4. Investments

AFS Securities

See Note 1 in our 2013 Form 10-K for information regarding our accounting policy relating to AFS securities, 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 September 30, 2014
	Amortized		Gross Unrealized						Fair
	Cost		Gains		Losses		OTTI		Value
Fixed maturity securities:
Corporate bonds	$	68,077	$	6,175	$	369	$	85	$	73,798
U.S. government bonds		365		38		1		-		402
Foreign government bonds		489		62		-		-		551
Residential mortgage-backed securities (“RMBS”)		4,063		267		-		21		4,309
Commercial mortgage-backed securities (“CMBS”)		607		29		-		14		622
Collateralized loan obligations (“CLOs”)		287		-		1		-		286
State and municipal bonds		3,709		716		5		-		4,420
Hybrid and redeemable preferred securities		887		110		37		-		960
VIEs' fixed maturity securities		586		12		-		-		598
Total fixed maturity securities		79,070		7,409		413		120		85,946
Equity securities		217		17		-		-		234
Total AFS securities	$	79,287	$	7,426	$	413	$	120	$	86,180



	As of December 31, 2013
	Amortized		Gross Unrealized						Fair
	Cost		Gains		Losses		OTTI		Value
Fixed maturity securities:
Corporate bonds	$	65,808	$	4,374	$	1,157	$	90	$	68,935
U.S. government bonds		355		26		14		-		367
Foreign government bonds		505		45		1		-		549
RMBS		4,135		256		10		31		4,350
CMBS		713		36		4		17		728
CLOs		232		-		1		6		225
State and municipal bonds		3,638		308		27		-		3,919
Hybrid and redeemable preferred securities		967		89		51		-		1,005
VIEs' fixed maturity securities		682		15		-		-		697
Total fixed maturity securities		77,035		5,149		1,265		144		80,775
Equity securities		182		19		-		-		201
Total AFS securities	$	77,217	$	5,168	$	1,265	$	144	$	80,976

The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of September 30, 2014, were as follows:



	Amortized		Fair
	Cost		Value
Due in one year or less	$	2,338	$	2,388
Due after one year through five years		17,352		18,852
Due after five years through ten years		22,426		23,467
Due after ten years		31,997		36,022
Subtotal		74,113		80,729
Mortgage-backed securities (“MBS”)		4,670		4,931
CLOs		287		286
Total fixed maturity AFS securities	$	79,070	$	85,946

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 September 30, 2014
	Less Than or Equal					Greater Than
	to Twelve Months					Twelve Months					Total
				Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
	Fair		Losses and			Fair		Losses and			Fair		Losses and
	Value			OTTI		Value			OTTI		Value			OTTI
Fixed maturity securities:
Corporate bonds	$	5,133		$	90	$	5,810		$	364	$	10,943		$	454
U.S. government bonds		156			1		-			-		156			1
RMBS		403			3		293			18		696			21
CMBS		6			-		116			14		122			14
CLOs		34			-		81			1		115			1
State and municipal bonds		44			1		24			4		68			5
Hybrid and redeemable
preferred securities		13			-		194			37		207			37
Total AFS securities	$	5,789		$	95	$	6,518		$	438	$	12,307		$	533

Total number of AFS securities in an unrealized loss position															1,057



	As of December 31, 2013
	Less Than or Equal					Greater Than
	to Twelve Months					Twelve Months					Total
				Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
	Fair		Losses and			Fair		Losses and			Fair		Losses and
	Value			OTTI		Value			OTTI		Value			OTTI
Fixed maturity securities:
Corporate bonds	$	16,918		$	1,018	$	1,258		$	229	$	18,176		$	1,247
U.S. government bonds		163			14		-			-		163			14
Foreign government bonds		69			1		-			-		69			1
RMBS		488			17		267			24		755			41
CMBS		109			7		43			14		152			21
CLOs		136			2		50			5		186			7
State and municipal bonds		377			20		24			7		401			27
Hybrid and redeemable
preferred securities		62			6		197			45		259			51
Total AFS securities	$	18,322		$	1,085	$	1,839		$	324	$	20,161		$	1,409

Total number of AFS securities in an unrealized loss position															1,484

For information regarding our investments in VIEs, see Note 3.

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 2013 Form 10-K. Selected information for these securities in a gross unrealized loss position (in millions) was as follows:



	As of September 30, 2014
	Amortized		Fair		Unrealized
	Cost		Value		Loss
Total
AFS securities backed by pools of residential mortgages	$	1,088	$	1,024	$	64
AFS securities backed by pools of commercial mortgages		148		134		14
Total	$	1,236	$	1,158	$	78

Subject to Detailed Analysis
AFS securities backed by pools of residential mortgages	$	790	$	731	$	59
AFS securities backed by pools of commercial mortgages		26		25		1
Total	$	816	$	756	$	60



	As of December 31, 2013
	Amortized		Fair		Unrealized
	Cost		Value		Loss
Total
AFS securities backed by pools of residential mortgages	$	1,261	$	1,146	$	115
AFS securities backed by pools of commercial mortgages		193		169		24
Total	$	1,454	$	1,315	$	139

