| Investments |
4. Investments
AFS Securities
See Note 1 in our 2016 Form 10-K for information regarding our accounting policy relating to AFS securities, which also includes additional disclosures regarding our fair value measurements.
The amortized cost, gross unrealized gains, losses and OTTI and fair value of AFS securities (in millions) were as follows:
As of June 30, 2017
Amortized
Gross Unrealized
Fair
Cost
Gains
Losses
OTTI (1)
Value
Fixed maturity securities:
Corporate bonds
$ 74,934
$ 6,108
$ 500
$ (6
)
$ 80,548
Asset-backed securities ("ABS")
996
46
12
(20
)
1,050
U.S. government bonds
536
44
2
-
578
Foreign government bonds
397
58
-
-
455
Residential mortgage-backed securities ("RMBS")
3,412
160
38
(18
)
3,552
Commercial mortgage-backed securities ("CMBS")
466
10
2
(2
)
476
Collateralized loan obligations ("CLOs")
697
4
2
(4
)
703
State and municipal bonds
4,172
850
12
-
5,010
Hybrid and redeemable preferred securities
584
85
27
-
642
Total fixed maturity securities
86,194
7,365
595
(50
)
93,014
Equity securities
262
19
6
-
275
Total AFS securities
$ 86,456
$ 7,384
$ 601
$ (50
)
$ 93,289
As of December 31, 2016
Amortized
Gross Unrealized
Fair
Cost
Gains
Losses
OTTI (1)
Value
Fixed maturity securities:
Corporate bonds
$ 73,275
$ 4,754
$ 970
$ (5
)
$ 77,064
ABS
1,047
39
14
(13
)
1,085
U.S. government bonds
384
37
2
-
419
Foreign government bonds
449
58
1
-
506
RMBS
3,534
147
73
(6
)
3,614
CMBS
345
8
4
(1
)
350
CLOs
742
1
3
(4
)
744
State and municipal bonds
3,929
718
20
-
4,627
Hybrid and redeemable preferred securities
582
70
48
-
604
VIEs’ fixed maturity securities
200
-
-
-
200
Total fixed maturity securities
84,487
5,832
1,135
(29
)
89,213
Equity securities
260
19
4
-
275
Total AFS securities
$ 84,747
$ 5,851
$ 1,139
$ (29
)
$ 89,488
(1)
Includes unrealized (gains) and losses on impaired securities related to changes in the fair value of such securities subsequent to the impairment measurement date.
The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of June 30 , 2017 , were as follows:
Amortized
Fair
Cost
Value
Due in one year or less
$ 3,559
$ 3,750
Due after one year through five years
16,854
18,006
Due after five years through ten years
15,756
16,742
Due after ten years
44,454
48,735
Subtotal
80,623
87,233
Structured securities (ABS, MBS, CLOs)
5,571
5,781
Total fixed maturity AFS securities
$ 86,194
$ 93,014
Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.
