4. Investments

AFS Securities

See Note 1 in our 2015 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 and losses, OTTI and fair value of AFS securities (in millions) were as follows:



	As of June 30, 2016
	Amortized		Gross Unrealized							Fair
	Cost		Gains		Losses		OTTI (1)			Value
Fixed maturity securities:
Corporate bonds	$	72,157	$	7,508	$	599	$	15		$	79,051
Asset-backed securities ("ABS")		1,041		46		17		(8	)		1,078
U.S. government bonds		386		78		-		-			464
Foreign government bonds		454		76		-		-			530
Residential mortgage-backed securities ("RMBS")		3,445		224		32		-			3,637
Commercial mortgage-backed securities ("CMBS")		319		16		-		(3	)		338
Collateralized loan obligations ("CLOs")		682		2		1		(4	)		687
State and municipal bonds		3,872		1,119		5		1			4,985
Hybrid and redeemable preferred securities		677		71		57		-			691
VIEs’ fixed maturity securities		598		2		-		-			600
Total fixed maturity securities		83,631		9,142		711		1			92,061
Equity securities		259		23		5		-			277
Total AFS securities	$	83,890	$	9,165	$	716	$	1		$	92,338



	As of December 31, 2015
	Amortized		Gross Unrealized							Fair
	Cost		Gains		Losses		OTTI (1)			Value
Fixed maturity securities:
Corporate bonds	$	70,993	$	3,924	$	1,984	$	2		$	72,931
ABS		1,064		41		17		(13	)		1,101
U.S. government bonds		386		45		2		-			429
Foreign government bonds		464		61		1		-			524
RMBS		3,566		186		36		(12	)		3,728
CMBS		364		10		2		(4	)		376
CLOs		588		1		3		(3	)		589
State and municipal bonds		3,806		686		12		-			4,480
Hybrid and redeemable preferred securities		762		88		44		-			806
VIEs’ fixed maturity securities		596		2		-		-			598
Total fixed maturity securities		82,589		5,044		2,101		(30	)		85,562
Equity securities		226		17		6		-			237
Total AFS securities	$	82,815	$	5,061	$	2,107	$	(30	)	$	85,799

⁽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.

The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of June 30, 2016, were as follows:



	Amortized		Fair
	Cost		Value
Due in one year or less	$	2,779	$	2,818
Due after one year through five years		18,683		19,932
Due after five years through ten years		18,391		19,381
Due after ten years		37,693		43,590
Subtotal		77,546		85,721
Structured securities (ABS, MBS, CLOs)		6,085		6,340
Total fixed maturity AFS securities	$	83,631	$	92,061

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, 2016
	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	$	1,605		$	67	$	4,922		$	548	$	6,527		$	615
ABS		144			3		295			34		439			37
RMBS		250			10		466			35		716			45
CMBS		11			1		10			1		21			2
CLOs		283			1		63			-		346			1
State and municipal bonds		1			-		50			6		51			6
Hybrid and redeemable
preferred securities		59			4		167			53		226			57
Total fixed maturity securities		2,353			86		5,973			677		8,326			763
Equity securities		23			3		28			2		51			5
Total AFS securities	$	2,376		$	89	$	6,001		$	679	$	8,377		$	768

Total number of AFS securities in an unrealized loss position															918



	As of December 31, 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	$	20,380		$	1,364	$	2,383		$	623	$	22,763		$	1,987
ABS		213			4		274			29		487			33
U.S. government bonds		15			2		-			-		15			2
Foreign government bonds		37			1		-			-		37			1
RMBS		627			21		371			22		998			43
CMBS		116			2		11			2		127			4
CLOs		271			2		49			1		320			3
State and municipal bonds		129			8		27			4		156			12
Hybrid and redeemable
preferred securities		38			1		148			43		186			44
Total fixed maturity securities		21,826			1,405		3,263			724		25,089			2,129
Equity securities		47			6		-			-		47			6
Total AFS securities	$	21,873		$	1,411	$	3,263		$	724	$	25,136		$	2,135

Total number of AFS securities in an unrealized loss position															2,007

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, 2016
								Number
	Fair		Gross Unrealized					of
	Value		Losses		OTTI		Securities (1)
Less than six months	$	73	$	23	$	2			23
Six months or greater, but less than nine months		127		45		-			20
Nine months or greater, but less than twelve months		163		64		5			19
Twelve months or greater		265		161		18			74
Total	$	628	$	293	$	25			136



	As of December 31, 2015
								Number
	Fair		Gross Unrealized					of
	Value		Losses		OTTI		Securities (1)
Less than six months	$	1,584	$	701	$	2			138
Six months or greater, but less than nine months		76		85		-			19
Nine months or greater, but less than twelve months		39		38		-			2
Twelve months or greater		153		83		15			60
Total	$	1,852	$	907	$	17			219

⁽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 $1.4 billion for the six months ended June 30, 2016. As discussed further below, we believe the unrealized loss position as of June 30, 2016, 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; (iii) the estimated future cash flows were equal to or greater than the amortized cost 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, 2016, 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, 2016, 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 temporarily-impaired security.

