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LENDING ACTIVITIES

3 Months Ended

Mar. 31, 2020

7. Lending Activities

Mortgage and other loans receivable include commercial mortgages, residential mortgages, life insurance policy loans, commercial loans, and other loans and notes receivable. Commercial mortgages, residential mortgages, commercial loans, and other loans and notes receivable are carried at unpaid principal balances less allowance for credit losses and plus or minus adjustments for the accretion or amortization of discount or premium. Interest income on such loans is accrued as earned.

Direct costs of originating commercial mortgages, commercial loans, and other loans and notes receivable, net of nonrefundable points and fees, are deferred and included in the carrying amount of the related receivables. The amount deferred is amortized to income as an adjustment to earnings using the interest method. Premiums and discounts on purchased residential mortgages are also amortized to income as an adjustment to earnings using the interest method.

Life insurance policy loans are carried at unpaid principal balances. There is no allowance for policy loans because these loans serve to reduce the death benefit paid when the death claim is made and the balances are effectively collateralized by the cash surrender value of the policy.

Interest income is not accrued when payment of contractual principal and interest is not expected. Any cash received on impaired loans is generally recorded as a reduction of the current carrying amount of the loan. Accrual of interest income is generally resumed when delinquent contractual principal and interest is repaid or when a portion of the delinquent contractual payments are made and the ongoing required contractual payments have been made for an appropriate period. As of March 31, 2020, $4 million and $304 million of residential mortgage loans and commercial mortgage loans, respectively, were placed on nonaccrual status.

Accrued interest is presented separately and is included in Other assets on the Condensed Consolidated Balance Sheets. As of March 31, 2020, accrued interest receivable was $18 million and $130 million associated with residential mortgage loans and commercial mortgage loans, respectively.

A significant majority of commercial mortgages in the portfolio are non-recourse loans and, accordingly, the only guarantees are for specific items that are exceptions to the non-recourse provisions. It is therefore extremely rare for us to have cause to enforce the provisions of a guarantee on a commercial real estate or mortgage loan.

The following table presents the composition of Mortgage and other loans receivable, net:

	March 31,			December 31,
(in millions)		2020		2019
Commercial mortgages^(a)	$	36,291	$	36,170
Residential mortgages		6,718		6,683
Life insurance policy loans		2,061		2,065
Commercial loans, other loans and notes receivable		2,561		2,504
Total mortgage and other loans receivable		47,631		47,422
Allowance for credit losses^(b)		(787)		(438)
Mortgage and other loans receivable, net	$	46,844	$	46,984

(a)Commercial mortgages primarily represent loans for apartments, offices and retail properties, with exposures in New York and California representing the largest geographic concentrations (aggregating approximately 23 percent and 11 percent, respectively, at March 31, 2020 and 23 percent and 10 percent, respectively, at December 31, 2019).

(b)Does not include $58 million of expected credit loss liability at March 31, 2020 in relation to off-balance-sheet commitments to fund commercial mortgage loans, which is recorded in Other liabilities.

Nonperforming loans are generally those loans where payment of contractual principal or interest is more than 90 days past due. Nonperforming loans were not significant for all periods presented.

Credit Quality of Commercial Mortgages

The following table presents debt service coverage ratios^(a) for commercial mortgages by year of vintage:

March 31, 2020
(in millions)		2020		2019		2018		2017		2016		Prior		Total
>1.2X	$	701	$	5,557	$	5,963	$	4,309	$	5,165	$	10,745	$	32,440
1.00 - 1.20X		115		255		505		338		162		2,072		3,447
<1.00X		-		74		-		-		-		330		404
Total commercial mortgages	$	816	$	5,886	$	6,468	$	4,647	$	5,327	$	13,147	$	36,291

The following table presents loan-to-value ratios^(b) for commercial mortgages by year of vintage:

March 31, 2020
(in millions)		2020		2019		2018		2017		2016		Prior		Total
Less than 65%	$	567	$	4,567	$	4,508	$	3,584	$	4,032	$	10,745	$	28,003
65% to 75%		249		1,319		1,960		924		1,104		2,221		7,777
76% to 80%		-		-		-		-		191		5		196
Greater than 80%		-		-		-		139		-		176		315
Total commercial mortgages	$	816	$	5,886	$	6,468	$	4,647	$	5,327	$	13,147	$	36,291