The fair value and gross unrealized losses, including the p ortion of OTTI recognized in OCI, of AFS securities (dollars in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
As of June 30, 2017
Less Than or Equal
Greater Than
to Twelve Months
Twelve Months
Total
Gross
Gross
Gross
Unrealized
Unrealized
Unrealized
Fair
Losses and
Fair
Losses and
Fair
Losses and
Value
OTTI
Value
OTTI
Value
OTTI
Fixed maturity securities:
Corporate bonds
$ 8,521
$ 223
$ 2,417
$ 279
$ 10,938
$ 502
ABS
84
3
260
21
344
24
U.S. government bonds
172
2
-
-
172
2
RMBS
805
35
146
5
951
40
CMBS
92
2
8
2
100
4
CLOs
227
2
19
-
246
2
State and municipal bonds
132
7
47
5
179
12
Hybrid and redeemable
preferred securities
22
1
151
26
173
27
Total fixed maturity securities
10,055
275
3,048
338
13,103
613
Equity securities
10
4
15
1
25
5
Total AFS securities
$ 10,065
$ 279
$ 3,063
$ 339
$ 13,128
$ 618
Total number of AFS securities in an unrealized loss position
1,155
As of December 31, 2016
Less Than or Equal
Greater Than
to Twelve Months
Twelve Months
Total
Gross
Gross
Gross
Unrealized
Unrealized
Unrealized
Fair
Losses and
Fair
Losses and
Fair
Losses and
Value
OTTI
Value
OTTI
Value
OTTI
Fixed maturity securities:
Corporate bonds
$ 15,820
$ 569
$ 3,187
$ 403
$ 19,007
$ 972
ABS
201
4
298
25
499
29
U.S. government bonds
18
2
-
-
18
2
Foreign government bonds
29
1
-
-
29
1
RMBS
989
58
392
23
1,381
81
CMBS
190
4
19
2
209
6
CLOs
259
3
25
-
284
3
State and municipal bonds
227
12
47
8
274
20
Hybrid and redeemable
preferred securities
76
4
143
44
219
48
Total fixed maturity securities
17,809
657
4,111
505
21,920
1,162
Equity securities
4
2
44
2
48
4
Total AFS securities
$ 17,813
$ 659
$ 4,155
$ 507
$ 21,968
$ 1,166
Total number of AFS securities in an unrealized loss position
1,744
The fair value, gross unrealized losses, the portion of OTTI recognized in OCI (in millions) and number of AFS securities where the fair value had declined and remained below amortized cost by greater than 20% were as follows:
As of June 30, 2017
Number
Fair
Gross Unrealized
of
Value
Losses
OTTI
Securities (1)
Less than six months
$ 64
$ 26
$
-
21
Six months or greater, but less than nine months
41
14
-
5
Nine months or greater, but less than twelve months
2
1
1
3
Twelve months or greater
253
110
9
51
Total
$ 360
$ 151
$ 10
80
As of December 31, 2016
Number
Fair
Gross Unrealized
of
Value
Losses
OTTI
Securities (1)
Less than six months
$ 174
$ 52
$ 2
19
Nine months or greater, but less than twelve months
1
1
-
2
Twelve months or greater
364
167
10
62
Total
$ 539
$ 220
$ 12
83
(1)
We may reflect a security in more than one aging category based on various purchase dates.
We regularly review our investment holdings for OTTI. Our gross unrealized losses, including the portion of OTTI recognized in OCI, on AFS securities decreased by $ 548 million for the six months ended June 30 , 2017 . As discussed further below, we believe the unrealized loss position as of June 30 , 2017 , did not represent OTTI as (i) we did not intend to sell these fixed maturity AFS securities; (ii) it is not more likely than not that we will be required to sell these fixed maturity AFS securities before recovery of their amortized cost basis; (iii) the estimated future cash flows were equal to or greater than the amortized cost basis of the debt securities; and (iv) we had the ability and intent to hold the equity AFS securities for a period of time sufficient for recovery.
Based upon this evaluation as of June 30 , 2017 , management believes we have the ability to generate adequate amounts of cash from our normal operations (e.g., insurance premiums and fees and investment income) to meet cash requirements with a prudent margin of safety without requiring the sale of our temporarily-impaired securities.
As of June 30 , 2017 , the unrealized losses associated with our corporate bond securities were attributable primarily to widening credit spreads and rising interest rates since purchase. We performed a detailed analysis of the financial performance of the underlying issuers and determined that we expected to recover the entire amortized cost for each temporarily-impaired security.
As of June 30 , 2017 , the unrealized losses associated with our mortgage-backed securities ( “ MBS ” ) and ABS were attributable primarily to widening credit spreads and rising interest rates since purchase . We assessed for credit impairment using a cash flow model that incorporates key assumptions including default rates, severities and prepayment rates. We estimated losses for a security by forecasting the underlying loans in each transaction. The forecasted loan performance was used to project cash flows to the various tranches in the structure, as applicable. Our forecasted cash flows also considered, as applicable, independent industr y analyst reports and forecasts and other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our subordination or other credit enhancement, we expected to recover the entire amortized cost of each temporarily-impaired security.
