Investments

6 Months Ended

Jun. 30, 2019

Investments, Debt and Equity Securities [Abstract]

Investments

4. Investments

See Note 1 of the Notes to the Consolidated Financial Statements included in the 2018 Annual Report for a description of the Company’s accounting policies for investments and Note 6 for information about the fair value hierarchy for investments and the related valuation methodologies.

Fixed Maturity Securities Available-for-sale (“AFS”)

Fixed Maturity Securities AFS by Sector

The following table presents the fixed maturity securities AFS by sector at:

	June 30, 2019											December 31, 2018
	Amortized Cost		Gross Unrealized							Estimated Fair Value		Amortized Cost		Gross Unrealized							Estimated Fair Value
			Gains		Temporary Losses		OTTI Losses (1)							Gains		Temporary Losses		OTTI Losses (1)
	(In millions)
Fixed maturity securities: (2)
U.S. corporate	$	25,634	$	2,190	$	86	$	—		$	27,738	$	23,902	$	816	$	659	$	—		$	24,059
U.S. government and agency	5,318		1,742		—		—			7,060		7,503		1,251		110		—			8,644
RMBS	8,883		425		18		(4		)	9,294		8,309		246		122		(2		)	8,435
Foreign corporate	8,981		532		97		—			9,416		8,044		157		306		—			7,895
CMBS	4,932		249		4		—			5,177		5,177		42		87		(1		)	5,133
State and political subdivision	3,192		634		1		—			3,825		3,202		399		15		—			3,586
ABS	1,827		24		9		—			1,842		2,120		13		22		—			2,111
Foreign government	1,459		203		3		—			1,659		1,415		101		31		—			1,485
Total fixed maturity securities	$	60,226	$	5,999	$	218	$	(4	)	$	66,011	$	59,672	$	3,025	$	1,352	$	(3	)	$	61,348

__________________

(1) Noncredit OTTI losses included in accumulated other comprehensive income (loss) (“AOCI”) in an unrealized gain position are due to increases in estimated fair value subsequent to initial recognition of noncredit losses on such securities.

(2) Redeemable preferred stock is reported within U.S. corporate and foreign corporate fixed maturity securities. Included within fixed maturity securities are structured securities including residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and asset-backed securities (“ABS”) (collectively, “Structured Securities”).

The Company held non-income producing fixed maturity securities with an estimated fair value of $32 million and less than $1 million with unrealized gains (losses) of ($2) million and less than $1 million at June 30, 2019 and December 31, 2018, respectively.

Maturities of Fixed Maturity Securities

The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity date, were as follows at June 30, 2019:

	Due in One Year or Less		Due After One Year Through Five Years		Due After Five Years Through Ten Years		Due After Ten Years		Structured Securities		Total Fixed Maturity Securities
	(In millions)
Amortized cost	$	1,561	$	6,889	$	12,017	$	24,117	$	15,642	$	60,226
Estimated fair value	$	1,571	$	7,080	$	12,659	$	28,388	$	16,313	$	66,011

Actual maturities may differ from contractual maturities due to the exercise of call or prepayment options. Fixed maturity securities not due at a single maturity date have been presented in the year of final contractual maturity. Structured Securities are shown separately, as they are not due at a single maturity.

Continuous Gross Unrealized Losses for Fixed Maturity Securities AFS by Sector

The following table presents the estimated fair value and gross unrealized losses of fixed maturity securities AFS in an unrealized loss position, aggregated by sector and by length of time that the securities have been in a continuous unrealized loss position at:

