7
Total carrying value	$	7,057	$	7,029

The number of impaired mortgage loans on real estate, each of which had an associated specific valuation allowance, and the carrying value of impaired mortgage loans on real estate (dollars in millions) were as follows:



	As of March 31, 2013		As of December 31, 2012
Number of impaired mortgage loans on real estate		6		10

Principal balance of impaired mortgage loans on real estate	$	46	$	75
Valuation allowance associated with impaired mortgage loans on real estate		(8)		(21)
Carrying value of impaired mortgage loans on real estate	$	38	$	54

The average carrying value on the impaired mortgage loans on real estate (in millions) was as follows:



	For the Three Months Ended March 31,
	2013		2012
Average carrying value for impaired mortgage loans on real estate	$	46	$	64
Interest income recognized on impaired mortgage loans on real estate		1		-
Interest income collected on impaired mortgage loans on real estate		1		-

As described in Note 1 in our 2012 Form 10-K, we use the loan-to-value and debt-service coverage ratios as credit quality indicators for our mortgage loans, which were as follows (dollars in millions):



	As of March 31, 2013					As of December 31, 2012
Loan-to-Value	Principal Amount		% of Total		Debt-Service CoverageRatio	Principal Amount		% of Total		Debt-Service CoverageRatio
Less than 65%	$	5,738	81.3	%	1.69	$	5,677	80.6	%	1.68
65% to 74%		877	12.4	%	1.39		897	12.7	%	1.39
75% to 100%		389	5.5	%	0.82		386	5.5	%	0.84
Greater than 100%		54	0.8	%	0.80		83	1.2	%	0.66
Total mortgage loans on real estate	$	7,058	100.0	%		$	7,043	100.0	%

Alternative Investments

As of March 31, 2013, and December 31, 2012, alternative investments included investments in 100 and 98 different partnerships, respectively, and the portfolio represented less than 1% of our overall invested assets.

Realized Gain (Loss) Related to Certain Investments

The detail of the realized gain (loss) related to certain investments (in millions) was as follows:



	For the Three Months Ended March 31,
	2013		2012
Fixed maturity AFS securities:
Gross gains	$	7	$	5
Gross losses		(19)		(63)
Equity AFS securities:
Gross gains		6		1
Gain (loss) on other investments		(1)		7
Associated amortization of DAC, VOBA, DSI and DFEL and changes in other contract holder funds		(7)		2
Total realized gain (loss) related to certain investments	$	(14)	$	(48)

Details underlying write-downs taken as a result of OTTI (in millions) that were recognized in net income (loss) and included in realized gain (loss) on AFS securities above, and the portion of OTTI recognized in OCI (in millions) were as follows:



	For the Three Months Ended March 31,
	2013		2012
OTTI Recognized in Net Income (Loss)
Corporate bonds	$	(3)	$	(19)
RMBS		(11)		(18)
CMBS		(2)		(20)
CDOs		(1)		-
Gross OTTI recognized in net income (loss)		(17)		(57)
Associated amortization of DAC, VOBA, DSI and DFEL		3		10
Net OTTI recognized in net income (loss), pre-tax	$	(14)	$	(47)

Portion of OTTI Recognized in OCI
Gross OTTI recognized in OCI	$	7	$	58
Change in DAC, VOBA, DSI and DFEL		(1)		(8)
Net portion of OTTI recognized in OCI, pre-tax	$	6	$	50

Determination of Credit Losses on Corporate Bonds and CDOs

As of March 31, 2013, and December 31, 2012, we reviewed our corporate bond and CDO portfolios for potential shortfall in contractual principal and interest based on numerous subjective and objective inputs. The factors used to determine the amount of credit loss for each individual security, include, but are not limited to, near term risk, substantial discrepancy between book and market value, sector or company-specific volatility, negative operating trends and trading levels wider than peers.

Credit ratings express opinions about the credit quality of a security. Securities rated investment grade, that is those rated BBB- or higher by Standard & Poor’s (“S&P”) Rating Services or Baa3 or higher by Moody’s Investors Service (“Moody’s”), are generally considered by the rating agencies and market participants to be low credit risk. As of March 31, 2013, and December 31, 2012, 96% of the fair value of our corporate bond portfolio was rated investment grade. As of March 31, 2013, and December 31, 2012, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $2.9 billion and $3.0 billion, respectively, and a fair value of $2.9 billion. As of March 31, 2013, and December 31, 2012, 93% of the fair value of our CDO portfolio was rated investment grade. As of March 31, 2013, and December 31, 2012, the portion of our CDO portfolio rated below investment grade had an amortized cost of $19 million and $21 million, respectively, and fair value of $12 million and $13 million, respectively. Based upon the analysis discussed above, we believed as of March 31, 2013, and December 31, 2012, that we would recover the amortized cost of each investment grade corporate bond and CDO security.

For securities where we recorded an OTTI recognized in net income (loss) for the three months ended March 31, 2013 and 2012, the recovery as a percentage of amortized cost was 98% and 92%, for corporate bonds, respectively, and 94% and 0% for CDOs, respectively.

