5. Investments

Fixed Maturity AFS Securities

The amortized cost, gross unrealized gains, losses and other-than-temporary impairment (“OTTI”) and fair value of fixed maturity AFS securities (in millions) were as follows:



	As of March 31, 2019
	Amortized		Gross Unrealized							Fair
	Cost		Gains		Losses		OTTI (1)			Value
Fixed maturity AFS securities:
Corporate bonds	$	79,243	$	4,813	$	838	$	10		$	83,208
ABS		990		46		6		(17	)		1,047
U.S. government bonds		387		37		1		-			423
Foreign government bonds		403		50		-		-			453
RMBS		3,296		142		42		(18	)		3,414
CMBS		868		16		3		(4	)		885
CLOs		2,439		4		11		(5	)		2,437
State and municipal bonds		4,687		890		8		-			5,569
Hybrid and redeemable preferred securities		581		57		24		-			614
Total fixed maturity AFS securities	$	92,894	$	6,055	$	933	$	(34	)	$	98,050



	As of December 31, 2018
	Amortized		Gross Unrealized							Fair
	Cost		Gains		Losses		OTTI (1)			Value
Fixed maturity AFS securities:
Corporate bonds	$	79,623	$	2,980	$	2,263	$	(8	)	$	80,348
ABS		916		42		6		(14	)		966
U.S. government bonds		390		29		2		-			417
Foreign government bonds		406		42		-		-			448
RMBS		3,308		118		67		(14	)		3,373
CMBS		811		6		16		(3	)		804
CLOs		1,746		3		24		(5	)		1,730
State and municipal bonds		4,647		716		18		-			5,345
Hybrid and redeemable preferred securities		582		45		34		-			593
Total fixed maturity AFS securities	$	92,429	$	3,981	$	2,430	$	(44	)	$	94,024

⁽¹⁾

Includes unrealized (gains) and losses on credit-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 March 31, 2019, were as follows:



	Amortized		Fair
	Cost		Value
Due in one year or less	$	3,610	$	3,614
Due after one year through five years		16,276		16,590
Due after five years through ten years		17,902		18,499
Due after ten years		47,513		51,564
Subtotal		85,301		90,267
Structured securities (ABS, MBS, CLOs)		7,593		7,783
Total fixed maturity AFS securities	$	92,894	$	98,050

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 fixed maturity 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, 2019
	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 AFS securities:
Corporate bonds	$	4,831		$	164	$	14,492		$	692	$	19,323		$	856
ABS		74			1		176			13		250			14
U.S. government bonds		6			-		28			1		34			1
RMBS		55			1		942			42		997			43
CMBS		10			-		297			3		307			3
CLOs		771			5		281			6		1,052			11
State and municipal bonds		156			1		135			7		291			8
Hybrid and redeemable
preferred securities		12			2		151			22		163			24
Total fixed maturity AFS securities	$	5,915		$	174	$	16,502		$	786	$	22,417		$	960

Total number of fixed maturity AFS securities in an unrealized loss position															1,881



	As of December 31, 2018
	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 AFS securities:
Corporate bonds	$	32,493		$	1,530	$	7,228		$	735	$	39,721		$	2,265
ABS		117			2		143			14		260			16
U.S. government bonds		70			1		23			1		93			2
RMBS		472			10		863			60		1,335			70
CMBS		470			11		82			5		552			16
CLOs		1,124			21		103			3		1,227			24
State and municipal bonds		404			8		96			10		500			18
Hybrid and redeemable
preferred securities		96			6		133			28		229			34
Total fixed maturity AFS securities	$	35,246		$	1,589	$	8,671		$	856	$	43,917		$	2,445

Total number of fixed maturity AFS securities in an unrealized loss position															3,414

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



	As of March 31, 2019
								Number
	Fair		Gross Unrealized					of
	Value		Losses		OTTI		Securities (1)
Less than six months	$	23	$	8	$	1			7
Six months or greater, but less than nine months		20		6		-			4
Nine months or greater, but less than twelve months		98		42		-			10
Twelve months or greater		152		52		22			32
Total	$	293	$	108	$	23			53