Subject to Detailed Analysis
AFS securities backed by pools of residential mortgages	$	933	$	833	$	100
AFS securities backed by pools of commercial mortgages		29		24		5
Total	$	962	$	857	$	105

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 September 30, 2014
								Number
	Fair		Gross Unrealized					of
	Value		Losses		OTTI		Securities (1)
Less than six months	$	14	$	-	$	7			3
Nine months or greater, but less than twelve months		1		-		-			3
Twelve months or greater		242		58		51			77
Total	$	257	$	58	$	58			83



	As of December 31, 2013
								Number
	Fair		Gross Unrealized					of
	Value		Losses		OTTI		Securities (1)
Less than six months	$	1	$	1	$	-			4
Six months or greater, but less than nine months		7		3		-			1
Nine months or greater, but less than twelve months		59		19		-			4
Twelve months or greater		349		92		81			92
Total	$	416	$	115	$	81			101

⁽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 by $876 million for the nine months ended September 30, 2014. As discussed further below, we believe the unrealized loss position as of September 30, 2014, did not represent OTTI as (i) we did not intend to sell the 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; and (iv) 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 September 30, 2014, 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 September 30, 2014, the unrealized losses associated with our corporate bond securities were attributable primarily to securities that were backed by individual issuer companies. 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 September 30, 2014, the unrealized losses associated with our MBS and commercial real estate (“CRE”) collateralized debt obligations (“CDOs”) were attributable primarily to collateral losses and credit spreads. We assessed our MBS and CRE CDOs for credit impairment using a cash flow model that 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 September 30, 2014, 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						For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Balance as of beginning-of-period	$	389		$	413		$	404		$	424
Increases attributable to:
Credit losses on securities for which an
OTTI was not previously recognized		1			6			2			26
Credit losses on securities for which an
OTTI was previously recognized		4			16			12			37
Decreases attributable to:
Securities sold		(17	)		(16	)		(41	)		(68	)
Balance as of end-of-period	$	377		$	419		$	377		$	419

During the nine months ended September 30, 2014 and 2013, 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; 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 September 30, 2014
			Gross Unrealized						OTTI in
	Amortized				Losses and		Fair		Credit
	Cost		Gains		OTTI		Value		Losses
Corporate bonds	$	280	$	34	$	35	$	279	$	125
RMBS		472		27		10		489		187
CMBS		48		4		12		40		65
Total	$	800	$	65	$	57	$	808	$	377



	As of December 31, 2013
			Gross Unrealized						OTTI in
	Amortized				Losses and		Fair		Credit
	Cost		Gains		OTTI		Value		Losses
Corporate bonds	$	265	$	18	$	49	$	234	$	133
RMBS		550		18		18		550		184
CMBS		35		4		12		27		87
Total	$	850	$	40	$	79	$	811	$	404

Mortgage Loans on Real Estate

See Note 1 in our 2013 Form 10-K for information regarding our accounting policy relating to 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 23% and 9%, respectively, of mortgage loans on real estate as of September 30, 2014, and December 31, 2013.

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



		As of				As of
	September 30,				December 31,
		2014				2013
Current		$	7,457			$	7,200
60 to 90 days past due			-				4
Greater than 90 days past due			8				3
Valuation allowance associated with impaired
mortgage loans on real estate			(3	)			(3	)
Unamortized premium (discount)			4				6
Total carrying value		$	7,466			$	7,210

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				As of
	September 30,				December 31,
		2014				2013
Number of impaired mortgage loans on real estate		3				3

Principal balance of impaired mortgage loans on real estate		$	27			$	27
Valuation allowance associated with impaired
mortgage loans on real estate			(3	)			(3	)
Carrying value of impaired mortgage loans on real estate		$	24			$	24

The changes in the valuation allowance associated with impaired mortgage loans on real estate (in millions) were as follows:



		As of			As of
	September 30,			December 31,
		2014			2013
Balance as of beginning-of-year		$	3		$	21
Additions			-			3
Charge-offs, net of recoveries			-			(21	)
Balance as of end-of-period		$	3		$	3

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



	For the Three				For the Nine
	Months Ended				Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Average carrying value for impaired
mortgage loans on real estate	$	24	$	31	$	24	$	37
Interest income recognized on impaired
mortgage loans on real estate		-		-		1		1
Interest income collected on impaired
mortgage loans on real estate		-		-		1		1

As described in Note 1 in our 2013 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 September 30, 2014				As of December 31, 2013
				Debt-				Debt-
				Service				Service
	Carrying		% of	Coverage	Carrying		% of	Coverage
	Value		Total	Ratio	Value		Total	Ratio
Less than 65%	$	6,480	86.8%	1.86	$	6,026	83.6%	1.78
65% to 74%		663	8.9%	1.54		744	10.3%	1.42
75% to 100%		292	3.9%	0.81		402	5.6%	0.83
Greater than 100%		31	0.4%	0.76		35	0.5%	0.78
Total mortgage loans on real estate	$	7,466	100.0%		$	7,207	100.0%