The following table presents debt service coverage ratios and loan-to-value ratios for commercial mortgages:

December 31, 2019	Debt Service Coverage Ratios^(a)
(in millions)		>1.20X		1.00X - 1.20X		<1.00X		Total
Loan-to-Value Ratios^(b)
Less than 65%	$	23,013	$	2,440	$	245	$	25,698
65% to 75%		9,007		899		40		9,946
76% to 80%		200		6		-		206
Greater than 80%		184		2		134		320
Total commercial mortgages	$	32,404	$	3,347	$	419	$	36,170

(a)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 was 2.0X at both March 31, 2020 and December 31, 2019. The debt service coverage ratios have been updated within the last three months.

(b)The loan-to-value ratio compares the current unpaid principal balance of the loan to the estimated fair value of the underlying property collateralizing the loan. Our weighted average loan-to-value ratio was 56 percent at both March 31, 2020 and December 31, 2019. The loan-to-value ratios have been updated within the last three months.The following table presents the credit quality performance indicators for commercial mortgages:

	Number															Percent
	of	Class														of
(dollars in millions)	Loans	Apartments			Offices		Retail	Industrial			Hotel		Others		Total^(c)	Total $
March 31, 2020
Credit Quality Performance
Indicator:
In good standing	718	$	14,153	$	10,478	$	5,221	$	3,574	$	2,156	$	438	$	36,020	99	%
Restructured^(a)	5		-		87		25		-		101		-		213	1
90 days or less delinquent	1		1		-		-		-		-		-		1	-
>90 days delinquent or in
process of foreclosure	2		-		57		-		-		-		-		57	-
Total^(b)	726	$	14,154	$	10,622	$	5,246	$	3,574	$	2,257	$	438	$	36,291	100	%
Allowance for credit losses		$	161	$	315	$	115	$	66	$	24	$	8	$	689	2	%

December 31, 2019
Credit Quality Performance
Indicator:
In good standing	736	$	13,698	$	10,553	$	5,332	$	3,663	$	2,211	$	522	$	35,979	99	%
Restructured^(a)	3		-		89		-		-		101		-		190	1
90 days or less delinquent	1		1		-		-		-		-		-		1	-
>90 days delinquent or in
process of foreclosure	-		-		-		-		-		-		-		-	-
Total^(b)	740	$	13,699	$	10,642	$	5,332	$	3,663	$	2,312	$	522	$	36,170	100	%
Allowance for credit losses:
Specific		$	-	$	2	$	1	$	-	$	6	$	-	$	9	-	%
General			81		153		44		30		14		5		327	1
Total allowance for credit losses		$	81	$	155	$	45	$	30	$	20	$	5	$	336	1	%

(a)Loans that have been modified in troubled debt restructurings and are performing according to their restructured terms. For additional discussion of troubled debt restructurings see Note 8 to the Consolidated Financial Statements in the 2019 Annual Report.

(b)Does not reflect allowance for credit losses.

(c)Our commercial mortgage loan portfolio is current as to payments of principal and interest, for both periods presented. There were no significant amounts of nonperforming commercial mortgages (defined as those loans where payment of contractual principal or interest is more than 90 days past due) during any of the periods presented.

The following table presents credit quality performance indicators for residential mortgages by year of vintage:

March 31, 2020
(in millions)		2020		2019		2018		2017		2016		Prior		Total
FICO*:
780 and greater	$	116	$	973	$	638	$	984	$	996	$	969	$	4,676
720 - 779		128		496		190		265		282		285		1,646
660 - 719		6		77		43		55		65		85		331
600 - 659		1		8		7		8		7		16		47
Less than 600		-		1		1		2		3		11		18
Total residential mortgages	$	251	$	1,555	$	879	$	1,314	$	1,353	$	1,366	$	6,718

*Fair Isaac Corporation (FICO) is the credit quality indicator used to evaluate consumer credit risk for residential mortgage loan borrowers and have been updated within the last three months

Methodology Used to Estimate the Allowance for Credit Losses

Subsequent to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020

At the time of origination or purchase, an allowance for credit losses is established for mortgage and other loan receivables and is updated each reporting period. Changes in the allowance for credit losses are recorded in realized capital losses. This allowance reflects the risk of loss, even when that risk is remote, and reflects losses expected over the remaining contractual life of the loan. The allowance for credit losses considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts of future economic conditions. We revert to historical information when we determine that we can no longer reliably forecast future economic assumptions.