	As of December 31, 2018
								Number
	Fair		Gross Unrealized					of
	Value		Losses		OTTI		Securities (1)
Less than six months	$	395	$	124	$	1			45
Six months or greater, but less than nine months		96		49		-			11
Nine months or greater, but less than twelve months		11		8		-			2
Twelve months or greater		143		74		8			32
Total	$	645	$	255	$	9			90

⁽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 fixed maturity AFS securities decreased by $1.5 billion for the three months ended March 31, 2019. As discussed further below, we believe the unrealized loss position as of March 31, 2019, 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; and (iii) the estimated future cash flows were equal to or greater than the amortized cost basis of the debt securities.

Based upon this evaluation as of March 31, 2019, 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, 2019, 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 of each temporarily-impaired security.

As of March 31, 2019, the unrealized losses associated with our mortgage-backed securities (“MBS”) and ABS were attributable primarily to widening credit spreads and rising interest rates since purchase. We assessed 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 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 March 31, 2019, 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
	Months Ended
	March 31,
	2019			2018
Balance as of beginning-of-year	$	355		$	378
Increases attributable to:
Credit losses on securities for which an
OTTI was not previously recognized		6			2
Credit losses on securities for which an
OTTI was previously recognized		2			-
Decreases attributable to:
Securities sold, paid down or matured		(4	)		(2	)
Balance as of end-of-period	$	359		$	378

During the three months ended March 31, 2019 and 2018, 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 fixed maturity AFS securities.

Determination of Credit Losses on Corporate Bonds

As of March 31, 2019, and December 31, 2018, we reviewed our corporate bond portfolio for potential shortfalls 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, 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, 2019, and December 31, 2018, 96% of the fair value of our corporate bond portfolio was rated investment grade. As of March 31, 2019, and December 31, 2018, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $3.3 billion and $3.2 billion, respectively, and a fair value of $3.2 billion and $3.0 billion, respectively. Based upon the analysis discussed above, we believe as of March 31, 2019, and December 31, 2018, that we would recover the amortized cost of each corporate bond.

Determination of Credit Losses on MBS and ABS

As of March 31, 2019, and December 31, 2018, default rates were projected by considering underlying MBS and ABS loan performance and collateral type. Projected default rates on existing delinquencies vary 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.

Mortgage Loans on Real Estate

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



	As of March 31, 2019									As of December 31, 2018
	Commercial			Residential			Total			Commercial			Residential		Total
Current	$	13,598		$	401		$	13,999		$	13,029		$	239	$	13,268
60 to 90 days past due		-			1			1			-			1		1
Greater than 90 days past due		-			1			1			-			-		-
Valuation allowance		-			(1	)		(1	)		-			-		-
Unamortized premium (discount)		(16	)		13			(3	)		(17	)		8		(9	)
Total carrying value	$	13,582		$	415		$	13,997		$	13,012		$	248	$	13,260

We establish a valuation allowance to provide for the risk of credit losses inherent in our portfolio. The valuation allowance includes specific valuation allowances for loans that are deemed to be impaired as well as general valuation allowances for pools of loans with similar risk characteristics where a property risk or market specific risk has not been identified but for which we anticipate a loss has occurred.

For our commercial mortgage loans, no specifically identified loans were impaired as of March 31, 2019, or December 31, 2018.

For our residential mortgage loans, no specifically identified loans were impaired as of March 31, 2019, or December 31, 2018. The general allowance established on residential mortgage loans as of March 31, 2019 was $1 million. As of December 31, 2018, the general allowance established on residential mortgage loans was less than $1 million.

