GENWORTH FINANCIAL INC, 10-Q filed on 4/29/2015
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2015
Apr. 22, 2015
Document Information [Line Items]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Mar. 31, 2015 
 
Document Fiscal Year Focus
2015 
 
Document Fiscal Period Focus
Q1 
 
Trading Symbol
GNW 
 
Entity Registrant Name
GENWORTH FINANCIAL INC 
 
Entity Central Index Key
0001276520 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
497,388,632 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Mar. 31, 2015
Dec. 31, 2014
Assets
 
 
Fixed maturity securities available-for-sale, at fair value
$ 62,942 
$ 62,447 
Equity securities available-for-sale, at fair value
306 
282 
Commercial mortgage loans
6,149 
6,100 
Restricted commercial mortgage loans related to securitization entities
188 
201 
Policy loans
1,506 
1,501 
Other invested assets
2,723 
2,296 
Restricted other invested assets related to securitization entities, at fair value
411 
411 
Total investments
74,225 
73,238 
Cash and cash equivalents
5,158 
4,918 
Accrued investment income
735 
685 
Deferred acquisition costs
4,918 
5,042 
Intangible assets
227 
272 
Goodwill
15 
16 
Reinsurance recoverable
17,339 
17,346 
Other assets
650 
633 
Separate account assets
9,064 
9,208 
Total assets
112,331 
111,358 
Liabilities and stockholders' equity
 
 
Future policy benefits
36,488 
35,915 
Policyholder account balances
26,146 
26,043 
Liability for policy and contract claims
8,030 
8,043 
Unearned premiums
3,731 
3,986 
Other liabilities ($38 and $45 of other liabilities are related to securitization entities)
3,899 
3,604 
Borrowings related to securitization entities ($81 and $85 are at fair value)
205 
219 
Non-recourse funding obligations
1,983 
1,996 
Long-term borrowings
4,601 
4,639 
Deferred tax liability
1,103 
908 
Separate account liabilities
9,064 
9,208 
Total liabilities
95,250 
94,561 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 586 million and 585 million shares issued as of March 31, 2015 and December 31, 2014, respectively; 497 million shares outstanding as of March 31, 2015 and December 31, 2014
Additional paid-in capital
11,998 
11,997 
Net unrealized investment gains (losses):
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
2,724 
2,431 
Net unrealized gains (losses) on other-than-temporarily impaired securities
24 
22 
Net unrealized investment gains (losses)
2,748 1
2,453 1
Derivatives qualifying as hedges
2,247 2
2,070 2
Foreign currency translation and other adjustments
(303)
(77)
Total accumulated other comprehensive income (loss)
4,692 
4,446 
Retained earnings
1,333 
1,179 
Treasury stock, at cost (88 million shares as of March 31, 2015 and December 31, 2014)
(2,700)
(2,700)
Total Genworth Financial, Inc.'s stockholders' equity
15,324 
14,923 
Noncontrolling interests
1,757 
1,874 
Total stockholders' equity
17,081 
16,797 
Total liabilities and stockholders' equity
$ 112,331 
$ 111,358 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Mar. 31, 2015
Dec. 31, 2014
Other liabilities, securitization entities
$ 38 
$ 45 
Borrowings related to securitization entities, fair value
$ 81 
$ 85 
Class A common stock, par value
$ 0.001 
$ 0.001 
Class A common stock, shares authorized
1,500,000,000 
1,500,000,000 
Class A common stock, shares issued
586,000,000 
585,000,000 
Class A common stock, shares outstanding
497,000,000 
497,000,000 
Treasury stock, shares
88,000,000 
88,000,000 
Condensed Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2015
Mar. 31, 2014
Revenues:
 
 
Premiums
$ 1,323 
$ 1,307 
Net investment income
803 
805 
Net investment gains (losses)
(16)
(17)
Insurance and investment product fees and other
225 
227 
Total revenues
2,335 
2,322 
Benefits and expenses:
 
 
Benefits and other changes in policy reserves
1,243 
1,194 
Interest credited
180 
183 
Acquisition and operating expenses, net of deferrals
380 
378 
Amortization of deferred acquisition costs and intangibles
121 
134 
Interest expense
116 
127 
Total benefits and expenses
2,040 
2,016 
Income before income taxes
295 
306 
Provision for income taxes
91 
87 
Net income
204 
219 
Less: net income attributable to noncontrolling interests
50 
35 
Net income available to Genworth Financial, Inc.'s common stockholders
154 
184 
Net income available to Genworth Financial, Inc.'s common stockholders per common share:
 
 
Basic
$ 0.31 
$ 0.37 
Diluted
$ 0.31 
$ 0.37 
Weighted-average common shares outstanding:
 
 
Basic
497.0 
495.8 
Diluted
498.9 
502.7 
Supplemental disclosures:
 
 
Total other-than-temporary impairments
(3)
(1)
Portion of other-than-temporary impairments included in other comprehensive income (loss)
Net other-than-temporary impairments
(3)
(1)
Other investments gains (losses)
(13)
(16)
Net investment gains (losses)
$ (16)
$ (17)
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2015
Mar. 31, 2014
Net income
$ 204 
$ 219 
Other comprehensive income (loss), net of taxes:
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
323 
706 
Net unrealized gains (losses) on other-than-temporarily impaired securities
Derivatives qualifying as hedges
177 1
219 1
Foreign currency translation and other adjustments
(370)
(21)
Total other comprehensive income (loss)
132 
910 
Total comprehensive income (loss)
336 
1,129 
Less: comprehensive income attributable to noncontrolling interests
(64)
Total comprehensive income (loss) available to Genworth Financial, Inc.'s common stockholders
$ 400 
$ 1,125 
Condensed Consolidated Statements of Changes in Stockholders' Equity (USD $)
In Millions, unless otherwise specified
Total
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, at cost
Total Genworth Financial, Inc.'s stockholders' equity
Noncontrolling interests
Balances at Dec. 31, 2013
$ 15,620 
$ 1 
$ 12,127 
$ 2,542 
$ 2,423 
$ (2,700)
$ 14,393 
$ 1,227 
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income
219 
184 
184 
35 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
706 
692 
692 
14 
Net unrealized gains (losses) on other-than-temporarily impaired securities
Derivatives qualifying as hedges
219 1
219 
219 
Foreign currency translation and other adjustments
(21)
24 
24 
(45)
Total comprehensive income (loss)
1,129 
 
 
 
 
 
1,125 
Dividends to noncontrolling interests
(13)
(13)
Stock-based compensation expense and exercises and other
(2)
(3)
(3)
Balances at Mar. 31, 2014
16,734 
12,124 
3,483 
2,607 
(2,700)
15,515 
1,219 
Balances at Dec. 31, 2014
16,797 
11,997 
4,446 
1,179 
(2,700)
14,923 
1,874 
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income
204 
154 
154 
50 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
323 
293 
293 
30 
Net unrealized gains (losses) on other-than-temporarily impaired securities
Derivatives qualifying as hedges
177 1
177 
177 
Foreign currency translation and other adjustments
(370)
(226)
(226)
(144)
Total comprehensive income (loss)
336 
 
 
 
 
 
400 
(64)
Dividends to noncontrolling interests
(54)
(54)
Stock-based compensation expense and exercises and other
Balances at Mar. 31, 2015
$ 17,081 
$ 1 
$ 11,998 
$ 4,692 
$ 1,333 
$ (2,700)
$ 15,324 
$ 1,757 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2015
Mar. 31, 2014
Cash flows from operating activities:
 
 
Net income
$ 204 
$ 219 
Adjustments to reconcile net income to net cash from operating activities:
 
 
Amortization of fixed maturity securities discounts and premiums and limited partnerships
(17)
(28)
Net investment losses (gains)
16 
17 
Charges assessed to policyholders
(196)
(187)
Acquisition costs deferred
(110)
(119)
Amortization of deferred acquisition costs and intangibles
121 
134 
Deferred income taxes
39 
17 
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments
18 
26 
Stock-based compensation expense
(2)
Change in certain assets and liabilities:
 
 
Accrued investment income and other assets
(75)
(109)
Insurance reserves
614 
550 
Current tax liabilities
(3)
(182)
Other liabilities, policy and contract claims and other policy-related balances
15 
(285)
Net cash from operating activities
624 
61 
Cash flows from investing activities:
 
 
Fixed maturity securities
1,153 
1,135 
Commercial mortgage loans
198 
139 
Restricted commercial mortgage loans related to securitization entities
13 
Proceeds from sales of investments:
 
 
Fixed maturity and equity securities
420 
708 
Purchases and originations of investments:
 
 
Fixed maturity and equity securities
(1,839)
(2,172)
Commercial mortgage loans
(247)
(132)
Other invested assets, net
(64)
111 
Net cash from investing activities
(366)
(204)
Cash flows from financing activities:
 
 
Deposits to universal life and investment contracts
630 
814 
Withdrawals from universal life and investment contracts
(527)
(505)
Redemption of non-recourse funding obligations
(13)
(8)
Repayment of borrowings related to securitization entities
(11)
(7)
Dividends paid to noncontrolling interests
(54)
(13)
Other, net
10 
(12)
Net cash from financing activities
35 
269 
Effect of exchange rate changes on cash and cash equivalents
(53)
20 
Net change in cash and cash equivalents
240 
146 
Cash and cash equivalents at beginning of period
4,918 
4,214 
Cash and cash equivalents at end of period
$ 5,158 
$ 4,360 
Formation of Genworth and Basis of Presentation
Formation of Genworth and Basis of Presentation

(1) Formation of Genworth and Basis of Presentation

Genworth Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware in 2003 in preparation for an initial public offering of Genworth common stock, which was completed on May 28, 2004. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, 100% owned subsidiary of a new public holding company that it had formed. The new public holding company was incorporated in Delaware on December 5, 2012, in connection with the reorganization, under the name Sub XLVI, Inc., and was renamed Genworth Financial, Inc. (“Genworth Financial”) upon the completion of the reorganization.

The accompanying unaudited condensed financial statements include on a consolidated basis the accounts of Genworth Financial and the affiliate companies in which it holds a majority voting interest or where it is the primary beneficiary of a variable interest entity (“VIE”). All intercompany accounts and transactions have been eliminated in consolidation.

References to “Genworth,” the “Company,” “we” or “our” in the accompanying consolidated financial statements and these notes thereto are, unless the context otherwise requires, to Genworth Financial on a consolidated basis.

