COMMERCIAL MORTGAGE LOANS

6 Months Ended

Jun. 30, 2021

The Company invests a portion of its investment portfolio in commercial mortgage loans. As of June 30, 2021, the Company’s commercial mortgage loan holdings were $10.4 billion, or $10.3 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 June 30, 2021, assuming the loans are called at their next call dates, $102 million of principal would become due for the remainder of 2021, $450 million in 2022 through 2026 and $13 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 June 30, 2021 and December 31, 2020, $682 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 and six months ended June 30, 2021 and 2020, the Company recognized $7 million, $14 million, $1 million, and $17 million, respectively, of participation commercial mortgage loan income.

As of June 30, 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 six months ended June 30, 2021, the Company recognized one troubled debt restructuring transaction as a result of granting a concession to a borrower which included loan terms unavailable from other lenders. This concession was the result of an agreement between the creditor and the debtor. The Company did not identify any loans whose principal was permanently impaired during the six months ended June 30, 2021.

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 six months ended June 30, 2021, the Company modified 16 loans under the Loan Modification Program, representing $311 million in unpaid principal balance. As of June 30, 2021, since the inception of the CARES Act, there were 286 total loans modified under the Loan Modification Program, representing $2.2 billion in unpaid principal balance. At June 30, 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 June 30, 2021
Commercial mortgage loans:
Performing	$	771	$	1,444	$	2,220	$	1,527	$	1,336	$	3,125	$	10,423
Non-performing	—		—		—		—		—		1		1
Amortized cost	$	771	$	1,444	$	2,220	$	1,527	$	1,336	$	3,126	$	10,424
Allowance for credit losses	(5)		(16)		(29)		(24)		(25)		(37)		(136)
Total commercial mortgage loans	$	766	$	1,428	$	2,191	$	1,503	$	1,311	$	3,089	$	10,288


	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 June 30, 2021					As of December 31, 2020
	Amortized Cost		% of Total		DSCR (2)	Amortized Cost		% of Total		DSCR (2)
	(Dollars In Millions)					(Dollars In Millions)
Loan-to-Value(1)
Greater than 75%	$	332	3	%	1.27	$	399	4	%	1.29
50% - 75%	6,691		64	%	1.65	6,557		64	%	1.61
Less than 50%	3,401		33	%	2.04	3,272		32	%	2.01
Total commercial mortgage loans	$	10,424	100	%		$	10,228	100	%

(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 June 30, 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 June 30, 2021 and December 31, 2020 was 1.76x and 1.72x, respectively.

The following provides a summary of the rollforward of the allowance for credit losses for funded commercial mortgage loans and unfunded commercial mortgage loan commitments for the periods indicated.


	As of and For The Six Months Ended June 30, 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	(7)		(3)
Provision	(79)		140
Ending balance	$	136	$	222

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

As of June 30, 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 six months ended June 30, 2021, an immaterial amount of accrued interest was excluded from the amortized cost basis pursuant to the Company's nonaccrual policy.