4. Investments

AFS Securities

See Note 1 in our 2014 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 June 30, 2015
	Amortized		Gross Unrealized							Fair
	Cost		Gains		Losses		OTTI (1)			Value
Fixed maturity securities:
Corporate bonds	$	69,149	$	4,859	$	968	$	4		$	73,036
Asset-backed securities ("ABS")		1,087		50		19		(15	)		1,133
U.S. government bonds		388		42		2		-			428
Foreign government bonds		472		68		-		-			540
Residential mortgage-backed securities ("RMBS")		3,815		222		24		(17	)		4,030
Commercial mortgage-backed securities ("CMBS")		432		17		3		-			446
Collateralized loan obligations ("CLOs")		496		2		1		(2	)		499
State and municipal bonds		3,781		651		14		-			4,418
Hybrid and redeemable preferred securities		836		97		41		-			892
VIEs’ fixed maturity securities		593		5		-		-			598
Total fixed maturity securities		81,049		6,013		1,072		(30	)		86,020
Equity securities		213		15		1		-			227
Total AFS securities	$	81,262	$	6,028	$	1,073	$	(30	)	$	86,247



	As of December 31, 2014
	Amortized		Gross Unrealized							Fair
	Cost		Gains		Losses		OTTI (1)			Value
Fixed maturity securities:
Corporate bonds	$	67,153	$	6,711	$	443	$	5		$	73,416
ABS		1,087		56		20		(7	)		1,130
U.S. government bonds		379		56		-		-			435
Foreign government bonds		473		68		-		-			541
RMBS		3,979		242		14		(19	)		4,226
CMBS		554		23		1		6			570
CLOs		375		-		2		(2	)		375
State and municipal bonds		3,723		874		4		-			4,593
Hybrid and redeemable preferred securities		886		108		40		-			954
VIEs’ fixed maturity securities		587		11		-		-			598
Total fixed maturity securities		79,196		8,149		524		(17	)		86,838
Equity securities		216		15		-		-			231
Total AFS securities	$	79,412	$	8,164	$	524	$	(17	)	$	87,069

(1) Includes unrealized gains and (losses) on impaired securities related to changes in the fair value of such securities subsequent to the impairment measurement date.

Certain amounts reported in prior years’ consolidated financial statements have been reclassified to conform to the presentation adopted in the current year. Specifically, we reclassified amounts related to subsequent changes in the fair value of AFS securities for which non-credit OTTI was previously recognized in OCI. Historically, these amounts were recognized through unrealized gain (loss) on AFS securities in the Consolidated Statements of Comprehensive Income (Loss). To better reflect the economic position of our AFS fixed maturity securities, these amounts are now recognized through unrealized OTTI on AFS securities in the Consolidated Statements of Comprehensive Income (Loss). These reclassifications had no effect on net income (loss) or stockholders’ equity of the prior years.

The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of June 30, 2015, were as follows:



	Amortized		Fair
	Cost		Value
Due in one year or less	$	2,556	$	2,608
Due after one year through five years		17,498		18,781
Due after five years through ten years		21,062		21,644
Due after ten years		33,510		36,281
Subtotal		74,626		79,314
Structured securities (ABS, MBS, CLOs)		6,423		6,706
Total fixed maturity AFS securities	$	81,049	$	86,020

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 June 30, 2015
	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	$	15,420		$	802	$	1,508		$	170		$	16,928		$	972
ABS		121			3		403			1			524			4
U.S. government bonds		13			2		-			-			13			2
RMBS		711			20		443			(13	)		1,154			7
CMBS		99			2		40			1			139			3
CLOs		85			-		64			(1	)		149			(1	)
State and municipal bonds		168			10		28			4			196			14
Hybrid and redeemable
preferred securities		73			2		146			39			219			41
Total fixed maturity securities		16,690			841		2,632			201			19,322			1,042
Equity securities		35			1		-			-			35			1
Total AFS securities	$	16,725		$	842	$	2,632		$	201		$	19,357		$	1,043

Total number of AFS securities in an unrealized loss position																1,538



	As of December 31, 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	$	4,799		$	208	$	4,475		$	240		$	9,274		$	448
ABS		91			2		428			11			519			13
RMBS		447			7		574			(12	)		1,021			(5	)
CMBS		121			1		41			6			162			7
CLOs		110			-		83			-			193			-
State and municipal bonds		6			-		26			4			32			4
Hybrid and redeemable
preferred securities		31			-		176			40			207			40
Total fixed maturity securities		5,605			218		5,803			289			11,408			507
Equity securities		37			-		-			-			37			-
Total AFS securities	$	5,642		$	218	$	5,803		$	289		$	11,445		$	507

Total number of AFS securities in an unrealized loss position																1,019

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

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 June 30, 2015
								Number
	Fair		Gross Unrealized					of
	Value		Losses		OTTI		Securities (1)
Less than six months	$	243	$	92	$	2			35
Six months or greater, but less than nine months		11		5		2			7
Nine months or greater, but less than twelve months		41		21		-			9
Twelve months or greater		130		52		20			52
Total	$	425	$	170	$	24			103