We have the following operating segments:

 

    International Mortgage Insurance. We are a leading provider of mortgage insurance products and related services in Canada and Australia and also participate in select European and other countries. Our products predominantly insure prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. We also selectively provide mortgage insurance on a structured, or bulk, basis that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk.

 

    U.S. Mortgage Insurance. In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. We selectively provide mortgage insurance on a bulk basis with essentially all of our bulk writings being prime-based. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk.

 

    U.S. Life Insurance. We offer and manage a variety of insurance and fixed annuity products in the United States. Our primary products include long-term care insurance, life insurance and fixed annuities.

 

    International Protection. We provide payment protection coverages (referred to as lifestyle protection) in multiple European countries and have operations in select other countries. Our lifestyle protection insurance products primarily help consumers meet specified payment obligations should they become unable to pay due to accident, illness, involuntary unemployment, disability or death.

 

    Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold. Our non-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”). We no longer offer retail and group variable annuities but continue to service our existing blocks of business.

We also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other non-core businesses that are managed outside of our operating segments, including discontinued operations.

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These unaudited condensed consolidated financial statements include all adjustments (including normal recurring adjustments) considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these unaudited condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2014 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

Accounting Changes
Accounting Changes

(2) Accounting Changes

a) Accounting Pronouncements Recently Adopted

On January 1, 2015, we early adopted new accounting guidance related to measuring the financial assets and financial liabilities of a consolidated collateralized financing entity. The guidance addresses the accounting for the measurement difference between the fair value of financial assets and the fair value of financial liabilities of a collateralized financing entity. The new guidance provides an alternative whereby a reporting entity could measure the financial assets and financial liabilities of the collateralized financing entity in its consolidated financial statements using the more observable of the fair values. There was no impact on our consolidated financial statements.

On January 1, 2015, we adopted new accounting guidance related to the accounting for repurchase-to-maturity transactions and repurchase financings. The new guidance changed the accounting for repurchase-to-maturity transactions and repurchase financing such that they were consistent with secured borrowing accounting. In addition, the guidance requires new disclosures for all repurchase agreements and securities lending transactions which will be effective in the second quarter of 2015. We do not have repurchase-to-maturity transactions, but have repurchase agreements and securities lending transactions that will be subject to additional disclosures. This new guidance did not have an impact on our consolidated financial statements but will impact our disclosures in the second quarter of 2015.

On January 1, 2015, we adopted new accounting guidance related to the accounting for investments in affordable housing projects that qualify for the low-income housing tax credit. The new guidance permits reporting entities to make an accounting policy election to account for investments in qualified affordable housing projects by amortizing the initial cost of the investment in proportion to the tax benefits received and recognize the net investment performance as a component of income tax expense (called the proportional amortization method) if certain conditions are met. The new guidance requires use of the equity method or cost method for investments in qualified affordable housing projects not accounted for using the proportional amortization method. The adoption of this new guidance did not have a material impact on our consolidated financial statements.

 

On January 1, 2015, we early adopted new accounting guidance related to the accounting for share-based payment awards when the terms of an award provide that a performance target can be achieved after the requisite service period. The guidance requires that such performance targets should not be reflected in estimating the grant-date fair value of an award, and that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. We have a performance stock unit plan where awards for employees who are retirement eligible can vest on a pro-rata basis upon retirement even if retirement occurs before the performance target is achieved. There was no impact on our consolidated financial statements.

b) Accounting Pronouncement Not Yet Adopted

In April 2015, the Financial Accounting Standards Board (the “FASB”) issued new guidance related to the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance is effective for us on January 1, 2016, with early adoption permitted, and is required to be applied on a retrospective basis. We are still in the process of evaluating the impact the guidance will have on our consolidated financial statements.

In February 2015, the FASB issued new accounting guidance related to consolidation. This guidance primarily impacts limited partnerships and similar legal entities, evaluation of fees paid to a decision maker as a variable interest, the effect of fee arrangements and related parties on the primary beneficiary determination and certain investment funds. This guidance is effective for us on January 1, 2016, with early adoption permitted. We are in the process of determining the impact on our consolidated financial statements.

Earnings Per Share
Earnings Per Share

(3) Earnings Per Share

Basic and diluted earnings per share are calculated by dividing each income category presented below by the weighted-average basic and diluted shares outstanding for the periods indicated:

 

     Three months ended  
     March 31,  

(Amounts in millions, except per share amounts)

       2015              2014      

Weighted-average shares used in basic earnings per common share calculations

     497.0        495.8  

Potentially dilutive securities:

     

Stock options, restricted stock units and stock appreciation rights

     1.9        6.9  
  

 

 

    

 

 

 

Weighted-average shares used in diluted earnings per common share calculations

  498.9     502.7  
  

 

 

    

 

 

 

Net income:

Net income

$ 204   $ 219  

Less: net income attributable to noncontrolling interests

  50     35  
  

 

 

    

 

 

 

Net income available to Genworth Financial, Inc.’s common stockholders

$ 154   $ 184  
  

 

 

    

 

 

 

Basic per common share

$ 0.31   $ 0.37  
  

 

 

    

 

 

 

Diluted per common share

$ 0.31   $ 0.37  
  

 

 

    

 

 

 
Investments
Investments

(4) Investments

(a) Net Investment Income

Sources of net investment income were as follows for the periods indicated:

 

     Three months ended  
     March 31,  

(Amounts in millions)

       2015             2014      

Fixed maturity securities—taxable

   $ 639     $ 648  

Fixed maturity securities—non-taxable

     3       3  

Commercial mortgage loans

     85       83  

Restricted commercial mortgage loans related to securitization entities

     4       4  

Equity securities

     4       4  

Other invested assets

     55       50  

Restricted other invested assets related to securitization entities

     1       1  

Policy loans

     33       31  

Cash, cash equivalents and short-term investments

     3       5  
  

 

 

   

 

 

 

Gross investment income before expenses and fees

  827     829  

Expenses and fees

  (24   (24
  

 

 

   

 

 

 

Net investment income

$ 803   $ 805  
  

 

 

   

 

 

 

(b) Net Investment Gains (Losses)

The following table sets forth net investment gains (losses) for the periods indicated:

 

     Three months ended  
     March 31,  

(Amounts in millions)

       2015             2014      

Available-for-sale securities:

    

Realized gains

   $ 15     $ 7  

Realized losses

     (12     (23
  

 

 

   

 

 

 

Net realized gains (losses) on available-for-sale securities

  3     (16
  

 

 

   

 

 

 

Impairments:

Total other-than-temporary impairments

  (3   (1

Portion of other-than-temporary impairments included in other comprehensive income (loss)

  —       —    
  

 

 

   

 

 

 

Net other-than-temporary impairments

  (3   (1
  

 

 

   

 

 

 

Trading securities

  6     12  

Commercial mortgage loans

  2     3  

Net gains (losses) related to securitization entities

  8     6  

Derivative instruments (1)

  (32   (21
  

 

 

   

 

 

 

Net investment gains (losses)

$ (16 $ (17
  

 

 

   

 

 

 

 

(1)  See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses).

 

We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the three months ended March 31, 2015 and 2014 was $140 million and $265 million, respectively, which was approximately 93% and 92%, respectively, of book value.

The following represents the activity for credit losses recognized in net income on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in other comprehensive income (loss) (“OCI”) as of and for the three months ended March 31:

 

(Amounts in millions)

   2015      2014  

Beginning balance

   $ 83      $ 101  

Reductions:

     

Securities sold, paid down or disposed

     (5      (2
  

 

 

    

 

 

 

Ending balance

$ 78   $ 99  
  

 

 

    

 

 

 

(c) Unrealized Investment Gains and Losses

Net unrealized gains and losses on available-for-sale investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of the dates indicated:

 

(Amounts in millions)

   March 31, 2015     December 31, 2014  

Net unrealized gains (losses) on investment securities:

    

Fixed maturity securities

   $ 6,500     $ 5,560  

Equity securities

     35       32  

Other invested assets

     (2     (2
  

 

 

   

 

 

 

Subtotal

  6,533     5,590  

Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves

  (2,112   (1,656

Income taxes, net

  (1,534   (1,372
  

 

 

   

 

 

 

Net unrealized investment gains (losses)

  2,887     2,562  

Less: net unrealized investment gains (losses) attributable to noncontrolling interests

  139     109  
  

 

 

   

 

 

 

Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.

$ 2,748   $ 2,453  
  

 

 

   

 

 

 

 

The change in net unrealized gains (losses) on available-for-sale investment securities reported in accumulated other comprehensive income (loss) was as follows as of and for the three months ended March 31:

 

(Amounts in millions)

   2015     2014  

Beginning balance

   $ 2,453     $ 926  

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     943       1,431  

Adjustment to deferred acquisition costs

     (98     (99

Adjustment to present value of future profits

     (20     (52

Adjustment to sales inducements

     (15     (13

Adjustment to benefit reserves

     (323     (188

Provision for income taxes

     (162     (378
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

  325     701  

Reclassification adjustments to net investment (gains) losses, net of taxes of $— and $(6)

  —       11  
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

  325     712  

Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests

  30     14  
  

 

 

   

 

 

 

Ending balance

$ 2,748   $ 1,624  
  

 

 

   

 

 

 

(d) Fixed Maturity and Equity Securities

As of March 31, 2015, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

          Gross unrealized gains     Gross unrealized losses        
    Amortized     Not other-than-     Other-than-     Not other-than-     Other-than-        
    cost or     temporarily     temporarily     temporarily     temporarily     Fair  

(Amounts in millions)

  cost     impaired     impaired     impaired     impaired     value  

Fixed maturity securities:

           

U.S. government, agencies and government-sponsored enterprises

  $ 4,985     $ 1,147     $ —       $ —       $ —       $ 6,132  

Tax-exempt

    348       29       —         (16     —         361  

Government—non-U.S.

    1,829       180       —         (1     —         2,008  

U.S. corporate

    24,526       3,395       22       (43     —         27,900  

Corporate—non-U.S.

