The components of net investment income for the years ended December 31, 2005 and 2004 were as follows (in millions):
2005 2004
Bonds $ 3,452 $ 3,225
Mortgage loans 562 590
Affiliated common stocks 20 125
Unaffiliated common and preferred stocks 117 89
Real estate 86 99
Limited partnerships 277 161
Policy loans 349 366
Other long-term investments 146 89
Short-term investments 98 38
Derivatives 21 9
Other 17 19
Gross investment income 5,145 4,810
Investment expenses (394) (344)
Net investment income 4,751 4,466 Amortization of IMR 83 98
For the years ended December 31, 2005 and 2004, realized capital gains and losses on sales computed under the specific identification method were as follows (in millions):
2005 2004
Gains Losses Gains Losses
Bonds $ 288 $ 229 $ 406 $ 188
Mortgage loans 2 46 3 6
Unaffiliated common and preferred stocks 289 107 381 70
Real estate 586 1 87 13
Other long-term investments 42 45 11 12
Derivative instruments 55 56 35 44
Other 1 5 1 19 $ 1,263 $ 489 $ 924 $ 352
Net realized capital gains before tax and transfers to the IMR $ 774 $ 572
Less:
Capital gains tax (223) (208) Net realized capital gains after
tax transferred to the IMR (72)
(165)
Net realized capital gains
after tax and transfers to the IMR $ 479 $ 199
In October 2005, the Company sold its investment in an apartment complex (known as “Manhattan House”) for $623 million, which generated a $582 million pre-tax realized capital gain.
The following table provides a summary of other than temporary impairment losses included as realized capital losses (in millions):
2005 2004
Bonds $ (60) $ (76)
Mortgage loans (9) -
Unaffiliated common and preferred stocks (31) (16) Other long-term investments (24) (12) $ (124) $ (104)
Proceeds from investments in bonds sold were $16,286 million and $22,014 million for the years ended December 31, 2005 and 2004, respectively.
The following table presents the Company’s gross unrealized losses and fair values for bonds and equities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in an unrealized loss position, at December 31, 2005 and 2004 (in millions):
2005
Less than 12 months Greater than 12 months Total
Estimated Estimated Estimated
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
Bonds
U.S. Treasury and U.S. Government
Corporations $ 929 $ 13 $ 197 $ 7 $ 1,126 $ 20 U.S. agencies, state, and municipal 201 3 - - 201 3 Foreign governments 27 - 15 1 42 1 Corporate 9,797 235 2,533 141 12,330 376 Other mortgage-backed bonds 4,065 69 422 16 4,487 85 Other asset-backed bonds 2,365 15 531 10 2,896 25 Total Bonds 17,384 335 3,698 175 21,082 510 Equity Securities (Unaffiliated)
Common Stock 369 21 - 369 21 - Preferred Stock 7 - - 7 - - Total Equity Securities 376 21 - - 376 21 Total temporarily impaired securities $ 17,760 $ 356 $ 3,698 $ 175 $ 21,458 $ 531
2004
Less than 12 months Greater than 12 months Total Estimated Estimated Estimated
Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Bonds
U.S. Treasury and U.S. Government
Corporations $ 422 $ 5 $ 7 $ - $ 429 $ 5 U.S. agencies, state, and municipal 130 1 1 - 131 1 Foreign governments 9 - 15 - 24 - Corporate 3,716 51 1,835 91 5,551 142 Other mortgage-backed bonds 1,018 8 152 6 1,170 14 Other asset-backed bonds 1,646 7 148 7 1,794 14
Total Bonds 6,941 72 2,158 104 9,099 176
Equity Securities (Unaffiliated)
Common Stock 273 13 - 273 13 - Preferred Stock 15 1 - 15 - 1
Total Equity Securities 288 14 - - 288 14
Total temporarily impaired securities $ 7,229 $ 86 $ 2,158 $ 104 $ 9,387 $ 190
At December 31, 2005, bonds represented approximately 96% of the Company’s total unrealized loss amount, which was comprised of approximately 2,800 different securities. Equity securities comprised the remaining 4%, consisting of 185 securities.