As of June 30 , 2017 , the unrealized losses associated with our hybrid and redeemable preferred securities were attributable primarily to wider credit spreads caused by illiquidity in the market and subordination within the capital structure, as well as credit risk of underlying issuers. For our hybrid and redeemable preferred securities, we evaluated the financial performance of the underlying issuers based upon credit performance and investment ratings and determined that we expected to recover the entire amortized cost of each temporarily-impaired security.
Changes in the amount of credit loss of OTTI recognized in net income (loss) where the portion related to other factors was recognized in OCI (in millions) on fixed maturity AFS securities were as follows:
For the Three
For the Six
Months Ended
Months Ended
June 30,
June 30,
2017
2016
2017
2016
Balance as of beginning-of-period
$ 393
$ 413
$ 430
$ 382
Increases attributable to:
Credit losses on securities for which an
OTTI was not previously recognized
4
26
5
61
Credit losses on securities for which an
OTTI was previously recognized
-
2
3
7
Decreases attributable to:
Securities sold, paid down or matured
(7
)
(10
)
(48
)
(19
)
Balance as of end-of-period
$ 390
$ 431
$ 390
$ 431
During the six months ended June 30 , 2017 and 2016 , we recorded credit losses on securities for which an OTTI was not previously recognized as we determined the cash flows expected to be collected would not be sufficient to recover the entire amortized cost basis of the debt security. The credit losses we recorded on securities for which an OTTI was not previously recognized were attributable primarily to one or a combination of the following reasons:
·
Failure of the issuer of the security to make scheduled payments;
·
Deterioration of creditworthiness of the issuer;
·
Deterioration of conditions specifically related to the security;
·
Deterioration of fundamentals of the industry in which the issuer operates; and
·
Deterioration of the rating of the security by a rating agency.
We recognize the OTTI attributed to the noncredit portion as a separate component in OCI referred to as unrealized OTTI on AFS securities.
Details of the amount of credit loss of OTTI recognized in net income (loss) for which a portion related to other factors was recognized in OCI (in millions), were as follows:
As of June 30, 2017
Net
Unrealized
OTTI in
Amortized
Gain/(Loss)
Fair
Credit
Cost
Position
Value
Losses
Corporate bonds
$ 22
$ 6
$ 28
$ 43
ABS
199
20
219
112
RMBS
292
18
310
188
CMBS
18
2
20
39
CLOs
11
4
15
5
State and municipal bonds
-
-
-
3
Total
$ 542
$ 50
$ 592
$ 390
As of December 31, 2016
Net
Unrealized
OTTI in
Amortized
Gain/(Loss)
Fair
Credit
Cost
Position
Value
Losses
Corporate bonds
$ 80
$ 5
$ 85
$ 77
ABS
212
13
225
112
RMBS
332
6
338
194
CMBS
29
1
30
39
CLOs
11
4
15
5
State and municipal bonds
2
-
2
3
Total
$ 666
$ 29
$ 695
$ 430
Mortgage Loans on Real Estate
See Note 1 in our 2016 Form 10-K for information regarding our accounting policy relating to mortgage loans on real estate.
Mortgage loans on real estate principally involve commercial real estate. The commercial loans are geographically diversified throughout the U.S. with the largest concentrations in California and Texas, which accounted for 20% and 11% , respectively , of mortgage loans on real estate as of June 30 , 2017, and December 31, 2016.