    13,791       1,177       1       (83     —         14,886  

Residential mortgage-backed

    4,746       414       15       (11     (1     5,163  

Commercial mortgage-backed

    2,508       180       5       (3     —         2,690  

Other asset-backed

    3,813       29       1       (41     —         3,802  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

  56,546     6,551     44     (198   (1   62,942  

Equity securities

  280     29     —       (3   —       306  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

$ 56,826   $ 6,580   $ 44   $ (201 $ (1 $ 63,248  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

As of December 31, 2014, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

          Gross unrealized gains     Gross unrealized losses        
    Amortized     Not other-than-     Other-than-     Not other-than-     Other-than-        
    cost or     temporarily     temporarily     temporarily     temporarily     Fair  

(Amounts in millions)

  cost     impaired     impaired     impaired     impaired     value  

Fixed maturity securities:

           

U.S. government, agencies and government-sponsored enterprises

  $ 5,006     $ 995     $ —       $ (1   $ —       $ 6,000  

Tax-exempt

    347       29       —         (14     —         362  

Government—non-U.S.

    1,952       156       —         (2     —         2,106  

U.S. corporate

    24,251       3,017       20       (88     —         27,200  

Corporate—non-U.S.

    14,214       1,015       —         (97     —         15,132  

Residential mortgage-backed

    4,881       362       15       (17     (1     5,240  

Commercial mortgage-backed

    2,564       143       4       (9     —         2,702  

Other asset-backed

    3,735       23       1       (54     —         3,705  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

  56,950     5,740     40     (282   (1   62,447  

Equity securities

  253     36     —       (7   —       282  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

$ 57,203   $ 5,776   $ 40   $ (289 $ (1 $ 62,729  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of March 31, 2015:

 

    Less than 12 months     12 months or more     Total  
          Gross           Gross                 Gross        
    Fair     unrealized     Number of     Fair     unrealized     Number of     Fair     unrealized     Number of  

(Dollar amounts in millions)

  value     losses     securities     value     losses (1)     securities     value     losses (1)     securities  

Description of Securities

                 

Fixed maturity securities:

                 

Tax-exempt

  $ —       $ —         —       $ 109     $ (16     10     $ 109     $ (16     10  

Government—non-U.S.

    50       (1     18       —         —          —         50       (1     18  

U.S. corporate

    1,178       (19     174       468       (24     66       1,646       (43     240  

Corporate—non-U.S.

    1,024       (68     172       249       (15     39       1,273       (83     211  

Residential mortgage-backed

    —          —          —          129       (12     76       129       (12     76  

Commercial mortgage-backed

    87       (1     14       99       (2     20       186       (3     34  

Other asset-backed

    823       (4     116       432       (37     51       1,255       (41     167  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

  3,162     (93   494     1,486     (106   262     4,648     (199   756  

Equity securities

  68     (3   64     —        —        —        68     (3   64  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

$ 3,230   $ (96   558   $ 1,486   $ (106   262   $ 4,716   $ (202   820  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

<20% Below cost

$ 3,089   $ (66   483   $ 1,369   $ (55   242   $ 4,458   $ (121   725  

20%-50% Below cost

  73     (27   11     117     (50   14     190     (77   25  

>50% Below cost

  —        —        —        —        (1   6     —        (1   6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

  3,162     (93   494     1,486     (106   262     4,648     (199   756  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

<20% Below cost

  64     (2   58     —        —        —        64     (2   58  

20%-50% Below cost

  4     (1   6     —        —        —        4     (1   6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

  68     (3   64     —        —        —        68     (3   64  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

$ 3,230   $ (96   558   $ 1,486   $ (106   262   $ 4,716   $ (202   820  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

$ 2,766   $ (59   445   $ 1,292   $ (85   204   $ 4,058   $ (144   649  

Below investment grade (2)

  464     (37   113     194     (21   58     658     (58   171  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

$ 3,230   $ (96   558   $ 1,486   $ (106   262   $ 4,716   $ (202   820  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Amounts included $1 million of unrealized losses on other-than-temporarily impaired securities.
(2)  Amounts that have been in a continuous unrealized loss position for 12 months or more included $1 million of unrealized losses on other-than-temporarily impaired securities.

 

As indicated in the table above, the majority of the securities in a continuous unrealized loss position for less than 12 months were investment grade and less than 20% below cost. These unrealized losses were primarily attributable to volatility in the utilities and energy sector, which resulted in a decline in the value of our corporate securities since acquisition. For securities that have been in a continuous unrealized loss position for less than 12 months, the average fair value percentage below cost was approximately 3% as of March 31, 2015.

Fixed Maturity Securities In A Continuous Unrealized Loss Position For 12 Months Or More

Of the $55 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “BBB+” and approximately 75% of the unrealized losses were related to investment grade securities as of March 31, 2015. These unrealized losses were predominantly attributable to corporate securities and municipal securities including fixed rate securities purchased in a lower rate environment and variable rate securities purchased in a higher rate and lower spread environment. The average fair value percentage below cost for these securities was approximately 4% as of March 31, 2015. See below for additional discussion related to fixed maturity securities that have been in a continuous unrealized loss position for 12 months or more with a fair value that was more than 20% below cost.

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous unrealized loss position for 12 months or more by asset class as of March 31, 2015:

 

    Investment Grade  
    20% to 50%     Greater than 50%  
                % of total                       % of total        
          Gross     gross                 Gross     gross        
    Fair     unrealized     unrealized     Number of     Fair     unrealized     unrealized     Number of  

(Dollar amounts in millions)

  value     losses     losses     securities     value     losses     losses     securities  

Fixed maturity securities:

               

Tax-exempt

  $ 9     $ (3     1     1     $ —       $ —         —       —    

U.S. corporate

    26       (10     5       1       —         —         —         —    

Structured securities:

               

Residential mortgage-backed

    5       (4     2       4       —         —         —         —    

Other asset-backed

    68       (26     13       4       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

  73     (30   15     8     —       —       —       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 108   $ (43   21   10   $ —     $ —       —     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Below Investment Grade  
    20% to 50%     Greater than 50%  
                % of total                       % of total        
          Gross     gross                 Gross     gross        
    Fair     unrealized     unrealized     Number of     Fair     unrealized     unrealized     Number of  

(Dollar amounts in millions)

  value     losses     losses     securities     value     losses     losses     securities  

Fixed maturity securities:

               

Structured securities:

               

Residential mortgage-backed

  $ 1     $ (1     —       3     $ —       $ (1     —       6  

Other asset-backed

    8       (6     3       1       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

  9     (7   3     4     —       (1   —       6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 9   $ (7   3   4   $ —     $ (1   —     6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For all securities in an unrealized loss position, we expect to recover the amortized cost based on our estimate of the amount and timing of cash flows to be collected. We do not intend to sell nor do we expect that we will be required to sell these securities prior to recovering our amortized cost. See below for further discussion of gross unrealized losses by asset class.

Structured Securities

Of the $38 million of unrealized losses related to structured securities that have been in an unrealized loss position for 12 months or more and were more than 20% below cost, $1 million related to other-than-temporarily impaired securities where the unrealized losses represented the portion of the other-than-temporary impairment recognized in OCI. The extent and duration of the unrealized loss position on our structured securities was primarily due to credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been impacted from high risk premiums being incorporated into the valuation as a result of the amount of potential losses that may be absorbed by the security in the event of additional deterioration in the U.S. economy.

While we considered the length of time each security had been in an unrealized loss position, the extent of the unrealized loss position and any significant declines in fair value subsequent to the balance sheet date in our evaluation of impairment for each of these individual securities, the primary factor in our evaluation of impairment is the expected performance for each of these securities. Our evaluation of expected performance is based on the historical performance of the associated securitization trust as well as the historical performance of the underlying collateral. Our examination of the historical performance of the securitization trust included consideration of the following factors for each class of securities issued by the trust: (i) the payment history, including failure to make scheduled payments; (ii) current payment status; (iii) current and historical outstanding balances; (iv) current levels of subordination and losses incurred to date; and (v) characteristics of the underlying collateral. Our examination of the historical performance of the underlying collateral included: (i) historical default rates, delinquency rates, voluntary and involuntary prepayments and severity of losses, including recent trends in this information; (ii) current payment status; (iii) loan to collateral value ratios, as applicable; (iv) vintage; and (v) other underlying characteristics such as current financial condition.

We used our assessment of the historical performance of both the securitization trust and the underlying collateral for each security, along with third-party sources, when available, to develop our best estimate of cash flows expected to be collected. These estimates reflect projections for future delinquencies, prepayments, defaults and losses for the assets that collateralize the securitization trust and are used to determine the expected cash flows for our security, based on the payment structure of the trust. Our projection of expected cash flows is primarily based on the expected performance of the underlying assets that collateralize the securitization trust and is not directly impacted by the rating of our security. While we consider the rating of the security as an indicator of the financial condition of the issuer, this factor does not have a significant impact on our expected cash flows for each security. In limited circumstances, our expected cash flows include expected payments from reliable financial guarantors where we believe the financial guarantor will have sufficient assets to pay claims under the financial guarantee when the cash flows from the securitization trust are not sufficient to make scheduled payments. We then discount the expected cash flows using the effective yield of each security to determine the present value of expected cash flows.

Based on this evaluation, the present value of expected cash flows was greater than or equal to the amortized cost for each security. Accordingly, we determined that the unrealized losses on each of our structured securities represented temporary impairments as of March 31, 2015.

 

Despite the considerable analysis and rigor employed on our structured securities, it is at least reasonably possible that the underlying collateral of these investments will perform worse than current market expectations. Such events may lead to adverse changes in cash flows on our holdings of structured securities and future write-downs within our portfolio of structured securities.

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of December 31, 2014:

 

    Less than 12 months     12 months or more     Total  
          Gross                 Gross                 Gross        
    Fair     unrealized     Number of     Fair     unrealized     Number of     Fair     unrealized     Number of  

(Dollar amounts in millions)

  value     losses     securities     value     losses (1)     securities     value     losses (1)     securities  

Description of Securities

                 

Fixed maturity securities:

                 

U.S. government, agencies and government-sponsored enterprises

  $ —       $ —         —       $ 75     $ (1     10     $ 75     $ (1     10  

Tax-exempt

    —         —         —         111       (14     10       111       (14     10  

Government—non-U.S.

    67       (1     18       22       (1     4       89       (2     22  

U.S. corporate

    1,656       (31     240       1,359       (57     210       3,015       (88     450  

Corporate—non-U.S.

