| Investments | 1.25 1.00 - 1.25 September 30, 2020 LTV Ratios: Less than 50% $ 413 $ 7 $ 420 77 % $ 430 77 % 50% to 60% 94 — 94 17 % 96 17 % 60% to 75% 32 — 32 6 % 34 6 % Commercial mortgage loans $ 539 $ 7 $ 546 100 % $ 560 100 % We recognize a mortgage loan as delinquent when payments on the loan are greater than 30 days past due. At September 30, 2020, we had no CMLs that were delinquent in principal or interest payments. Allowance for Expected Credit Loss We estimate expected credit losses for our commercial loan portfolio using a probability of default/loss given default model. Significant inputs to this model include the loans current performance, underlying collateral type, location, contractual life, LTV, and DSC. The model projects losses using a two year reasonable and supportable forecast and then reverts over a three year period to market-wide historical loss experience. Changes in our allowance for expected credit losses on commercial mortgage loans are recognized in Recognized gains and losses, net in the accompanying unaudited Condensed Consolidated Statements of Earnings. An allowance for expected credit loss is not measured on accrued interest income for commercial mortgage loans as we have a process to write-off interest on loans that enter into non-accrual status (over 90 days past due). Residential Mortgage Loans Residential mortgage loans ("RMLs") represented approximately 3% of our total investments as of September 30, 2020. Our residential mortgage loans are closed end, amortizing loans and 100% of the properties are located in the United States. We diversify our RML portfolio by state to attempt to reduce concentration risk. The distribution of RMLs by state with highest-to-lowest concentration are reflected in the following tables (dollars in millions): September 30, 2020 U.S. State: Unpaid Principal Balance % of Total California $ 189 17 % Florida 186 17 % New Jersey 100 9 % All Other States (1) 621 57 % Total mortgage loans $ 1,096 100 % (1) The individual concentration of each state is less than 8% as of September 30, 2020. Residential mortgage loans have a primary credit quality indicator of either a performing or nonperforming loan. We define non-performing residential mortgage loans as those that are 90 or more days past due or in nonaccrual status which is assessed monthly. The credit quality of RMLs as at September 30, 2020, was as follows (dollars in millions): September 30, 2020 Performance indicators: Carrying Value % of Total Performing $ 997 91 % Non-performing 99 9 % Total residential mortgage loans, gross of valuation allowance $ 1,096 100 % Allowance for expected loan loss (33) — % Total residential mortgage loans $ 1,063 100 % Loans segregated by risk rating exposure as of September 30, 2020, were as follows (in millions): September 30, 2020 Amortized Cost by Origination Year 2020 2019 2018 2017 2016 Prior Total Residential mortgages Current (less than 30 days past due) $ 244 $ 536 $ 66 $ 46 $ 62 $ 2 $ 956 30-89 days past due 17 74 5 1 2 — 99 Over 90 days past due 9 29 3 — — — 41 Total residential mortgages $ 270 $ 639 $ 74 $ 47 $ 64 $ 2 $ 1,096 Commercial mortgages Current (less than 30 days past due) $ 174 $ — $ 6 $ — $ 11 $ 355 $ 546 30-89 days past due — — — — — — — Over 90 days past due — — — — — — — Total commercial mortgage $ 174 $ — $ 6 $ — $ 11 $ 355 $ 546 September 30, 2020 Amortized Cost by Origination Year 2020 2019 2018 2017 2016 Prior Total Commercial mortgages LTV Less than 50% $ 107 $ — $ 6 $ — $ — $ 306 $ 419 50% to 60% 34 — — — 11 49 94 60% to 75% 33 — — — — — 33 Total commercial mortgages $ 174 $ — $ 6 $ — $ 11 $ 355 $ 546 Commercial mortgages DSCR Greater than 1.25x $ 174 $ — $ 6 $ — $ 11 $ 349 $ 540 1.00x - 1.25x — — — — — 6 6 Less than 1.00x — — — — — — — Total commercial mortgages $ 174 $ — $ 6 $ — $ 11 $ 355 $ 546 Non-accrual loans by amortized cost as of September 30, 2020, was as follows: Amortized cost of loans on non-accrual September 30, 2020 Residential mortgage: $ 64 Commercial mortgage: — Total non-accrual loans $ 64 Allowance for Expected Credit Loss We estimate expected credit losses for our mortgage loan portfolio using a probability of default/loss given default model. Significant inputs to this model include the loans' current performance, underlying collateral type, location, contractual life, LTV, and Debt to Income or FICO. The model projects losses using a two year reasonable and supportable forecast and then reverts over a three year period to market-wide historical loss experience. Changes in our allowance for expected credit losses on mortgage loans are recognized in Recognized gains and losses, net in the accompanying unaudited Condensed Consolidated Statements of Earnings. Credit losses on purchase credit deteriorated (“PCD”) financial assets were recognized