FAIR VALUE MEASUREMENTS |
4. Fair Value Measurements Fair Value Measurements on a Recurring Basis Assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are measured and classified in accordance with a fair value hierarchy consisting of three “levels” based on the observability of valuation inputs:
Level 1: Fair value measurements based on quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. We do not adjust the quoted price for such instruments.
Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions about the inputs a hypothetical market participant would use to value that asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table presents information about assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value measurement based on the observability of the inputs used: September 30, 2020 | | | | | | | Counterparty | Cash | | (in millions) | | Level 1 | | Level 2 | | Level 3 | | Netting(a) | Collateral | | Total | Assets: | | | | | | | | | | | | | Bonds available for sale: | | | | | | | | | | | | | U.S. government and government sponsored entities | $ | 33 | $ | 5,102 | $ | - | $ | - | $ | - | $ | 5,135 | Obligations of states, municipalities and political subdivisions | | - | | 13,990 | | 2,183 | | - | | - | | 16,173 | Non-U.S. governments | | 41 | | 15,126 | | 7 | | - | | - | | 15,174 | Corporate debt | | - | | 159,991 | | 2,115 | | - | | - | | 162,106 | RMBS | | - | | 20,759 | | 12,655 | | - | | - | | 33,414 | CMBS | | - | | 14,796 | | 981 | | - | | - | | 15,777 | CDO/ABS | | - | | 8,833 | | 9,353 | | - | | - | | 18,186 | Total bonds available for sale | | 74 | | 238,597 | | 27,294 | | - | | - | | 265,965 | Other bond securities: | | | | | | | | | | | | | U.S. government and government sponsored entities | | - | | 1,870 | | - | | - | | - | | 1,870 | Non-U.S. governments | | - | | - | | - | | - | | - | | - | Corporate debt | | - | | 12 | | - | | - | | - | | 12 | RMBS | | - | | 320 | | 168 | | - | | - | | 488 | CMBS | | - | | 274 | | 48 | | - | | - | | 322 | CDO/ABS | | - | | 168 | | 2,555 | | - | | - | | 2,723 | Total other bond securities | | - | | 2,644 | | 2,771 | | - | | - | | 5,415 | Equity securities | | 827 | | 18 | | 26 | | - | | - | | 871 | Other invested assets(b) | | - | | 94 | | 1,583 | | - | | - | | 1,677 | Derivative assets: | | | | | | | | | | | | | Interest rate contracts | | 3 | | 5,051 | | - | | - | | - | | 5,054 | Foreign exchange contracts | | - | | 1,585 | | 3 | | - | | - | | 1,588 | Equity contracts | | 6 | | 841 | | 110 | | - | | - | | 957 | Credit contracts | | - | | - | | 1 | | - | | - | | 1 | Other contracts | | - | | - | | 13 | | - | | - | | 13 | Counterparty netting and cash collateral | | - | | - | | - | | (3,695) | | (3,129) | | (6,824) | Total derivative assets | | 9 | | 7,477 | | 127 | | (3,695) | | (3,129) | | 789 | Short-term investments | | 3,195 | | 4,019 | | - | | - | | - | | 7,214 | Other assets | | - | | - | | 112 | | - | | - | | 112 | Separate account assets | | 88,023 | | 4,013 | | - | | - | | - | | 92,036 | Total | $ | 92,128 | $ | 256,862 | $ | 31,913 | $ | (3,695) | $ | (3,129) | $ | 374,079 | Liabilities: | | | | | | | | | | | | | Policyholder contract deposits | $ | - | $ | - | $ | 9,322 | $ | - | $ | - | $ | 9,322 | Derivative liabilities: | | | | | | | | | | | | | Interest rate contracts | | - | | 4,559 | | - | | - | | - | | 4,559 | Foreign exchange contracts | | - | | 619 | | - | | - | | - | | 619 | Equity contracts | | 12 | | 84 | | 5 | | - | | - | | 101 | Credit contracts | | - | | 24 | | 45 | | - | | - | | 69 | Other contracts | | - | | - | | 7 | | - | | - | | 7 | Counterparty netting and cash collateral | | - | | - | | - | | (3,695) | | (1,060) | | (4,755) | Total derivative liabilities | | 12 | | 5,286 | | 57 | | (3,695) | | (1,060) | | 600 | Fortitude Re funds withheld payable | | - | | - | | 5,136 | | - | | - | | 5,136 | Other liabilities | | - | | - | | - | | - | | - | | - | Long-term debt | | - | | 2,169 | | - | | - | | - | | 2,169 | Total | $ | 12 | $ | 7,455 | $ | 14,515 | $ | (3,695) | $ | (1,060) | $ | 17,227 |
December 31, 2019 | | | | | | | Counterparty | Cash | | (in millions) | | Level 1 | | Level 2 | | Level 3 | | Netting(a) | | Collateral | | Total | Assets: | | | | | | | | | | | | | Bonds available for sale: | | | | | | | | | | | | | U.S. government and government sponsored entities | $ | 135 | $ | 5,245 | $ | - | $ | - | $ | - | $ | 5,380 | Obligations of states, municipalities and political subdivisions | | - | | 13,197 | | 2,121 | | - | | - | | 15,318 | Non-U.S. governments | | 60 | | 14,809 | | - | | - | | - | | 14,869 | Corporate debt | | - | | 147,973 | | 1,663 | | - | | - | | 149,636 | RMBS | | - | | 19,397 | | 13,408 | | - | | - | | 32,805 | CMBS | | - | | 13,377 | | 1,053 | | - | | - | | 14,430 | CDO/ABS | | - | | 10,962 | | 7,686 | | - | | - | | 18,648 | Total bonds available for sale | | 195 | | 224,960 | | 25,931 | | - | | - | | 251,086 | Other bond securities: | | | | | | | | | | | | | U.S. government and government sponsored entities | | - | | 2,121 | | - | | - | | - | | 2,121 | Non-U.S. governments | | - | | - | | - | | - | | - | | - | Corporate debt | | - | | 18 | | - | | - | | - | | 18 | RMBS | | - | | 346 | | 143 | | - | | - | | 489 | CMBS | | - | | 272 | | 50 | | - | | - | | 322 | CDO/ABS | | - | | 187 | | 3,545 | | - | | - | | 3,732 | Total other bond securities | | - | | 2,944 | | 3,738 | | - | | - | | 6,682 | Equity securities | | 756 | | 77 | | 8 | | - | | - | | 841 | Other invested assets(b) | | - | | 86 | | 1,192 | | - | | - | | 1,278 | Derivative assets: | | | | | | | | | | | | | Interest rate contracts | | 1 | | 3,199 | | - | | - | | - | | 3,200 | Foreign exchange contracts | | - | | 1,034 | | 6 | | - | | - | | 1,040 | Equity contracts | | 5 | | 593 | | 171 | | - | | - | | 769 | Credit contracts | | - | | - | | 3 | | - | | - | | 3 | Other contracts | | - | | - | | 14 | | - | | - | | 14 | Counterparty netting and cash collateral | | - | | - | | - | | (2,427) | | (1,806) | | (4,233) | Total derivative assets | | 6 | | 4,826 | | 194 | | (2,427) | | (1,806) | | 793 | Short-term investments | | 2,299 | | 3,044 | | - | | - | | - | | 5,343 | Other assets | | 57 | | 2,212 | | 89 | | - | | - | | 2,358 | Separate account assets | | 89,069 | | 4,203 | | - | | - | | - | | 93,272 | Total | $ | 92,382 | $ | 242,352 | $ | 31,152 | $ | (2,427) | $ | (1,806) | $ | 361,653 | Liabilities: | | | | | | | | | | | | | Policyholder contract deposits | $ | - | $ | - | $ | 6,910 | $ | - | $ | - | $ | 6,910 | Derivative liabilities: | | | | | | | | | | | | | Interest rate contracts | | 4 | | 2,745 | | - | | - | | - | | 2,749 | Foreign exchange contracts | | - | | 1,025 | | - | | - | | - | | 1,025 | Equity contracts | | 8 | | 111 | | 20 | | - | | - | | 139 | Credit contracts | | - | | 24 | | 65 | | - | | - | | 89 | Other contracts | | - | | - | | 7 | | - | | - | | 7 | Counterparty netting and cash collateral | | - | | - | | - | | (2,427) | | (527) | | (2,954) | Total derivative liabilities | | 12 | | 3,905 | | 92 | | (2,427) | | (527) | | 1,055 | Other liabilities | | - | | 45 | | - | | - | | - | | 45 | Long-term debt | | - | | 2,062 | | - | | - | | - | | 2,062 | Total | $ | 12 | $ | 6,012 | $ | 7,002 | $ | (2,427) | $ | (527) | $ | 10,072 | (a)Represents netting of derivative exposures covered by qualifying master netting agreements.