    1,568       (69     239       515       (28     70       2,083       (97     309  

Residential mortgage-backed

    180       (1     24       254       (17     90       434       (18     114  

Commercial mortgage-backed

    163             21       362       (9     49       525       (9     70  

Other asset-backed

    1,551       (12     215       487       (42     55       2,038       (54     270  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

  5,185     (114   757     3,185     (169   498     8,370     (283   1,255  

Equity securities

  30     (3   46     48     (4   6     78     (7   52  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

$ 5,215   $ (117   803   $ 3,233   $ (173   504   $ 8,448   $ (290   1,307  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

<20% Below cost

$ 5,148   $ (103   753   $ 3,054   $ (115   477   $ 8,202   $ (218   1,230  

20%-50% Below cost

  37     (11   4     131     (53   15     168     (64   19  

>50% Below cost

  —       —       —       —       (1   6     —       (1   6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

  5,185     (114   757     3,185     (169   498     8,370     (283   1,255  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

<20% Below cost

  26     (2   40     48     (4   6     74     (6   46  

20%-50% Below cost

  4     (1   6     —       —        —       4     (1   6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

  30     (3   46     48     (4   6     78     (7   52  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

$ 5,215   $ (117   803   $ 3,233   $ (173   504   $ 8,448   $ (290   1,307  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

$ 4,623   $ (75   675   $ 2,936   $ (146   431   $ 7,559   $ (221   1,106  

Below investment grade (2)

  592     (42   128     297     (27   73     889     (69   201  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

$ 5,215   $ (117   803   $ 3,233   $ (173   504   $ 8,448   $ (290   1,307  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Amounts included $1 million of unrealized losses on other-than-temporarily impaired securities.
(2)  Amounts that have been in a continuous unrealized loss position for 12 months or more included $1 million of unrealized losses on other-than-temporarily impaired securities.

 

The scheduled maturity distribution of fixed maturity securities as of March 31, 2015 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Amortized         
     cost or      Fair  

(Amounts in millions)

   cost      value  

Due one year or less

   $ 2,060      $ 2,077  

Due after one year through five years

     10,913        11,552  

Due after five years through ten years

     11,584        12,343  

Due after ten years

     20,922        25,315  
  

 

 

    

 

 

 

Subtotal

  45,479     51,287  

Residential mortgage-backed

  4,746     5,163  

Commercial mortgage-backed

  2,508     2,690  

Other asset-backed

  3,813     3,802  
  

 

 

    

 

 

 

Total

$ 56,546   $ 62,942  
  

 

 

    

 

 

 

As of March 31, 2015, $7,229 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of March 31, 2015, securities issued by utilities and energy, finance and insurance, and consumer—non-cyclical industry groups represented approximately 25%, 19% and 12%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio. This portfolio is widely diversified among various geographic regions in the United States and internationally, and is not dependent on the economic stability of one particular region.

As of March 31, 2015, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.

(e) Commercial Mortgage Loans

Our mortgage loans are collateralized by commercial properties, including multi-family residential buildings. The carrying value of commercial mortgage loans is stated at original cost net of principal payments, amortization and allowance for loan losses.

 

We diversify our commercial mortgage loans by both property type and geographic region. The following tables set forth the distribution across property type and geographic region for commercial mortgage loans as of the dates indicated:

 

     March 31, 2015     December 31, 2014  
     Carrying      % of     Carrying      % of  

(Amounts in millions)

   value      total     value      total  

Property type:

          

Retail

   $ 2,193        36   $ 2,150        35

Office

     1,660        27       1,643        27  

Industrial

     1,553        25       1,597        26  

Apartments

     494        8       494        8  

Mixed use/other

     270        4       239        4  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

  6,170     100   6,123     100
     

 

 

      

 

 

 

Unamortized balance of loan origination fees and costs

  (1   (1

Allowance for losses

  (20   (22
  

 

 

      

 

 

    

Total

$ 6,149   $ 6,100  
  

 

 

      

 

 

    

 

     March 31, 2015     December 31, 2014  
     Carrying      % of     Carrying      % of  

(Amounts in millions)

   value      total     value      total  

Geographic region:

          

South Atlantic

   $ 1,677        27   $ 1,673        27

Pacific

     1,616        26       1,636        27  

Middle Atlantic

     837        14       826        14  

Mountain

     557        9       536        9  

East North Central

     390        6       397        7  

West North Central

     385        6       382        6  

West South Central

     275        5       268        4  

New England

     267        4       264        4  

East South Central

     166        3       141        2  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

  6,170     100   6,123     100
     

 

 

      

 

 

 

Unamortized balance of loan origination fees and costs

  (1   (1

Allowance for losses

  (20   (22
  

 

 

      

 

 

    

Total

$ 6,149   $ 6,100  
  

 

 

      

 

 

    

 

The following tables set forth the aging of past due commercial mortgage loans by property type as of the dates indicated:

 

     March 31, 2015  
     31 - 60 days
past due
    61 - 90 days
past due
    Greater than
90 days past
due
    Total
past due
    Current     Total  
              

(Amounts in millions)

            

Property type:

            

Retail

   $ —        $ —        $ —        $ —        $ 2,193     $ 2,193  

Office

     —          —          3       3       1,657       1,660  

Industrial

     —          —          2       2       1,551       1,553  

Apartments

     —          —          —          —          494       494  

Mixed use/other

     —          —          —          —          270       270  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

$ —      $ —      $ 5   $ 5   $ 6,165   $ 6,170  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

  —     —     —     —     100    100 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2014  

(Amounts in millions)

   31 - 60 days
past due
    61 - 90 days
past due
    Greater than
90 days past
due
    Total
past due
    Current     Total  
            

Property type:

            

Retail

   $ —        $ —        $ —        $ —        $ 2,150     $ 2,150  

Office

     —          —          6       6       1,637       1,643  

Industrial

     —          —          2       2       1,595       1,597  

Apartments

     —          —          —          —          494       494  

Mixed use/other

     —          —          —          —          239       239  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

$ —      $ —      $ 8   $ 8   $ 6,115   $ 6,123  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

  —     —     —     —     100   100 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of March 31, 2015 and December 31, 2014, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of March 31, 2015 and December 31, 2014.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of March 31, 2015, our commercial mortgage loans greater than 90 days past due included loans with appraised values in excess of the recorded investment and the current recorded investment of these loans was expected to be recoverable.

During the three months ended March 31, 2015 and the year ended December 31, 2014, we modified or extended 3 and 28 commercial mortgage loans, respectively, with a total carrying value of $48 million and $254 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower and were not considered troubled debt restructurings.

 

The following table sets forth the allowance for credit losses and recorded investment in commercial mortgage loans as of or for the periods indicated:

 

     Three months ended
March 31,
 

(Amounts in millions)

       2015             2014      

Allowance for credit losses:

    

Beginning balance

   $ 22     $ 33  

Charge-offs

     (3     (1

Recoveries

     —          —     

Provision

     1       (2
  

 

 

   

 

 

 

Ending balance

$ 20   $ 30  
  

 

 

   

 

 

 

Ending allowance for individually impaired loans

$ —      $ —     
  

 

 

   

 

 

 

Ending allowance for loans not individually impaired that were evaluated collectively for impairment

$ 20   $ 30  
  

 

 

   

 

 

 

Recorded investment:

Ending balance

$ 6,170   $ 5,924  
  

 

 

   

 

 

 

Ending balance of individually impaired loans

$ 18   $ 17  
  

 

 

   

 

 

 

Ending balance of loans not individually impaired that were evaluated collectively for impairment

$ 6,152   $ 5,907  
  

 

 

   

 

 

 

As of March 31, 2015, we had an individually impaired commercial mortgage loan included within the office property type with a recorded investment of $3 million, an unpaid principal balance of $6 million and charge-offs of $3 million. As of March 31, 2015 and December 31, 2014, we had an individually impaired commercial mortgage loan included within the industrial property type with a recorded investment of $15 million, an unpaid principal balance of $16 million and charge-offs of $1 million, which were recorded in the first quarter of 2014.

In evaluating the credit quality of commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. Certain risks associated with commercial mortgage loans can be evaluated by reviewing both the loan-to-value and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average loan-to-value ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower loan-to-value indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual net operating income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or non-recurring third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio should not be used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.

 

The following tables set forth the loan-to-value of commercial mortgage loans by property type as of the dates indicated:

 

     March 31, 2015  

(Amounts in millions)

   0% - 50%     51% - 60%     61% - 75%     76% - 100%     Greater
than 100%  (1)
    Total  
            

Property type:

            

Retail

   $ 715     $ 428     $ 958     $ 74     $ 18      $ 2,193  

Office

     464       261       798       116       21        1,660  

Industrial

     426       282       766       56       23        1,553  

Apartments

     215       74       197       8       —          494  

Mixed use/other

     59       36       169       6       —          270  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

$ 1,879   $ 1,081   $ 2,888   $ 260   $ 62    $ 6,170  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

  30    18    47      1   100 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

  2.14     1.76     1.61     0.98     0.56      1.76  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Included $15 million of impaired loans and $47 million of loans in good standing, where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 118%.

 

     December 31, 2014  

(Amounts in millions)

   0% - 50%     51% - 60%     61% - 75%     76% - 100%     Greater
than 100%  (1)
    Total  
            

Property type:

            

Retail

   $ 671     $ 419     $ 967     $ 75     $ 18      $ 2,150  

Office

     383       278       782       164       36        1,643  

Industrial

     451       285       778       60       23        1,597  

Apartments

     211       76       199       8       —          494  

Mixed use/other

     45       43       145       6       —          239  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

$ 1,761   $ 1,101   $ 2,871   $ 313   $ 77    $ 6,123  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

  29    18    47      1   100 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

  2.27     1.75     1.61     1.02     0.72      1.78  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Included $15 million of impaired loans, $6 million of loans past due and not individually impaired and $56 million of loans in good standing, where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 120%.

 

The following tables set forth the debt service coverage ratio for fixed rate commercial mortgage loans by property type as of the dates indicated:

 

     March 31, 2015  

(Amounts in millions)

   Less than 1.00     1.00 - 1.25     1.26 - 1.50     1.51 - 2.00     Greater
than 2.00
    Total  
            

Property type:

            

Retail

   $ 76     $ 248     $ 553     $ 901     $ 415     $ 2,193  

Office

     115       94       298       768       378       1,653  

Industrial

     160       143       240       675       333       1,551  

Apartments

     1       48       91       185       169       494  

Mixed use/other

     6       1       86       137       40       270  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

$ 358   $ 534   $ 1,268   $ 2,666   $ 1,335   $ 6,161  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

  6   9   20   43   22   100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

  75   63   60   60   44   58
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     December 31, 2014  

(Amounts in millions)

   Less than 1.00     1.00 - 1.25     1.26 - 1.50     1.51 - 2.00     Greater
than 2.00
    Total  
            

Property type:

            

Retail

   $ 80     $ 253     $ 524     $ 870     $ 423     $ 2,150  

Office

     119       101       247       780       389       1,636  

Industrial

     158       142       246       706       343       1,595  

Apartments

     1       48       88       186       171       494  

Mixed use/other

     6       1       61       135       36       239  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

$ 364   $ 545   $ 1,166   $ 2,677   $ 1,362   $ 6,114  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

  6   9   19   44   22   100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

  77   64   64   59   45   59
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of March 31, 2015 and December 31, 2014, we had floating rate commercial mortgage loans of $9 million.