The following provides the current and past due composition of our mortgage loans on real estate (in millions):
As of
As of
June 30,
December 31,
2017
2016
Current
$ 10,023
$ 9,888
60 to 90 days past due
-
-
Greater than 90 days past due
2
2
Valuation allowance associated with impaired mortgage loans on real estate
(2
)
(2
)
Unamortized premium (discount)
-
1
Total carrying value
$ 10,023
$ 9,889
The number of impaired mortgage loans on real estate, each of which had an associated specific valuation allowance, and the carrying value of impaired mortgage loans on real estate (dollars in millions) were as follows:
As of
As of
June 30,
December 31,
2017
2016
Number of impaired mortgage loans on real estate
2
2
Principal balance of impaired mortgage loans on real estate
$ 7
$ 7
Valuation allowance associated with impaired mortgage loans on real estate
(2
)
(2
)
Carrying value of impaired mortgage loans on real estate
$ 5
$ 5
The changes in the valuation allowance associated with impaired mortgage loans on real estate (in millions) were as follows:
For the Three
For the Six
Months Ended
Months Ended
June 30,
June 30,
2017
2016
2017
2016
Balance as of beginning-of-period
$ 2
$ 2
$ 2
$ 2
Additions
-
-
-
-
Charge-offs, net of recoveries
-
-
-
-
Balance as of end-of-period
$ 2
$ 2
$ 2
$ 2
Additional information related to impaired mortgage loans on real estate (in millions) was as follows:
For the Three
For the Six
Months Ended
Months Ended
June 30,
June 30,
2017
2016
2017
2016
Average carrying value for impaired mortgage loans on real estate
$ 5
$ 6
$ 5
$ 6
Interest income recognized on impaired mortgage loans on real estate
-
-
-
-
Interest income collected on impaired mortgage loans on real estate
-
-
-
-
As described in Note 1 in our 2016 Form 10-K, we use the loan-to-value and debt-service coverage ratios as credit quality indicators for our mortgage loans, which were as follows (dollars in millions):
As of June 30, 2017
As of December 31, 2016
Debt-
Debt-
Service
Service
Carrying
% of
Coverage
Carrying
% of
Coverage
Loan-to-Value Ratio
Value
Total
Ratio
Value
Total
Ratio
Less than 65%
$ 8,993
89.7%
2.22
$ 8,709
88.0%
2.16
65% to 74%
892
8.9%
1.89
1,009
10.2%
1.87
75% to 100%
133
1.3%
0.82
166
1.7%
0.82
Greater than 100%
5
0.1%
1.04
5
0.1%
1.04
Total mortgage loans on real estate
$ 10,023
100.0%
$ 9,889
100.0%
Alternative Investments
As of June 30 , 2017 , and December 31, 201 6 , alternative investments included investments in 206 and 202 different partnerships, respectively, and the portfolios represented approximately 1 % of our overall invested assets.
Realized Gain (Loss) Related to Certain Investments
The detail of the realized gain (loss) related to certain investments (in millions) was as follows:
For the Three
For the Six
Months Ended
Months Ended
June 30,
June 30,
2017
2016
2017
2016
Fixed maturity AFS securities: (1)
Gross gains
$ 3
$ 7
$ 11
$ 61
Gross losses
(13
)
(65
)
(25
)
(163
)
Equity AFS securities:
Gross gains
-
2
1
2
Gross losses
-
(1
)
-
(1
)
Gain (loss) on other investments
(2
)
(3
)
(5
)
(63
)
Associated amortization of DAC, VOBA, DSI and DFEL
and changes in other contract holder funds
(6
)
(5
)
(13
)
(8
)
Total realized gain (loss) related to certain investments, pre-tax
$ (18
)
$ (65
)
$ (31
)
$ (172
)
(1)
These amounts are represented net of related fair value hedging activity. See Note 5 for more information.
Details underlying write-downs taken as a result of OTTI (in millions) that were recognized in net income (loss) and included in realized gain (loss) on AFS securities above, and the portion of OTTI recognized in OCI (in millions) were as follows:
For the Three
For the Six
Months Ended
Months Ended
June 30,
June 30,
2017
2016
2017
2016
OTTI Recognized in Net Income (Loss)
Fixed maturity securities:
Corporate bonds
$ (4
)
$ (26
)
$ (5
)
$ (62
)
ABS
-
(1
)
(1
)
(3
)
RMBS
-
(1
)
(1
)
(3
)
State and municipal bonds
-
-
(1
)
-
Total fixed maturity securities
(4
)
(28
)
(8
)
(68
)
Equity securities
-
(1
)
-
(1
)
Gross OTTI recognized in net income (loss)
(4
)
(29
)
(8
)
(69
)
Associated amortization of DAC, VOBA, DSI and DFEL
-
1
-
5
Net OTTI recognized in net income (loss), pre-tax
$ (4
)
$ (28
)
$ (8
)
$ (64
)
Portion of OTTI Recognized in OCI
Gross OTTI recognized in OCI
$
-
$ 10
$
-
$ 36
Change in DAC, VOBA, DSI and DFEL
-
(2
)
-
(8
)
Net portion of OTTI recognized in OCI, pre-tax
$
-
$ 8
$
-
$ 28
Determination of Credit Losses on Corporate Bonds and ABS
As of June 30 , 2017 , and December 31, 2016 , we reviewed our corporate bond and ABS portfolios for potential shortfall in contractual principal and interest based on numerous subjective and objective inputs. The factors used to determine the amount of credit loss for each individual security, include, but are not limited to, near term risk, substantial discrepancy between book and market value, sector or company-specific volatility, negative operating trends and trading levels wider than peers.