	June 30, 2019								December 31, 2018
	Less than 12 Months				Equal to or Greater than 12 Months				Less than 12 Months				Equal to or Greater than 12 Months
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
	(Dollars in millions)
Fixed maturity securities:
U.S. corporate	$	1,323	$	40	$	1,224	$	46	$	10,450	$	465	$	2,290	$	194
U.S. government and agency	99		—		58		—		359		7		1,355		103
RMBS	105		1		1,378		13		1,550		21		2,567		99
Foreign corporate	740		27		743		70		3,916		199		746		107
CMBS	78		—		262		4		2,264		52		800		34
State and political subdivision	5		—		36		1		346		7		158		8
ABS	560		4		357		5		1,407		21		70		1
Foreign government	54		3		—		—		520		25		132		6
Total fixed maturity securities	$	2,964	$	75	$	4,058	$	139	$	20,812	$	797	$	8,118	$	552
Total number of securities in an unrealized loss position	639				511				2,988				1,022

Evaluation of AFS Securities for OTTI and Evaluating Temporarily Impaired AFS Securities

Evaluation and Measurement Methodologies

Management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used in the impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the estimated fair value has been below amortized cost; (ii) the potential for impairments when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire industry sector or sub-sector; (iv) the potential for impairments in certain economically depressed geographic locations; (v) the potential for impairments where the issuer, series of issuers or industry has suffered a catastrophic loss or has exhausted natural resources; (vi) whether the Company has the intent to sell or will more likely than not be required to sell a particular security before the decline in estimated fair value below amortized cost recovers; (vii) with respect to Structured Securities, changes in forecasted cash flows after considering the quality of underlying collateral, expected prepayment speeds, current and forecasted loss severity, consideration of the payment terms of the underlying assets backing a particular security, and the payment priority within the tranche structure of the security; (viii) the potential for impairments due to weakening of foreign currencies on non-functional currency denominated fixed maturity securities that are near maturity; and (ix) other subjective factors, including concentrations and information obtained from regulators and rating agencies.

For securities in an unrealized loss position, an OTTI is recognized in earnings when it is anticipated that the amortized cost will not be recovered. When either: (i) the Company has the intent to sell the security; or (ii) it is more likely than not that the Company will be required to sell the security before recovery, the OTTI recognized in earnings is the entire difference between the security’s amortized cost and estimated fair value. If neither of these conditions exists, the difference between the amortized cost of the security and the present value of projected future cash flows expected to be collected is recognized as an OTTI in earnings (“credit loss”). If the estimated fair value is less than the present value of projected future cash flows expected to be collected, this portion of OTTI related to other-than-credit factors (“noncredit loss”) is recorded in other comprehensive income (“OCI”).

Current Period Evaluation

Based on the Company’s current evaluation of its AFS securities in an unrealized loss position in accordance with its impairment policy, and the Company’s current intentions and assessments (as applicable to the type of security) about holding, selling and any requirements to sell these securities, the Company concluded that these securities were not other-than-temporarily impaired at June 30, 2019.

Gross unrealized losses on fixed maturity securities decreased $1.1 billion during the six months ended June 30, 2019 to $214 million. The decrease in gross unrealized losses for the six months ended June 30, 2019 was primarily attributable to decreasing longer-term interest rates and narrowing credit spreads.

At June 30, 2019, $7 million of the total $214 million of gross unrealized losses were from seven fixed maturity securities with an unrealized loss position of 20% or more of amortized cost for six months or greater.

Mortgage Loans

Mortgage Loans by Portfolio Segment

Mortgage loans are summarized as follows at:

	June 30, 2019					December 31, 2018
	Carrying Value			% of Total		Carrying Value			% of Total
	(Dollars in millions)
Mortgage loans:
Commercial	$	9,239		61.7	%	$	8,502		62.6	%
Agricultural	3,184			21.2		2,874			21.1
Residential	2,627			17.5		2,276			16.7
Subtotal (1)	15,050			100.4		13,652			100.4
Valuation allowances (2)	(63		)	(0.4	)	(56		)	(0.4	)
Total mortgage loans, net	$	14,987		100.0	%	$	13,596		100.0	%

__________________

(1) Purchases of mortgage loans from third parties were $86 million and $563 million for the three months and six months ended June 30, 2019, respectively, and $518 million and $604 million for the three months and six months ended June 30, 2018, respectively, and were primarily comprised of residential mortgage loans.

