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Variable Interest Entities
 6 Months Ended
Jun. 30, 2015
Variable Interest Entities [Abstract]  
Variable interest entities [Text Block]
Variable Interest Entities
The Company provides asset management services to investment entities which are considered to be VIEs, such as CLOs, hedge funds, property funds (pooled investment vehicles) and private equity funds (collectively, “investment entities”), which are sponsored by the Company. The Company consolidates certain CLOs and property funds (collectively, “consolidated investment entities”). In addition, the Company invests in structured investments and affordable housing partnerships which are considered VIEs which the Company does not consolidate.
Non-Consolidated VIEs
The Company has determined that consolidation is not required for hedge funds and private equity funds which are sponsored by the Company. The Company's maximum exposure to loss with respect to its investment in these entities is limited to its carrying value. The carrying value of the Company’s investment in these entities was $98 million and $89 million as of June 30, 2015 and December 31, 2014, respectively.
The Company manages one CLO which it does not consolidate. The Company manages the CLO and earns management fees and incentive fees from the CLO based on the CLO’s collateral pool. Unlike the consolidated CLOs, the Company has no investment in the CLO and no exposure to loss.
The Company has variable interests in affordable housing partnerships for which it is not the primary beneficiary and therefore does not consolidate. The Company’s maximum exposure to loss as a result of its investments in affordable housing partnerships is limited to the carrying value of these investments. The carrying value is reflected in other investments and was $494 million and $504 million as of June 30, 2015 and December 31, 2014, respectively.
The Company invests in structured investments which are considered VIEs for which it is not the sponsor. These structured investments typically invest in fixed income instruments and are managed by third parties and include asset backed securities, commercial mortgage backed securities and residential mortgage backed securities. The Company classifies these investments as Available-for-Sale securities. The Company has determined that it is not the primary beneficiary of these structures due to the size of the Company’s investment in the entities and position in the capital structure of these entities. The Company's maximum exposure to loss as a result of its investment in these structured investments is limited to its carrying value. See Note 4 for additional information about these structured investments.
The Company has no obligation to provide financial or other support to the non-consolidated VIEs beyond its investment nor has the Company provided any support to these entities. The carrying value of the Company’s investment in these entities is included in investments on the consolidated balance sheets.
Consolidated VIEs
The consolidated CLOs are asset backed financing entities collateralized by a pool of assets, primarily syndicated loans and, to a lesser extent, high-yield bonds and stocks. Multiple tranches of debt securities are issued by a CLO, offering investors various maturity and credit risk characteristics. The debt securities issued by the CLOs are non-recourse to the Company. The CLO’s debt holders have recourse only to the assets of the CLO. The assets of the CLOs cannot be used by the Company. Scheduled debt payments are based on the performance of the CLO’s collateral pool. The Company generally earns management fees from the CLOs based on the CLO’s collateral pool and, in certain instances, may also receive incentive fees. The Company has invested in a portion of the unrated, junior subordinated notes of certain CLOs. For certain of the CLOs, the Company has determined that consolidation is required as it has power over the CLOs as collateral manager and holds a variable interest in the CLOs for which the Company has the potential to receive benefits or the potential obligation to absorb losses that could be significant to the CLO.
The Company provides investment advice and related services to property funds, certain of which are considered VIEs. For investment management services, the Company generally earns management fees based on the market value of assets under management, and in certain instances may also receive performance-based fees. The Company has determined that consolidation is required for certain property funds managed by the Company.
During the six months ended June 30, 2015, the Company consolidated one new CLO with assets of approximately $564 million and liquidated no CLOs. During the six months ended June 30, 2014, the Company consolidated two new CLOs with assets of approximately $1.1 billion and liquidated one CLO resulting in the sale of approximately $315 million in assets.
During the six months ended June 30, 2015, the Company consolidated two new property funds with assets of approximately $248 million. During the six months ended June 30, 2014, the Company consolidated one new property fund with assets of approximately $206 million. The Company terminated one property fund during each of the six months ended June 30, 2015 and 2014. The liquidation of properties may occur over several years until the fund is terminated. See the summary of changes in Level 3 assets and liabilities for gross sales and purchases of properties, within the other assets caption, for the three months and six months ended June 30, 2015 and 2014.
Fair Value of Assets and Liabilities
The Company categorizes its fair value measurements according to a three-level hierarchy. See Note 10 for the definition of the three levels of the fair value hierarchy.
The following tables present the balances of assets and liabilities held by consolidated investment entities measured at fair value on a recurring basis:
 