on the opening balance sheet for the amounts shown in the table below (in millions). September 30, 2020 Credit Losses on PCD Financial Assets Residential Mortgage Commercial Mortgage Total Provision for loan losses $ 26 $ 2 $ 28 For initial credit losses on purchased loans accounted for as PCD financial assets 7 — 7 Balance, September 30, 2020 $ 33 $ 2 $ 35 An allowance for expected credit loss is not measured on accrued interest income for commercial mortgage loans as we have a process to write-off interest on loans that enter into non-accrual status (over 90 days past due). Allowances for expected credit losses are measured on accrued interest income for residential mortgage loans as seen in the table below (in millions). September 30, 2020 Residential Mortgage $ — Commercial Mortgage — Total loans that are 90 days past due and still accruing $ — Interest and Investment Income The major sources of Interest and investment income reported on the accompanying unaudited Condensed Consolidated Statements of Earnings were as follows (in millions): Three months ended Nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Fixed maturity securities, available-for-sale $ 286 $ 18 $ 419 $ 54 Equity securities 5 3 14 7 Preferred securities 15 5 40 17 Mortgage loans 24 — 31 — Invested cash and short-term investments — 9 8 24 Limited partnerships 25 — 25 — Tax deferred property exchange income 5 20 28 55 Other investments 7 3 19 16 Gross investment income 367 58 584 173 Investment expense (31) (1) (43) (3) Net investment income $ 336 $ 57 $ 541 $ 170 Recognized Gains and Losses, net Details underlying Recognized gains and losses, net reported on the accompanying unaudited Condensed Consolidated Statements of Earnings were as follows (in millions): Three months ended Nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Net realized gains on fixed maturity available-for-sale securities $ 20 $ 1 $ 36 $ 2 Net realized/unrealized gains (losses) on equity securities (2) (6) (2) (63) 171 Net realized/unrealized gains (losses) on preferred securities (3) 46 4 (28) 23 Realized losses on other invested assets (10) 1 (23) (9) Change in allowance for expected credit losses (11) — (35) — Derivatives and embedded derivatives: Realized gains on certain derivative instruments 30 — 39 — Unrealized gains on certain derivative instruments 16 — 21 — Change in fair value of reinsurance related embedded derivatives (1) (14) — (35) — Change in fair value of other derivatives and embedded derivatives 2 — 3 — Realized losses on derivatives and embedded derivatives 34 — 28 — Recognized gains and losses, net $ 73 $ 4 $ (85) $ 187 (1) Change in fair value of reinsurance related embedded derivatives is due to held for sale unaffiliated third party business under the fair value option election, and activity related to the FGL Insurance and Kubera reinsurance treaty. (2) Includes valuation losses of less than $1 million and $56 million for the three and nine months ended September 30, 2020, respectively, and valuation (losses) gains of $(1) million and $167 million for the three and nine months ended September 30, 2019, respectively. (3) Includes valuation gains (losses) of $18 million and $(55) million for the three and nine months ended September 30, 2020, respectively, and valuation gains of $4 million and $23 million for the three and nine months ended September 30, 2019, respectively. The proceeds from the sale of fixed-maturity available for-sale-securities and the gross gains and losses associated with those transactions were as follows (in millions): Three months ended Nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Proceeds $ 493 $ 78 $ 1,007 $ 450 Gross gains 24 1 53 3 Gross losses (5) — (12) (1) Unconsolidated Variable Interest Entities The Company owns investments in VIEs that are not consolidated within our financial statements, and one investment in a VIE that is considered consolidated within our financial statements. VIEs do not have sufficient equity to finance their own activities without additional financial support and certain of its investors lack certain characteristics of a controlling financial interest. VIEs are consolidated by their ‘primary beneficiary’, a designation given to an entity that receives both the benefits from the VIE as well as the substantive power to make its key economic decisions. While the Company participates in the benefits from VIEs in which it invests, but does not consolidate, the substantive power to make the key economic decisions for each respective VIE resides with entities not under common control with the Company. It is for this reason that the Company is not considered the primary beneficiary for the VIE investments that are not consolidated. We have concluded we are the primary beneficiary of one VIE. The primary beneficiary