NOTE 3. INVESTMENT SECURITIES
Substantially all of our investment securities are classified as available-for-sale. These comprise mainly investment-grade debt securities supporting obligations to annuitants and policyholders in our run-off insurance operations and supporting obligations to holders of guaranteed investment contracts (GICs) in Trinity and investments held in our CLL business collateralized by senior secured loans of high-quality, middle-market companies in a variety of industries. We do not have any securities classified as held-to-maturity.
|December 31 (In millions)||cost||gains||losses||fair value||cost||gains||losses||fair value|
|Corporate - non-U.S.||13||-||(1)||12||6||-||-||6|
|State and municipal||4,245||235||(191)||4,289||4,084||575||(113)||4,546|
|Commercial mortgage- backed||2,929||188||(82)||3,035||2,930||259||(95)||3,094|
|Corporate - non-U.S.||1,741||103||(86)||1,758||2,391||150||(126)||2,415|
|Government - non-U.S.||2,336||81||(7)||2,410||1,617||149||(3)||1,763|
|U.S. government and|
(a) Substantially collateralized by U.S. mortgages. Of our total RMBS portfolio at December 31, 2013, $1,224 million relates to securities issued by government-sponsored entities and $686 million relates to securities of private label issuers. Securities issued by private label issuers are collateralized primarily by pools of individual direct mortgage loans of financial institutions.
The fair value of investment securities decreased to $43,981 million at December 31, 2013, from $48,510 million at December 31, 2012, primarily due to the sale of U.S. government and federal agency securities at our treasury operations and the impact of higher interest rates.
The following tables present the estimated fair values and gross unrealized losses of our available-for-sale investment securities.
|In loss position for|
|Less than 12 months||12 months or more|
|December 31 (In millions)||fair value||(a)||losses||(a)(b)||fair value||losses||(b)|
|State and municipal||1,076||(82)||367||(109)|
|Corporate - non-U.S.||108||(4)||454||(83)|
|Government - non-U.S.||1,479||(6)||42||(1)|
|U.S. government and federal agency||229||(27)||254||-|
|State and municipal||146||(2)||326||(111)|
|Corporate - non-U.S.||167||(8)||602||(118)|
|Government - non-U.S.||201||(1)||37||(2)|
|U.S. government and federal agency||-||-||-||-|
We regularly review investment securities for impairment using both qualitative and quantitative criteria. We presently do not intend to sell the vast majority of our debt securities that are in an unrealized loss position and believe that it is not more likely than not that we will be required to sell these securities before recovery of our amortized cost. We believe that the unrealized loss associated with our equity securities will be recovered within the foreseeable future.
Substantially all of our U.S. corporate debt securities are rated investment grade by the major rating agencies. We evaluate U.S. corporate debt securities based on a variety of factors, such as the financial health of and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security. In the event a U.S. corporate debt security is deemed to be other-than-temporarily impaired, we isolate the credit portion of the impairment by comparing the present value of our expectation of cash flows to the amortized cost of the security. We discount the cash flows using the original effective interest rate of the security.
The vast majority of our RMBS have investment-grade credit ratings from the major rating agencies and are in a senior position in the capital structure of the deals. Of our total RMBS at December 31, 2013 and 2012, approximately $378 million and $471 million, respectively, relate to residential subprime credit, primarily supporting our guaranteed investment contracts. These are collateralized primarily by pools of individual, direct mortgage loans (a majority of which were originated in 2006 and 2005), not other structured products such as collateralized debt obligations. In addition, of the total residential subprime credit exposure at December 31, 2013 and 2012, approximately $285 million and $219 million, respectively, was insured by Monoline insurers (Monolines) on which we continue to place reliance.
Our commercial mortgage-backed securities (CMBS) portfolio is collateralized by both diversified pools of mortgages that were originated for securitization (conduit CMBS) and pools of large loans backed by high-quality properties (large loan CMBS), a majority of which were originated in 2007 and 2006. The vast majority of the securities in our CMBS portfolio have investment-grade credit ratings and are in a senior position in the capital structure of the deals.