(b)Excludes investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent), which totaled $5.4 billion and $5.5 billion as of September 30, 2020 and December 31, 2019, respectively. Changes in Level 3 Recurring Fair Value Measurements The following tables present changes during the three- and nine-month periods ended September 30, 2020 and 2019 in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) related to the Level 3 assets and liabilities in the Condensed Consolidated Balance Sheets at September 30, 2020 and 2019: | | | | Net | | | | | | | | | | | | | | | | Changes in | | | | | Realized | | | | | | | | | | | | | | | | Unrealized Gains | | | | | and | | | | Purchases, | | | | | | | | | | Changes in | | (Losses) Included in | | | | | Unrealized | | | | Sales, | | | | | | | | | | Unrealized Gains | | Other Comprehensive | | | | | Gains | | | | Issuances | | | | | | | | | | (Losses) Included | | Income (Loss) for | | | Fair Value | (Losses) | | Other | | and | | Gross | | Gross | | | Fair Value | | in Income on | | Recurring Level 3 | | | Beginning | | Included | Comprehensive | Settlements, | Transfers | Transfers | | Divested | | End | | Instruments Held | | Instruments Held | (in millions) | | of Period | | in Income | | Income (Loss) | | Net | | In | | Out | Businesses | of Period | | at End of Period | | at End of Period | Three Months Ended September 30, 2020 | | | | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | | | | | | | | Bonds available for sale: | | | | | | | | | | | | | | | | | | | | | Obligations of states, | | | | | | | | | | | | | | | | | | | | | municipalities and | | | | | | | | | | | | | | | | | | | | | political subdivisions | $ | 2,279 | $ | 3 | $ | (4) | $ | (30) | $ | - | $ | (65) | $ | - | $ | 2,183 | $ | - | $ | - | Non-U.S. governments | | 5 | | - | | 1 | | - | | 1 | | - | | - | | 7 | | - | | - | Corporate debt | | 1,900 | | (33) | | 52 | | (25) | | 452 | | (231) | | - | | 2,115 | | - | | 38 | RMBS | | 12,678 | | 192 | | 301 | | (412) | | 3 | | (107) | | - | | 12,655 | | - | | 335 | CMBS | | 1,149 | | 3 | | 36 | | (11) | | - | | (196) | | - | | 981 | | - | | 27 | CDO/ABS | | 9,461 | | 5 | | 180 | | (174) | | 125 | | (244) | | - | | 9,353 | | - | | 172 | Total bonds available for sale(a) | | 27,472 | | 170 | | 566 | | (652) | | 581 | | (843) | | - | | 27,294 | | - | | 572 | Other bond securities: | | | | | | | | | | | | | | | | | | | | | RMBS | | 168 | | 16 | | - | | (16) | | - | | - | | - | | 168 | | 4 | | - | CMBS | | 47 | | 1 | | - | | - | | - | | - | | - | | 48 | | 1 | | - | CDO/ABS | | 2,531 | | 124 | | - | | (100) | | - | | - | | - | | 2,555 | | 34 | | - | Total other bond securities | | 2,746 | | 141 | | - | | (116) | | - | | - | | - | | 2,771 | | 39 | | - | Equity securities | | 43 | | - | | 2 | | 1 | | 7 | | (27) | | - | | 26 | | 1 | | - | Other invested assets | | 1,486 | | 74 | | (2) | | 25 | | - | | - | | - | | 1,583 | | - | | - | Other assets | | 111 | | - | | - | | 2 | | - | | - | | (1) | | 112 | | - | | - | Total | $ | 31,858 | $ | 385 | $ | 566 | $ | (740) | $ | 588 | $ | (870) | $ | (1) | $ | 31,786 | $ | 40 | $ | 572 | | | | | Net | | | | | | | | | | | | | | | | Changes in | | | | | Realized | | | | | | | | | | | | | | | | Unrealized Gains | | | | | and | | | | Purchases, | | | | | | | | | | Changes in | | (Losses) Included in | | | | | Unrealized | | | | Sales, | | | | | | | | | | Unrealized Gains | | Other Comprehensive | | | | | (Gains) | | | | Issuances | | | | | | | | | | (Losses) Included | | Income (Loss) for | | | Fair Value | Losses | | Other | | and | | Gross | | Gross | | | Fair Value | | in Income on | | Recurring Level 3 | | | Beginning | | Included | Comprehensive | Settlements, | Transfers | Transfers | | Divested | | End | | Instruments Held | | Instruments Held | (in millions) | | of Period | | in Income | | Income (Loss) | | Net | | In | | Out | Businesses | of Period | | at End of Period | | at End of Period | Liabilities: | | | | | | | | | | | | | | | | | | | | | Policyholder contract deposits | $ | 9,233 | $ | 19 | $ | - | $ | 70 | $ | - | $ | - | $ | - | $ | 9,322 | $ | 273 | $ | - | Derivative liabilities, net: | | | | | | | | | | | | | | | | | | | | | Interest rate contracts | | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | Foreign exchange contracts | | (1) | | (2) | | - | | - | | - | | - | | - | | (3) | | 2 | | - | Equity contracts | | (53) | | 9 | | - | | (65) | | (1) | | 5 | | - | | (105) | | - | | - | Credit contracts | | 45 | | 1 | | - | | (2) | | - | | - | | - | | 44 | | (7) | | - | Other contracts | | (3) | | (19) | | - | | 16 | | - | | - | | - | | (6) | | 18 | | - | Total derivative liabilities, net(b) | | (12) | | (11) | | - | | (51) | | (1) | | 5 | | - | | (70) | | 13 | | - | Fortitude Re funds withheld | | | | | | | | | | | | | | | | | | | | | payable | | 4,510 | | 656 | | - | | (30) | | - | | - | | - | | 5,136 | | (256) | | - | Total | $ | 13,731 | $ | 664 | $ | - | $ | (11) | $ | (1) | $ | 5 | $ | - | $ | 14,388 | $ | 30 | $ | - |
| | | | Net | | | | | | | | | | | | | | | | Changes in | | | | | Realized | | | | | | | | | | | | | | | | Unrealized Gains | | | | | and | | | | Purchases, | | | | | | | | | | Changes in | | (Losses) Included in | | | | | Unrealized | | | | Sales, | | | | | | | | | | Unrealized Gains | | Other Comprehensive | | | | | Gains | | | | Issuances | | | | | | | | | | (Losses) Included | | Income (Loss) for | | | Fair Value | | (Losses) | | Other | | and | | Gross | | Gross | | | Fair Value | | in Income on | | Recurring Level 3 | | | Beginning | | Included | Comprehensive | Settlements, | Transfers | Transfers | | Divested | | End | | Instruments Held | | Instruments Held | (in millions) | | of Period | | in Income | | Income (Loss) | | Net | | In | | Out | Businesses | of Period | | at End of Period | | at End of Period | Nine Months Ended September 30, 2020 | | | | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | | | | | | | | Bonds available for sale: | | | | | | | | | | | | | | | | | | | | | Obligations of states, | | | | | | | | | | | | | | | | | | | | | municipalities and | | | | | | | | | | | | | | | | | | | | | political