COMMERCIAL MORTGAGE LOANS

3 Months Ended

Mar. 31, 2021

The Company invests a portion of its investment portfolio in commercial mortgage loans. As of March 31, 2021, the Company’s commercial mortgage loan holdings were $10.3 billion, or $10.1 billion net of allowance for credit losses. The Company has specialized in making loans on credit-oriented commercial properties, credit-anchored strip shopping centers, senior living facilities, and apartments. The Company’s underwriting procedures relative to its commercial mortgage loan portfolio are based, in the Company’s view, on a conservative and disciplined approach. The Company concentrates on a small number of commercial real estate asset types associated with the necessities of life (retail, multi-family, senior living, professional office buildings, and warehouses). The Company believes that these asset types tend to weather economic downturns better than other commercial asset classes in which it has chosen not to participate. The Company believes this disciplined approach has helped to maintain a relatively low delinquency and foreclosure rate throughout its history. The majority of the Company’s commercial mortgage loans portfolio was underwritten by the Company. From time to time, the Company may acquire loans in conjunction with an acquisition.

The Company’s commercial mortgage loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net of the allowance for credit losses. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Amortization of premiums and discounts is recorded using the effective yield method. Interest income, amortization of premiums and discounts and prepayment fees are reported in net investment income.

Certain of the commercial mortgage loans have call options that occur within the next 9 years. However, if interest rates were to significantly increase, the Company may be unable to exercise the call options on its existing commercial mortgage loans commensurate with the significantly increased market rates. As of March 31, 2021, assuming the loans are called at their next call dates, $168 million of principal would become due for the remainder of 2021, $538 million in 2022 through 2026 and $10 million in 2027 through 2029.

The Company offers a type of commercial mortgage loan under which the Company will permit a loan-to-value ratio of up to 85% in exchange for a participating interest in the cash flows from the underlying real estate. As of March 31, 2021 and December 31, 2020, $774 million and $806 million, respectively, of the Company’s total commercial mortgage loans principal balance have this participation feature. Cash flows received as a result of this participation feature are recorded as interest income. During the three months ended March 31, 2021 and 2020, the Company recognized $7 million and $16 million, respectively, of participation commercial mortgage loan income.

As of March 31, 2021 and December 31, 2020, $1 million and $3 million, respectively, of invested assets consisted of commercial mortgage loans that were nonperforming, restructured or foreclosed and converted to real estate properties. The Company does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities. For all commercial mortgage loans, the impact of troubled debt restructurings is reflected in our investment balance and in the allowance for commercial mortgage loan credit losses.

During the three months ended March 31, 2021 and 2020, the Company did not recognize any troubled debt restructurings transactions, respectively, as a result of granting concessions to borrowers which included loan terms unavailable from other lenders. The Company did not identify any loans whose principal was permanently impaired during the three months ended March 31, 2021 or during the three months ended March 31, 2020.

The Company provides certain relief under the Coronavirus Aid Relief, and Economic Security Act (“the CARES Act”) under its COVID-19 Commercial Mortgage Loan Program (the “Loan Modification Program”). During the three months ended March 31, 2021, the Company modified 7 loans under the Loan Modification Program, representing $143 million in unpaid principal balance. As of March 31, 2021, since the inception of the CARES Act, there were 295 total loans modified under the Loan Modification Program, representing $2.2 billion in unpaid principal balance. At March 31, 2021, $1.7 billion of these loans have resumed regular principal and interest payments in accordance with the terms of the modification agreements. The modifications under this program include agreements to defer principal payments only and/or to defer principal and interest payments for a specified period of time. None of these modifications were considered troubled debt restructurings.

The amortized cost basis of the Company's commercial mortgage loan receivables by origination year, net of the allowance, for credit losses is as follows:


	Term Loans Amortized Cost Basis by Origination Year
	2021		2020		2019		2018		2017		Prior		Total
	(Dollars In Millions)
As of March 31, 2021
Commercial mortgage loans:
Performing	$	314	$	1,443	$	2,391	$	1,560	$	1,344	$	3,255	$	10,307
Non-performing	—		—		—		—		—		1		1
Amortized cost	$	314	$	1,443	$	2,391	$	1,560	$	1,344	$	3,256	$	10,308
Allowance for credit losses	(2)		(18)		(35)		(34)		(31)		(51)		(171)
Total commercial mortgage loans	$	312	$	1,425	$	2,356	$	1,526	$	1,313	$	3,205	$	10,137


