Investments

12 Months Ended

Dec. 31, 2012

Investments [Abstract]

Investments

Note 12 — Investments

• Fixed Maturities and Equity Securities

Securities in the following table are included in fixed maturities and equity securities on the Company's Consolidated Balance Sheets. The Company's hybrid investments include certain preferred stock or debt securities with call or conversion features.

(In millions)	2012		2011
Included in fixed maturities:
Trading securities (amortized cost: $1; $2)	$	1	$	2
Hybrid securities (amortized cost: $15; $26)		15		28
Total	$	16	$	30
Included in equity securities:
Hybrid securities (amortized cost: $84; $90)	$	70	$	65

Fixed maturities included federal government securities of $54 million at December 31, 2012 and $79 million at December 31, 2011, that were pledged as collateral to brokers as required under certain futures contracts.

The following information about fixed maturities excludes trading and hybrid securities. The amortized cost and fair value by contractual maturity periods for fixed maturities were as follows at December 31, 2012:

	Amortized		Fair
(In millions)	Cost		Value
Due in one year or less	$	1,121	$	1,141
Due after one year through five years		5,211		5,633
Due after five years through ten years		5,283		5,973
Due after ten years		2,850		3,796
Mortgage and other asset-backed securities		1,000		1,146
Total	$	15,465	$	17,689

Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations, with or without penalties. Also, in some cases the Company may extend maturity dates.

Gross unrealized appreciation (depreciation) on fixed maturities by type of issuer is shown below (excluding trading securities and hybrid securities with a fair value of $16 million at December 31, 2012 and $30 million at December 31, 2011).

(In millions)				December 31, 2012
			Unrealized		Unrealized
	Amortized		Appre-		Depre-		Fair
	Cost		ciation		ciation		Value
Federal government and agency	$	509	$	393	$	-	$	902
State and local government		2,169		270		(2)		2,437
Foreign government		1,197		126		(1)		1,322
Corporate		10,590		1,308		(17)		11,881
Federal agency mortgage-backed		121		1		-		122
Other mortgage-backed		82		11		(4)		89
Other asset-backed		797		145		(6)		936
Total	$	15,465	$	2,254	$	(30)	$	17,689
(In millions)		December 31, 2011
Federal government and agency	$	552	$	406	$	-	$	958
State and local government		2,185		274		(3)		2,456
Foreign government		1,173		103		(2)		1,274
Corporate		9,460		1,070		(45)		10,485
Federal agency mortgage-backed		9		-		-		9
Other mortgage-backed		73		10		(4)		79
Other asset-backed		777		160		(11)		926
Total	$	14,229	$	2,023	$	(65)	$	16,187

The above table includes investments with a fair value of $3.1 billion supporting the Company's run-off settlement annuity business,with gross unrealized appreciation of $883 millionand gross unrealized depreciation of $8 million at December 31, 2012. Such unrealized amounts are required to support future policy benefit liabilities of this business and, as such, are not included in accumulated other comprehensive income. At December 31, 2011, investments supporting this business had a fair value of $3 billion, gross unrealized appreciation of $851 million and gross unrealized depreciation of $25 million.

As of December 31, 2012, the Company had commitments to purchase $58 million of fixed maturities, most of which bear interest at a fixed market rate.

Review of declines in fair value. Management reviews fixed maturities with a decline in fair value from cost for impairment based on criteria that include:

•        length of time and severity of decline;
•        financial health and specific near term prospects of the issuer;
•        changes in the regulatory, economic or general market environment of the issuer's industry or geographic region; and
•        the Company's intent to sell or the likelihood of a required sale prior to recovery.

Excluding trading and hybrid securities, as of December 31, 2012, fixed maturities with a decline in fair value from amortized cost (primarily corporate, and other asset and mortgage-backed securities) were as follows, including the length of time of such decline:

(Dollars in millions)	December 31, 2012
	Fair		Amortized		Unrealized		Number
	Value		Cost		Depreciation		of Issues
Fixed maturities:
One year or less:
Investment grade	$	488	$	494	$	(6)	200
Below investment grade	$	123	$	125	$	(2)	67
More than one year:
Investment grade	$	195	$	207	$	(12)	39
Below investment grade	$	26	$	36	$	(10)	14

As of December 31, 2012, the unrealized depreciation of investment grade fixed maturities is primarily due to increases in market yields since purchase. Excluding trading and hybrid securities, equity securities with a fair value lower than cost were not material at December 31, 2012.

• Commercial Mortgage Loans

Mortgage loans held by the Company are made exclusively to commercial borrowers and are diversified by property type, location and borrower. Loans are secured by high quality, primarily completed and substantially leased operating properties.