conclusion was drawn given the fact that substantially all of the VIE’s activities are conducted on our behalf and we are the sole investor and limited partner. As we are considered the primary beneficiary, this VIE is consolidated within our financial statements. As of September 30, 2020, we have $75 million of net assets recorded related to this VIE. We previously executed a commitment of $83 million to purchase common shares in an unaffiliated private business development company ("BDC"). The BDC invests in secured and unsecured fixed maturity and equity securities of middle market companies in the United States. Due to the voting structure of the transaction, the Company does not have voting power. As of September 30, 2020, the BDC was listed on the NASDAQ. We invest in various limited partnerships as a passive investor. These investments are in credit funds with a bias towards current income, real assets, or private equity. Limited partnership interests are accounted for under the equity method and are included in Investments in unconsolidated affiliates on our unaudited Condensed Consolidated Balance Sheets. Our maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in our unaudited Condensed Consolidated Balance Sheets in addition to any required unfunded commitments. As of September 30, 2020, our maximum exposure to loss was $1,161 million in recorded carrying value and $1,343 million in unfunded commitments. Investment with Related Party Included in equity securities as of September 30, 2020 and December 31, 2019 are 5,706,134 shares of Cannae common stock (NYSE: CNNE) which were purchased during the fourth quarter of 2017 in connection with the split-off of our former portfolio company investments to Cannae. The fair value of our related party investment based on quoted market prices is $213 million and $212 million as of September 30, 2020 and December 31, 2019, respectively." id="sjs-B4">Investments Our fixed maturity securities investments have been designated as available-for-sale and are carried at fair value, net of allowance for expected credit losses, with unrealized gains and losses included in AOCI, net of associated adjustments for DAC, VOBA, DSI, UREV, SOP 03-1 reserves, and deferred income taxes. Our equity securities investments are carried at fair value with unrealized gains and losses included in net income (loss). The Company’s consolidated investments at September 30, 2020 and December 31, 2019 are summarized as follows (in millions): September 30, 2020 Amortized Cost Allowance for Expected Credit Losses Gross Unrealized Gains Gross Unrealized Losses Fair Value Carrying Value Available-for-sale securities Asset-backed securities $ 5,527 $ — $ 221 $ (8) $ 5,739 $ 5,739 Commercial mortgage-backed securities 2,501 — 275 (4) 2,772 2,772 Corporates 13,340 (18) 687 (45) 13,965 13,965 Hybrids 951 — 45 (3) 993 993 Municipals 1,408 — 59 (1) 1,466 1,466 Residential mortgage-backed securities 878 (4) 9 (1) 882 882 U.S. Government 394 — 11 — 405 405 Foreign Governments 179 — 9 — 188 188 Total available-for-sale securities $ 25,178 $ (22) $ 1,316 $ (62) $ 26,410 $ 26,410 December 31, 2019 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Carrying Value Available-for-sale securities Commercial mortgage-backed/asset-backed securities $ 22 $ — $ — $ 22 $ 22 Corporates 1,510 49 (3) 1,556 1,556 Hybrids 26 5 — 31 31 Municipals 90 3 — 93 93 Residential mortgage-backed securities 38 2 — 40 40 U.S. Government 282 7 (1) 288 288 Foreign Governments 61 1 (2) 60 60 Total available-for-sale securities $ 2,029 $ 67 $ (6) $ 2,090 $ 2,090 Securities held on deposit with various state regulatory authorities had a fair value of $20.2 billion and $94 million at September 30, 2020 and December 31, 2019, respectively. At September 30, 2020 and December 31, 2019, the Company held no material investments that were non-income producing for a period greater than twelve months. At September 30, 2020 and December 31, 2019, the Company's accrued interest receivable balance was $254 million and $16 million, respectively. Accrued interest receivable is classified within Prepaid expenses and other assets within the unaudited Condensed Consolidated Balance Sheets. In accordance with our FHLB agreements, the investments supporting the funding agreement liabilities are pledged as collateral to secure the FHLB funding agreement liabilities and are not available to the Company for general purposes. The collateral investments had a fair value of $1,497 million at September 30, 2020. The amortized cost and fair value of fixed maturity available-for-sale securities by contractual maturities, as applicable, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations. September 30, 2020 (in millions) Amortized Cost Fair Value Corporates, Non-structured Hybrids, Municipal