As of June 30, 2016, the unrealized losses associated with our mortgage-backed securities (“MBS”) and ABS were attributable primarily to 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 of each temporarily-impaired security.

As of June 30, 2016, 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 temporarily-impaired 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,
	2016			2015			2016			2015
Balance as of beginning-of-period	$	413		$	382		$	382		$	380
Increases attributable to:
Credit losses on securities for which an
OTTI was not previously recognized		26			3			61			16
Credit losses on securities for which an
OTTI was previously recognized		2			4			7			6
Decreases attributable to:
Securities sold, paid down or matured		(10	)		(15	)		(19	)		(28	)
Balance as of end-of-period	$	431		$	374		$	431		$	374

During the six months ended June 30, 2016 and 2015, 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 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, 2016
			Net
			Unrealized					OTTI in
	Amortized		Gain/(Loss)			Fair		Credit
	Cost		Position			Value		Losses
Corporate bonds	$	91	$	(15	)	$	76	$	85
ABS		198		8			206		109
RMBS		353		-			353		194
CMBS		32		3			35		37
CLOs		11		4			15		5
State and municipal bonds		4		(1	)		3		1
Total	$	689	$	(1	)	$	688	$	431



	As of December 31, 2015
			Net
			Unrealized					OTTI in
	Amortized		Gain/(Loss)			Fair		Credit
	Cost		Position			Value		Losses
Corporate bonds	$	31	$	(2	)	$	29	$	28
ABS		199		13			212		108
RMBS		365		12			377		193
CMBS		34		4			38		48
CLOs		11		3			14		5
Total	$	640	$	30		$	670	$	382

Mortgage Loans on Real Estate

See Note 1 in our 2015 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, which accounted for 21% of mortgage loans on real estate as of June 30, 2016, and December 31, 2015, and Texas, which accounted for 11% and 10%, respectively.

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,
		2016				2015
Current		$	9,255			$	8,677
60 to 90 days past due			-				-
Greater than 90 days past due			2				-
Valuation allowance associated with impaired mortgage loans on real estate			(2	)			(2	)
Unamortized premium (discount)			2				3
Total carrying value		$	9,257			$	8,678

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,
		2016				2015
Number of impaired mortgage loans on real estate		2				2

Principal balance of impaired mortgage loans on real estate		$	7			$	8
Valuation allowance associated with impaired mortgage loans on real estate			(2	)			(2	)
Carrying value of impaired mortgage loans on real estate		$	5			$	6

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



	For the Three				For the Six
	Months Ended				Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Balance as of beginning-of-period	$	2	$	3	$	2	$	3
Additions		-		-		-		-
Charge-offs, net of recoveries		-		-		-		-
Balance as of end-of-period	$	2	$	3	$	2	$	3

Additional information related to 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,
	2016		2015		2016		2015
Average carrying value for impaired mortgage loans on real estate	$	6	$	23	$	6	$	23
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 2015 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, 2016				As of December 31, 2015
				Debt-				Debt-
				Service				Service
	Carrying		% of	Coverage	Carrying		% of	Coverage
Loan-to-Value Ratio	Value		Total	Ratio	Value		Total	Ratio
Less than 65%	$	8,182	88.4%	2.14	$	7,718	88.9%	2.06
65% to 74%		814	8.8%	1.82		653	7.5%	1.60
75% to 100%		253	2.7%	0.84		301	3.5%	0.83
Greater than 100%		8	0.1%	1.05		6	0.1%	1.05
Total mortgage loans on real estate	$	9,257	100.0%		$	8,678	100.0%

Alternative Investments

As of June 30, 2016, and December 31, 2015, alternative investments included investments in 197 and 190 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,
	2016			2015			2016			2015
Fixed maturity AFS securities: (1)
Gross gains	$	7		$	21		$	61		$	23
Gross losses		(65	)		(13	)		(163	)		(29	)
Equity AFS securities:
Gross gains		2			1			2			1
Gross losses		(1	)		-			(1	)		-
Gain (loss) on other investments		(3	)		-			(63	)		(8	)
Associated amortization of DAC, VOBA, DSI and DFEL
and changes in other contract holder funds		(5	)		(10	)		(8	)		(15	)
Total realized gain (loss) related to certain investments, pre-tax	$	(65	)	$	(1	)	$	(172	)	$	(28	)

⁽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,
	2016			2015			2016			2015
OTTI Recognized in Net Income (Loss)
Fixed maturity securities:
Corporate bonds	$	(26	)	$	(4	)	$	(62	)	$	(15	)
ABS		(1	)		(3	)		(3	)		(5	)
RMBS		(1	)		-			(3	)		(2	)
Total fixed maturity securities		(28	)		(7	)		(68	)		(22	)
Equity securities		(1	)		-			(1	)		-
Gross OTTI recognized in net income (loss)		(29	)		(7	)		(69	)		(22	)
Associated amortization of DAC, VOBA, DSI and DFEL		1			-			5			2
Net OTTI recognized in net income (loss), pre-tax	$	(28	)	$	(7	)	$	(64	)	$	(20	)