Determination of Credit Losses on MBS

As of March 31, 2013, and December 31, 2012, default rates were projected by considering underlying MBS loan performance and collateral type. Projected default rates on existing delinquencies vary between 10% to 100% depending on loan type and severity of delinquency status. In addition, we estimate the potential contributions of currently performing loans that may become delinquent in the future based on the change in delinquencies and loan liquidations experienced in the recent history. Finally, we develop a default rate timing curve by aggregating the defaults for all loans in the pool (delinquent loans, foreclosure and real estate owned and new delinquencies from currently performing loans) and the associated loan-level loss severities.

We use certain available loan characteristics such as lien status, loan sizes and occupancy to estimate the loss severity of loans. Second lien loans are assigned 100% severity, if defaulted. For first lien loans, we assume a minimum of 30% severity with higher severity assumed for investor properties and further adjusted by housing price assumptions. With the default rate timing curve and loan-level severity, we derive the future expected credit losses.

Payables for Collateral on Investments

The carrying values of the payables for collateral on investments (in millions) included on our Consolidated Balance Sheets and the fair value of the related investments or collateral consisted of the following:



	As of March 31, 2013				As of December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
Collateral payable held for derivative investments⁽¹⁾	$	1,992	$	1,992	$	2,567	$	2,567
Securities pledged under securities lending agreements⁽²⁾		199		192		197		189
Securities pledged under reverse repurchase agreements⁽³⁾		280		293		280		294
Securities pledged for Term Asset-Backed Securities Loan Facility ("TALF") ⁽⁴⁾		36		51		37		52
Investments pledged for Federal Home Loan Bank ofIndianapolis ("FHLBI")⁽⁵⁾		1,600		2,764		1,100		1,936
Total payables for collateral on investments	$	4,107	$	5,292	$	4,181	$	5,038

⁽¹⁾

We obtain collateral based upon contractual provisions with our counterparties. These agreements take into consideration the counterparties’ credit rating as compared to ours, the fair value of the derivative investments and specified thresholds that if exceeded result in the receipt of cash that is typically invested in cash and invested cash. See Note 6 for details about maximum collateral potentially required to post on our credit default swaps.

⁽²⁾

Our pledged securities under securities lending agreements are included in fixed maturity AFS securities on our Consolidated Balance Sheets. We generally obtain collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. We value collateral daily and obtain additional collateral when deemed appropriate. The cash received in our securities lending program is typically invested in cash and invested cash or fixed maturity AFS securities.

⁽³⁾

Our pledged securities under reverse repurchase agreements are included in fixed maturity AFS securities on our Consolidated Balance Sheets. We obtain collateral in an amount equal to 95% of the fair value of the securities, and our agreements with third parties contain contractual provisions to allow for additional collateral to be obtained when necessary. The cash received in our reverse repurchase program is typically invested in fixed maturity AFS securities.

⁽⁴⁾

Our pledged securities for TALF are included in fixed maturity AFS securities on our Consolidated Balance Sheets. We obtain collateral in an amount that has typically averaged 90% of the fair value of the TALF securities. The cash received in these transactions is invested in fixed maturity AFS securities.

⁽⁵⁾

Our pledged investments for FHLBI are included in fixed maturity AFS securities and mortgage loans on real estate on our Consolidated Balance Sheets. The collateral requirements are generally 105% to 115% of the fair value for fixed maturity AFS securities and 155% to 175% of the fair value for mortgage loans on real estate. The cash received in these transactions is primarily invested in cash and invested cash or fixed maturity AFS securities.

For information related to balance sheet offsetting of our securities lending and reverse repurchase agreements see Note 5.

Increase (decrease) in payables for collateral on investments (in millions) included on the Consolidated Statements of Cash Flows consisted of the following:



	For the Three Months Ended March 31,
	2013		2012
Collateral payable held for derivative investments	$	(575)	$	(848)
Securities pledged under securities lending agreements		2		-
Securities pledged for TALF		(1)		(10)
Investments pledged for FHLBI		500		-
Total increase (decrease) in payables for collateral on investments	$	(74)	$	(858)

Investment Commitments

As of March 31, 2013, our investment commitments were $888 million, which included $369 million of limited partnerships (“LPs”), $372 million of private placement securities and $147 million of mortgage loans on real estate.

Concentrations of Financial Instruments

As of March 31, 2013, and December 31, 2012, our most significant investments in one issuer were our investments in securities issued by the Federal Home Loan Mortgage Corporation with a fair value of $3.4 billion and $3.8 billion, respectively, or 3% and 4% of our invested assets portfolio, respectively, and our investments in securities issued by Fannie Mae with a fair value of $2.1 billion and $2.2 billion, respectively, or 2% of our invested assets portfolio. These investments are included in corporate bonds in the tables above.

As of March 31, 2013, and December 31, 2012, our most significant investments in one industry were our investment securities in the electric industry with a fair value of $8.8 billion and $8.7 billion, respectively, or 9% of our invested assets portfolio, and our investment securities in the banking industry with a fair value of $5.0 billion, or 5% of our invested assets portfolio. We utilized the industry classifications to obtain the concentration of financial instruments amount; as such, this amount will not agree to the AFS securities table above.