	Term Loans Amortized Cost Basis by Origination Year
	2020		2019		2018		2017		2016		Prior		Total
	(Dollars In Millions)
As of December 31, 2020
Commercial mortgage loans:
Performing	$	1,463	$	2,442	$	1,577	$	1,344	$	943	$	2,458	$	10,227
Non-performing											1		1
Amortized cost	$	1,463	$	2,442	$	1,577	$	1,344	$	943	$	2,459	$	10,228
Allowance for credit losses	(21)		(46)		(55)		(37)		(25)		(38)		(222)
Total commercial mortgage loans	$	1,442	$	2,396	$	1,522	$	1,307	$	918	$	2,421	$	10,006

The following tables provide a comparative view of the key credit quality indicators of the Loan-to-Value and Debt Service Coverage Ratio (“DSCR”):


	As of March 31, 2021					As of December 31, 2020
	Amortized Cost		% of Total		DSCR (2)	Amortized Cost		% of Total		DSCR (2)
	(Dollars In Millions)
Loan-to-Value(1)
Greater than 75%	$	393	4	%	0.05	$	399	4	%	0.05
50% - 75%	6,504		63	%	1.02	6,557		64	%	1.04
Less than 50%	3,411		33	%	0.67	3,272		32	%	0.63
Total commercial mortgage loans	$	10,308	100	%	1.74	$	10,228	100	%	1.72

(1) The loan-to-value ratio compares the current unpaid principal of the loan to the estimated fair value of the underlying property collateralizing the loan. Our weighted average loan-to-value ratio was 54% at March 31, 2021 and 54% at December 31, 2020.
(2) The debt service coverage ratio compares a property’s net operating income to its debt service payments, including principal and interest. Our weighted average debt service coverage ratio for March 31, 2021 and December 31, 2020 was 1.74x and 1.72x, respectively.

The ACL decreased by $58 million during the three months ended March 31, 2021, primarily as a result of improvement in the macroeconomic forecasts, as a result of COVID-19, used in the measurement of the ACL since the initial allowance was established.


	As of and For The Three Months Ended March 31, 2021		As of and For The Year Ended December 31, 2020
	(Dollars In Millions)
Allowance for Funded Commercial Mortgage Loan Credit Losses
Beginning balance	$	222	$	5
Cumulative effect adjustment	—		80
Charge offs	—		—
Recoveries	(5)		(3)
Provision	(46)		140
Ending balance	$	171	$	222

Allowance for Unfunded Commercial Mortgage Loan Commitments Credit Losses
Beginning balance	$	22	$	—
Cumulative effect adjustment	—		10
Charge offs	—		—
Recoveries	—		—
Provision	(7)		12
Ending balance	$	15	$	22

As of March 31, 2021, the Company had a total of one loan of $1 million that was 90 days and greater delinquent. As of December 31, 2020, the Company had a total of one loan of $1 million that was 60-89 days delinquent.

The Company’s commercial mortgage loan portfolio consists of commercial mortgage loans that are collateralized by real estate. Due to the collateralized nature of the loans, any assessment of impairment and ultimate loss given a default on the loans is based upon a consideration of the estimated fair value of the real estate.

The Company limits accrued interest income on loans to ninety days of interest. For loans in nonaccrual status, interest income is recognized on a cash basis. For the three months ended March 31, 2021, an immaterial amount of accrued interest was excluded from the amortized cost basis pursuant to the Company's nonaccrual policy.

As of March 31, 2021, the Company had one loan in a nonaccrual status with an allowance recorded. The recorded investment, unpaid principal balance, and average recorded investment was $1 million. As of December 31, 2020, the Company had one loan in a nonaccrual status with no related allowance recorded. The recorded investment, unpaid principal balance, and average recorded investment was $1 million.

Commercial mortgage loans that were modified in a troubled debt restructuring as of December 31, 2020 is shown below. The Company did not have any commercial mortgage loans that were modified in a troubled debt restructuring as of March 31, 2021.


	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars In Millions)




As of December 31, 2020
Troubled debt restructuring:
Commercial mortgage loans	2	$	2	$	2