subdivisions | $ | 2,121 | $ | 8 | $ | 195 | $ | 127 | $ | 27 | $ | (295) | $ | - | $ | 2,183 | $ | - | $ | 193 | Non-U.S. governments | | - | | - | | 1 | | 5 | | 7 | | (6) | | - | | 7 | | - | | - | Corporate debt | | 1,663 | | (101) | | 43 | | 95 | | 1,074 | | (659) | | - | | 2,115 | | - | | 59 | RMBS | | 13,408 | | 532 | | (375) | | (806) | | 29 | | (133) | | - | | 12,655 | | - | | (213) | CMBS | | 1,053 | | 14 | | 70 | | 17 | | 23 | | (196) | | - | | 981 | | - | | 66 | CDO/ABS | | 7,686 | | 25 | | 55 | | (19) | | 2,062 | | (456) | | - | | 9,353 | | - | | 38 | Total bonds available for sale(a) | | 25,931 | | 478 | | (11) | | (581) | | 3,222 | | (1,745) | | - | | 27,294 | | - | | 143 | Other bond securities: | | | | | | | | | | | | | | | | | | | | | RMBS | | 143 | | 16 | | - | | 9 | | - | | - | | - | | 168 | | 3 | | - | CMBS | | 50 | | - | | - | | (2) | | - | | - | | - | | 48 | | (1) | | - | CDO/ABS | | 3,545 | | 225 | | - | | (1,215) | | - | | - | | - | | 2,555 | | 25 | | - | Total other bond securities | | 3,738 | | 241 | | - | | (1,208) | | - | | - | | - | | 2,771 | | 27 | | - | Equity securities | | 8 | | (1) | | 3 | | 11 | | 33 | | (28) | | - | | 26 | | 1 | | - | Other invested assets | | 1,192 | | 11 | | (2) | | 232 | | 150 | | - | | - | | 1,583 | | (13) | | - | Other assets | | 89 | | - | | - | | 61 | | - | | - | | (38) | | 112 | | - | | - | Total | $ | 30,958 | $ | 729 | $ | (10) | $ | (1,485) | $ | 3,405 | $ | (1,773) | $ | (38) | $ | 31,786 | $ | 15 | $ | 143 | | | | | Net | | | | | | | | | | | | | | | | Changes in | | | | | Realized | | | | | | | | | | | | | | | | Unrealized Gains | | | | | and | | | | Purchases, | | | | | | | | | | Changes in | | (Losses) Included in | | | | | Unrealized | | | | Sales, | | | | | | | | | | Unrealized Gains | | Other Comprehensive | | | | | (Gains) | | | | Issuances | | | | | | | | | | (Losses) Included | | Income (Loss) for | | | Fair Value | | Losses | | Other | | and | | Gross | | Gross | | | | Fair Value | | in Income on | | Recurring Level 3 | | | Beginning | | Included | Comprehensive | Settlements, | Transfers | Transfers | | Divested | | End | | Instruments Held | | Instruments Held | (in millions) | | of Period | | in Income | | Income (Loss) | | Net | | In | | Out | Businesses | | of Period | | at End of Period | | at End of Period | Liabilities: | | | | | | | | | | | | | | | | | | | | | Policyholder contract deposits | $ | 6,910 | $ | 2,250 | $ | - | $ | 162 | $ | - | $ | - | $ | - | $ | 9,322 | $ | (1,436) | $ | - | Derivative liabilities, net: | | | | | | | | | | | | | | | | | | | | | Interest rate contracts | | - | | (1) | | - | | 1 | | - | | - | | - | | - | | 1 | | - | Foreign exchange contracts | | (6) | | 2 | | - | | 1 | | - | | - | | - | | (3) | | 2 | | - | Equity contracts | | (151) | | 19 | | - | | 23 | | (1) | | 5 | | - | | (105) | | (62) | | - | Credit contracts | | 62 | | (59) | | - | | 41 | | - | | - | | - | | 44 | | 8 | | - | Other contracts | | (7) | | (46) | | - | | 47 | | - | | - | | - | | (6) | | 45 | | - | Total derivative liabilities, net(b) | | (102) | | (85) | | - | | 113 | | (1) | | 5 | | - | | (70) | | (6) | | - | Fortitude Re funds withheld | | | | | | | | | | | | | | | | | | | | | payable | | - | | 1,493 | | - | | (30) | | - | | - | | 3,673 | | 5,136 | | (919) | | - | Total | $ | 6,808 | $ | 3,658 | $ | - | $ | 245 | $ | (1) | $ | 5 | $ | 3,673 | $ | 14,388 | $ | (2,361) | $ | - |
| | | | Net | | | | | | | | | | | | | | Changes in | | | | | Realized and | | | | | | | | | | | | | | Unrealized Gains | | | | | Unrealized | | | | Purchases, | | | | | | | | | | (Losses) Included | | | Fair Value | Gains (Losses) | | Other | | Sales, | | Gross | | Gross | | | | Fair Value | | in Income on | | | Beginning | | Included | | Comprehensive | | Issuances and | | Transfers | | Transfers | | Divested | | End | | Instruments Held | (in millions) | | of Period | | in Income | | Income (Loss) | Settlements, Net | | In | | Out | Businesses | | of Period | | at End of Period | Three Months Ended September 30, 2019 | | | | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | | | | | | Bonds available for sale: | | | | | | | | | | | | | | | | | | | Obligations of states, municipalities | | | | | | | | | | | | | | | | | | | and political subdivisions | $ | 2,162 | $ | (1) | $ | 119 | $ | 92 | $ | - | $ | (265) | $ | - | $ | 2,107 | $ | - | Non-U.S. governments | | 2 | | 6 | | - | | - | | 5 | | - | | - | | 13 | | - | Corporate debt | | 1,821 | | (36) | | (2) | | (535) | | 112 | | (85) | | - | | 1,275 | | - | RMBS | | 13,863 | | 166 | | 15 | | (418) | | 16 | | (82) | | - | | 13,560 | | - | CMBS | | 1,103 | | 2 | | 32 | | 85 | | - | | (172) | | - | | 1,050 | | - | CDO/ABS | | 9,062 | | 3 | | 37 | | (170) | | 7 | | - | | - | | 8,939 | | - | Total bonds available for sale | | 28,013 | | 140 | | 201 | | (946) | | 140 | | (604) | | - | | 26,944 | | - | Other bond securities: | | | | | | | | | | | | | | | | | | | RMBS | | 830 | | 9 | | - | | (24) | | - | | - | | - | | 815 | | 1 | CMBS | | 88 | | 1 | | - | | (17) | | - | | (4) | | - | | 68 | | (2) | CDO/ABS | | 4,150 | | 115 | | - | | (334) | | - | | - | | - | | 3,931 | | 28 | Total other bond securities | | 5,068 | | 125 | | - | | (375) | | - | | (4) | | - | | 4,814 | | 27 | Equity securities | | 35 | | - | | - | | (29) | | 2 | | - | | - | | 8 | | (2) | Other invested assets | | 605 | | 6 | | - | | (22) | | - | | - | | - | | 589 | | 7 | Other assets | | 61 | | - | | - | | (1) | | - | | - | | - | | 60 | | - | Total | $ | 33,782 | $ | 271 | $ | 201 | $ | (1,373) | $ | 142 | $ | (608) | $ | - | $ | 32,415 | $ | 32 | | | | | Net | | | | | | | | | | | | | | Changes in | | | | | Realized and | | | | | | | | | | | | | | Unrealized Gains | | | | | Unrealized | | | | Purchases, | | | | | | | | | | (Losses) Included | | | Fair Value | (Gains) Losses | | Other | | Sales, | | Gross | | Gross | | | | Fair Value | | in Income on | | | Beginning | | Included | | Comprehensive | | Issuances and | | Transfers | | Transfers | | Divested | | End | | Instruments Held | (in millions) | | of Period | | in Income | | Income (Loss) | Settlements, Net | | In | | Out | | Businesses | | of Period | | at End of Period | Liabilities: | | | | | | | | | | | | | | | | | | | Policyholder contract deposits | $ | 6,065 | $ | 861 | $ | - | $ | 240 | $ | - | $ | - | $ | - | $ | 7,166 | $ | (691) | Derivative liabilities, net: | | | | | | | | | | | | | | | | | | | Interest rate contracts | | 16 | | (3) | | - | | (13) | | - | | - | | - | | - | | - | Foreign exchange contracts | | (4) | | 6 | | - | | (3) | | - | | - | | - | | (1) | | - | Equity contracts | | (113) | | 12 | | - | | - | | - | | - | | - | | (101) | | (13) | Credit contracts | | 173 | | (24) | | - | | (47) | | - | | - | | - | | 102 | | 14 | Other contracts | | (7) | | (17) | | - | | 17 | | - | | - | | - | | (7) | | 15 | Total derivative liabilities, net(b) | | 65 | | (26) | | - | | (46) | | - | | - | | - | | (7) | | 16 | Total | $ | 6,130 | $ | 835 | $ | - | $ | 194 | $ | - | $ | - | $ | - | $ | 7,159 | $ | (675) |