The allowances for the commercial mortgage loans and residential mortgage loans are estimated utilizing a Probability of Default /Loss Given Default model. Loss rate factors are determined based on historical data and adjusted for current and forecasted information. The loss rates are applied based on individual loan attributes and considering such data points as Loan-to-Value, FICO scores, and debt service coverage.

The estimate of credit losses also reflects management’s assumptions on certain macroeconomic factors that include, but are not limited to, gross domestic product growth, employment, inflation, housing price index, interest rates and credit spreads.

Accrued interest is excluded from the measurement of the allowance for credit losses and accrued interest is reversed through interest income once a loan is placed on nonaccrual.

When all or a portion of a loan is deemed uncollectible, the uncollectible portion of the carrying amount of the loan is charged off against the allowance.

We also have off-balance sheet commitments related to our commercial mortgage loans. The liability for expected credit losses related to these commercial mortgage loan commitments is reported in Other liabilities in the Condensed Consolidated Balance Sheets. When a commitment is funded, we record a loan receivable and reclassify the liability for expected credit losses related to the commitment into loan allowance for expected credit losses. Other changes in the liability for expected credit losses on loan commitments are recorded in Net realized capital gains (losses) in the Condensed Consolidated Statements of Income.

Prior to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020

Mortgage and other loans receivable are considered impaired when collection of all amounts due under contractual terms is not probable. Impairment is measured using either i) the present value of expected future cash flows discounted at the loan’s effective interest rate, ii) the loan’s observable market price, if available, or iii) the fair value of the collateral if the loan is collateral dependent. Impairment of commercial mortgages is typically determined using the fair value of collateral while impairment of other loans is typically determined using the present value of cash flows or the loan’s observable market price. An allowance is typically established for the difference between the impaired value of the loan and its current carrying amount. Additional allowance amounts are established for incurred but not specifically identified impairments, based on statistical models primarily driven by past-due status, debt service coverage, loan-to-value ratio, property type and location, loan term, profile of the borrower and of the major property tenants, and loan seasoning. When all or a portion of a loan is deemed uncollectable, the uncollectable portion of the carrying amount of the loan is charged off against the allowance.

The following table presents a rollforward of the changes in the allowance for losses on Mortgage and other loans receivable^(a):

Three Months Ended March 31,	2020						2019
		Commercial		Other				Commercial			Other
(in millions)		Mortgages		Loans		Total		Mortgages			Loans		Total
Allowance, beginning of year	$	336	$	102	$	438	$	318		$	79	$	397
Initial allowance upon CECL adoption		311		7		318		-			-		-
Loans charged off		-		-		-		-			-		-
Recoveries of loans previously charged off		-		-		-		-			-		-
Net charge-offs		-		-		-		-			-		-
Provision for loan losses		42		(11)		31		5			20		25
Allowance, end of period	$	689	$	98	$	787	$	323	^(b)	$	99	$	422

(a)Does not include $58 million of expected credit loss liability at March 31, 2020 in relation to off-balance-sheet commitments to fund commercial mortgage loans, which is recorded in Other liabilities.

(b)The March 31, 2019 total allowance was calculated prior to the adoption of ASC 326 on January 1, 2020. Of the total allowance, $3 million relates to individually assessed credit losses on $148 million of commercial mortgages at 2019.

As a result of the COVID-19 crisis, including the significant global economic slowdown and general market decline, our expectations and models used to estimate the allowance for losses on commercial and residential mortgage loans have been updated to reflect the current economic environment. The full impact of COVID-19 on real estate valuations remains uncertain and we will continue to review our valuations as further information becomes available.

During the three month period ended March 31, 2020, loans with a carrying value of $25 million were modified in troubled debt restructurings. There were no loans modified in troubled debt restructurings during the three-month period ended March 31, 2019.