(f) Restricted Commercial Mortgage Loans Related To Securitization Entities

We have a consolidated securitization entity that holds commercial mortgage loans that are recorded as restricted commercial mortgage loans related to securitization entities.

(g) Restricted Other Invested Assets Related To Securitization Entities

We have consolidated securitization entities that hold certain investments that are recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities hold certain investments as trading securities and whereby the changes in fair value are recorded in current period income (loss). The trading securities comprise asset-backed securities, including residual interest in certain policy loan securitization entities and highly rated bonds that are primarily backed by credit card receivables.

Derivative Instruments
Derivative Instruments

(5) Derivative Instruments

Our business activities routinely deal with fluctuations in interest rates, equity prices, currency exchange rates and other asset and liability prices. We use derivative instruments to mitigate or reduce certain of these risks. We have established policies for managing each of these risks, including prohibitions on derivatives market-making and other speculative derivatives activities. These policies require the use of derivative instruments in concert with other techniques to reduce or mitigate these risks. While we use derivatives to mitigate or reduce risks, certain derivatives do not meet the accounting requirements to be designated as hedging instruments and are denoted as “derivatives not designated as hedges” in the following disclosures. For derivatives that meet the accounting requirements to be designated as hedges, the following disclosures for these derivatives are denoted as “derivatives designated as hedges,” which include both cash flow and fair value hedges.

The following table sets forth our positions in derivative instruments as of the dates indicated:

 

    Derivative assets     Derivative liabilities  
        Fair value         Fair value  

(Amounts in millions)

  Balance
sheet classification
  March 31,
2015
    December 31,
2014
    Balance
sheet classification
  March 31,
2015
    December 31,
2014
 
           

Derivatives designated as hedges

           

Cash flow hedges:

           

Interest rate swaps

  Other invested assets   $ 948     $ 639     Other liabilities   $ 45     $ 27  

Inflation indexed swaps

  Other invested assets     —          —        Other liabilities     31       42  

Foreign currency swaps

  Other invested assets     9       6     Other liabilities     —          —     
   

 

 

   

 

 

     

 

 

   

 

 

 

Total cash flow hedges

  957     645     76     69  
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives designated as hedges

  957     645     76     69  
   

 

 

   

 

 

     

 

 

   

 

 

 

Derivatives not designated as hedges

Interest rate swaps

Other invested assets   492     452   Other liabilities   224     177  

Interest rate swaps related to securitization entities

Restricted other
invested assets
  —        —      Other liabilities   29     26  

Foreign currency swaps

Other invested assets   —        —      Other liabilities   15     7  

Credit default swaps

Other invested assets   3     4   Other liabilities   —        —     

Credit default swaps related to securitization entities

Restricted other
invested assets
  —        —      Other liabilities   10     17  

Equity index options

Other invested assets   15     17   Other liabilities   —        —     

Financial futures

Other invested assets   —        —      Other liabilities   —        —     

Equity return swaps

Other invested assets   —        —      Other liabilities   6     1  

Other foreign currency contracts

Other invested assets   17     14   Other liabilities   24     13  

GMWB embedded derivatives

Reinsurance
recoverable (1)
  14     13   Policyholder
account balances (2)
  316     291  

Fixed index annuity embedded derivatives

Other assets   —        —      Policyholder
account balances (3)
  300     276  

Indexed universal life embedded derivatives

Reinsurance
recoverable
  —        —      Policyholder
account balances (4)
  7     7  
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives not designated as hedges

  541     500     931     815  
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives

$ 1,498   $ 1,145   $ 1,007   $ 884  
   

 

 

   

 

 

     

 

 

   

 

 

 

 

(1)  Represents embedded derivatives associated with the reinsured portion of our guaranteed minimum withdrawal benefits (“GMWB”) liabilities.
(2)  Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
(3)  Represents the embedded derivatives associated with our fixed index annuity liabilities.
(4)  Represents the embedded derivatives associated with our indexed universal life liabilities.

 

The fair value of derivative positions presented above was not offset by the respective collateral amounts retained or provided under these agreements.

The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB, fixed index annuity embedded derivatives and indexed universal life embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:

 

(Notional in millions)

   Measurement      December 31,
2014
     Additions      Maturities/
terminations
    March 31,
2015
 
             

Derivatives designated as hedges

             

Cash flow hedges:

             

Interest rate swaps

     Notional       $ 11,961      $ —         $ (6   $ 11,955  

Inflation indexed swaps

     Notional         571        1        (10     562  

Foreign currency swaps

     Notional         35        —           —          35  
     

 

 

    

 

 

    

 

 

   

 

 

 

Total cash flow hedges

  12,567     1     (16   12,552  
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives designated as hedges

  12,567     1     (16   12,552  
     

 

 

    

 

 

    

 

 

   

 

 

 

Derivatives not designated as hedges

Interest rate swaps

  Notional      5,074     250     (392   4,932  

Interest rate swaps related to securitization entities

  Notional      77     —        (4   73  

Credit default swaps

  Notional      394     —        —        394  

Credit default swaps related to securitization entities

  Notional      312     —        —        312  

Equity index options

  Notional      994     212     (201   1,005  

Financial futures

  Notional      1,331     1,465     (1,433   1,363  

Equity return swaps

  Notional      108     127     (103   132  

Foreign currency swaps

  Notional      104     4     —        108  

Other foreign currency contracts

  Notional      425     104     (129   400  
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives not designated as hedges

  8,819     2,162     (2,262   8,719  
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives

$ 21,386   $ 2,163   $ (2,278 $ 21,271  
     

 

 

    

 

 

    

 

 

   

 

 

 

(Number of policies)

   Measurement      December 31,
2014
     Additions      Maturities/
terminations
    March 31,
2015
 
             

Derivatives not designated as hedges

             

GMWB embedded derivatives

     Policies         39,015        —           (784     38,231  

Fixed index annuity embedded derivatives

     Policies         13,901        1,179        (82     14,998  

Indexed universal life embedded derivatives

     Policies         421        127        (2     546  

 

Cash Flow Hedges

Certain derivative instruments are designated as cash flow hedges. The changes in fair value of these instruments are recorded as a component of OCI. We designate and account for the following as cash flow hedges when they have met the effectiveness requirements: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) forward starting interest rate swaps to hedge against changes in interest rates associated with future fixed rate bond purchases and/or interest income; (v) forward bond purchase commitments to hedge against the variability in the anticipated cash flows required to purchase future fixed rate bonds; and (vi) other instruments to hedge the cash flows of various forecasted transactions.

The following table provides information about the pre-tax income effects of cash flow hedges for the three months ended March 31, 2015:

 

(Amounts in millions)

  Gain (loss)
recognized
in OCI
    Gain (loss)
reclassified
into

net income
from OCI
    Classification of gain
(loss) reclassified into
net income
  Gain (loss)
recognized in
net income (1)
    Classification of gain
(loss) recognized in
net income
         
         
         

Interest rate swaps hedging assets

  $ 306     $ 19      Net investment
income
  $ 4      Net investment
gains (losses)

Interest rate swaps hedging liabilities

    (18     —        Interest expense     —        Net investment
gains (losses)

Inflation indexed swaps

    11       9      Net investment
income
    —        Net investment
gains (losses)

Foreign currency swaps

    3       —        Net investment
income
    —        Net investment
gains (losses)
 

 

 

   

 

 

     

 

 

   

Total

$ 302   $ 28   $ 4   
 

 

 

   

 

 

     

 

 

   

 

(1)  Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

The following table provides information about the pre-tax income effects of cash flow hedges for the three months ended March 31, 2014:

 

(Amounts in millions)

  Gain (loss)
recognized
in OCI
    Gain (loss)
reclassified
into

net income
from OCI
    Classification of gain
(loss) reclassified into
net income
  Gain (loss)
recognized in
net income (1)
    Classification of gain
(loss) recognized in
net income
         
         
         

Interest rate swaps hedging assets

  $ 357     $ 15      Net investment
income
  $ 4      Net investment
gains (losses)

Interest rate swaps hedging liabilities

    (20     —        Interest expense     —        Net investment
gains (losses)

Inflation indexed swaps

    (3     (1   Net investment
income
    —        Net investment
gains (losses)

Forward bond purchase commitments

    18       —        Net investment
income
    —        Net investment
gains (losses)
 

 

 

   

 

 

     

 

 

   

Total

$ 352   $ 14   $ 4   
 

 

 

   

 

 

     

 

 

   

 

(1)  Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

 

The following table provides a reconciliation of current period changes, net of applicable income taxes, for these designated derivatives presented in the separate component of stockholders’ equity labeled “derivatives qualifying as hedges,” for the periods indicated:

 

     Three months ended
March 31,
 

(Amounts in millions)

       2015             2014      

Derivatives qualifying as effective accounting hedges as of January 1

   $ 2,070     $ 1,319  

Current period increases (decreases) in fair value, net of deferred taxes of $(107) and $(124)

     195       228  

Reclassification to net (income), net of deferred taxes of $10 and $5

     (18     (9
  

 

 

   

 

 

 

Derivatives qualifying as effective accounting hedges as of March 31

$ 2,247   $ 1,538  
  

 

 

   

 

 

 

The total of derivatives designated as cash flow hedges of $2,247 million, net of taxes, recorded in stockholders’ equity as of March 31, 2015 is expected to be reclassified to net income in the future, concurrently with and primarily offsetting changes in interest expense and interest income on floating rate instruments and interest income on future fixed rate bond purchases. Of this amount, $59 million, net of taxes, is expected to be reclassified to net income in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2047. There were immaterial amounts reclassified to net income during the three months ended March 31, 2015 in connection with forecasted transactions that were no longer considered probable of occurring.