| | | | Net | | | | | | | | | | | | | | Changes in | | | | | Realized and | | | | | | | | | | | | | | Unrealized Gains | | | | | Unrealized | | | | Purchases, | | | | | | | | | | (Losses) Included | | | Fair Value | Gains (Losses) | | Other | | Sales, | | Gross | | Gross | | | | Fair Value | | in Income on | | | Beginning | | Included | Comprehensive | | Issuances and | | Transfers | | Transfers | | Divested | | End | | Instruments Held | (in millions) | | of Period | | in Income | | Income (Loss) | Settlements, Net | | In | | Out | Businesses | | of Period | | at End of Period | Nine Months Ended September 30, 2019 | | | | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | | | | | | Bonds available for sale: | | | | | | | | | | | | | | | | | | | Obligations of states, municipalities | | | | | | | | | | | | | | | | | | | and political subdivisions | $ | 2,000 | $ | (2) | $ | 321 | $ | 178 | $ | 35 | $ | (425) | $ | - | $ | 2,107 | $ | - | Non-U.S. governments | | 11 | | 5 | | - | | (4) | | 5 | | (4) | | - | | 13 | | - | Corporate debt | | 864 | | (10) | | 79 | | (600) | | 1,155 | | (213) | | - | | 1,275 | | - | RMBS | | 14,199 | | 575 | | 176 | | (1,234) | | 83 | | (239) | | - | | 13,560 | | - | CMBS | | 917 | | 8 | | 62 | | 381 | | 58 | | (376) | | - | | 1,050 | | - | CDO/ABS | | 9,102 | | 15 | | 204 | | (111) | | 103 | | (374) | | - | | 8,939 | | - | Total bonds available for sale | | 27,093 | | 591 | | 842 | | (1,390) | | 1,439 | | (1,631) | | - | | 26,944 | | - | Other bond securities: | | | | | | | | | | | | | | | | | | | RMBS | | 1,290 | | 69 | | - | | (544) | | - | | - | | - | | 815 | | (18) | CMBS | | 77 | | 5 | | - | | - | | - | | (14) | | - | | 68 | | 3 | CDO/ABS | | 4,478 | | 299 | | - | | (749) | | - | | (97) | | - | | 3,931 | | 128 | Total other bond securities | | 5,845 | | 373 | | - | | (1,293) | | - | | (111) | | - | | 4,814 | | 113 | Equity securities | | 27 | | - | | - | | (20) | | 2 | | (1) | | - | | 8 | | 2 | Other invested assets | | 587 | | 24 | | 1 | | (23) | | - | | - | | - | | 589 | | 27 | Other assets | | 58 | | - | | - | | 2 | | - | | - | | - | | 60 | | - | Total | $ | 33,610 | $ | 988 | $ | 843 | $ | (2,724) | $ | 1,441 | $ | (1,743) | $ | - | $ | 32,415 | $ | 142 | | | | | Net | | | | | | | | | | | | | | Changes in | | | | | Realized and | | | | | | | | | | | | | | Unrealized Gains | | | | | Unrealized | | | | Purchases, | | | | | | | | | | (Losses) Included | | | Fair Value | (Gains) Losses | | Other | | Sales, | | Gross | | Gross | | | | Fair Value | | in Income on | | | Beginning | | Included | Comprehensive | | Issuances and | | Transfers | | Transfers | | Divested | | End | | Instruments Held | (in millions) | | of Period | | in Income | | Income (Loss) | Settlements, Net | | In | | Out | | Businesses | | of Period | | at End of Period | Liabilities: | | | | | | | | | | | | | | | | | | | Policyholder contract deposits | $ | 4,116 | $ | 2,400 | $ | - | $ | 650 | $ | - | $ | - | $ | - | $ | 7,166 | $ | (2,044) | Derivative liabilities, net: | | | | | | | | | | | | | | | | | | | Interest rate contracts | | 15 | | - | | - | | (15) | | - | | - | | - | | - | | 1 | Foreign exchange contracts | | (5) | | (4) | | - | | 8 | | - | | - | | - | | (1) | | - | Equity contracts | | (75) | | (8) | | - | | (18) | | - | | - | | - | | (101) | | 19 | Credit contracts | | 227 | | (51) | | - | | (74) | | - | | - | | - | | 102 | | 13 | Other contracts | | (9) | | (50) | | - | | 52 | | - | | - | | - | | (7) | | 50 | Total derivative liabilities, net(b) | | 153 | | (113) | | - | | (47) | | - | | - | | - | | (7) | | 83 | Total | $ | 4,269 | $ | 2,287 | $ | - | $ | 603 | $ | - | $ | - | $ | - | $ | 7,159 | $ | (1,961) |
(a)
As a result of the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020, credit losses are included in net realized and unrealized (gains) losses included in income. (b)
Total Level 3 derivative exposures have been netted in these tables for presentation purposes only. Net realized and unrealized gains and losses included in income related to Level 3 assets and liabilities shown above are reported in the Condensed Consolidated Statements of Income as follows: | | Net | | Net Realized | | | | | | | Investment | | Capital | | Other | | | (in millions) | | Income | Gains (Losses) | | Income | | Total | Three Months Ended September 30, 2020 | | | | | | | | | Assets: | | | | | | | | | Bonds available for sale* | $ | 177 | $ | (7) | $ | - | $ | 170 | Other bond securities | | 143 | | (2) | | - | | 141 | Equity securities | | - | | - | | - | | - | Other invested assets | | 74 | | - | | - | | 74 | Nine Months Ended September 30, 2020 | | | | | | | | | Assets: | | | | | | | | | Bonds available for sale* | $ | 557 | $ | (79) | $ | - | $ | 478 | Other bond securities | | (25) | | 266 | | - | | 241 | Equity securities | | - | | (1) | | - | | (1) | Other invested assets | | 11 | | - | | - | | 11 | Three Months Ended September 30, 2019 | | | | | | | | | Assets: | | | | | | | | | Bonds available for sale | $ | 164 | $ | (24) | $ | - | $ | 140 | Other bond securities | | 110 | | 15 | | - | | 125 | Other invested assets | | 7 | | (1) | | - | | 6 | Nine Months Ended September 30, 2019 | | | | | | | | | Assets: | | | | | | | | | Bonds available for sale | $ | 651 | $ | (60) | $ | - | $ | 591 | Other bond securities | | 306 | | 67 | | - | | 373 | Other invested assets | | 25 | | (1) | | - | | 24 | | | | | | | | | | | | Net | | Net Realized | | | | | | | Investment | | Capital | | Other | | | (in millions) | | Income | (Gains) Losses | | Income | | Total | Three Months Ended September 30, 2020 | | | | | | | | | Liabilities: | | | | | | | | | Policyholder contract deposits | $ | - | $ | 19 | $ | - | $ | 19 | Derivative liabilities, net | | - | | 5 | | (16) | | (11) | Fortitude Re funds withheld payable | | - | | 656 | | - | | 656 | Nine Months Ended September 30, 2020 | | | | | | | | | Liabilities: | | | | | | | | | Policyholder contract deposits | $ | - | $ | 2,250 | $ | - | $ | 2,250 | Derivative liabilities, net | | - | | (41) | | (44) | | (85) | Fortitude Re funds withheld payable | | - | | 1,493 | | - | | 1,493 | Three Months Ended September 30, 2019 | | | | | | | | | Liabilities: | | | | | | | | | Policyholder contract deposits | $ | - | $ | 861 | $ | - | $ | 861 | Derivative liabilities, net | | - | | (11) | | (15) | | (26) | Nine Months Ended September 30, 2019 | | | | | | | | | Liabilities: | | | | | | | | | Policyholder contract deposits | $ | - | $ | 2,400 | $ | - | $ | 2,400 | Derivative liabilities, net | | - | | (64) | | (49) | | (113) |