and Government securities: Due in one year or less $ 569 $ 571 Due after one year through five years 2,104 2,188 Due after five years through ten years 2,257 2,360 Due after ten years 11,316 11,868 Subtotal 16,246 16,987 Other securities which provide for periodic payments: Asset-backed securities 5,527 5,739 Commercial mortgage-backed securities 2,501 2,772 Structured hybrids 26 30 Residential mortgage-backed securities 878 882 Subtotal 8,932 9,423 Total fixed maturity available-for-sale securities $ 25,178 $ 26,410 Allowance for Current Expected Credit Loss Following the adoption of ASU 2016-13 and the related targeted improvements and transition relief amendments (see Note A Recent Accounting Pronouncements for further details) effective January 1, 2020, we regularly review AFS securities for declines in fair value that we determine to be credit related. For our fixed maturity AFS securities, we generally consider the following in determining whether our unrealized losses are credit related, and if so, the magnitude of the credit loss: • The extent to which the fair value is less than the amortized cost basis; • The reasons for the decline in value (credit event, currency or interest-rate related, including general credit spread widening); • The financial condition of and near-term prospects of the issuer (including issuer's current credit rating and the probability of full recovery of principal based upon the issuer's financial strength); • Current delinquencies and nonperforming assets of underlying collateral; • Expected future default rates; • Collateral value by vintage, geographic region, industry concentration or property type; • Subordination levels or other credit enhancements as of the balance sheet date as compared to origination; and • Contractual and regulatory cash obligations and the issuer's plans to meet such obligations. We recognize an allowance for current expected credit losses on fixed maturity securities in an unrealized loss position when it is determined, using the factors discussed above, a component of the unrealized loss is related to credit. We measure the credit loss using a discounted cash flow model that utilizes the single best estimate cash flow and the recognized credit loss is limited to the total unrealized loss on the security (i.e. the fair value floor). Cash flows are discounted using the implicit yield of bonds at their time of purchase and the current book yield for asset and mortgage backed securities as well as variable rate securities. We recognize the expected credit losses in Recognized gains and losses, net in the unaudited Condensed Consolidated Statements of Earnings, with an offset for the amount of non-credit impairments recognized in AOCI. We do not measure a credit loss allowance on accrued investment income because we write-off accrued interest through to Interest and investment income when collectability concerns arise. We consider the following in determining whether write-offs of a security’s amortized cost is necessary: • We believe amounts related to securities have become uncollectible; or • We intend to sell a security; or • It is more likely than not that we will be required to sell a security prior to recovery. If we intend to sell a fixed maturity AFS security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis and the fair value of the security is below amortized cost, we will write down the security to current fair value, with a corresponding charge, net of any amount previously recognized as an allowance for expected credit loss, to Recognized gains and losses, net in the accompanying unaudited Condensed Consolidated Statements of Earnings. If we do not intend to sell a fixed maturity security or it is more likely than not that we will not be required to sell a fixed maturity security before recovery of its amortized cost basis but believe amounts related to a security are uncollectible (generally based on proximity to expected credit loss), an impairment is deemed to have occurred and the amortized cost is written down to the estimated recovery value with a corresponding charge, net of any amount previously recognized as an allowance for expected credit loss, to Recognized gains and losses, net in the accompanying unaudited Condensed Consolidated Statements of Earnings. The remainder of unrealized loss is held in AOCI. The activity in the allowance for expected credit losses of available-for-sale securities aggregated by investment category were as follows for the three and nine months ended September 30, 2020 (in millions): Three Months Ended September 30, 2020 Additions Reductions Balance at Beginning of Period For credit losses on securities for which losses were not previously recorded For initial credit losses on purchased securities accounted for as PCD financial