Alternative Investments

As of September 30, 2014, and December 31, 2013, alternative investments included investments in 152 and 121 different partnerships, respectively, and the portfolio represented approximately 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						For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Fixed maturity AFS securities:
Gross gains	$	4		$	5		$	23		$	17
Gross losses		(6	)		(28	)		(18	)		(73	)
Equity AFS securities:
Gross gains		2			1			5			7
Gross losses		-			(1	)		-			(2	)
Gain (loss) on other investments		-			(2	)		3			(3	)
Associated amortization of DAC, VOBA,
DSI and DFEL and changes in other
contract holder funds		(7	)		(8	)		(24	)		(19	)
Total realized gain (loss) related to
certain investments, pre-tax	$	(7	)	$	(33	)	$	(11	)	$	(73	)

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						For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
OTTI Recognized in Net Income (Loss)
Fixed maturity securities:
Corporate bonds	$	(2	)	$	(11	)	$	(7	)	$	(21	)
RMBS		(1	)		(10	)		(4	)		(25	)
CMBS		-			(1	)		(1	)		(15	)
CRE CDOs		(2	)		-			(2	)		(1	)
Total fixed maturity securities		(5	)		(22	)		(14	)		(62	)
Equity securities		-			(1	)		-			(1	)
Gross OTTI recognized in net
income (loss)		(5	)		(23	)		(14	)		(63	)
Associated amortization of DAC,
VOBA, DSI and DFEL		1			4			3			11
Net OTTI recognized in net
income (loss), pre-tax	$	(4	)	$	(19	)	$	(11	)	$	(52	)

Portion of OTTI Recognized in OCI
Gross OTTI recognized in OCI	$	2		$	4		$	11		$	10
Change in DAC, VOBA, DSI and DFEL		-			(1	)		(1	)		(1	)
Net portion of OTTI recognized in OCI,
pre-tax	$	2		$	3		$	10		$	9

Determination of Credit Losses on Corporate Bonds and CDOs

As of September 30, 2014, and December 31, 2013, 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 September 30, 2014, and December 31, 2013, 95% and 96%, respectively, of the fair value of our corporate bond portfolio was rated investment grade. As of September 30, 2014, and December 31, 2013, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $3.5 billion and $3.0 billion, respectively, and a fair value of $3.5 billion and $2.9 billion, respectively. As of September 30, 2014, and December 31, 2013, 96% and 94%, respectively, of the fair value of our CDO portfolio was rated investment grade. As of September 30, 2014, and December 31, 2013, the portion of our CDO portfolio rated below investment grade had an amortized cost of $12 million and $16 million, respectively, and fair value of $12 million and $13 million, respectively. Based upon the analysis discussed above, we believe as of September 30, 2014, and December 31, 2013, that we would recover the amortized cost of each fixed maturity security.

Determination of Credit Losses on MBS

As of September 30, 2014, and December 31, 2013, default rates were projected by considering underlying MBS loan performance and collateral type. Projected default rates on existing delinquencies vary between approximately 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 value 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 September 30, 2014				As of December 31, 2013
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Collateral payable for derivative investments (1)	$	1,276	$	1,276	$	638	$	638
Securities pledged under securities lending agreements (2)		197		191		184		178
Securities pledged under repurchase agreements (3)		205		215		530		553
Securities pledged for Term Asset-Backed Securities
Loan Facility (“TALF”) (4)		-		-		36		49
Investments pledged for Federal Home Loan Bank of
Indianapolis (“FHLBI”) (5)		2,175		3,535		1,850		3,127
Total payables for collateral on investments	$	3,853	$	5,217	$	3,238	$	4,545

⁽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 5 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 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 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 FHLBI overcollateralization requirements for the assets that we pledge are generally 105% to 115% of the fair value for fixed maturity AFS securities and 165% to 175% of the unpaid principal balance 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 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 Nine
	Months Ended
	September 30,
	2014			2013
Collateral payable for derivative investments	$	638		$	(1,610	)
Securities pledged under securities lending agreements		13			(17	)
Securities pledged under repurchase agreements		(325	)		250
Securities pledged for TALF		(36	)		(1	)
Investments pledged for FHLBI		325			750
Total increase (decrease) in payables for collateral on investments	$	615		$	(628	)

Investment Commitments

As of September 30, 2014, our investment commitments were $1.1 billion, which included $525 million of LPs, $316 million of mortgage loans on real estate and $282 million of private debt investments.

Concentrations of Financial Instruments

As of September 30, 2014, and December 31, 2013, 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 $2.4 billion and $2.6 billion, respectively, or 2% and 3%, respectively, of our invested assets portfolio, and our investments in securities issued by Fannie Mae with a fair value of $1.4 billion and $1.7 billion, respectively, or 1% and 2%, respectively, of our invested assets portfolio. These investments are included in corporate bonds in the tables above.

As of September 30, 2014, and December 31, 2013, our most significant investments in one industry were our investment securities in the electric industry with a fair value of $9.7 billion and $8.7 billion, respectively, or 10% and 9%, respectively, 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.