*As a result of the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020, credit losses are included in net realized capital gains (losses). The following table presents the gross components of purchases, sales, issuances and settlements, net, shown above, for the three- and nine-month periods ended September 30, 2020 and 2019 related to Level 3 assets and liabilities in the Condensed Consolidated Balance Sheets: | | | | | | Issuances | | Purchases, Sales, | | | | | | | and | | Issuances and | (in millions) | | Purchases | | Sales | | Settlements(a) | | Settlements, Net(a) | Three Months Ended September 30, 2020 | | | | | | | | | Assets: | | | | | | | | | Bonds available for sale: | | | | | | | | | Obligations of states, municipalities and political subdivisions | $ | 34 | $ | (18) | $ | (46) | $ | (30) | Non-U.S. governments | | - | | - | | - | | - | Corporate debt | | 23 | | (2) | | (46) | | (25) | RMBS | | 182 | | - | | (594) | | (412) | CMBS | | 2 | | (10) | | (3) | | (11) | CDO/ABS | | 234 | | (78) | | (330) | | (174) | Total bonds available for sale | | 475 | | (108) | | (1,019) | | (652) | Other bond securities: | | | | | | | | | RMBS | | - | | - | | (16) | | (16) | CMBS | | - | | - | | - | | - | CDO/ABS | | - | | - | | (100) | | (100) | Total other bond securities | | - | | - | | (116) | | (116) | Equity securities | | 1 | | - | | - | | 1 | Other invested assets | | 25 | | - | | - | | 25 | Other assets | | - | | - | | 2 | | 2 | Total assets | $ | 501 | $ | (108) | $ | (1,133) | $ | (740) | Liabilities: | | | | | | | | | Policyholder contract deposits | $ | - | $ | 170 | $ | (100) | $ | 70 | Derivative liabilities, net | | (19) | | - | | (32) | | (51) | Fortitude Re funds withheld payable | | - | | - | | (30) | | (30) | Other liabilities | | - | | - | | - | | - | Total liabilities | $ | (19) | $ | 170 | $ | (162) | $ | (11) | Three Months Ended September 30, 2019 | | | | | | | | | Assets: | | | | | | | | | Bonds available for sale: | | | | | | | | | Obligations of states, municipalities and political subdivisions | $ | 109 | $ | - | $ | (17) | $ | 92 | Non-U.S. governments | | - | | - | | - | | - | Corporate debt | | 1 | | (128) | | (408) | | (535) | RMBS | | 253 | | - | | (671) | | (418) | CMBS | | 92 | | - | | (7) | | 85 | CDO/ABS | | 458 | | (198) | | (430) | | (170) | Total bonds available for sale | | 913 | | (326) | | (1,533) | | (946) | Other bond securities: | | | | | | | | | RMBS | | - | | - | | (24) | | (24) | CMBS | | - | | (16) | | (1) | | (17) | CDO/ABS | | - | | (153) | | (181) | | (334) | Total other bond securities | | - | | (169) | | (206) | | (375) | Equity securities | | - | | - | | (29) | | (29) | Other invested assets | | 21 | | - | | (43) | | (22) | Other assets | | - | | - | | (1) | | (1) | Total assets | $ | 934 | $ | (495) | $ | (1,812) | $ | (1,373) | Liabilities: | | | | | | | | | Policyholder contract deposits | $ | - | $ | 240 | $ | - | $ | 240 | Derivative liabilities, net | | (7) | | - | | (39) | | (46) | Total liabilities | $ | (7) | $ | 240 | $ | (39) | $ | 194 |
| | | | | | Issuances | | Purchases, Sales, | | | | | | | and | | Issuances and | (in millions) | | Purchases | | Sales | | Settlements(a) | | Settlements, Net(a) | Nine Months Ended September 30, 2020 | | | | | | | | | Assets: | | | | | | | | | Bonds available for sale: | | | | | | | | | Obligations of states, municipalities and political subdivisions | $ | 201 | $ | (20) | $ | (54) | $ | 127 | Non-U.S. governments | | 5 | | - | | - | | 5 | Corporate debt | | 256 | | (7) | | (154) | | 95 | RMBS | | 883 | | - | | (1,689) | | (806) | CMBS | | 56 | | (17) | | (22) | | 17 | CDO/ABS | | 715 | | (103) | | (631) | | (19) | Total bonds available for sale | | 2,116 | | (147) | | (2,550) | | (581) | Other bond securities: | | | | | | | | | RMBS | | 37 | | - | | (28) | | 9 | CMBS | | - | | - | | (2) | | (2) | CDO/ABS | | 35 | | (579) | | (671) | | (1,215) | Total other bond securities | | 72 | | (579) | | (701) | | (1,208) | Equity securities | | 11 | | - | | - | | 11 | Other invested assets | | 277 | | - | | (45) | | 232 | Other assets | | 55 | | - | | 6 | | 61 | Total assets | $ | 2,531 | $ | (726) | $ | (3,290) | $ | (1,485) | Liabilities: | | | | | | | | | Policyholder contract deposits | $ | - | $ | 514 | $ | (352) | $ | 162 | Derivative liabilities, net | | (43) | | 8 | | 148 | | 113 | Fortitude Re funds withheld payable | | - | | - | | (30) | | (30) | Other liabilities | | - | | - | | - | | - | Total liabilities | $ | (43) | $ | 522 | $ | (234) | $ | 245 | Nine Months Ended September 30, 2019 | | | | | | | | | Assets: | | | | | | | | | Bonds available for sale: | | | | | | | | | Obligations of states, municipalities and political subdivisions | $ | 243 | $ | (16) | $ | (49) | $ | 178 | Non-U.S. governments | | - | | - | | (4) | | (4) | Corporate debt | | 58 | | (129) | | (529) | | (600) | RMBS | | 860 | | (26) | | (2,068) | | (1,234) | CMBS | | 455 | | - | | (74) | | 381 | CDO/ABS | | 1,628 | | (508) | | (1,231) | | (111) | Total bonds available for sale | | 3,244 | | (679) | | (3,955) | | (1,390) | Other bond securities: | | | | | | | | | RMBS | | - | | (437) | | (107) | | (544) | CMBS | | 18 | | (16) | | (2) | | - | CDO/ABS | | - | | (153) | | (596) | | (749) | Total other bond securities | | 18 | | (606) | | (705) | | (1,293) | Equity securities | | 9 | | - | | (29) | | (20) | Other invested assets | | 64 | | - | | (87) | | (23) | Other assets | | - | | - | | 2 | | 2 | Total assets | $ | 3,335 | $ | (1,285) | $ | (4,774) | $ | (2,724) | Liabilities: | | | | | | | | | Policyholder contract deposits | $ | - | $ | 616 | $ | 34 | $ | 650 | Derivative liabilities, net | | (29) | | - | | (18) | | (47) | Total liabilities | $ | (29) | $ | 616 | $ | 16 | $ | 603 |