assets (1) (Additions) reductions in allowance recorded on previously impaired securities For securities sold during the period For securities intended/required to be sold prior to recovery of amortized cost basis Writeoffs charged against the allowance Balance at End of Period Available-for-sale securities Asset-backed securities $ (2) $ — $ — $ 2 $ — $ — $ — $ — Corporates (21) (3) — 6 — — — (18) Hybrids — — — — — — — — Residential mortgage-backed securities (5) — — 1 — — — (4) Total available-for-sale securities $ (28) $ (3) $ — $ 9 $ — $ — $ — $ — $ (22) (1) Purchased credit deteriorated financial assets ("PCD") Nine Months Ended September 30, 2020 Additions Reductions Balance at Beginning of Period For credit losses on securities for which losses were not previously recorded For initial credit losses on purchased securities accounted for as PCD financial assets (1) (Additions) reductions in allowance recorded on previously impaired securities For securities sold during the period For securities intended/required to be sold prior to recovery of amortized cost basis Writeoffs charged against the allowance Balance at End of Period Available-for-sale securities Asset-backed securities $ — $ 7 $ (9) $ 2 — $ — $ — $ — $ — Corporates — (15) (16) 6 — 3 4 — (18) Hybrids — — (3) — — 3 — — — Residential mortgage-backed securities — 2 (7) 1 — — — — (4) Total available-for-sale securities $ — $ (6) $ (35) $ 9 $ — $ 6 $ 4 $ — $ (22) (1) Purchased credit deteriorated financial assets ("PCD") Purchased credit-deteriorated available-for-sale debt securities ("PCD"s) are AFS securities purchased at a discount, where part of that discount is attributable to credit . Credit loss allowances are calculated for these securities as of the date of their acquisition, with the initial allowance serving to increase amortized cost. The following table summarizes year to date PCD AFS security purchases (in millions). Purchased credit-deteriorated available-for-sale debt securities September 30, 2020 Purchase price $ 265 Allowance for credit losses at acquisition 35 Discount (or premiums) attributable to other factors 84 AFS purchased credit-deteriorated par value $ 384 The fair value and gross unrealized losses of available-for-sale securities, excluding securities in an unrealized loss position with an allowance for expected credit loss, aggregated by investment category and duration of fair value below amortized cost as of September 30, 2020, and December 31, 2019 were as follows (dollars in millions): September 30, 2020 Less than 12 months 12 months or longer Total Fair Value Gross Unrealized Fair Value Gross Unrealized Fair Value Gross Unrealized Available-for-sale securities Asset-backed securities $ 426 $ (8) $ — $ — $ 426 $ (8) Commercial mortgage-backed securities 166 (4) — — 166 (4) Corporates 1,809 (44) 36 (1) 1,845 (45) Hybrids 205 (3) — — 205 (3) Municipals 133 (1) — — 133 (1) Residential mortgage-backed securities 17 (1) — — 17 (1) U.S. Government 49 — — — 49 — Foreign Government 11 — — — 11 — Total available-for-sale securities $ 2,816 $ (61) $ 36 $ (1) $ 2,852 $ (62) Total number of available-for-sale securities in an unrealized loss position less than twelve months 304 Total number of available-for-sale securities in an unrealized loss position twelve months or longer 6 Total number of available-for-sale securities in an unrealized loss position 310 December 31, 2019 Less than 12 months 12 months or longer Total Fair Value Gross Unrealized Fair Value Gross Unrealized Fair Value Gross Unrealized Available-for-sale securities Corporates $ 98 $ (2) $ 51 $ (1) $ 149 $ (3) U.S. Government 62 (1) — — 62 (1) Foreign Government — — 33 (2) 33 (2) Total available-for-sale securities $ 160 $ (3) $ 84 $ (3) $ 244 $ (6) Total number of available-for-sale securities in an unrealized loss position less than twelve months 19 Total number of available-for-sale securities in an unrealized loss position twelve months or longer 10 Total number of available-for-sale securities in an unrealized loss position 29 We determined the significant increase in unrealized losses as of September 30, 2020 was caused by the significant widening of spreads in fixed income markets in response to the economic uncertainty created by the COVID-19 pandemic. These widening spreads were in most cases driven by market illiquidity and perceived increases in credit risk. For securities in an unrealized loss position as of September 30, 2020 and an expected credit loss was not determined, we believe that the unrealized loss is being driven by interest rate declines or near-term illiquidity and uncertainty of the impact of COVID-19 on the economy as opposed to issuer specific credit concerns. Specific to asset-backed and mortgage-backed securities for which an expected credit loss was not determined, the