June 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Assets
 

 
 

 
 

 
 

Investments:
 

 
 

 
 

 
 

Corporate debt securities
$
—

 
$
180

 
$
—

 
$
180

Common stocks
144

 
39

 
11

 
194

Other investments
4

 
25

 
—

 
29

Syndicated loans
—

 
5,734

 
457

 
6,191

Total investments
148

 
5,978

 
468

 
6,594

Receivables
—

 
39

 
—

 
39

Other assets
—

 
1

 
1,979

 
1,980

Total assets at fair value
$
148

 
$
6,018

 
$
2,447

 
$
8,613

Liabilities
 

 
 

 
 

 
 

Debt
$
—

 
$
—

 
$
6,487

 
$
6,487

Other liabilities
—

 
238

 
—

 
238

Total liabilities at fair value
$
—

 
$
238

 
$
6,487

 
$
6,725

 
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Assets
 

 
 

 
 

 
 

Investments:
 

 
 

 
 

 
 

Corporate debt securities
$
—

 
$
171

 
$
—

 
$
171

Common stocks
130

 
40

 
7

 
177

Other investments
4

 
25

 
—

 
29

Syndicated loans
—

 
5,287

 
484

 
5,771

Total investments
134

 
5,523

 
491

 
6,148

Receivables
—

 
49

 
—

 
49

Other assets
—

 
1

 
1,935

 
1,936

Total assets at fair value
$
134

 
$
5,573

 
$
2,426

 
$
8,133

Liabilities
 

 
 

 
 

 
 

Debt
$
—

 
$
—

 
$
6,030

 
$
6,030

Other liabilities
—

 
193

 
—

 
193

Total liabilities at fair value
$
—

 
$
193

 
$
6,030

 
$
6,223


The following tables provide a summary of changes in Level 3 assets and liabilities held by consolidated investment entities measured at fair value on a recurring basis:
 
Common Stocks
 
Syndicated Loans
 
Other Assets
 
Debt
 
 
(in millions)
  
Balance, April 1, 2015
$
11

 
$
467

 
$
1,889

 
$
(5,933
)
 
Total gains (losses) included in:
 
 
 
 
 
 
 
 
Net income
—

 
1

(1) 
67

(2) 
(23
)
(1) 
Other comprehensive income
—

 
—

 
117

 
—

 
Purchases
—

 
119

 
4

 
—

 
Sales
—

 
(15
)
 
(98
)
 
—

 
Issues
—

 
—

 
—

 
(569
)
 
Settlements
—

 
(42
)
 
—

 
38

 
Transfers into Level 3
—

 
132

 
—

 
—

 
Transfers out of Level 3
—

 
(205
)
 
—

 
—

 
Balance, June 30, 2015
$
11

 
$
457

 
$
1,979

 
$
(6,487
)
 
Changes in unrealized gains (losses) included in income relating to assets and liabilities held at June 30, 2015
$
—


$
—


$
58

(2) 
$
(23
)
(1) 
(1) Included in net investment income in the Consolidated Statements of Operations.
(2) Included in other revenues in the Consolidated Statements of Operations.
 