Bonds that were in an unrealized loss position less than twelve months at December 31, 2005, represent $335 million or 63% of the Company’s total unrealized loss, and bonds in an unrealized loss position greater than twelve months represent $175 million or 33% of the Company’s total unrealized loss. Of the total amount of bond unrealized losses, $450 million or 85% is related to unrealized losses on investment grade securities. Investment grade is defined as a security having a credit rating from the NAIC of 1 or 2; a rating of Aaa, Aa, A or Baa from Moody’s or a rating of AAA, AA, A or BBB from Standard & Poor’s (‘‘S&P’’); or a comparable internal rating if an externally provided rating is not available. Unrealized losses on bonds with a rating below investment grade represent $81 million or 15% of the Company’s total unrealized losses. Unrealized losses on investment grade securities are principally related to changes in interest rates or changes in sector spreads from date of purchase. The continued rise in interest rates in 2005 over 2004 levels has contributed to the decline in value of our bond investments as follows:
U.S. Treasury and Government Corporations and Agencies. The unrealized losses on the company’s investments in U.S. Treasury obligations and direct obligations of U.S. corporations and agencies were $23 million or 4% of the Company’s unrealized losses. These were spread across 126 securities and the decline in value was caused by interest rate increases. The contractual terms of these investments are guaranteed by the full faith and credit of the U.S. Government. Because the Company has the ability and intent to retain the investment for the period of time sufficient to allow for an anticipated recovery in value, the Company did not consider these investments to be other than temporarily impaired.
Corporate Bonds. Unrealized losses on corporate bonds were $376 million or 74% percent of the total
bond unrealized losses. The amount of unrealized losses on the Company’s investment in corporate bonds is spread over 1,503 individual securities with varying interest rates and maturities. Corporate securities that were priced below 95% of the security’s amortized cost represented $159 million or 31% of the total bond unrealized losses. These unrealized losses are principally due to changes in interest rates and were spread across all industry sectors with no one sector experiencing a disproportionate amount of losses over other sectors. The industry sectors with the largest unrealized losses on securities that were priced below 95% of the security’s amortized cost were Canadian paper products ($13 million), auto parts and supply industry ($11 million) and electric utilities ($9 million). Because the securities continue to meet their contractual payments and the Company has the ability and intent to retain the investment for the period of time sufficient to allow for an anticipated recovery in value, the Company did not consider these investments to be other than temporarily impaired.
Mortgage-Backed Securities. Unrealized losses on mortgage-backed securities were $85 million or 17% percent of the total bond unrealized losses. The amount of unrealized losses on the Company’s investment in mortgage-backed securities was due to increases in interest rates. These losses are spread across approximately 570 fixed and variable rate investment grade securities. Mortgage-backed securities that were priced below 95% of the security’s amortized cost represented $6 million or 7% of the total unrealized losses for mortgage-backed securities. Because the decline in market value is attributable to changes in interest rates and all contractual payments remain current, the Company has the ability and intent to retain the investment for the period of time sufficient to allow for an anticipated recovery in value.
Asset-Backed Securities. Unrealized losses on asset-backed securities were $25 million or 5% percent
of the total bond unrealized losses. The unrealized losses on these investments are due to changes in interest rates. These losses are spread across approximately 392 securities. The Company measures its asset-backed portfolio for impairments based on the security’s credit rating and whether the security has an unrealized loss. When the fair value of the securities are below amortized cost and there are negative changes in estimated future cash flows, the securities are deemed impaired and a realized loss is recognized in net income in the accompanying Statutory Statement of Operations. The Company also evaluates these securities for impairments based on facts and circumstances, even if there has been no
negative change in estimated future cash flows. These securities are investment grade and are priced at or greater than 95% of amortized cost.