effect of any increased expectations of underlying collateral defaults have not risen to the level of impacting the tranches of those securities. Mortgage Loans Our mortgage loans are collateralized by commercial and residential properties. Commercial Mortgage Loans Commercial mortgage loans ("CMLs") represented approximately 2% of our total investments as of September 30, 2020. We primarily invest in mortgage loans on income producing properties including hotels, industrial properties, retail buildings, multifamily properties and office buildings. We diversify our CML portfolio by geographic region and property type to attempt to reduce concentration risk. We continuously evaluate CMLs based on relevant current information to ensure properties are performing at a consistent and acceptable level to secure the related debt. The distribution of CMLs, gross of valuation allowances, by property type and geographic region is reflected in the following tables (dollars in millions): September 30, 2020 Gross Carrying Value % of Total Property Type: Hotel $ 19 3 % Industrial - General 11 2 % Industrial - Warehouse 12 2 % Multifamily 113 21 % Office 107 20 % Retail 141 26 % Other 143 26 % Total commercial mortgage loans, gross of valuation allowance $ 546 100 % Allowance for expected credit loss (2) Total commercial mortgage loans $ 544 U.S. Region: East North Central $ 63 12 % East South Central 51 9 % Middle Atlantic 77 14 % Mountain 48 9 % New England 43 8 % Pacific 126 23 % South Atlantic 67 12 % West North Central 13 2 % West South Central 58 11 % Total commercial mortgage loans, gross of valuation allowance $ 546 100 % Allowance for expected credit loss (2) Total commercial mortgage loans $ 544 All of our investments in CMLs had a loan-to-value ("LTV") ratio of less than 75% at September 30, 2020, as measured at inception of the loans unless otherwise updated. LTV and debt service coverage ("DSC") ratios are measures commonly used to assess the risk and quality of mortgage loans. The LTV ratio is expressed as a percentage of the amount of the loan relative to the value of the underlying property. A LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the underlying collateral. The DSC ratio, based upon the most recently received financial statements, is expressed as a percentage of the amount of a property’s net income to its debt service payments. A DSC ratio of less than 1.00 indicates that a property’s operations do not generate sufficient income to cover debt payments. We normalize our DSC ratios to a 25-year amortization period for purposes of our general loan allowance evaluation. The following table presents the recorded investment in CMLs by LTV and DSC ratio categories and estimated fair value by the indicated loan-to-value ratios at September 30, 2020 (dollars in millions) : Debt-Service Coverage Ratios Total Amount % of Total Estimated Fair Value % of Total >1.25 1.00 - 1.25 September 30, 2020 LTV Ratios: Less than 50% $ 413 $ 7 $ 420 77 % $ 430 77 % 50% to 60% 94 — 94 17 % 96 17 % 60% to 75% 32 — 32 6 % 34 6 % Commercial mortgage loans $ 539 $ 7 $ 546 100 % $ 560 100 % We recognize a mortgage loan as delinquent when payments on the loan are greater than 30 days past due. At September 30, 2020, we had no CMLs that were delinquent in principal or interest payments. Allowance for Expected Credit Loss We estimate expected credit losses for our commercial loan portfolio using a probability of default/loss given default model. Significant inputs to this model include the loans current performance, underlying collateral type, location, contractual life, LTV, and DSC. The model projects losses using a two year reasonable and supportable forecast and then reverts over a three year period to market-wide historical loss experience. Changes in our allowance for expected credit losses on commercial mortgage loans are recognized in Recognized gains and losses, net in the accompanying unaudited Condensed Consolidated Statements of Earnings. An allowance for expected credit loss is not measured on accrued interest income for commercial mortgage loans as we have a process to write-off interest on loans that enter into non-accrual status (over 90 days past due). Residential Mortgage Loans Residential mortgage loans ("RMLs") represented approximately 3% of our total investments as of September 30, 2020. Our residential mortgage loans are closed end, amortizing loans and 100% of the properties are located in the United States. We diversify our RML portfolio by state to attempt to reduce concentration risk. The distribution of RMLs by state with highest-to-lowest concentration are reflected in the following tables (dollars in millions): September 30, 2020 U.S. State: Unpaid Principal Balance % of Total California $ 189 17 % Florida 186 17 % New Jersey 