(2) The valuation allowances were primarily from collective evaluation (non-specific loan related).

Information on commercial, agricultural and residential mortgage loans is presented in the tables below.

Valuation Allowance Methodology

Mortgage loans are considered to be impaired when it is probable that, based upon current information and events, the Company will be unable to collect all amounts due under the loan agreement. Specific valuation allowances are established using the same methodology for all three portfolio segments as the excess carrying value of a loan over either (i) the present value of expected future cash flows discounted at the loan’s original effective interest rate, (ii) the estimated fair value of the loan’s underlying collateral if the loan is in the process of foreclosure or otherwise collateral dependent, or (iii) the loan’s observable market price. A common evaluation framework is used for establishing non-specific valuation allowances for all loan portfolio segments; however, a separate non-specific valuation allowance is calculated and maintained for each loan portfolio segment that is based on inputs unique to each loan portfolio segment. Non-specific valuation allowances are established for pools of loans with similar risk characteristics where a property-specific or market-specific risk has not been identified, but for which the Company expects to incur a credit loss. These evaluations are based upon several loan portfolio segment-specific factors, including the Company’s experience for loan losses, defaults and loss severity, and loss expectations for loans with similar risk characteristics. These evaluations are revised as conditions change and new information becomes available.

Credit Quality of Commercial Mortgage Loans

The credit quality of commercial mortgage loans was as follows at:

	Recorded Investment
	Debt Service Coverage Ratios								% of Total		Estimated Fair Value		% of Total
	> 1.20x		1.00x - 1.20x		< 1.00x		Total
	(Dollars in millions)
June 30, 2019
Loan-to-value ratios:
Less than 65%	$	8,170	$	120	$	113	$	8,403	91.0	%	$	8,790	91.1	%
65% to 75%	688		—		—		688		7.4		712		7.4
76% to 80%	139		—		9		148		1.6		148		1.5
Total	$	8,997	$	120	$	122	$	9,239	100.0	%	$	9,650	100.0	%
December 31, 2018
Loan-to-value ratios:
Less than 65%	$	7,444	$	89	$	34	$	7,567	89.0	%	$	7,642	89.0	%
65% to 75%	762		—		24		786		9.2		797		9.3
76% to 80%	141		—		8		149		1.8		145		1.7
Total	$	8,347	$	89	$	66	$	8,502	100.0	%	$	8,584	100.0	%

Credit Quality of Agricultural Mortgage Loans

The credit quality of agricultural mortgage loans was as follows at: 

	June 30, 2019				December 31, 2018
	Recorded Investment		% of Total		Recorded Investment		% of Total
	(Dollars in millions)
Loan-to-value ratios:
Less than 65%	$	2,833	89.0	%	$	2,551	88.8	%
65% to 75%	350		11.0		322		11.2
76% to 80%	1		—		1		—
Total	$	3,184	100.0	%	$	2,874	100.0	%

The estimated fair value of agricultural mortgage loans was $3.3 billion and $2.9 billion at June 30, 2019 and December 31, 2018, respectively.

Credit Quality of Residential Mortgage Loans

The credit quality of residential mortgage loans was as follows at:

	June 30, 2019				December 31, 2018
	Recorded Investment		% of Total		Recorded Investment		% of Total
	(Dollars in millions)
Performance indicators:
Performing	$	2,590	98.6	%	$	2,240	98.4	%
Nonperforming	37		1.4		36		1.6
Total	$	2,627	100.0	%	$	2,276	100.0	%

The estimated fair value of residential mortgage loans was $2.7 billion and $2.3 billion at June 30, 2019 and December 31, 2018, respectively.