Corporate Debt Securities
 
Common Stocks
 
Syndicated Loans
 
Other Assets
 
Debt
 
 
(in millions)
  
Balance, April 1, 2014
$
13

 
$
10

 
$
384

 
$
1,993

 
$
(5,225
)
 
Total gains (losses) included in:
 
 
 

 
 

  
 

  
 

  
Net income
—


—


2

(1) 
106

(2) 
(15
)
(1) 
Other comprehensive loss
—

 
—

 
—

 
52

 
—

 
Purchases
—

 
—

 
142

 
240

 
—

 
Sales
(7
)
 
(2
)
 
(27
)
 
(2
)
 
—

 
Issues
—

 
—

 
—

 
—

 
(608
)
 
Settlements
—

 
—

 
(26
)
 
—

 
337

 
Transfers into Level 3
—

 
5

 
98

 
—

 
—

 
Transfers out of Level 3
(6
)
 
(6
)
 
(146
)
 
—

 
—

 
Balance, June 30, 2014
$
—

 
$
7

 
$
427

 
$
2,389

 
$
(5,511
)
 
Changes in unrealized gains included in income relating to assets and liabilities held at June 30, 2014
$
—


$
—


$
1

(1) 
$
108

(2) 
$
19

(1) 
(1) Included in net investment income in the Consolidated Statements of Operations.
(2) Included in other revenues in the Consolidated Statements of Operations.
 
Common Stocks
 
Syndicated Loans
 
Other Assets
 
Debt
 
 
(in millions)
  
Balance, January 1, 2015
$
7

 
$
484

 
$
1,935

 
$
(6,030
)
 
Total gains (losses) included in:
 
 
 
 
 
 
 
 
Net income
(1
)
(1) 
—


98

(2) 
29

(1) 
Other comprehensive income
—

 
—

 
7

 
—

 
Purchases
—

 
156

 
346

 
—

 
Sales
—

 
(18
)
 
(407
)
 
—

 
Issues
—

 
—

 
—

 
(569
)
 
Settlements
—

 
(73
)
 
—

 
83

 
Transfers into Level 3
5

 
387

 
—

 
—

 
Transfers out of Level 3
—

 
(479
)
 
—

 
—

 
Balance, June 30, 2015
$
11

 
$
457

 
$
1,979

 
$
(6,487
)
 
Changes in unrealized gains (losses) included in income relating to assets and liabilities held at June 30, 2015
$
(1
)
(1) 
$
(1
)
(1) 
$
—

(2) 
$
29

(1) 
(1) Included in net investment income in the Consolidated Statements of Operations.
(2) Included in other revenues in the Consolidated Statements of Operations.
 
Corporate Debt Securities
 
Common Stocks
 
Syndicated Loans
 
Other Assets
 
Debt
 
 
(in millions)
  
Balance, January 1, 2014
$
2

 
$
14

 
$
368

 
$
1,936

 
$
(4,804
)
 
Total gains (losses) included in:
 
 
 
 
 
 
 
 
 
 
Net income
1

(1) 
2

(1) 
6

(1) 
186

(2) 
(25
)
(1) 
Other comprehensive loss
—

 
—

 
—

 
67

 
—

 
Purchases
2

 
—

 
238

 
259

 
—

 
Sales
(9
)
 
(2
)
 
(27
)
 
(70
)
 
—

 
Issues
—

 
—

 
—

 
—

 
(1,064
)
 
Settlements
—

 
—

 
(38
)
 
—

 
382

 
Transfers into Level 3
10

 
11

 
244

 
11

 
—

 
Transfers out of Level 3
(6
)
 
(18
)
 
(364
)
 
—

 
—

 
Balance, June 30, 2014
$
—

 
$
7

 
$
427

 
$
2,389

 
$
(5,511
)
 
Changes in unrealized gains included in income relating to assets and liabilities held at June 30, 2014
$
—

 
$
1

(1) 
$
2

(1) 
$
186

(2) 
$
10

(1) 
(1) Included in net investment income in the Consolidated Statements of Operations.
(2) Included in other revenues in the Consolidated Statements of Operations.
Securities and loans transferred from Level 2 to Level 3 represent assets with fair values that are now based on a single non-binding broker quote. Securities and loans transferred from Level 3 to Level 2 represent assets with fair values that are now obtained from a third party pricing service with observable inputs or priced in active markets. During the reporting periods, there were no transfers between Level 1 and Level 2.
The following tables provide a summary of the significant unobservable inputs used in the fair value measurements developed by the Company or reasonably available to the Company of Level 3 assets and liabilities held by consolidated investment entities:
 