100 9 % All Other States (1) 621 57 % Total mortgage loans $ 1,096 100 % (1) The individual concentration of each state is less than 8% as of September 30, 2020. Residential mortgage loans have a primary credit quality indicator of either a performing or nonperforming loan. We define non-performing residential mortgage loans as those that are 90 or more days past due or in nonaccrual status which is assessed monthly. The credit quality of RMLs as at September 30, 2020, was as follows (dollars in millions): September 30, 2020 Performance indicators: Carrying Value % of Total Performing $ 997 91 % Non-performing 99 9 % Total residential mortgage loans, gross of valuation allowance $ 1,096 100 % Allowance for expected loan loss (33) — % Total residential mortgage loans $ 1,063 100 % Loans segregated by risk rating exposure as of September 30, 2020, were as follows (in millions): September 30, 2020 Amortized Cost by Origination Year 2020 2019 2018 2017 2016 Prior Total Residential mortgages Current (less than 30 days past due) $ 244 $ 536 $ 66 $ 46 $ 62 $ 2 $ 956 30-89 days past due 17 74 5 1 2 — 99 Over 90 days past due 9 29 3 — — — 41 Total residential mortgages $ 270 $ 639 $ 74 $ 47 $ 64 $ 2 $ 1,096 Commercial mortgages Current (less than 30 days past due) $ 174 $ — $ 6 $ — $ 11 $ 355 $ 546 30-89 days past due — — — — — — — Over 90 days past due — — — — — — — Total commercial mortgage $ 174 $ — $ 6 $ — $ 11 $ 355 $ 546 September 30, 2020 Amortized Cost by Origination Year 2020 2019 2018 2017 2016 Prior Total Commercial mortgages LTV Less than 50% $ 107 $ — $ 6 $ — $ — $ 306 $ 419 50% to 60% 34 — — — 11 49 94 60% to 75% 33 — — — — — 33 Total commercial mortgages $ 174 $ — $ 6 $ — $ 11 $ 355 $ 546 Commercial mortgages DSCR Greater than 1.25x $ 174 $ — $ 6 $ — $ 11 $ 349 $ 540 1.00x - 1.25x — — — — — 6 6 Less than 1.00x — — — — — — — Total commercial mortgages $ 174 $ — $ 6 $ — $ 11 $ 355 $ 546 Non-accrual loans by amortized cost as of September 30, 2020, was as follows: Amortized cost of loans on non-accrual September 30, 2020 Residential mortgage: $ 64 Commercial mortgage: — Total non-accrual loans $ 64 Allowance for Expected Credit Loss We estimate expected credit losses for our mortgage loan portfolio using a probability of default/loss given default model. Significant inputs to this model include the loans' current performance, underlying collateral type, location, contractual life, LTV, and Debt to Income or FICO. The model projects losses using a two year reasonable and supportable forecast and then reverts over a three year period to market-wide historical loss experience. Changes in our allowance for expected credit losses on mortgage loans are recognized in Recognized gains and losses, net in the accompanying unaudited Condensed Consolidated Statements of Earnings. Credit losses on purchase credit deteriorated (“PCD”) financial assets were recognized on the opening balance sheet for the amounts shown in the table below (in millions). September 30, 2020 Credit Losses on PCD Financial Assets Residential Mortgage Commercial Mortgage Total Provision for loan losses $ 26 $ 2 $ 28 For initial credit losses on purchased loans accounted for as PCD financial assets 7 — 7 Balance, September 30, 2020 $ 33 $ 2 $ 35 An allowance for expected credit loss is not measured on accrued interest income for commercial mortgage loans as we have a process to write-off interest on loans that enter into non-accrual status (over 90 days past due). Allowances for expected credit losses are measured on accrued interest income for residential mortgage loans as seen in the table below (in millions). September 30, 2020 Residential Mortgage $ — Commercial Mortgage — Total loans that are 90 days past due and still accruing $ — Interest and Investment Income The major sources of Interest and investment income reported on the accompanying unaudited Condensed Consolidated Statements of Earnings were as follows (in millions): Three months ended Nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Fixed maturity securities, available-for-sale $ 286 $ 18 $ 419 $ 54 Equity securities 5 3 14 7 Preferred securities 15 5 40 17 Mortgage loans 24 — 31 — Invested cash and short-term investments — 9 8 24 Limited partnerships 25 — 25 — Tax deferred property exchange income 5 20 28 55 Other investments 7 3 19 16 Gross investment income 367 58 584 173 Investment expense (31) (1) (43) (3) Net investment income $ 336 $ 57 $ 541 $ 170 Recognized Gains and Losses, net Details underlying Recognized gains and losses, net reported on the accompanying unaudited Condensed Consolidated Statements of Earnings were as follows (in millions): Three months ended Nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Net realized gains on fixed maturity available-for-sale securities $ 20 $ 1 $ 36 $ 2 