Past Due, Nonaccrual and Modified Mortgage Loans

The Company has a high quality, well performing mortgage loan portfolio, with over 99% of all mortgage loans classified as performing at both June 30, 2019 and December 31, 2018. The Company defines delinquency consistent with industry practice, when mortgage loans are past due as follows: commercial and residential mortgage loans — 60 days and agricultural mortgage loans — 90 days. The Company had no commercial mortgage loans past due or in nonaccrual status at either June 30, 2019 or December 31, 2018. Agricultural mortgage loans past due totaled $6 million and less than $1 million at June 30, 2019 and December 31, 2018, respectively. The Company had no agricultural mortgage loans in nonaccrual status at either June 30, 2019 or December 31, 2018. Residential mortgage loans past due and in nonaccrual status totaled $37 million and $36 million at June 30, 2019 and December 31, 2018, respectively. During the three months and six months ended June 30, 2019 and 2018, the Company did not have a significant number of mortgage loans modified in a troubled debt restructuring.

Other Invested Assets

Freestanding derivatives with positive estimated fair values comprise over 90% of other invested assets. See Note 5 for information about freestanding derivatives with positive estimated fair values. Other invested assets also includes tax credit and renewable energy partnerships, leveraged leases and Federal Home Loan Bank stock.

Cash Equivalents

The carrying value of cash equivalents, which includes securities and other investments with an original or remaining maturity of three months or less at the time of purchase, was $946 million and $2.8 billion at June 30, 2019 and December 31, 2018, respectively.

Net Unrealized Investment Gains (Losses)

Unrealized investment gains (losses) on fixed maturity securities and the effect on DAC, VOBA, deferred sales inducements (“DSI”) and future policy benefits, that would result from the realization of the unrealized gains (losses), are included in net unrealized investment gains (losses) in AOCI.

The components of net unrealized investment gains (losses), included in AOCI, were as follows:

	June 30, 2019			December 31, 2018
	(In millions)
Fixed maturity securities	$	5,785		$	1,679
Derivatives	243			253
Other	(13		)	(15		)
Subtotal	6,015			1,917
Amounts allocated from:
Future policy benefits	(2,317		)	(885		)
DAC, VOBA and DSI	(289		)	(90		)
Subtotal	(2,606		)	(975		)
Deferred income tax benefit (expense)	(716		)	(198		)
Net unrealized investment gains (losses)	$	2,693		$	744

The changes in net unrealized investment gains (losses) were as follows:

	Six Months Ended   June 30, 2019
	(In millions)
Balance, December 31, 2018	$	744
Unrealized investment gains (losses) during the period	4,098
Unrealized investment gains (losses) relating to:
Future policy benefits	(1,432		)
DAC, VOBA and DSI	(199		)
Deferred income tax benefit (expense)	(518		)
Balance, June 30, 2019	$	2,693
Change in net unrealized investment gains (losses)	$	1,949

Concentrations of Credit Risk

There were no investments in any counterparty that were greater than 10% of the Company’s equity, other than the U.S. government and its agencies, at both June 30, 2019 and December 31, 2018.

Securities Lending

Elements of the securities lending program are presented below at:

	June 30, 2019		December 31, 2018
	(In millions)
Securities on loan: (1)
Amortized cost	$	2,038	$	3,056
Estimated fair value	$	2,973	$	3,628
Cash collateral received from counterparties (2)	$	3,023	$	3,646
Security collateral received from counterparties (3)	$	18	$	55
Reinvestment portfolio — estimated fair value	$	3,072	$	3,658

__________________

(1) Included within fixed maturity securities.

(2) Included within payables for collateral under securities loaned and other transactions.

(3) Security collateral received from counterparties may not be sold or re-pledged, unless the counterparty is in default, and is not reflected on the consolidated financial statements.