	As of December 31, 2014
								Number
	Fair		Gross Unrealized					of
	Value		Losses		OTTI		Securities (1)
Less than six months	$	48	$	19	$	-			12
Six months or greater, but less than nine months		8		7		-			3
Twelve months or greater		242		97		33			82
Total	$	298	$	123	$	33			97

(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 increased by $536 million for the six months ended June 30, 2015. As discussed further below, we believe the unrealized loss position as of June 30, 2015, 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 June 30, 2015, 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 June 30, 2015, the unrealized losses associated with our corporate bond securities were attributable primarily to widening credit spreads and rising interest rates since purchase. We performed a detailed analysis of the financial performance of the underlying issuers and determined that we expected to recover the entire amortized cost for each security.

As of June 30, 2015, the unrealized losses associated with our mortgage-backed securities (“MBS”) and ABS were attributable primarily to collateral losses and credit spreads. We assessed 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 June 30, 2015, 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 underlying issuers. For our hybrid and redeemable preferred securities, we evaluated the financial performance of the underlying issuers 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 Six
	Months Ended						Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
Balance as of beginning-of-period	$	382		$	408		$	380		$	404
Increases attributable to:
Credit losses on securities for which an
OTTI was not previously recognized		3			1			16			2
Credit losses on securities for which an
OTTI was previously recognized		4			3			6			7
Decreases attributable to:
Securities sold, paid down or matured		(15	)		(23	)		(28	)		(24	)
Balance as of end-of-period	$	374		$	389		$	374		$	389

During the six months ended June 30, 2015 and 2014, 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 June 30, 2015
			Net
			Unrealized					OTTI in
	Amortized		Gain/(Loss)			Fair		Credit
	Cost		Position			Value		Losses
Corporate bonds	$	86	$	(22	)	$	64	$	23
ABS		220		17			237		111
RMBS		409		17			426		192
CMBS		40		-			40		48
Total	$	755	$	12		$	767	$	374



	As of December 31, 2014
			Net
			Unrealized					OTTI in
	Amortized		Gain/(Loss)			Fair		Credit
	Cost		Position			Value		Losses
Corporate bonds	$	38	$	(4	)	$	34	$	20
ABS		232		9			241		108
RMBS		447		19			466		190
CMBS		46		(6	)		40		62
Total	$	763	$	18		$	781	$	380

Mortgage Loans on Real Estate

See Note 1 in our 2014 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 June 30, 2015, and December 31, 2014.

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



		As of			As of
	June 30,				December 31,
		2015				2014
Current		$	8,171			$	7,565
60 to 90 days past due			-				-
Greater than 90 days past due			-				8
Valuation allowance associated with impaired mortgage loans on real estate			(3	)			(3	)
Unamortized premium (discount)			3				4
Total carrying value		$	8,171			$	7,574

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
	June 30,				December 31,
		2015				2014
Number of impaired mortgage loans on real estate		3				3

Principal balance of impaired mortgage loans on real estate		$	26			$	26
Valuation allowance associated with impaired mortgage loans on real estate			(3	)			(3	)
Carrying value of impaired mortgage loans on real estate		$	23			$	23

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



	As of			As of
	June 30,			December 31,
		2015			2014
Balance as of beginning-of-year		$	3		$	3
Additions			-			-
Charge-offs, net of recoveries			-			-
Balance as of end-of-period		$	3		$	3

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



	For the Three				For the Six
	Months Ended				Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Average carrying value for impaired mortgage loans on real estate	$	23	$	24	$	23	$	24
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 2014 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 June 30, 2015				As of December 31, 2014
				Debt-				Debt-
				Service				Service
	Carrying		% of	Coverage	Carrying		% of	Coverage
	Value		Total	Ratio	Value		Total	Ratio
Less than 65%	$	7,250	88.7%	2.02	$	6,596	87.1%	1.90
65% to 74%		574	7.0%	1.60		631	8.3%	1.55
75% to 100%		317	3.9%	0.81		316	4.2%	0.77
Greater than 100%		30	0.4%	0.77		31	0.4%	0.77
Total mortgage loans on real estate	$	8,171	100.0%		$	7,574	100.0%

Alternative Investments

As of June 30, 2015, and December 31, 2014, alternative investments included investments in 180 and 156 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 Six
	Months Ended						Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
Fixed maturity AFS securities: (1)
Gross gains	$	21		$	11		$	23		$	19
Gross losses		(13	)		(6	)		(29	)		(13	)
Equity AFS securities:
Gross gains		1			3			1			3
Gross losses		-			-			-			-
Gain (loss) on other investments		-			3			(8	)		3
Associated amortization of DAC, VOBA, DSI and DFEL
and changes in other contract holder funds		(10	)		(10	)		(15	)		(17	)
Total realized gain (loss) related to certain investments, pre-tax	$	(1	)	$	1		$	(28	)	$	(5	)

(1) These amounts are represented net of related fair value hedging activity. See Note 5 for more information.