Portion of OTTI Recognized in OCI
Gross OTTI recognized in OCI	$	10		$	9		$	36		$	18
Change in DAC, VOBA, DSI and DFEL		(2	)		(2	)		(8	)		(3	)
Net portion of OTTI recognized in OCI, pre-tax	$	8		$	7		$	28		$	15

Determination of Credit Losses on Corporate Bonds and ABS

As of June 30, 2016, and December 31, 2015, 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, 2016, and December 31, 2015, 95% and 96%, respectively, of the fair value of our corporate bond portfolio was rated investment grade. As of June 30, 2016, and December 31, 2015, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $4.0 billion and $3.6 billion, respectively, and a fair value of $3.7 billion and $3.3 billion, respectively. As of June 30, 2016, and December 31, 2015, 96% of the fair value of our ABS portfolio was rated investment grade. As of June 30, 2016, and December 31, 2015, the portion of our ABS portfolio rated below investment grade had an amortized cost of $103 million and $107 million, respectively, and a fair value of $85 million and $92 million, respectively. Based upon the analysis discussed above, we believe as of June 30, 2016, and December 31, 2015, that we would recover the amortized cost of each fixed maturity security.

Determination of Credit Losses on MBS

As of June 30, 2016, and December 31, 2015, 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 loss 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, 2016				As of December 31, 2015
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Collateral payable for derivative investments (1)	$	3,004	$	3,004	$	1,387	$	1,387
Securities pledged under securities lending agreements (2)		249		240		242		231
Securities pledged under repurchase agreements (3)		689		748		673		739
Investments pledged for Federal Home Loan Bank of
Indianapolis (“FHLBI”) (4)		2,355		3,767		2,355		3,391
Total payables for collateral on investments	$	6,297	$	7,759	$	4,657	$	5,748

⁽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 collateral requirements are generally 105% to 115% of the fair value for fixed maturity AFS securities and 155% to 175% of the fair value of 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,
	2016		2015
Collateral payable for derivative investments	$	1,617	$	(602	)
Securities pledged under securities lending agreements		7		28
Securities pledged under repurchase agreements		16		427
Investments pledged for FHLBI		-		325
Total increase (decrease) in payables for collateral on investments	$	1,640	$	178

We have elected not to offset our repurchase agreements and securities lending transactions in our financial statements. The remaining contractual maturities of repurchase agreements and securities lending transactions accounted for as secured borrowings were as follows:



	As of June 30, 2016
	Overnight and Continuous		Up to 30 Days		30 - 90 Days		Greater Than 90 Days		Total
Repurchase Agreements
Corporate bonds	$	-	$	-	$	290	$	149	$	439
RMBS		-		-		-		250		250
Total		-		-		290		399		689
Securities Lending
Corporate bonds		249		-		-		-		249
Total		249		-		-		-		249
Total gross secured borrowings	$	249	$	-	$	290	$	399	$	938


	As of December 31, 2015
	Overnight and Continuous		Up to 30 Days		30 - 90 Days		Greater Than 90 Days		Total
Repurchase Agreements
Corporate bonds	$	-	$	-	$	275	$	148	$	423
RMBS		-		-		-		250		250
Total		-		-		275		398		673
Securities Lending
Corporate bonds		242		-		-		-		242
Total		242		-		-		-		242
Total gross secured borrowings	$	242	$	-	$	275	$	398	$	915

We accept collateral in the form of securities in connection with repurchase agreements. In instances where we are permitted to sell or re-pledge the securities received, we record the fair value of the collateral received and a related obligation to return the collateral in the financial statements. In addition, we receive securities in connection with securities borrowing agreements that we are permitted to sell or re-pledge. As of June 30, 2016, the fair value of all collateral received that we are permitted to sell or re-pledge was $176 million. As of June 30, 2016, we have not sold or re-pledged this collateral.

Investment Commitments

As of June 30, 2016, our investment commitments were $1.4 billion, which included $752 million of LPs, $479 million of mortgage loans on real estate and $146 million of private placement securities.

Concentrations of Financial Instruments

As of June 30, 2016, and December 31, 2015, 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 $1.7 billion and $1.8 billion, respectively, or 2% of our invested assets portfolio, and our investments in securities issued by Fannie Mae with a fair value of $1.2 billion, or 1% of our invested assets portfolio.

As of June 30, 2016, and December 31, 2015, our most significant investments in one industry were our investments in securities in the consumer non-cyclical industry with a fair value of $14.0 billion and $12.0 billion, respectively, or 13% and 12%, respectively, of our invested assets portfolio, and our investments in securities in the utilities industry with a fair value of $13.8 billion and $12.8 billion, respectively, or 13% of our invested assets portfolio. These concentrations include both AFS and trading securities.