The cash collateral liability by loaned security type and remaining tenor of the agreements were as follows at:

	June 30, 2019								December 31, 2018
	Remaining Tenor of Securities Lending Agreements								Remaining Tenor of Securities Lending Agreements
	Open (1)		1 Month or Less		1 to 6 Months		Total		Open (1)		1 Month or Less		1 to 6 Months		Total
	(In millions)
U.S. government and agency	$	1,446	$	686	$	891	$	3,023	$	1,474	$	1,823	$	349	$	3,646

__________________

(1) The related loaned security could be returned to the Company on the next business day which would require the Company to immediately return the cash collateral.

If the Company is required to return significant amounts of cash collateral on short notice and is forced to sell securities to meet the return obligation, it may have difficulty selling such collateral that is invested in securities in a timely manner, be forced to sell securities in a volatile or illiquid market for less than what otherwise would have been realized under normal market conditions, or both. The estimated fair value of the securities on loan related to the cash collateral on open at June 30, 2019 was $1.4 billion, all of which were U.S. government and agency securities which, if put back to the Company, could be immediately sold to satisfy the cash requirement.

The reinvestment portfolio acquired with the cash collateral consisted principally of fixed maturity securities (including agency RMBS, U.S. and foreign corporate securities, ABS, non-agency RMBS and U.S. government and agency securities) with 55% invested in agency RMBS, cash and cash equivalents and U.S. government and agency securities at June 30, 2019. If the securities on loan or the reinvestment portfolio become less liquid, the Company has the liquidity resources of most of its general account available to meet any potential cash demands when securities on loan are put back to the Company.

Invested Assets on Deposit, Held in Trust and Pledged as Collateral

Invested assets on deposit, held in trust and pledged as collateral are presented below at estimated fair value at:

	June 30, 2019		December 31, 2018
	(In millions)
Invested assets on deposit (regulatory deposits) (1)	$	8,988	$	8,172
Invested assets held in trust (reinsurance agreements) (2)	4,087		3,455
Invested assets pledged as collateral (3)	3,335		3,340
Total invested assets on deposit, held in trust and pledged as collateral	$	16,410	$	14,967

__________________

(1) The Company has assets, primarily fixed maturity securities, on deposit with governmental authorities relating to certain policyholder liabilities, of which $171 million and $55 million of the assets on deposit balance represents restricted cash at June 30, 2019 and December 31, 2018, respectively.

(2) The Company has assets, primarily fixed maturity securities, held in trust relating to certain reinsurance transactions. $52 million and $87 million of the assets held in trust balance represents restricted cash at June 30, 2019 and December 31, 2018, respectively.

(3) The Company has pledged invested assets in connection with various agreements and transactions, including funding agreements (see Note 4 of the Notes to the Consolidated Financial Statements included in the 2018 Annual Report) and derivative transactions (see Note 5).

See “— Securities Lending” for information regarding securities on loan.

Variable Interest Entities

The Company has invested in legal entities that are variable interest entities (“VIEs”). VIEs are consolidated when the investor is the primary beneficiary. A primary beneficiary is the variable interest holder in a VIE with both the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and the obligation to absorb losses, or the right to receive benefits that could potentially be significant to the VIE.

There were no material VIEs for which the Company has concluded that it is the primary beneficiary at June 30, 2019 or December 31, 2018.

The Company’s investments in unconsolidated VIEs are described below.

Fixed Maturity Securities

The Company invests in U.S. corporate bonds, foreign corporate bonds, and Structured Securities issued by VIEs. The Company is not obligated to provide any financial or other support to these VIEs, other than the original investment. The Company’s involvement with these entities is limited to that of a passive investor. The Company has no unilateral right to appoint or remove the servicer, special servicer, or investment manager, which are generally viewed as having the power to direct the activities that most significantly impact the economic performance of the VIE, nor does the Company function in any of these roles. The Company does not have the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the entity; as a result, the Company has determined it is not the primary beneficiary, or consolidator, of the VIE. The Company’s maximum exposure to loss on these fixed maturity securities is limited to the amortized cost of these investments. See “— Fixed Maturity Securities AFS” for information on these securities.