Fair Value Hedges

Certain derivative instruments are designated as fair value hedges. The changes in fair value of these instruments are recorded in net income. In addition, changes in the fair value attributable to the hedged portion of the underlying instrument are reported in net income. We designate and account for the following as fair value hedges when they have met the effectiveness requirements: (i) interest rate swaps to convert fixed rate liabilities into floating rate liabilities; (ii) cross currency swaps to convert non-U.S. dollar fixed rate liabilities to floating rate U.S. dollar liabilities; and (iii) other instruments to hedge various fair value exposures of investments.

There were no pre-tax income effects of fair value hedges and related hedged items for the three months ended March 31, 2015 and 2014.

Derivatives Not Designated As Hedges

We also enter into certain non-qualifying derivative instruments such as: (i) interest rate swaps and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) credit default swaps to enhance yield and reproduce characteristics of investments with similar terms and credit risk; (iii) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits, fixed index annuities and indexed universal life; (iv) interest rate swaps where the hedging relationship does not qualify for hedge accounting; (v) credit default swaps to mitigate loss exposure to certain credit risk; (vi) foreign currency swaps, options and forward contracts to mitigate currency risk associated with non-functional currency investments held by certain foreign subsidiaries and future dividends or other cash flows from certain foreign subsidiaries to our holding company; and (vii) equity index options to mitigate certain macroeconomic risks associated with certain foreign subsidiaries. Additionally, we provide GMWBs on certain variable annuities that are required to be bifurcated as embedded derivatives. We also offer fixed index annuity and indexed universal life products and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.

We also have derivatives related to securitization entities where we were required to consolidate the related securitization entity as a result of our involvement in the structure. The counterparties for these derivatives typically only have recourse to the securitization entity. The interest rate swaps used for these entities are typically used to effectively convert the interest payments on the assets of the securitization entity to the same basis as the interest rate on the borrowings issued by the securitization entity. Credit default swaps are utilized in certain securitization entities to enhance the yield payable on the borrowings issued by the securitization entity and also include a settlement feature that allows the securitization entity to provide the par value of assets in the securitization entity for the amount of any losses incurred under the credit default swap.

The following table provides the pre-tax gain (loss) recognized in net income for the effects of derivatives not designated as hedges for the periods indicated:

 

     Three months ended March 31,    

Classification of gain (loss) recognized

in net income

(Amounts in millions)

   2015     2014    

Interest rate swaps

   $ 8     $ (3   Net investment gains (losses)

Interest rate swaps related to securitization entities

     (3     (3   Net investment gains (losses)

Credit default swaps

     1       —       Net investment gains (losses)

Credit default swaps related to securitization entities

     8       7     Net investment gains (losses)

Equity index options

     (10     (7   Net investment gains (losses)

Financial futures

     7       27     Net investment gains (losses)

Equity return swaps

     (9     (1   Net investment gains (losses)

Other foreign currency contracts

     (1     (9   Net investment gains (losses)

Foreign currency swaps

     (10     —       Net investment gains (losses)

GMWB embedded derivatives

     (16     (31   Net investment gains (losses)

Fixed index annuity embedded derivatives

     (7     (1   Net investment gains (losses)

Indexed universal life embedded derivatives

     1       —       Net investment gains (losses)
  

 

 

   

 

 

   

Total derivatives not designated as hedges

$ (31 $ (21
  

 

 

   

 

 

   

Derivative Counterparty Credit Risk

Most of our derivative arrangements with counterparties require the posting of collateral upon meeting certain net exposure thresholds. For derivatives related to securitization entities, there are no arrangements that require either party to provide collateral and the recourse of the derivative counterparty is typically limited to the assets held by the securitization entity and there is no recourse to any entity other than the securitization entity.

 

The following tables present additional information about derivative assets and liabilities subject to an enforceable master netting arrangement as of the dates indicated:

 

    March 31, 2015     December 31, 2014  

(Amounts in millions)

  Derivatives
assets
(1)
    Derivatives
liabilities 
(2)
    Net
derivatives
    Derivatives
assets
(1)
    Derivatives
liabilities 
(2)
    Net
derivatives
 

Amounts presented in the balance sheet:

           

Gross amounts recognized

  $ 1,526      $ 369      $ 1,157     $ 1,157      $ 273      $ 884  

Gross amounts offset in the balance sheet

    —          —          —         —          —          —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net amounts presented in the balance sheet

  1,526      369      1,157     1,157      273      884  

Gross amounts not offset in the balance sheet:

Financial instruments (3)

  (289   (289   —       (227   (227   —    

Collateral received

  (1,088   —        (1,088   (884   —        (884

Collateral pledged

  —        (205   205     —        (49   49  

Over collateralization

  2      125      (123   1      5      (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net amount

$ 151    $ —      $ 151   $ 47    $ 2    $ 45  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Included $42 million and $25 million of accruals on derivatives classified as other assets and does not include amounts related to embedded derivatives as of March 31, 2015 and December 31, 2014, respectively.
(2)  Included $24 million and $6 million of accruals on derivatives classified as other liabilities and does not include amounts related to embedded derivatives and derivatives related to securitization entities as of March 31, 2015 and December 31, 2014, respectively.
(3)  Amounts represent derivative assets and/or liabilities that are presented gross within the balance sheet but are held with the same counterparty where we have a master netting arrangement. This adjustment results in presenting the net asset and net liability position for each counterparty.

Except for derivatives related to securitization entities, almost all of our master swap agreements contain credit downgrade provisions that allow either party to assign or terminate derivative transactions if the other party’s long-term unsecured debt rating or financial strength rating is below the limit defined in the applicable agreement. If the downgrade provisions had been triggered as of March 31, 2015 and December 31, 2014, we could have been allowed to claim $151 million and $47 million, respectively, or required to disburse up to $2 million as of December 31, 2014. The chart above excludes embedded derivatives and derivatives related to securitization entities as those derivatives are not subject to master netting arrangements.

Credit Derivatives

We sell protection under single name credit default swaps and credit default swap index tranches in combination with purchasing securities to replicate characteristics of similar investments based on the credit quality and term of the credit default swap. Credit default triggers for both indexed reference entities and single name reference entities follow the Credit Derivatives Physical Settlement Matrix published by the International Swaps and Derivatives Association. Under these terms, credit default triggers are defined as bankruptcy, failure to pay or restructuring, if applicable. Our maximum exposure to credit loss equals the notional value for credit default swaps. In the event of default for credit default swaps, we are typically required to pay the protection holder the full notional value less a recovery rate determined at auction.

 

In addition to the credit derivatives discussed above, we also have credit derivative instruments related to securitization entities that we consolidate. These derivatives represent a customized index of reference entities with specified attachment points for certain derivatives. The credit default triggers are similar to those described above. In the event of default, the securitization entity will provide the counterparty with the par value of assets held in the securitization entity for the amount of incurred loss on the credit default swap. The maximum exposure to loss for the securitization entity is the notional value of the derivatives. Certain losses on these credit default swaps would be absorbed by the third-party noteholders of the securitization entity and the remaining losses on the credit default swaps would be absorbed by our portion of the notes issued by the securitization entity.

The following table sets forth our credit default swaps where we sell protection on single name reference entities and the fair values as of the dates indicated:

 

     March 31, 2015      December 31, 2014  
     Notional                    Notional                

(Amounts in millions)

   value      Assets      Liabilities      value      Assets      Liabilities  

Investment grade

                 

Matures in less than one year

   $ —         $ —        $ —        $  —         $ —        $ —     

Matures after one year through five years

     39        1        —          39        1        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit default swaps on single name reference entities

$ 39   $ 1   $ —     $ 39   $ 1   $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth our credit default swaps where we sell protection on credit default swap index tranches and the fair values as of the dates indicated:

 

     March 31, 2015      December 31, 2014  
     Notional                    Notional                

(Amounts in millions)

   value      Assets      Liabilities      value      Assets      Liabilities  

Original index tranche attachment/detachment point and maturity:

                 

7% - 15% matures after one year through five years (1)

   $ 100      $ 1      $ —        $ 100      $ 1      $ —    

9% - 12% matures in less than one year (2)

     250        1        —          250        2        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit default swap index tranches

  350     2     —       350     3     —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Customized credit default swap index tranches related to securitization entities:

Portion backing third-party borrowings maturing 2017 (3)

  12     —       —       12     —       —    

Portion backing our interest maturing 2017 (4)

  300     —       10     300     —       17  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total customized credit default swap index tranches related to securitization entities

  312     —       10     312     —       17  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit default swaps on index tranches

$ 662   $ 2   $ 10   $ 662   $ 3   $ 17  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  The current attachment/detachment as of March 31, 2015 and December 31, 2014 was 7% – 15%.
(2)  The current attachment/detachment as of March 31, 2015 and December 31, 2014 was 9% – 12%.
(3)  Original notional value was $39 million.
(4)  Original notional value was $300 million.
Fair Value of Financial Instruments
Fair Value of Financial Instruments

(6) Fair Value of Financial Instruments

Assets and liabilities that are reflected in the accompanying consolidated financial statements at fair value are not included in the following disclosure of fair value. Such items include cash and cash equivalents, investment securities, separate accounts, securities held as collateral and derivative instruments. Other financial assets and liabilities—those not carried at fair value—are discussed below. Apart from certain of our borrowings and certain marketable securities, few of the instruments discussed below are actively traded and their fair values must often be determined using models. The fair value estimates are made at a specific point in time, based upon available market information and judgments about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets.

The basis on which we estimate fair value is as follows:

Commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates. Given the limited availability of data related to transactions for similar instruments, we typically classify these loans as Level 3.

Restricted commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates. Given the limited availability of data related to transactions for similar instruments, we typically classify these loans as Level 3.

Other invested assets. Primarily represents short-term investments and limited partnerships accounted for under the cost method. The fair value of short-term investments typically does not include significant unobservable inputs and approximate our amortized cost basis. As a result, short-term investments are classified as Level 2. Limited partnerships are valued based on comparable market transactions, discounted future cash flows, quoted market prices and/or estimates using the most recent data available for the underlying instrument. Cost method limited partnerships typically include significant unobservable inputs as a result of being relatively illiquid with limited market activity for similar instruments and are classified as Level 3.