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



	For the Three
	Months Ended
	March 31,
	2019		2018
Balance as of beginning-of-year	$	-	$	3
Additions		-		-
Charge-offs, net of recoveries		-		-
Balance as of end-of-period	$	-	$	3

Additional information related to impaired commercial mortgage loans on real estate (in millions) was as follows:



	For the Three
	Months Ended
	March 31,
	2019		2018
Average carrying value for impaired commercial mortgage loans on real estate	$	-	$	8
Interest income recognized on impaired commercial mortgage loans on real estate		-		-
Interest income collected on impaired commercial mortgage loans on real estate		-		-

We use the loan-to-value and debt-service coverage ratios as credit quality indicators for our commercial mortgage loans on real estate (dollars in millions) as follows:



	As of March 31, 2019				As of December 31, 2018
				Debt-				Debt-
				Service				Service
	Carrying		% of	Coverage	Carrying		% of	Coverage
Loan-to-Value Ratio	Value		Total	Ratio	Value		Total	Ratio
Less than 65%	$	12,368	91.1%	2.27	$	11,716	90.1%	2.30
65% to 74%		1,175	8.6%	1.74		1,238	9.5%	1.76
75% to 100%		39	0.3%	1.20		58	0.4%	0.95
Total	$	13,582	100.0%		$	13,012	100.0%

We use loan performance status as the primary credit quality indicator for our residential mortgage loans on real estate (dollars in millions) as follows:



	As of March 31, 2019			As of December 31, 2018
	Carrying		% of	Carrying		% of
Performance Indicator	Value		Total	Value		Total
Performing	$	414	99.5%	$	247	99.6%
Nonperforming		2	0.5%		1	0.4%
Total	$	416	100.0%	$	248	100.0%

Our commercial mortgage loan portfolio is geographically diversified throughout the U.S. with the largest concentrations in California, which accounted for 23% of commercial mortgage loans on real estate as of March 31, 2019, and December 31, 2018, and Texas, which accounted for 12% of commercial mortgage loans on real estate as of March 31, 2019, and December 31, 2018.

Our residential mortgage loan portfolio is geographically diversified throughout the U.S. with the largest concentrations in California, which accounted for 30% and 34% of residential mortgage loans on real estate as of March 31, 2019, and December 31, 2018, respectively, and Florida, which accounted for 19% of residential mortgage loans on real estate as of March 31, 2019, and December 31, 2018.

Alternative Investments

As of March 31, 2019, and December 31, 2018, alternative investments included investments in 246 and 237 different partnerships, respectively, and the portfolio represented approximately 2% and 1% of our overall invested assets, respectively.

Realized Gain (Loss)

Details underlying realized gain (loss) (in millions) reported on our Consolidated Statements of Comprehensive Income (Loss) were as follows:



	For the Three
	Months Ended
	March 31,
	2019			2018
Fixed maturity AFS securities:
Gross gains	$	12		$	14
Gross losses		(27	)		(30	)
Gross OTTI		(8	)		(2	)
Gain (loss) on other investments (1)		5			2
Associated amortization of DAC, VOBA, DSI and DFEL
and changes in other contract holder funds		(2	)		(5	)
Total realized gain (loss) related to certain investments		(20	)		(21	)
Realized gain (loss) on the mark-to-market on certain instruments (2)		(121	)		1
Indexed annuity and IUL contracts net derivatives results: (3)
Gross gain (loss)		(35	)		(1	)
Associated amortization of DAC, VOBA, DSI and DFEL		1			-
Variable annuity net derivatives results: (4)
Gross gain (loss)		(215	)		33
Associated amortization of DAC, VOBA, DSI and DFEL		28			-
Total realized gain (loss)	$	(362	)	$	12

⁽¹⁾

Includes market adjustments on equity securities still held of $6 million and less than $1 million for the three months ended March 31, 2019 and 2018, respectively.

⁽²⁾

Represents changes in the fair values of certain derivative investments (not including those associated with our variable and indexed annuity and IUL contracts net derivative results), reinsurance related embedded derivatives and trading securities. See Note 8 for information regarding modified coinsurance.

⁽³⁾

Represents the net difference between the change in the fair value of the S&P 500 Index® (“S&P 500”) call options that we hold and the change in the fair value of the embedded derivative liabilities of our indexed annuity and IUL contracts along with changes in the fair value of embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products.