Limited Partnerships and LLCs

The Company holds investments in certain limited partnerships and LLCs which are VIEs. These ventures include real estate limited partnerships/LLCs, private equity funds, hedge funds, and to a lesser extent tax credit and renewable energy partnerships. The Company is not considered the primary beneficiary, or consolidator, when its involvement takes the form of a limited partner interest and is restricted to a role of a passive investor, as a limited partner’s interest does not provide the Company with any substantive kick-out or participating rights, nor does it provide the Company with the power to direct the activities of the fund. The Company’s maximum exposure to loss on these investments is limited to: (i) the amount invested in debt or equity of the VIE and (ii) commitments to the VIE, as described in Note 10.

The carrying amount and maximum exposure to loss related to the VIEs in which the Company concluded that it holds a variable interest, but is not the primary beneficiary, were as follows at:

	June 30, 2019				December 31, 2018
	Carrying Amount		Maximum Exposure to Loss		Carrying Amount		Maximum Exposure to Loss
	(In millions)
Fixed maturity securities	$	13,219	$	12,609	$	12,848	$	12,848
Limited partnerships and LLCs	1,761		2,989		1,743		3,130
Total	$	14,980	$	15,598	$	14,591	$	15,978

Net Investment Income

The components of net investment income were as follows:

	Three Months Ended   June 30,				Six Months Ended   June 30,
	2019		2018		2019		2018
	(In millions)
Investment income:
Fixed maturity securities	$	666	$	621	$	1,308	$	1,233
Equity securities	2		2		5		4
Mortgage loans	175		127		333		244
Policy loans	12		28		22		38
Real estate limited partnerships and limited liability companies	12		10		20		24
Other limited partnership interests	75		24		75		89
Cash, cash equivalents and short-term investments	17		5		27		10
Other	7		11		18		20
Subtotal	966		828		1,808		1,662
Less: Investment expenses	48		48		102		90
Net investment income	$	918	$	780	$	1,706	$	1,572

See “— Related Party Investment Transactions” for discussion of related party investment expenses.

Net Investment Gains (Losses)

Components of Net Investment Gains (Losses)

The components of net investment gains (losses) were as follows:

	Three Months Ended   June 30,						Six Months Ended   June 30,
	2019			2018			2019			2018
	(In millions)
Fixed maturity securities	$	62		$	(65	)	$	47		$	(103	)
Equity securities	1			(2		)	11			(3		)
Mortgage loans	(3		)	(3		)	(7		)	(7		)
Real estate limited partnerships and limited liability companies	1			—			—			42
Other limited partnership interests	(4		)	—			(5		)	—
Other	(1		)	(4		)	—			(7		)
Total net investment gains (losses)	$	56		$	(74	)	$	46		$	(78	)

Sales or Disposals of Fixed Maturity Securities

Investment gains and losses on sales of securities are determined on a specific identification basis. Proceeds from sales or disposals of fixed maturity securities and the components of fixed maturity securities net investment gains (losses) were as shown in the table below.

	Three Months Ended   June 30,						Six Months Ended   June 30,
	2019			2018			2019			2018
	(In millions)
Proceeds	$	3,416		$	2,450		$	6,636		$	5,288
Gross investment gains	$	99		$	9		$	163		$	12
Gross investment losses	(37		)	(74		)	(116		)	(115		)
Net investment gains (losses)	$	62		$	(65	)	$	47		$	(103	)

Related Party Investment Transactions

The Company receives investment administrative services from MetLife Investment Advisors, LLC, which was considered a related party investment manager until the completion of the MetLife Divestiture. The related investment administrative service charges were $26 million and $49 million for the three months and six months ended June 30, 2018, respectively. All of the charges reported as related party activity in 2018 occurred prior to the MetLife Divestiture. See Note 1 regarding the MetLife Divestiture.