Our asset-backed securities (ABS) portfolio is collateralized by senior secured loans of high-quality, middle-market companies in a variety of industries, as well as a variety of diversified pools of assets such as student loans and credit cards. The vast majority of our ABS are in a senior position in the capital structure of the deals. In addition, substantially all of the securities that are below investment-grade are in an unrealized gain position.
For ABS and RMBS, we estimate the portion of loss attributable to credit using a discounted cash flow model that considers estimates of cash flows generated from the underlying collateral. Estimates of cash flows consider credit risk, interest rate and prepayment assumptions that incorporate management's best estimate of key assumptions of the underlying collateral, including default rates, loss severity and prepayment rates. For CMBS, we estimate the portion of loss attributable to credit by evaluating potential losses on each of the underlying loans in the security. Collateral cash flows are considered in the context of our position in the capital structure of the deals. Assumptions can vary widely depending upon the collateral type, geographic concentrations and vintage.
If there has been an adverse change in cash flows for RMBS, management considers credit enhancements such as monoline insurance (which are features of a specific security). In evaluating the overall credit worthiness of the Monoline, we use an analysis that is similar to the approach we use for corporate bonds, including an evaluation of the sufficiency of the Monoline's cash reserves and capital, ratings activity, whether the Monoline is in default or default appears imminent, and the potential for intervention by an insurance or other regulator.
During 2013, we recorded pre-tax, other-than-temporary impairments of $798 million, of which $767 million was recorded through earnings ($15 million relates to equity securities) and $31 million was recorded in accumulated other comprehensive income (AOCI). At January 1, 2013, cumulative impairments recognized in earnings associated with debt securities still held were $588 million. During 2013, we recognized first-time impairments of $389 million and incremental charges on previously impaired securities of $336 million. Of these cumulative amounts recognized through December 31, 2013, $120 million related to securities that were subsequently sold before the end of 2013.
During 2012, we recorded pre-tax, other-than-temporary impairments of $193 million, of which $141 million was recorded through earnings ($39 million relates to equity securities) and $52 million was recorded in AOCI. At January 1, 2012, cumulative impairments recognized in earnings associated with debt securities still held were $726 million. During 2012, we recognized first-time impairments of $27 million and incremental charges on previously impaired securities of $40 million. Of these cumulative amounts recognized through December 31, 2012, $219 million related to securities that were subsequently sold before the end of 2012.
During 2011, we recorded pre-tax, other-than-temporary impairments of $467 million, of which $387 million was recorded through earnings ($81 million relates to equity securities) and $80 million was recorded in AOCI. At January 1, 2011, cumulative impairments recognized in earnings associated with debt securities still held were $500 million. During 2011, we recognized first-time impairments of $58 million and incremental charges on previously impaired securities of $230 million. Of these cumulative amounts recognized through December 31, 2011, $62 million related to securities that were subsequently sold before the end of 2011.
|Contractual Maturities of Investment in Available-for-Sale Debt Securities (Excluding Mortgage-Backed|
|and Asset-Backed Securities)|
|(In millions)||cost||fair value|
|Within one year||$||2,397||$||2,417|
|After one year through five years||3,303||3,506|
|After five years through ten years||4,984||5,156|
|After ten years||18,024||19,901|
We expect actual maturities to differ from contractual maturities because borrowers have the right to call or prepay certain obligations.
Supplemental information about gross realized gains and losses on available-for-sale investment securities follows.
|Losses, including impairments||(20)||(1)||-|
|Losses, including impairments||(762)||(211)||(402)|
Although we generally do not have the intent to sell any specific securities at the end of the period, in the ordinary course of managing our investment securities portfolio, we may sell securities prior to their maturities for a variety of reasons, including diversification, credit quality, yield and liquidity requirements and the funding of claims and obligations to policyholders. In some of our bank subsidiaries, we maintain a certain level of purchases and sales volume principally of non-U.S. government debt securities. In these situations, fair value approximates carrying value for these securities.
Proceeds from investment securities sales and early redemptions by issuers totaled $19,276 million, $12,745 million and $15,606 million in 2013, 2012 and 2011, respectively, principally from the sale of Comcast guaranteed debt and short-term securities in our bank subsidiaries and treasury operations.
We recognized pre-tax gains on trading securities of $48 million, $20 million and $22 million in 2013, 2012 and 2011, respectively.