Long-term borrowings. We utilize available market data when determining fair value of long-term borrowings issued in the United States and Canada, which includes data on recent trades for the same or similar financial instruments. Accordingly, these instruments are classified as Level 2 measurements. In cases where market data is not available such as our long-term borrowings in Australia, we use broker quotes for which we consider the valuation methodology utilized by the third party, but the valuation typically includes significant unobservable inputs. Accordingly, we classify these borrowings where fair value is based on our consideration of broker quotes as Level 3 measurements.

Non-recourse funding obligations. We use an internal model to determine fair value using the current floating rate coupon and expected life/final maturity of the instrument discounted using the floating rate index and current market spread assumption, which is estimated based on recent transactions for these instruments or similar instruments as well as other market information or broker provided data. Given these instruments are private and very little market activity exists, our current market spread assumption is considered to have significant unobservable inputs in calculating fair value and, therefore, results in the fair value of these instruments being classified as Level 3.

 

Borrowings related to securitization entities. Based on market quotes or comparable market transactions. Some of these borrowings are publicly traded debt securities and are classified as Level 2. Certain borrowings are not publicly traded and are classified as Level 3.

Investment contracts. Based on expected future cash flows, discounted at current market rates for annuity contracts or institutional products. Given the significant unobservable inputs associated with policyholder behavior and current market rate assumptions used to discount the expected future cash flows, we classify these instruments as Level 3 except for certain funding agreement-backed notes that are traded in the marketplace as a security and are classified as Level 2.

The following represents our estimated fair value of financial assets and liabilities that are not required to be carried at fair value as of the dates indicated:

 

     March 31, 2015  

(Amounts in millions)

   Notional
amount
    Carrying
amount
     Fair value  
        Total      Level 1      Level 2      Level 3  

Assets:

                

Commercial mortgage loans

   $   (1)    $ 6,149      $ 6,588      $ —        $ —        $ 6,588  

Restricted commercial mortgage loans

       (1)      188        213        —          —          213  

Other invested assets

       (1)      484        487        —          412        75  

Liabilities:

                

Long-term borrowings

       (1)      4,601        4,422        —          4,312        110  

Non-recourse funding obligations

       (1)      1,983        1,435        —          —          1,435  

Borrowings related to securitization entities

       (1)      124        133        —          133        —    

Investment contracts

       (1)      17,514        18,597        —          7        18,590  

Other firm commitments:

                

Commitments to fund limited partnerships

     71        —          —          —          —          —    

Ordinary course of business lending commitments

     49        —          —          —          —          —    

 

     December 31, 2014  

(Amounts in millions)

   Notional
amount
    Carrying
amount
     Fair value  
        Total      Level 1      Level 2      Level 3  

Assets:

                

Commercial mortgage loans

   $   (1)    $ 6,100      $ 6,573      $ —        $ —        $ 6,573  

Restricted commercial mortgage loans

       (1)      201        228        —          —          228  

Other invested assets

       (1)      374        385        —          300        85  

Liabilities:

                

Long-term borrowings

       (1)      4,639        4,300        —          4,181        119  

Non-recourse funding obligations

       (1)      1,996        1,438        —          —          1,438  

Borrowings related to securitization entities

       (1)      134        146        —          146        —    

Investment contracts

       (1)      17,497        18,023        —          7        18,016  

Other firm commitments:

                

Commitments to fund limited partnerships

     53        —          —          —          —          —    

Ordinary course of business lending commitments

     155        —          —          —          —          —    

 

(1)  These financial instruments do not have notional amounts.

 

Recurring Fair Value Measurements

We have fixed maturity, equity and trading securities, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are carried at fair value. Below is a description of the valuation techniques and inputs used to determine fair value by class of instrument.

Fixed maturity, equity and trading securities

The valuations of fixed maturity, equity and trading securities are determined using a market approach, income approach or a combination of the market and income approach depending on the type of instrument and availability of information. For all exchange-traded equity securities, the valuations are classified as Level 1.

We utilize certain third-party data providers when determining fair value. We consider information obtained from third-party pricing services (“pricing services”) as well as third-party broker provided prices, or broker quotes, in our determination of fair value. Additionally, we utilize internal models to determine the valuation of securities using an income approach where the inputs are based on third-party provided market inputs. While we consider the valuations provided by pricing services and broker quotes to be of high quality, management determines the fair value of our investment securities after considering all relevant and available information. We also use various methods to obtain an understanding of the valuation methodologies and procedures used by third-party data providers to ensure sufficient understanding to evaluate the valuation data received, including an understanding of the assumptions and inputs utilized to determine the appropriate fair value. For pricing services, we analyze the prices provided by our primary pricing services to other readily available pricing services and perform a detailed review of the assumptions and inputs from each pricing service to determine the appropriate fair value when pricing differences exceed certain thresholds. We also evaluate changes in fair value that are greater than 10% each month to further aid in our review of the accuracy of fair value measurements and our understanding of changes in fair value, with more detailed reviews performed by the asset managers responsible for the related asset class associated with the security being reviewed. A pricing committee provides additional oversight and guidance in the evaluation and review of the pricing methodologies used to value our investment portfolio.

In general, we first obtain valuations from pricing services. If a price is not supplied by a pricing service, we will typically seek a broker quote for public or private fixed maturity securities. In certain instances, we utilize price caps for broker quoted securities where the estimated market yield results in a valuation that may exceed the amount that we believe would be received in a market transaction. For certain private fixed maturity securities where we do not obtain valuations from pricing services, we utilize an internal model to determine fair value since transactions for identical securities are not readily observable and these securities are not typically valued by pricing services. For all securities, excluding certain private fixed maturity securities, if neither a pricing service nor broker quotes valuation is available, we determine fair value using internal models.

For pricing services, we obtain an understanding of the pricing methodologies and procedures for each type of instrument. Additionally, on a monthly basis we review a sample of securities, examining the pricing service’s assumptions to determine if we agree with the service’s derived price. In general, a pricing service does not provide a price for a security if sufficient information is not readily available to determine fair value or if such security is not in the specific sector or class covered by a particular pricing service. Given our understanding of the pricing methodologies and procedures of pricing services, the securities valued by pricing services are typically classified as Level 2 unless we determine the valuation process for a security or group of securities utilizes significant unobservable inputs, which would result in the valuation being classified as Level 3.

 

For private fixed maturity securities, we obtain public bond spreads and utilize those in an internal model to determine fair value. Other inputs to the model include rating and weighted-average life, as well as sector which is used to assign the spread. We then add an additional premium, which represents an unobservable input, to the public bond spread to adjust for the liquidity and other features of our private placements. We utilize the estimated market yield to discount the expected cash flows of the security to determine fair value. We utilize price caps for securities where the estimated market yield results in a valuation that may exceed the amount that would be received in a market transaction and value all private fixed maturity securities at par that have less than 12 months to maturity. When a security does not have an external rating, we assign the security an internal rating to determine the appropriate public bond spread that should be utilized in the valuation. To evaluate the reasonableness of the internal model, we review a sample of private fixed maturity securities each month. In that review we compare the modeled prices to the prices of similar public securities in conjunction with analysis on current market indicators. While we generally consider the public bond spreads by sector and maturity to be observable inputs, we evaluate the similarities of our private placement with the public bonds, any price caps utilized, liquidity premiums applied, and whether external ratings are available for our private placements to determine whether the spreads utilized would be considered observable inputs. We classify private securities without an external rating and public bond spread as Level 3. In general, increases (decreases) in credit spreads will decrease (increase) the fair value for our fixed maturity securities.

For broker quotes, we consider the valuation methodology utilized by the third party and analyze a sample each month to assess reasonableness given then current market conditions. Additionally, for broker quotes on certain structured securities, we validate prices received against other publicly available pricing sources. As the valuation typically includes significant unobservable inputs, we classify the securities where fair value is based on our consideration of broker quotes as Level 3 measurements.

For remaining securities priced using internal models, we maximize the use of observable inputs but typically utilize significant unobservable inputs to determine fair value. Accordingly, the valuations are typically classified as Level 3.

Restricted other invested assets related to securitization entities

We have trading securities related to securitization entities that are classified as restricted other invested assets and are carried at fair value. The trading securities represent asset-backed securities. The valuation for trading securities is determined using a market approach and/or an income approach depending on the availability of information. For certain highly rated asset-backed securities, there is observable market information for transactions of the same or similar instruments, which is provided to us by a third-party pricing service and is classified as Level 2. For certain securities that are not actively traded, we determine fair value after considering third-party broker provided prices or discounted expected cash flows using current yields for similar securities and classify these valuations as Level 3.

Securities lending collateral

The fair value of securities held as collateral is primarily based on Level 2 inputs from market information for the collateral that is held on our behalf by the custodian. We determine fair value after considering prices obtained by third-party pricing services.

Separate account assets

The fair value of separate account assets is based on the quoted prices of the underlying fund investments and, therefore, represents Level 1 pricing.

 

Derivatives

We consider counterparty collateral arrangements and rights of set-off when evaluating our net credit risk exposure to our derivative counterparties. Accordingly, we are permitted to include consideration of these arrangements when determining whether any incremental adjustment should be made for both the counterparty’s and our non-performance risk in measuring fair value for our derivative instruments. As a result of these counterparty arrangements, we determined that any adjustment for credit risk would not be material and we do not record any incremental adjustment for our non-performance risk or the non-performance risk of the derivative counterparty for our derivative assets or liabilities. We determine fair value for our derivatives using an income approach with internal models based on relevant market inputs for each derivative instrument. We also compare the fair value determined using our internal model to the valuations provided by our derivative counterparties with any significant differences or changes in valuation being evaluated further by our derivatives professionals that are familiar with the instrument and market inputs used in the valuation.

Interest rate swaps. The valuation of interest rate swaps is determined using an income approach. The primary input into the valuation represents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2. For certain interest rate swaps, the inputs into the valuation also include the total returns of certain bonds that would primarily be considered an observable input and result in the derivative being classified as Level 2. For certain other swaps, there are features that provide an option to the counterparty to terminate the swap at specified dates. The interest rate volatility input used to value these options would be considered a significant unobservable input and results in the fair value measurement of the derivative being classified as Level 3. These options to terminate the swap by the counterparty are based on forward interest rate swap curves and volatility. As interest rate volatility increases, our valuation of the derivative changes unfavorably.

Interest rate swaps related to securitization entities. The valuation of interest rate swaps related to securitization entities is determined using an income approach. The primary input into the valuation represents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2.