(a)There were no issuances during the three- and nine-month periods ended September 30, 2020 and 2019. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3 in the tables above. As a result, the unrealized gains (losses) on instruments held at September 30, 2020 and 2019 may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable inputs (e.g., changes in unobservable long-dated volatilities). Transfers of Level 3 Assets and Liabilities The Net realized and unrealized gains (losses) included in income (loss) or Other comprehensive income (loss) as shown in the table above excludes $(79) million and $(207) million of net gains (losses) related to assets and liabilities transferred into Level 3 during the three- and nine-month periods ended September 30, 2020, respectively, and includes $18 million and $(13) million of net gains (losses) related to assets and liabilities transferred out of Level 3 during the three- and nine-month periods ended September 30, 2020, respectively. The Net realized and unrealized gains (losses) included in income (loss) or Other comprehensive income (loss) as shown in the table above excludes $(40) million of net losses related to assets and liabilities transferred into Level 3 during the nine-month period ended September 30, 2019, and includes $24 million and $28 million of net gains related to assets and liabilities transferred out of Level 3 during the three- and nine-month periods ended September 30, 2019, respectively. Transfers of Level 3 Assets During the three- and nine-month periods ended September 30, 2020 and 2019, transfers into Level 3 assets primarily included certain investments in private placement corporate debt, RMBS, CMBS and CDO/ABS. Transfers of private placement corporate debt and certain ABS into Level 3 assets were primarily the result of limited market pricing information that required us to determine fair value for these securities based on inputs that are adjusted to better reflect our own assumptions regarding the characteristics of a specific security or associated market liquidity. The transfers of investments in RMBS, CMBS and CDO and certain ABS into Level 3 assets were due to diminished market transparency and liquidity for individual security types. During the three- and nine-month periods ended September 30, 2020 and 2019, transfers out of Level 3 assets primarily included private placement and other corporate debt, CMBS, RMBS, CDO/ABS and certain investments in municipal securities. Transfers of certain investments in municipal securities, corporate debt, RMBS, CMBS and CDO/ABS out of Level 3 assets were based on consideration of market liquidity as well as related transparency of pricing and associated observable inputs for these investments. Transfers of certain investments in private placement corporate debt and certain ABS out of Level 3 assets were primarily the result of using observable pricing information that reflects the fair value of those securities without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market. Transfers of Level 3 Liabilities There were no significant transfers of derivative or other liabilities into or out of Level 3 for the three- and nine-month periods ended September 30, 2020 and 2019. Divested Businesses The Level 3 liabilities for the three- and nine-month periods ended September 30, 2020 includes an embedded derivative associated with the funds withheld payable to Fortitude Re that was established as a result of the Majority Interest Fortitude Sale. QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENTS The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments, and includes only those instruments for which information about the inputs is reasonably available to us, such as data from independent third-party valuation service providers and from internal valuation models. Because input information from third-parties with respect to certain Level 3 instruments (primarily CDO/ABS) may not be reasonably available to us, balances shown below may not equal total amounts reported for such Level 3 assets and liabilities: | Fair Value at | | | | | September 30, | Valuation | | Range | (in millions) | 2020 | Technique | Unobservable Input(b) | (Weighted Average)(c) | Assets: | | | | | | | | | | | | Obligations of states, municipalities | | | | | | and political subdivisions | $ | 1,731 | Discounted cash flow | Yield | 2.87% - 3.39% (3.13%) | | | | | | | Corporate debt | | 1,672 | Discounted cash flow | Yield | 2.99% - 6.03% (4.51%) | | | | | | | RMBS(a) | | 11,810 | Discounted cash flow | Constant prepayment rate | 3.81% - 12.15% (7.98%) | | | | | Loss severity | 28.62% - 77.94% (53.28%) | | | | | Constant default rate | 1.30% - 6.14% (3.72%) | | | | | Yield | 1.74% - 4.41% (3.08%) | | | | | | | CDO/ABS(a) | | 8,704 | Discounted cash flow | Yield | 2.01% - 5.53% (3.77%) | | | | | | | CMBS | | 561 | Discounted cash flow | Yield | 0.78% - 5.68% (3.23%) | Liabilities(d): | | | | | | | | | | | | Embedded derivatives within | | | | | | Policyholder contract deposits: | | | | | | | | | | | | Variable annuity guaranteed minimum withdrawal benefits (GMWB) | | 3,832 | Discounted cash flow | Equity volatility | 7.15% - 56.25% | | | | | Base lapse rate | 0.16% - 12.60% | | | | | Dynamic lapse multiplier | 50.00% - 143.00% | | | | | Mortality multiplier(e) | 38.00% - 147.00% | | | | | Utilization | 90.00% - 100.00% | | | | | Equity / interest rate correlation | 20.00% - 40.00% | | | | | NPA(f) | 0.14% - 2.07% | | | | | | | Index annuities including certain GMWB | | 4,881 | Discounted cash flow | Lapse rate | 0.38% - 50.00% | | | | | Mortality multiplier(e) | 24.00% - 180.00% | | | | | Utilization(g) | 80.00% - 100.00% | | | | | Option budget | 0.00% - 4.00% | | | | | NPA(f) | 0.14% - 2.07% | | | | | | | Indexed life | | 577 | Discounted cash flow | Base lapse rate | 0.00% - 37.97% | | | | | Mortality rate | 0.00% - 100.00% | | | | | NPA(f) | 0.14% - 2.07% |
| | Fair Value at | | | | | | December 31, | Valuation | | Range | (in millions) | | 2019 | Technique | Unobservable Input(b) | (Weighted Average)(c) | Assets: | | | | | | | | | | | | Obligations of states, municipalities | | | | | | and political subdivisions | $ | 1,633 | Discounted cash flow | Yield | 3.35% - 3.95% (3.65%) | | | | | | | Corporate debt | | 1,087 | Discounted cash flow | Yield | 3.48% - 6.22% (4.85%) | | | | | | | RMBS(a) | | 11,746 | Discounted cash flow | Constant prepayment rate | 4.00% - 12.89% (8.44%) | | | | | Loss severity | 33.68% - 76.91% (55.29%) | | | | | Constant default rate | 1.68% - 6.17% (3.93%) | | | | | Yield | 2.52% - 4.53% (3.52%) | | | | | | | CDO/ABS(a) | | 6,025 | Discounted cash flow | Yield | 2.92% - 4.91% (3.91%) | | | | | | | CMBS | | 476 | Discounted cash flow | Yield | 2.77% - 5.18% (3.97%) | Liabilities: | | | | | | | | | | | | Embedded derivatives within | | | | | | Policyholder contract deposits: | | | | | | | | | | | | GMWB | | 2,474 | Discounted cash flow | Equity volatility | 6.15% - 48.85% | | | | | Base lapse rate | 0.16% - 12.60% | | | | | Dynamic lapse multiplier | 50.00% - 143.00% | | | | | Mortality multiplier(d) | 38.00% - 147.00% | | | | | Utilization | 90.00% - 100.00% | | | | | Equity / interest rate correlation | 20.00% - 40.00% | | | | | NPA(e) | 0.12% - 1.53% | | | | | | | Index annuities | | 3,895 | Discounted cash flow | Lapse rate | 0.31% - 50.00% | | | | | Mortality multiplier(d) | 24.00% - 180.00% | | | | | Option budget | 1.00% - 4.00% | | | | | NPA(e) | 0.12% - 1.53% | | | | | | | Indexed life | | 510 | Discounted cash flow | Base lapse rate | 0.00% - 37.97% | | | | | Mortality rate | 0.00% - 100.00% | | | | | NPA(e) | 0.12% - 1.53% |