⁽⁴⁾

Includes the net difference in the change in embedded derivative reserves of our guaranteed living benefit (“GLB”) riders and the change in the fair value of the derivative instruments we own to hedge the change in embedded derivative reserves on our GLB riders and the benefit ratio unlocking on our GLB and GDB riders, including the cost of purchasing the hedging instruments.

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



	For the Three
	Months Ended
	March 31,
	2019			2018
OTTI Recognized in Net Income (Loss)
Fixed maturity AFS securities:
Corporate bonds	$	(6	)	$	(2	)
ABS		(1	)		-
RMBS		(1	)		-
Gross OTTI recognized in net income (loss)		(8	)		(2	)
Associated amortization of DAC, VOBA, DSI and DFEL		-			-
Net OTTI recognized in net income (loss)	$	(8	)	$	(2	)

Portion of OTTI Recognized in OCI
Gross OTTI recognized in OCI	$	16		$	-
Change in DAC, VOBA, DSI and DFEL		(1	)		-
Net portion of OTTI recognized in OCI	$	15		$	-

Payables for Collateral on Investments

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



	As of March 31, 2019				As of December 31, 2018
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Collateral payable for derivative investments (1)	$	695	$	695	$	637	$	637
Securities pledged under securities lending agreements (2)		136		131		88		85
Securities pledged under repurchase agreements (3)		151		187		150		185
Investments pledged for Federal Home Loan Bank of
Indianapolis (“FHLBI”) (4)		4,380		6,570		3,930		5,923
Total payables for collateral on investments	$	5,362	$	7,583	$	4,805	$	6,830

⁽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 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. The collateral requirements are generally 80% 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 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 Three
	Months Ended
	March 31,
	2019		2018
Collateral payable for derivative investments	$	58	$	(83	)
Securities pledged under securities lending agreements		48		(68	)
Securities pledged under repurchase agreements		1		(1	)
Investments pledged for FHLBI		450		-
Total increase (decrease) in payables for collateral on investments	$	557	$	(152	)

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 (in millions) were as follows:



	As of March 31, 2019
	Overnight and Continuous		Up to 30 Days		30 - 90 Days		Greater Than 90 Days		Total
Repurchase Agreements
Corporate bonds	$	-	$	-	$	-	$	151	$	151
Securities Lending
Corporate bonds		136		-		-		-		136
Total gross secured borrowings	$	136	$	-	$	-	$	151	$	287


	As of December 31, 2018
	Overnight and Continuous		Up to 30 Days		30 - 90 Days		Greater Than 90 Days		Total
Repurchase Agreements
Corporate bonds	$	-	$	-	$	-	$	150	$	150
Securities Lending
Corporate bonds		88		-		-		-		88
Total gross secured borrowings	$	88	$	-	$	-	$	150	$	238

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 report 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 which we are permitted to sell or re-pledge. As of March 31, 2019, the fair value of all collateral received that we are permitted to sell or re-pledge was $548 million. As of March 31, 2019, we have re-pledged $536 million of this collateral to cover initial margin and over-the-counter collateral requirements on certain derivative investments.

Investment Commitments

As of March 31, 2019, our investment commitments were $2.0 billion, which included $823 million of LPs, $669 million of mortgage loans on real estate and $528 million of private placement securities.

Concentrations of Financial Instruments

As of March 31, 2019, and December 31, 2018, 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 $1.4 billion or 1% of our invested assets portfolio, and our investments in securities issued by the Federal National Mortgage Association with a fair value of $1.3 billion or 1% of our invested assets portfolio. These concentrations include fixed maturity AFS, trading and equity securities.

As of March 31, 2019, our most significant investments in one industry were our investments in securities in the financial services industry and the consumer non-cyclical industry with a fair value of $15.3 billion and $15.1 billion, respectively, or 13% and 12%, respectively, of our invested assets portfolio. As of December 31, 2018, our most significant investments in one industry were our investments in securities in the consumer non-cyclical industry and the financial services industry with a fair value of $14.5 billion and $14.2 billion, respectively, or 13% and 12% of our invested assets portfolio. These concentrations include fixed maturity AFS, trading and equity securities.