Inflation indexed swaps. The valuation of inflation indexed swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, the current consumer price index and the forward consumer price index curve, which are generally considered observable inputs, and results in the derivative being classified as Level 2.

Foreign currency swaps. The valuation of foreign currency swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and foreign currency exchange rates, both of which are considered an observable input, and results in the derivative being classified as Level 2.

Credit default swaps. We have both single name credit default swaps and index tranche credit default swaps. For single name credit default swaps, we utilize an income approach to determine fair value based on using current market information for the credit spreads of the reference entity, which is considered observable inputs based on the reference entities of our derivatives and results in these derivatives being classified as Level 2. For index tranche credit default swaps, we utilize an income approach that utilizes current market information related to credit spreads and expected defaults and losses associated with the reference entities that comprise the respective index associated with each derivative. There are significant unobservable inputs associated with the timing and amount of losses from the reference entities as well as the timing or amount of losses, if any, that will be absorbed by our tranche. Accordingly, the index tranche credit default swaps are classified as Level 3. As credit spreads widen for the underlying issuers comprising the index, the change in our valuation of these credit default swaps will be unfavorable.

Credit default swaps related to securitization entities. Credit default swaps related to securitization entities represent customized index tranche credit default swaps and are valued using a similar methodology as described above for index tranche credit default swaps. We determine fair value of these credit default swaps after considering both the valuation methodology described above as well as the valuation provided by the derivative counterparty. In addition to the valuation methodology and inputs described for index tranche credit default swaps, these customized credit default swaps contain a feature that permits the securitization entity to provide the par value of underlying assets in the securitization entity to settle any losses under the credit default swap. The valuation of this settlement feature is dependent upon the valuation of the underlying assets and the timing and amount of any expected loss on the credit default swap, which is considered a significant unobservable input. Accordingly, these customized index tranche credit default swaps related to securitization entities are classified as Level 3. As credit spreads widen for the underlying issuers comprising the customized index, the change in our valuation of these credit default swaps will be unfavorable.

Equity index options. We have equity index options associated with various equity indices. The valuation of equity index options is determined using an income approach. The primary inputs into the valuation represent forward interest rate volatility and time value component associated with the optionality in the derivative, which are considered significant unobservable inputs in most instances. The equity index volatility surface is determined based on market information that is not readily observable and is developed based upon inputs received from several third-party sources. Accordingly, these options are classified as Level 3. As equity index volatility increases, our valuation of these options changes favorably.

Financial futures. The fair value of financial futures is based on the closing exchange prices. Accordingly, these financial futures are classified as Level 1. The period end valuation is zero as a result of settling the margins on these contracts on a daily basis.

Equity return swaps. The valuation of equity return swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and underlying equity index values, which are generally considered observable inputs, and results in the derivative being classified as Level 2.

Forward bond purchase commitments. The valuation of forward bond purchase commitments is determined using an income approach. The primary input into the valuation represents the current bond prices and interest rates, which are generally considered an observable input, and results in the derivative being classified as Level 2.

Other foreign currency contracts. We have certain foreign currency options classified as other foreign currency contracts. The valuation of foreign currency options is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, foreign currency exchange rates, forward interest rate, foreign currency exchange rate volatility, foreign equity index volatility and time value component associated with the optionality in the derivative. As a result of the significant unobservable inputs associated with the forward interest rate, foreign currency exchange rate volatility and foreign equity index volatility inputs, the derivative is classified as Level 3. As foreign currency exchange rate volatility and foreign equity index volatility increases, the change in our valuation of these options will be favorable for purchase options and unfavorable for options sold. We also have foreign currency forward contracts where the valuation is determined using an income approach. The primary inputs into the valuation represent the forward foreign currency exchange rates, which are generally considered observable inputs and results in the derivative being classified as Level 2.

GMWB embedded derivatives

We are required to bifurcate an embedded derivative for certain features associated with annuity products and related reinsurance agreements where we provide a GMWB to the policyholder and are required to record the GMWB embedded derivative at fair value. The valuation of our GMWB embedded derivative is based on an income approach that incorporates inputs such as forward interest rates, equity index volatility, equity index and fund correlation, and policyholder assumptions such as utilization, lapse and mortality. In addition to these inputs, we also consider risk and expense margins when determining the projected cash flows that would be determined by another market participant. While the risk and expense margins are considered in determining fair value, these inputs do not have a significant impact on the valuation. We determine fair value using an internal model based on the various inputs noted above. The resulting fair value measurement from the model is reviewed by the product actuarial, risk and finance professionals each reporting period with changes in fair value also being compared to changes in derivatives and other instruments used to mitigate changes in fair value from certain market risks, such as equity index volatility and interest rates.

For GMWB liabilities, non-performance risk is integrated into the discount rate. Our discount rate used to determine fair value of our GMWB liabilities includes market credit spreads above U.S. Treasury rates to reflect an adjustment for the non-performance risk of the GMWB liabilities. As of March 31, 2015 and December 31, 2014, the impact of non-performance risk resulted in a lower fair value of our GMWB liabilities of $81 million and $74 million, respectively.

To determine the appropriate discount rate to reflect the non-performance risk of the GMWB liabilities, we evaluate the non-performance risk in our liabilities based on a hypothetical exit market transaction as there is no exit market for these types of liabilities. A hypothetical exit market can be viewed as a hypothetical transfer of the liability to another similarly rated insurance company which would closely resemble a reinsurance transaction. Another hypothetical exit market transaction can be viewed as a hypothetical transaction from the perspective of the GMWB policyholder. In determining the appropriate discount rate to incorporate non-performance risk of the GMWB liabilities, we also considered the impacts of state guarantees embedded in the related insurance product as a form of inseparable third-party guarantee. We believe that a hypothetical exit market participant would use a similar discount rate as described above to value the liabilities.

For equity index volatility, we determine the projected equity market volatility using both historical volatility and projected equity market volatility with more significance being placed on projected near-term volatility and recent historical data. Given the different attributes and market characteristics of GMWB liabilities compared to equity index options in the derivative market, the equity index volatility assumption for GMWB liabilities may be different from the volatility assumption for equity index options, especially for the longer dated points on the curve.

Equity index and fund correlations are determined based on historical price observations for the fund and equity index.

For policyholder assumptions, we use our expected lapse, mortality and utilization assumptions and update these assumptions for our actual experience, as necessary. For our lapse assumption, we adjust our base lapse assumption by policy based on a combination of the policyholder’s current account value and GMWB benefit.

 

We classify the GMWB valuation as Level 3 based on having significant unobservable inputs, with equity index volatility and non-performance risk being considered the more significant unobservable inputs. As equity index volatility increases, the fair value of the GMWB liabilities will increase. Any increase in non-performance risk would increase the discount rate and would decrease the fair value of the GMWB liability. Additionally, we consider lapse and utilization assumptions to be significant unobservable inputs. An increase in our lapse assumption would decrease the fair value of the GMWB liability, whereas an increase in our utilization rate would increase the fair value.

Fixed index annuity embedded derivatives

We offer fixed indexed annuity products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate non-performance risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease.

Indexed universal life embedded derivatives

We offer indexed universal life products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate non-performance risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease.

Borrowings related to securitization entities

We record certain borrowings related to securitization entities at fair value. The fair value of these borrowings is determined using either a market approach or income approach, depending on the instrument and availability of market information. Given the unique characteristics of the securitization entities that issued these borrowings as well as the lack of comparable instruments, we determine fair value considering the valuation of the underlying assets held by the securitization entities and any derivatives, as well as any unique characteristics of the borrowings that may impact the valuation. After considering all relevant inputs, we determine fair value of the borrowings using the net valuation of the underlying assets and derivatives that are backing the borrowings. Accordingly, these instruments are classified as Level 3. Increases in the valuation of the underlying assets or decreases in the derivative liabilities will result in an increase in the fair value of these borrowings.

 

The following tables set forth our assets and liabilities by class of instrument that are measured at fair value on a recurring basis as of the dates indicated:

 

    March 31, 2015  

(Amounts in millions)

  Total     Level 1     Level 2     Level 3  

Assets

       

Investments:

       

Fixed maturity securities:

       

U.S. government, agencies and government-sponsored enterprises

  $ 6,132     $ —       $ 6,129     $ 3  

Tax-exempt

    361       —         361       —    

Government—non-U.S.

    2,008       —         2,002       6  

U.S. corporate

    27,900       —         25,422       2,478  

Corporate—non-U.S.

    14,886       —         13,109       1,777  

Residential mortgage-backed

    5,163       —         5,094       69  

Commercial mortgage-backed

    2,690       —         2,686       4  

Other asset-backed

    3,802       —         2,346       1,456  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

  62,942     —       57,149     5,793  
 

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

  306     269     3     34  
 

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets:

Trading securities

  218     —       218     —    

Derivative assets:

Interest rate swaps

  1,440     —       1,440     —    

Foreign currency swaps

  9     —       9     —    

Credit default swaps

  3     —       1     2  

Equity index options

  15     —       —       15  

Other foreign currency contracts

  17     —       17     —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets

  1,484     —       1,467     17  
 

 

 

   

 

 

   

 

 

   

 

 

 

Securities lending collateral

  323     —       323     —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other invested assets

  2,025     —       2,008     17  
 

 

 

   

 

 

   

 

 

   

 

 

 

Restricted other invested assets related to securitization entities

  411     —       181     230  

Reinsurance recoverable (1)

  14     —       —       14  

Separate account assets

  9,064     9,064     —       —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

$ 74,762   $ 9,333   $ 59,341   $ 6,088  
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

Policyholder account balances:

GMWB embedded derivatives (2)

$ 316   $ —     $ —     $ 316  

Fixed index annuity embedded derivatives

  300     —       —       300  

Indexed universal life embedded derivatives

  7     —       —       7  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total policyholder account balances

  623     —       —       623  
 

 

 

   

 

 

   

 

 

   

 

 

 

Derivative liabilities:

Interest rate swaps

  269     —       269     —    

Interest rate swaps related to securitization entities

  29     —       29     —    

Inflation indexed swaps

  31     —       31     —    

Foreign currency swaps

  15     —       15     —    

Credit default swaps related to securitization entities

  10     —       —       10  

Equity return swaps

  6     —       6     —    

Other foreign currency contracts

  24     —       24     —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities

  384     —       374     10  
 

 

 

   

 

 

   

 

 

   

 

 

 

Borrowings related to securitization entities