At December 31, commercial mortgage loans were distributed among the following property types and geographic regions:

(In millions)	2012		2011
Property type
Office buildings	$	866	$	1,014
Apartment buildings		571		705
Industrial		532		670
Hotels		463		542
Retail facilities		346		297
Other		73		73
Total	$	2,851	$	3,301
Geographic region
Pacific	$	966	$	893
South Atlantic		730		870
New England		387		450
Central		352		511
Middle Atlantic		300		391
Mountain		116		186
Total	$	2,851	$	3,301

At December 31, 2012, scheduled commercial mortgage loan maturities were as follows (in millions): $419 in 2013, $290 in 2014, $318 in 2015, $791 in 2016 and $1,033 thereafter. Actual maturities could differ from contractual maturities for several reasons: borrowers may have the right to prepay obligations, with or without prepayment penalties; the maturity date may be extended; and loans may be refinanced.

As of December 31, 2012, the Company had commitments to extend credit under commercial mortgage loan agreements of $6 million.

Credit quality.The Company applies a consistent and disciplined approach to evaluating and monitoring credit risk, beginning with the initial underwriting of a mortgage loan and continuing throughout the investment holding period. Mortgage origination professionals employ an internal rating system developed from the Company's experience in real estate investing and mortgage lending. A quality rating, designed to evaluate the relative risk of the transaction, is assigned at each loan's origination and is updated each year as part of the annual portfolio loan review.The Company monitors credit quality on an ongoing basis, classifying each loan as a loan in good standing, potential problem loan or problem loan.

Quality ratings are based on internal evaluations of each loan's specific characteristics considering a number of key inputs, including real estate market-related factors such as rental rates and vacancies, and property-specific inputs such as growth rate assumptions and lease rollover statistics. However, the two most significant contributors to the credit quality rating are the debt service coverage and loan-to-value ratios. The debt service coverage ratio measures the amount of property cash flow available to meet annual interest and principal payments on debt. A debt service coverage ratio below 1.0 indicates that there is not enough cash flow to cover the loan payments. The loan-to-value ratio, commonly expressed as a percentage, compares the amount of the loan to the fair value of the underlying property collateralizing the loan.

]

The following tables summarize the credit risk profile of the Company's commercial mortgage loan portfolio using carrying values classified based on loan-to-value and debt service coverage ratios, as of December 31, 2012 and 2011:

(In millions)				December 31, 2012
	Debt Service Coverage Ratio
		1.30x or		1.20x to		1.10x to		1.00x to		Less than
Loan-to-Value Ratios		Greater		1.29x		1.19x		1.09x		1.00x		Total
Below 50%	$	297	$	8	$	-	$	50	$	-	$	355
50% to 59%		614		104		25		52		-		795
60% to 69%		562		75		-		66		-		703
70% to 79%		194		143		132		4		16		489
80% to 89%		45		42		131		18		58		294
90% to 99%		14		30		-		-		58		102
100% or above		-		-		30		17		66		113
Total	$	1,726	$	402	$	318	$	207	$	198	$	2,851
(In millions)	December 31, 2011
	Debt Service Coverage Ratio
		1.30x or		1.20x to		1.10x to		1.00x to		Less than
Loan-to-Value Ratios		Greater		1.29x		1.19x		1.09x		1.00x		Total
Below 50%	$	225	$	55	$	3	$	50	$	9	$	342
50% to 59%		444		47		26		-		53		570
60% to 69%		646		140		42		-		77		905
70% to 79%		117		132		120		159		33		561
80% to 89%		99		81		79		72		71		402
90% to 99%		36		35		30		58		116		275
100% or above		-		10		50		51		135		246
Total	$	1,567	$	500	$	350	$	390	$	494	$	3,301

The Company's annual in-depth review of its commercial mortgage loan investments is the primary mechanism for identifying emerging risks in the portfolio. The most recent review was completed by the Company's investment professionals in the second quarter of 2012 and included an analysis of each underlying property's most recent annual financial statements, rent rolls, operating plans, budgets, a physical inspection of the property and other pertinent factors. Based on historical results, current leases, lease expirations and rental conditions in each market, the Company estimates the current year and future stabilized property income and fair value, and categorizes the investments as loans in good standing, potential problem loans or problem loans. Based on property valuations and cash flows estimated as part of this review, and considering updates for loans where material changes were subsequently identified, the portfolio's average loan-to-value ratio improved to 65% at December 31, 2012, decreasing from 70% as of December 31, 2011. The portfolio's average debt service coverage ratio was estimated to be 1.56 at December 31, 2012, a significant improvement from 1.40 at December 31, 2011.

Quality ratings are adjusted between annual reviews if new property information is received or events such as delinquency or a borrower's request for restructure cause management to believe that the Company's estimate of financial performance, fair value or the risk profile of the underlying property has been impacted.

During 2012, the Company restructured a $119 million problem mortgage loan, net of a valuation reserve, into two notes carried at $100 million and $19 million. The $100 million note was reclassified to impaired commercial mortgage loans with no valuation reserves and the $19 million note was classified as another long-term investment. This modification was considered a troubled debt restructuring because the borrower was experiencing financial difficulties and an interest rate concession was granted. No valuation reserve was required because the fair value of the underlying property equaled the carrying value of the outstanding loan. Following the restructuring, the $100 million note was paid down by $46 million with the remaining $54 million note reclassified to good standing due to an improved quality rating based on significant improvements in its loan-to-value and debt service coverage ratios resulting from the annual loan review.