Net realized/unrealized gains (losses) on equity securities (2) (6) (2) (63) 171 Net realized/unrealized gains (losses) on preferred securities (3) 46 4 (28) 23 Realized losses on other invested assets (10) 1 (23) (9) Change in allowance for expected credit losses (11) — (35) — Derivatives and embedded derivatives: Realized gains on certain derivative instruments 30 — 39 — Unrealized gains on certain derivative instruments 16 — 21 — Change in fair value of reinsurance related embedded derivatives (1) (14) — (35) — Change in fair value of other derivatives and embedded derivatives 2 — 3 — Realized losses on derivatives and embedded derivatives 34 — 28 — Recognized gains and losses, net $ 73 $ 4 $ (85) $ 187 (1) Change in fair value of reinsurance related embedded derivatives is due to held for sale unaffiliated third party business under the fair value option election, and activity related to the FGL Insurance and Kubera reinsurance treaty. (2) Includes valuation losses of less than $1 million and $56 million for the three and nine months ended September 30, 2020, respectively, and valuation (losses) gains of $(1) million and $167 million for the three and nine months ended September 30, 2019, respectively. (3) Includes valuation gains (losses) of $18 million and $(55) million for the three and nine months ended September 30, 2020, respectively, and valuation gains of $4 million and $23 million for the three and nine months ended September 30, 2019, respectively. The proceeds from the sale of fixed-maturity available for-sale-securities and the gross gains and losses associated with those transactions were as follows (in millions): Three months ended Nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Proceeds $ 493 $ 78 $ 1,007 $ 450 Gross gains 24 1 53 3 Gross losses (5) — (12) (1) Unconsolidated Variable Interest Entities The Company owns investments in VIEs that are not consolidated within our financial statements, and one investment in a VIE that is considered consolidated within our financial statements. VIEs do not have sufficient equity to finance their own activities without additional financial support and certain of its investors lack certain characteristics of a controlling financial interest. VIEs are consolidated by their ‘primary beneficiary’, a designation given to an entity that receives both the benefits from the VIE as well as the substantive power to make its key economic decisions. While the Company participates in the benefits from VIEs in which it invests, but does not consolidate, the substantive power to make the key economic decisions for each respective VIE resides with entities not under common control with the Company. It is for this reason that the Company is not considered the primary beneficiary for the VIE investments that are not consolidated. We have concluded we are the primary beneficiary of one VIE. The primary beneficiary conclusion was drawn given the fact that substantially all of the VIE’s activities are conducted on our behalf and we are the sole investor and limited partner. As we are considered the primary beneficiary, this VIE is consolidated within our financial statements. As of September 30, 2020, we have $75 million of net assets recorded related to this VIE. We previously executed a commitment of $83 million to purchase common shares in an unaffiliated private business development company ("BDC"). The BDC invests in secured and unsecured fixed maturity and equity securities of middle market companies in the United States. Due to the voting structure of the transaction, the Company does not have voting power. As of September 30, 2020, the BDC was listed on the NASDAQ. We invest in various limited partnerships as a passive investor. These investments are in credit funds with a bias towards current income, real assets, or private equity. Limited partnership interests are accounted for under the equity method and are included in Investments in unconsolidated affiliates on our unaudited Condensed Consolidated Balance Sheets. Our maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in our unaudited Condensed Consolidated Balance Sheets in addition to any required unfunded commitments. As of September 30, 2020, our maximum exposure to loss was $1,161 million in recorded carrying value and $1,343 million in unfunded commitments. Investment with Related Party Included in equity securities as of September 30, 2020 and December 31, 2019 are 5,706,134 shares of Cannae common stock (NYSE: CNNE) which were purchased during the fourth quarter of 2017 in connection with the split-off of our former portfolio company investments to Cannae. The fair value of our related party investment based on quoted market prices is $213 million and $212 million as of September 30, 2020 and December 31, 2019, respectively. |