Credit ratings express opinions about the credit quality of a security. Securities rated investment grade, that is those rated BBB- or higher by Standard & Poor’s ( “ S&P ” ) Rating Services or Baa3 or higher by Moody’s Investors Service ( “ Moody’s ” ), are generally considered by the rating agencies and market participants to be low credit risk. As of June 30 , 2017 , and December 31, 2016 , 96% and 95% , respectively, of the fair value of our corporate bond portfolio was rated investment grade. As of June 30 , 2017 , and December 31, 2016 , the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $ 3.5 billion and $3.8 billion, respectively, and a fair value of $ 3.4 billion and $ 3.7 billion, respectively. As of June 30 , 2017, and December 31, 201 6 , 96% of the fair value of our ABS portfolio was rated investment grade. As of June 30, 2017, and December 31, 2016 , the portion of our ABS portfolio rated below investment grade had an amortized cost of $ 86 million and $ 91 million, respectively, and a fair value of $73 million and $ 75 million, respectively. Based upon the analysis discussed above, we believe as of June 30 , 2017, and December 31, 2016 , that we would recover the amortized cost of each fixed maturity security.
Determination of Credit Losses on MBS
As of June 30 , 2017, and December 31, 2016 , default rates were projected by considering underlying MBS loan performance and collateral type. Projected default rates on existing delinquencies vary between 10% to 100% depending on loan type and severity of delinquency status. In addition, we estimate the potential contributions of currently performing loans that may become delinquent in the future based on the change in delinquencies and loan liquidations experienced in the recent history. Finally, we develop a default rate timing curve by aggregating the defaults for all loans in the pool (delinquent loans, foreclosure and real estate owned and new delinquencies from currently performing loans) and the associated loan-level loss severities.
We use certain available loan characteristics such as lien status, loan sizes and occupancy to estimate the loss severity of loans. Second lien loans are assigned 100% severity, if defaulted. For first lien loans, we assume a minimum of 30% severity with higher severity assumed for investor properties and further adjusted by housing price assumptions. With the default rate timing curve and loan-level loss severity, we derive the future expected credit losses.
Payables for Collateral on Investments
The carrying value of the payables for collateral on investments (in millions) included on our Consolidated Balance Sheets and the fair value of the related investments or collateral consisted of the following:
As of June 30, 2017
As of December 31, 2016
Carrying
Fair
Carrying
Fair
Value
Value
Value
Value
Collateral payable for derivative investments (1)
$ 1,054
$ 1,054
$ 894
$ 894
Securities pledged under securities lending agreements (2)
208
200
216
209
Securities pledged under repurchase agreements (3)
540
587
535
589
Investments pledged for Federal Home Loan Bank of
Indianapolis (“FHLBI”) (4)
3,150
4,654
3,350
4,947
Total payables for collateral on investments
$ 4,952
$ 6,495
$ 4,995
$ 6,639
(1)
We obtain collateral based upon contractual provisions with our counterparties. These agreements take into consideration the counterparties’ credit rating as compared to ours, the fair value of the derivative investments and specified thresholds that if exceeded result in the receipt of cash that is typically invested in cash and invested cash. See Note 5 for additional information.
(2)
Our pledged securities under securities lending agreements are included in fixed maturity AFS securities on our Consolidated Balance Sheets. We generally obtain collateral in an amount equal to 102 % and 105 % of the fair value of the domestic and foreign securities, respectively. We value collateral daily and obtain additional collateral when deemed appropriate. The cash received in our securities lending program is typically invested in cash and invested cash or fixed maturity AFS securities.