During 2011, the Company restructured a $65 million potential problem loan into two notes carried at $55 million and $10 million. This modification was considered a troubled debt restructuring because the borrower was experiencing financial difficulties and an interest rate concession was granted. No valuation reserve was required because the fair value of the underlying property exceeded the carrying value of the outstanding loan. As a part of this restructuring, the borrowers and the Company have committed to fund additional capital for leasing and capital requirements.

Other loans were modified during 2012 and 2011, but were not considered troubled debt restructures. The impact of modifications to these loans was not material to the Company's results of operations, financial condition or liquidity.

Potential problem mortgage loans are considered current (no payment more than 59 days past due), but exhibit certain characteristics that increase the likelihood of future default. The characteristics management considers include, but are not limited to, the deterioration of debt service coverage below 1.0, estimated loan-to-value ratios increasing to 100% or more, downgrade in quality rating and request from the borrower for restructuring. In addition, loans are considered potential problems if principal or interest payments are past due by more than 30 but less than 60 days. Problem mortgage loans are either in default by 60 days or more or have been restructured as to terms, which could include concessions on interest rate, principal payment or maturity date. The Company monitors each problem and potential problem mortgage loan on an ongoing basis, and updates the loan categorization and quality rating when warranted.

Problem and potential problem mortgage loans, net of valuation reserves, totaled $215 million at December 31, 2012 and $336 million at December 31, 2011. At December 31, 2012, mortgage loans located in the South Atlantic region represented the most significant component of problem and potential problem mortgage loans, with no significant concentration by property type. At December 31, 2011, mortgage loans collateralized by industrial properties represent the most significant component of problem and potential problem mortgage loans, with no significant concentration by geographic region.

Impaired commercial mortgage loans.The carrying value of the Company's impaired commercial mortgage loans and related valuation reserves were as follows:

(In millions)		2012					2011
		Gross		Reserves		Net		Gross		Reserves		Net
Impaired commercial mortgage loans with valuation reserves	$	72	$	(7)	$	65	$	154	$	(19)	$	135
Impaired commercial mortgage loans with no valuation reserves		60		-		60		60		-		60
Total	$	132	$	(7)	$	125	$	214	$	(19)	$	195

During 2012, the Company recorded a $10 million pre-tax ($7 million after-tax) increase in valuation reserves on three impaired commercial mortgage loans collateralized by industrial properties and one impaired commercial mortgage loan collateralized by a retail property. The average recorded investment in impaired loans was $167 million during 2012 and $176 million during 2011. The Company recognizes interest income on problem mortgage loans only when payment is actually received because of the risk profile of the underlying investment. Additionalinterest income that would have been reflected in net income if interest on non-accrual commercial mortgage loans had been received in accordance with the original terms was not significant for 2012 or 2011. Interest incomeon impaired commercial mortgage loans was not significant for 2012 or 2011. See Note 2 for further information on impaired commercial mortgage loans.

The following table summarizesthe changes in valuation reserves for commercial mortgage loans:

(In millions)	2012		2011
Reserve balance, January 1,	$	19	$	12
Increase in valuation reserves		10		16
Charge-offs upon sales and repayments, net of recoveries		(3)		(1)
Transfers to other long-term investments		(16)		-
Transfers to foreclosed real estate		(3)		(8)
Reserve balance, December 31,	$	7	$	19

• Real Estate

As of December 31, 2012 and 2011, real estate investments consisted primarily of officeand industrial buildings in California. Investments with a carrying value of $49 million as of December 31, 2012and2011 were non-income producing during the preceding twelve months.As of December 31, 2012, the Company had commitments to contribute additional equity of $7 million to real estate investments.

• Other Long-Term Investments

As of December 31, other long-term investments consisted of the following:

(In millions)	2012		2011
Real estate entities	$	823	$	665
Securities partnerships		343		298
Interest rate and foreign currency swaps		6		12
Mezzanine loans		31		31
Other		52		52
Total	$	1,255	$	1,058

Investments in real estate entities and securities partnerships with a carrying value of $199 million at December 31, 2012 and $171 million at December 31, 2011 were non-income producing during the preceding twelve months.

As of December 31, 2012, the Company had commitments to contribute:

• $197 million to limited liability entities that hold either real estate or loans to real estate entities that are diversified by property type and geographic region; and
• $312 million to entities that hold securities diversified by issuer and maturity date.

The Company expects to disburse approximately 50% of the committed amounts in 2013.

E. Short-Term Investments and Cash Equivalents

Short-term investments and cash equivalents included corporate securities of $1.1 billion, federal government securities of $167 million and money market funds of $217 million as ofDecember 31, 2012. The Company's short-term investments and cash equivalents as of December 31, 2011 included corporate securities of $4.1billion, federal government securities of $164 million and money market funds of $40 million. The decrease during 2012 is primarily due to funds used to acquire HealthSpring. See Note 3 for further information.

F.Concentration of Risk

As of December 31, 2012 and 2011, the Company did not have a concentration of investments in a single issuer or borrower exceeding 10% of shareholders' equity.