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 Six
	Months Ended						Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
OTTI Recognized in Net Income (Loss)
Fixed maturity securities:
Corporate bonds	$	(4	)	$	-		$	(15	)	$	-
ABS		(3	)		(2	)		(5	)		(5	)
RMBS		-			(1	)		(2	)		(3	)
CMBS		-			(1	)		-			(1	)
Gross OTTI recognized in net income (loss)		(7	)		(4	)		(22	)		(9	)
Associated amortization of DAC, VOBA, DSI and DFEL		-			1			2			2
Net OTTI recognized in net income (loss), pre-tax	$	(7	)	$	(3	)		(20	)		(7	)

Portion of OTTI Recognized in OCI
Gross OTTI recognized in OCI	$	9		$	2		$	18		$	9
Change in DAC, VOBA, DSI and DFEL		(2	)		-			(3	)		(1	)
Net portion of OTTI recognized in OCI, pre-tax	$	7		$	2		$	15		$	8

Determination of Credit Losses on Corporate Bonds and ABS

As of June 30, 2015, and December 31, 2014, we reviewed our corporate bond and ABS 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 June 30, 2015, and December 31, 2014, 95% and 96%, respectively, of the fair value of our corporate bond portfolio was rated investment grade. As of June 30, 2015, and December 31, 2014, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $3.4 billion and $3.3 billion, respectively, and a fair value of $3.4 billion and $3.2 billion, respectively. As of June 30, 2015, and December 31, 2014, 92% and 88%, respectively, of the fair value of our ABS portfolio was rated investment grade. As of June 30, 2015, and December 31, 2014, the portion of our ABS portfolio rated below investment grade had an amortized cost of $184 million and $193 million, respectively, and fair value of $174 million and $176 million, respectively. Based upon the analysis discussed above, we believe as of June 30, 2015, and December 31, 2014, that we would recover the amortized cost of each fixed maturity security.

Determination of Credit Losses on MBS

As of June 30, 2015, and December 31, 2014, 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 June 30, 2015				As of December 31, 2014
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Collateral payable for derivative investments (1)	$	1,071	$	1,071	$	1,673	$	1,673
Securities pledged under securities lending agreements (2)		232		222		204		196
Securities pledged under repurchase agreements (3)		1,034		1,112		607		666
Investments pledged for Federal Home Loan Bank of
Indianapolis (“FHLBI”) (4)		2,250		3,067		1,925		3,151
Total payables for collateral on investments	$	4,587	$	5,472	$	4,409	$	5,686

(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 additional information.

(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 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 155% 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.

Increase (decrease) in payables for collateral on investments (in millions) consisted of the following:



	For the Six
	Months Ended
	June 30,
	2015			2014
Collateral payable for derivative investments	$	(602	)	$	319
Securities pledged under securities lending agreements		28			15
Securities pledged under repurchase agreements		427			(325	)
Investments pledged for FHLBI		325			325
Total increase (decrease) in payables for collateral on investments	$	178		$	334

The remaining contractual maturities of repurchase agreements, repurchase-to-maturity transactions and securities lending transactions accounted for as secured borrowings were as follows:



	As of June 30, 2015
	Overnight and Continuous		Up to 30 Days		30 – 90 Days		Greater Than 90 Days		Total
Repurchase Agreements and Repurchase-to-Maturity Transactions:
ABS	$	-	$	-	$	-	$	500	$	500
Corporate bonds		-		105		275		154		534
Total		-		105		275		654		1,034
Securities Lending
Corporate bonds		224		-		-		-		224
Equity securities		3		-		-		-		3
Foreign government bonds		5		-		-		-		5
Total		232		-		-		-		232
Total secured borrowings	$	232	$	105	$	275	$	654	$	1,266

Gross amount of recognized liabilities for repurchase agreements and securities lending:									$	1,266
Amounts related to agreements not included in offsetting disclosures:									$	-

We accept collateral in the form of securities in connection with repurchase agreements that we are permitted to sell or re-pledge in certain cases. In such cases, we report the fair value of the collateral and a related obligation to return the collateral. As of June 30, 2015, the fair value of collateral received that we are permitted to sell or re-pledge was $154 million. We have not sold or re-pledged this collateral.

Investment Commitments

As of June 30, 2015, our investment commitments were $1.3 billion, which included $656 million of LPs, $390 million of mortgage loans on real estate, and $284 million of private debt investments.

Concentrations of Financial Instruments

As of June 30, 2015, and December 31, 2014, 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 $2.0 billion and $2.2 billion, respectively, or 2% of our invested assets portfolio, and our investments in securities issued by Fannie Mae with a fair value of $1.3 billion and $1.4 billion, respectively, or 1% of our invested assets portfolio.

As of June 30, 2015, and December 31, 2014, our most significant investments in one industry were our investment securities in the utilities industry with a fair value of $12.4 billion and $12.8 billion, respectively, or 12% and 13%, respectively, of our invested assets portfolio, and our investment securities in the consumer non-cyclical industry with a fair value of $11.7 billion, or 12% and 11%, respectively, of our invested assets portfolio. These concentrations include both AFS and trading securities.