(a)
Information received from third-party valuation service providers. The ranges of the unobservable inputs for constant prepayment rate, loss severity and constant default rate relate to each of the individual underlying mortgage loans that comprise the entire portfolio of securities in the RMBS and CDO securitization vehicles and not necessarily to the securitization vehicle bonds (tranches) purchased by us. The ranges of these inputs do not directly correlate to changes in the fair values of the tranches purchased by us, because there are other factors relevant to the fair values of specific tranches owned by us including, but not limited to, purchase price, position in the waterfall, senior versus subordinated position and attachment points. (b)
Represents discount rates, estimates and assumptions that we believe would be used by market participants when valuing these assets and liabilities. (c)
The weighted averaging for fixed maturity securities is based on the estimated fair value of the securities. Because the valuation methodology for embedded derivatives within Policyholder contract deposits uses a range of inputs that vary at the contract level over the cash flow projection period, management believes that presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation. (d)
The Fortitude Re funds withheld payable has been excluded from the above table. As discussed in Note 7, the Fortitude Re funds withheld payable is created through modified coinsurance (modco) and funds withheld reinsurance arrangements where the investments supporting the reinsurance agreements are withheld by, and continue to reside on AIG’s balance sheet. This embedded derivative is valued as a total return swap with reference to the fair value of the invested assets held by AIG. Accordingly, the unobservable inputs utilized in the valuation of the embedded derivative are a component of the invested assets supporting the reinsurance agreements that are held on AIG’s balance sheet. (e)
Mortality inputs are shown as multipliers of the 2012 Individual Annuity Mortality Basic table. (f)
The non-performance risk adjustment (NPA) applied as a spread over risk-free curve for discounting. (g)
The partial withdrawal utilization unobservable input range shown applies only to policies with guaranteed minimum withdrawal benefit riders that are accounted for as an embedded derivative. The total embedded derivative liability at September 30, 2020 is approximately $611 million. The remaining guaranteed minimum riders on the Index Annuities are valued under the accounting guidance for certain nontraditional long-duration contracts. The ranges of reported inputs for Obligations of states, municipalities and political subdivisions, Corporate debt, RMBS, CDO/ABS, and CMBS valued using a discounted cash flow technique consist of one standard deviation in either direction from the value-weighted average. The preceding table does not give effect to our risk management practices that might offset risks inherent in these Level 3 assets and liabilities. Interrelationships between Unobservable Inputs We consider unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset or liability. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The following paragraphs provide a general description of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply. Fixed Maturity Securities The significant unobservable input used in the fair value measurement of fixed maturity securities is yield. The yield is affected by the market movements in credit spreads and U.S. Treasury yields. The yield may be affected by other factors including constant prepayment rates, loss severity, and constant default rates. In general, increases in the yield would decrease the fair value of investments, and conversely, decreases in the yield would increase the fair value of investments. Embedded derivatives within Policyholder contract deposits Embedded derivatives reported within Policyholder contract deposits include interest crediting rates based on market indices within index annuities, indexed life, and GICs as well as GMWB within variable annuity and certain index annuity products. For any given contract, assumptions for unobservable inputs vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. The following unobservable inputs are used for valuing embedded derivatives measured at fair value:
Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are available. Increases in assumed volatility will generally increase the fair value of both the projected cash flows from rider fees as well as the projected cash flows related to benefit payments. Therefore, the net change in the fair value of the liability may be either a decrease or an increase, depending on the relative changes in projected rider fees and projected benefit payments.
Equity / interest rate correlation estimates the relationship between changes in equity returns and interest rates in the economic scenario generator used to value our GMWB embedded derivatives. In general, a higher positive correlation assumes that equity markets and interest rates move in a more correlated fashion, which generally increases the fair value of the liability.
Base lapse rate assumptions are determined by company experience and are adjusted at the contract level using a dynamic lapse function, which reduces the base lapse rate when the contract is in-the-money (when the contract holder’s guaranteed value, as estimated by the company, is worth more than their underlying account value). Lapse rates are also generally assumed to be lower in periods when a surrender charge applies. Increases in assumed lapse rates will generally decrease the fair value of the liability, as fewer policyholders would persist to collect guaranteed withdrawal amounts.
Mortality rate assumptions, which vary by age and gender, are based on company experience and include a mortality improvement assumption. Increases in assumed mortality rates will decrease the fair value of the liability, while lower mortality rate assumptions will generally increase the fair value of the liability, because guaranteed payments will be made for a longer period of time.
Utilization assumptions estimate the timing when policyholders with a GMWB will elect to utilize their benefit and begin taking withdrawals. The assumptions may vary by the type of guarantee, tax-qualified status, the contract’s withdrawal history and the age of the policyholder. Utilization assumptions are based on company experience, which includes partial withdrawal behavior. Increases in assumed utilization rates will generally increase the fair value of the liability.
