Investment income

Net investment income by source (excluding unit-linked and with-profit business) was as follows:

Dividends received from investments accounted for using the equity method were USD 64 million and USD 128 million for 2011 and 2012, respectively.

Realised gains and losses

Realised gains and losses for fixed income, equity securities and other investments (excluding unit-linked and with-profit business) were as follows:

Proceeds from sales of fixed income securities available-for-sale amounted to USD 115 775 million and USD 101 046 million for 2011 and 2012, respectively. Sales of equity securities available-for-sale were USD 2 389 million and USD 1 494 million for 2011 and 2012, respectively.

Investment result – unit-linked and with-profit business

Net investment result on unit-linked and with-profit business credited to policyholders was as follows:

Impairment on fixed income securities related to credit losses

Other-than-temporary impairments for debt securities are bifurcated between credit and non-credit components, with the credit component recognised through earnings and the non-credit component recognised in other comprehensive income. The credit component of other-than-temporary impairments is defined as the difference between a security’s amortised cost basis and expected cash flows. Methodologies for measuring the credit component of impairment are aligned to market observer forecasts of credit performance drivers. Management believes that these forecasts are representative of median market expectations.

For securitised products, cash flow projection analysis is conducted by integrating forward-looking evaluation of collateral performance drivers, including default rates, prepayment rates and loss severities, and deal-level features, such as credit enhancement and prioritisation among tranches for payments of principal and interest. Analytics are differentiated by asset class, product type and security-level differences in historical and expected performance. For corporate bonds and similar hybrid debt instruments, an expected loss approach based on default probabilities and loss severities expected in the current and forecast economic environment is used for securities identified as credit-impaired to project probability-weighted cash flows. Expected cash flows resulting from these analyses are discounted, and net present value is compared to the amortised cost basis to determine the credit component of other-than-temporary impairments.

A reconciliation of other-than-temporary impairment related to credit losses recognised in earnings was as follows:

Investments available-for-sale

Amortised cost or cost, estimated fair values and other-than-temporary impairments of fixed income securities classified as available-for-sale as of 31 December were as follows:

The “Other-than-temporary impairments recognised in other comprehensive income” column includes only securities with a credit-related loss recognised in earnings. Subsequent recovery in fair value of securities previously impaired in other comprehensive income is presented in the “Other-than-temporary impairments recognised in other comprehensive income” column.

Investments trading

Fixed income securities and equity securities classified as trading (excluding unit-linked and with-profit business) as of 31 December were as follows:

Investments held for unit-linked and with-profit business

Investments held for unit-linked and with-profit business as of 31 December were as follows:

Maturity of fixed income securities available-for-sale

The amortised cost or cost and estimated fair values of investments in fixed income securities AFS by remaining maturity are shown below. Fixed maturity investments are assumed not to be called for redemption prior to the stated maturity date. As of 31 December 2011 and 2012, USD 10 274 million and USD 9 958 million, respectively, of fixed income securities AFS were callable.

Assets pledged

As of 31 December 2012, investments with a carrying value of USD 9 731 million were on deposit with regulatory agencies in accordance with local requirements. As of 31 December 2012, investments with a carrying value of USD 12 644 million were placed on deposit or pledged to secure certain reinsurance liabilities, including pledged investments in subsidiaries.

As of 31 December 2011 and 2012, securities of USD 7 823 million and USD 12 994 million, respectively, were pledged as collateral in securities lending transactions and repurchase agreements. The associated liabilities of USD 6 349 million and USD 2 612 million, respectively, were recognised in accrued expenses and other liabilities.

A real estate portfolio with a carrying value of USD 258 million serves as collateral for short-term senior operational debt of USD 710 million.

Collateral accepted which the Group has the right to sell or repledge

As of 31 December 2011 and 2012, the fair value of the government and corporate bond securities received as collateral was USD 4 241 million and USD 4 329 million, respectively. Of this, the amount that was sold or repledged as of 31 December 2011 and 2012 was nil and USD 1 195 million, respectively. The sources of the collateral are reverse repurchase agreements and derivative transactions.

Unrealised losses on securities available-for-sale

The following table shows the fair value and unrealised losses of the Group’s fixed income securities, aggregated by investment category and length of time that individual securities were in a continuous unrealised loss position as of 31 December 2011 and 2012. As of 31 December 2011 and 2012, USD 144 million and USD 32 million, respectively, of the gross unrealised loss on equity securities AFS relates to declines in value for less than 12 months and USD 4 million and USD 28 million, respectively, to declines in value for more than 12 months.

Mortgages, loans and real estate

As of 31 December, the carrying values of investments in mortgages, policy and other loans, and real estate (excluding unit-linked and with-profit business) were as follows:

The fair value of the real estate as of 31 December 2011 and 2012 was USD 2 215 million and USD 2 536 million, respectively. The carrying value of policy loans, mortgages and other loans approximates fair value.

As of 31 December 2011 and 2012, the Group’s investment in mortgages and other loans included USD 270 million and USD 282 million, respectively, of loans due from employees, and USD 357 million and USD 390 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates.

As of 31 December 2011 and 2012, investments in real estate included USD 6 million and USD 5 million, respectively, of real estate held for sale.

Depreciation expense related to income-producing properties was USD 21 million and USD 24 million for 2011 and 2012, respectively. Accumulated depreciation on investment real estate totalled USD 460 million and USD 549 million as of 31 December 2011 and 2012, respectively.

Substantially all mortgages, policy loans and other loan receivables are secured by buildings, land or the underlying policies.