(3)
Our pledged securities under repurchase agreements are included in fixed maturity AFS securities on our Consolidated Balance Sheets. We obtain collateral in an amount equal to 95 % of the fair value of the securities, and our agreements with third parties contain contractual provisions to allow for additional collateral to be obtained when necessary. The cash received in our repurchase program is typically invested in fixed maturity AFS securities.
(4)
Our pledged investments for FHLBI are included in fixed maturity AFS securities and mortgage loans on real estate on our Consolidated Balance Sheets. The collateral requirements are generally 105 % to 115 % of the fair value for fixed maturity AFS securities and 155 % to 175 % of the fair value for mortgage loans on real estate. The cash received in these transactions is primarily invested in cash and invested cash or fixed maturity AFS securities.
Increase (decrease) in payables for collateral on investments (in millions) consisted of the following:
For the Six
Months Ended
June 30,
2017
2016
Collateral payable for derivative investments
$ 160
$ 1,617
Securities pledged under securities lending agreements
(8
)
7
Securities pledged under repurchase agreements
5
16
Investments pledged for FHLBI
(200
)
-
Total increase (decrease) in payables for collateral on investments
$ (43
)
$ 1,640
We have elected not to offset our repurchase agreements and securities lending transactions in our financial statements. The remaining contractual maturities of repurchase agreements and securities lending transactions accounted for as secured borrowings were as follows:
As of June 30, 2017
Overnight and Continuous
Up to 30 Days
30 - 90 Days
Greater Than 90 Days
Total
Repurchase Agreements
Corporate bonds
$
-
$ 100
$ 290
$ 150
$ 540
Total
-
100
290
150
540
Securities Lending
Corporate bonds
208
-
-
-
208
Total
208
-
-
-
208
Total gross secured borrowings
$ 208
$ 100
$ 290
$ 150
$ 748
As of December 31, 2016
Overnight and Continuous
Up to 30 Days
30 - 90 Days
Greater Than 90 Days
Total
Repurchase Agreements
Corporate bonds
$
-
$
-
$ 389
$ 146
$ 535
Total
-
-
389
146
535
Securities Lending
Corporate bonds
212
-
-
-
212
Foreign government bonds
4
-
-
-
4
Total
216
-
-
-
216
Total gross secured borrowings
$ 216
$
-
$ 389
$ 146
$ 751
We accept collateral in the form of securities in connection with repurchase agreements. In instances where we are permitted to sell or re-pledge the securities received, we report the fair value of the collateral received and a related obligation to return the collateral in the financial statements. In addition, we receive securities in connection with securities borrowing agreements, which we are permitted to sell or re-pledge. As of June 30 , 2017, the fair value of all collateral received that we are permitted to sell or re-pledge was $ 177 million . As of June 30 , 2017, we have re-pledged $80 million of this collateral to cover initial margin on certain derivative investments .
Investment Commitments
As of June 30, 2017 , our investment commitments were $ 1.7 billion, which included $ 794 million of LPs, $ 443 million of mortgage loans on real estate and $ 466 million of private placement securities.
Concentrations of Financial Instruments
As of June 30 , 2017 , and December 31, 2016 , our most significant investments in one issuer were our investments in securities issued by the Federal Home Loan Mortgage Corporation with a fair value of $ 1.4 billion and $ 1.5 billion, respectively, or 1% of our invested assets portfolio, and our investments in securities issued by Federal National Mortgage Association with a fair value of $ 1.0 billion and $1.1 billion, respectively, or 1 % of our invested assets portfolio. These concentrations include both AFS and trading securities.
As of June 30 , 2017, and December 31, 2016 , our most significant investments in one industry were our investment securities in the consumer non-cyclical industry with a fair value of $ 14.7 billion and $ 13.7 billion, respectively, or 13% of our invested assets portfolio, and our investment securities in the utilities industry with a fair value of $13.8 billion and $ 13.2 billion, respectively , or 12% of our invested assets portfolio. These concentrations include both AFS and trading securities . |