Option budget estimates the expected long-term cost of options used to hedge exposures associated with equity price changes. The level of option budgets determines future costs of the options, which impacts the growth in account value and the valuation of embedded derivatives. Embedded derivatives within reinsurance contracts The fair value of embedded derivatives associated with funds withheld reinsurance contracts is determined based upon a total return swap technique with reference to the fair value of the investments held by AIG related to AIG’s funds withheld payable. The fair value of the underlying assets is generally based on market observable inputs using industry standard valuation techniques. The valuation also requires certain significant inputs, which are generally not observable and accordingly, the valuation is considered Level 3 in the fair value hierarchy. Investments in Certain Entities Carried at Fair Value Using Net Asset Value Per Share The following table includes information related to our investments in certain other invested assets, including private equity funds, hedge funds and other alternative investments that calculate net asset value per share (or its equivalent). For these investments, which are measured at fair value on a recurring basis, we use the net asset value per share to measure fair value. | | September 30, 2020 | | December 31, 2019 | | | | Fair Value | | | | Fair Value | | | | | | Using NAV | | | | Using NAV | | | | | | Per Share (or | | Unfunded | | Per Share (or | | Unfunded | (in millions) | Investment Category Includes | | its equivalent) | Commitments | | its equivalent) | Commitments | Investment Category | | | | | | | | | | | Private equity funds: | | | | | | | | | | | Leveraged buyout | Debt and/or equity investments made as part of a transaction in which assets of mature companies are acquired from the current shareholders, typically with the use of financial leverage | $ | 1,382 | $ | 1,697 | | $ | 1,189 | $ | 1,543 | | | | | | | | | | | | Real Estate / Infrastructure | Investments in real estate properties and infrastructure positions, including power plants and other energy generating facilities | | 429 | | 450 | | | 400 | | 290 | | | | | | | | | | | | Venture capital | Early-stage, high-potential, growth companies expected to generate a return through an eventual realization event, such as an initial public offering or sale of the company | | 143 | | 166 | | | 111 | | 155 | | | | | | | | | | | | Growth equity | Funds that make investments in established companies for the purpose of growing their businesses | | 523 | | 54 | | | 422 | | 57 | | | | | | | | | | | | Mezzanine | Funds that make investments in the junior debt and equity securities of leveraged companies | | 349 | | 282 | | | 325 | | 414 | | | | | | | | | | | | Other | Includes distressed funds that invest in securities of companies that are in default or under bankruptcy protection, as well as funds that have multi-strategy, and other strategies | | 821 | | 441 | | | 773 | | 206 | Total private equity funds | | 3,647 | | 3,090 | | | 3,220 | | 2,665 | Hedge funds: | | | | | | | | | | | Event-driven | Securities of companies undergoing material structural changes, including mergers, acquisitions and other reorganizations | | 353 | | - | | | 727 | | - | | | | | | | | | | | | Long-short | Securities that the manager believes are undervalued, with corresponding short positions to hedge market risk | | 364 | | - | | | 539 | | - | | | | | | | | | | | | Macro | Investments that take long and short positions in financial instruments based on a top-down view of certain economic and capital market conditions | | 751 | | - | | | 894 | | - | | | | | | | | | | | | Other | Includes investments held in funds that are less liquid, as well as other strategies which allow for broader allocation between public and private investments | | 272 | | 1 | | | 169 | | 1 | Total hedge funds | | | 1,740 | | 1 | | | 2,329 | | 1 | Total | | $ | 5,387 | $ | 3,091 | | $ | 5,549 | $ | 2,666 |
Private equity fund investments included above are not redeemable, because distributions from the funds will be received when underlying investments of the funds are liquidated. Private equity funds are generally expected to have 10-year lives at their inception, but these lives may be extended at the fund manager’s discretion, typically in one or two-year increments. The hedge fund investments included above, which are carried at fair value, are generally redeemable subject to the redemption notices period. The majority of our hedge fund investments are redeemable monthly or quarterly. Fair Value Option The following table presents the gains or losses recorded related to the eligible instruments for which we elected the fair value option: | Gain (Loss) Three Months Ended September 30, | Gain (Loss) Nine Months Ended September 30, | | (in millions) | | 2020 | | 2019 | | 2020 | | 2019 | Assets: | | | | | | | | | Bonds | $ | 171 | $ | 333 | $ | 485 | $ | 971 | Alternative investments(a) | | 407 | | 92 | | 242 | | 473 | Liabilities: | | | | | | | | | Long-term debt(b) | | 18 | | (75) | | (203) | | (228) | Total gain | $ | 596 | $ | 350 | $ | 524 | $ | 1,216 |
(a)
Includes certain hedge funds, private equity funds and other investment partnerships. (b)
Includes GIAs, notes, bonds and mortgages payable. We calculate the effect of these credit spread changes using discounted cash flow techniques that incorporate current market interest rates, our observable credit spreads on these liabilities and other factors that mitigate the risk of nonperformance such as cash collateral posted. The following table presents the difference between fair value and the aggregate contractual principal amount of long-term debt for which the fair value option was elected: | September 30, 2020 | | December 31, 2019 | | | | Outstanding | | | | | | Outstanding | | | (in millions) | Fair Value | Principal Amount | Difference | | Fair Value | Principal Amount | Difference | Liabilities: | | | | | | | | | | | | | | Long-term debt* | $ | 2,169 | $ | 1,506 | $ | 663 | | $ | 2,062 | $ | 1,502 | $ | 560 | *Includes GIAs, notes, bonds, loans and mortgages payable.FAIR VALUE MEASUREMENTS ON A NON-RECURRING BASIS The following table presents assets measured at fair value on a non-recurring basis at the time of impairment and the related impairment charges recorded during the periods presented: | Assets at Fair Value | | Impairment Charges | | Non-Recurring Basis | | Three Months Ended September 30, | | Nine Months Ended September 30, | (in millions) | Level 1 | Level 2 | Level 3 | | Total | | | 2020 | | 2019 | | | 2020 | | 2019 | September 30, 2020 | | | | | | | | | | | | | | | | | | | Other investments | $ | - | $ | - | $ | 268 | $ | 268 | | $ | 12 | $ | 7 | | $ | 60 | $ | 65 | Other assets | | - | | - | | 31 | | 31 | | | 2 | | 45 | | | 14 | | 62 | Total | $ | - | $ | - | $ | 299 | $ | 299 | | $ | 14 | $ | 52 | | $ | 74 | $ | 127 | December 31, 2019 | | | | | | | | | | | | | | | | | | | Other investments | $ | - | $ | - | $ | 329 | $ | 329 | | | | | | | | | | | Other assets | | - | | - | | 1 | | 1 | | | | | | | | | | | Total | $ | - | $ | - | $ | 330 | $ | 330 | | | | | | | | | | |
FAIR VALUE INFORMATION ABOUT FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE The following table presents the carrying amounts and estimated fair values of our financial instruments not measured at fair value and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the observability of the inputs used: | Estimated Fair Value | | Carrying | (in millions) | | Level 1 | | Level 2 | | Level 3 | | Total | | Value | September 30, 2020 | | | | | | | | | | | Assets: | | | | | | | | | | | Mortgage and other loans receivable | $ | - | $ | 99 | $ | 48,118 | $ | 48,217 | $ | 45,590 | Other invested assets | | - | | 798 | | 6 | | 804 | | 804 | Short-term investments | | - | | 13,434 | | - | | 13,434 | | 13,434 | Cash | | 3,191 | | - | | - | | 3,191 | | 3,191 | Other assets | | 188 | | 14 | | - | | 202 | | 202 | Liabilities: | | | | | | | | | | | Policyholder contract deposits associated | | | | | | | | | | | with investment-type contracts | | - | | 224 | | 143,873 | | 144,097 | | 129,170 | Fortitude Re funds withheld payable | | - | | - | | 37,407 | | 37,407 | | 37,407 | Other liabilities | | - | | 3,823 | | - | | 3,823 | | 3,823 | Long-term debt and debt of consolidated investment entities | | - | | 31,391 | | 8,281 | | 39,672 | | 36,068 | Separate account liabilities - investment contracts | | - | | 87,564 | | - | | 87,564 | | 87,564 | December 31, 2019 | | | | | | | | | | | Assets: | | | | | | | | | | | Mortgage and other loans receivable | $ | - | $ | 101 | $ | 48,904 | $ | 49,005 | $ | 46,984 | Other invested assets | | - | | 735 | | 6 | | 741 | | 742 | Short-term investments | | - | | 7,887 | | - | | 7,887 | | 7,887 | Cash | | 2,856 | | - | | - | | 2,856 | | 2,856 | Other assets | | 291 | | 20 | | - | | 311 | | 311 | Liabilities: | | | | | | | | | | | Policyholder contract deposits associated | | | | | | | | | | | with investment-type contracts | | - | | 255 | | 132,991 | | 133,246 | | 126,137 | Other liabilities | | 15 | | 3,048 | | - | | 3,063 | | 3,063 | Long-term debt and debt of consolidated investment entities | | - | | 27,024 | | 8,883 | | 35,907 | | 33,288 | Separate account liabilities - investment contracts | | - | | 88,770 | | - | | 88,770 | | 88,770 |
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