June 30, 2015
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range 
 
Weighted Average
 
(in millions)
 
 
 
 
 
 
 
 
Other assets (property funds)
$
1,972

 
Discounted cash flow/ market comparables
 
Equivalent yield
 
4.4
%
–
13.5%
 
6.2
%
 
 

 
 
 
Expected rental value (per square foot)
 
$5
–
$92
 
$40
CLO debt
$
6,487

 
Discounted cash flow
 
Annual default rate
 
2.5%
 


 
 

 
 
 
Discount rate
 
1.6
%
–
8.3%
 
2.8
%
 
 

 
 
 
Constant prepayment rate
 
5.0
%
–
10.0%
 
9.8
%
 
 

 
 
 
Loss recovery
 
36.4
%
–
63.6%
 
62.7
%
 
December 31, 2014
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range 
 
Weighted Average
 
(in millions)
 
 
 
 
 
 
 
 
Other assets (property funds)
$
1,935

 
Discounted cash flow/ market comparables
 
Equivalent yield
 
4.4
%
–
12.0%
 
6.5
%
 
 

 
 
 
Expected rental value (per square foot)
 
$3
–
$94
 
$34
CLO debt
$
6,030

 
Discounted cash flow
 
Annual default rate
 
2.5%
 


 
 

 
 
 
Discount rate
 
1.2
%
–
8.3%
 
2.4
%
 
 

 
 
 
Constant prepayment rate
 
5.0
%
–
10.0%
 
9.8
%
 
 
 
 
 
Loss recovery
 
36.4
%
–
63.6%
 
62.7
%

Level 3 measurements not included in the tables above are obtained from non-binding broker quotes where unobservable inputs are not reasonably available to the Company.
Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs
Generally, a significant increase (decrease) in the expected rental value used in the fair value measurement of properties held by consolidated investment entities in isolation would result in a significantly higher (lower) fair value measurement and a significant increase (decrease) in the equivalent yield in isolation would result in a significantly lower (higher) fair value measurement.
Generally, a significant increase (decrease) in the annual default rate and discount rate used in the fair value measurement of the CLO’s debt in isolation would result in a significantly lower (higher) fair value measurement and a significant increase (decrease) in loss recovery in isolation would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the constant prepayment rate in isolation would result in a significantly higher (lower) fair value measurement.
Determination of Fair Value
Assets
Investments
The fair value of syndicated loans obtained from third party pricing services using a market approach with observable inputs is classified as Level 2. The fair value of syndicated loans obtained from third party pricing services with a single non-binding broker quote as the underlying valuation source is classified as Level 3. The underlying inputs used in non-binding broker quotes are not readily available to the Company.
In consideration of the above, management is responsible for the fair values recorded on the financial statements. Prices received from third party pricing services are subjected to exception reporting that identifies loans with significant daily price movements as well as no movements. The Company reviews the exception reporting and resolves the exceptions through reaffirmation of the price or recording an appropriate fair value estimate. The Company also performs subsequent transaction testing. The Company performs annual due diligence of the third party pricing services. The Company’s due diligence procedures include assessing the vendor’s valuation qualifications, control environment, analysis of asset-class specific valuation methodologies and understanding of sources of market observable assumptions and unobservable assumptions, if any, employed in the valuation methodology. The Company also considers the results of its exception reporting controls and any resulting price challenges that arise.
See Note 10 for a description of the Company’s determination of the fair value of corporate debt securities, U.S. government and agencies obligations, common stocks and other investments.
Receivables
For receivables of the consolidated CLOs, the carrying value approximates fair value as the nature of these assets has historically been short term and the receivables have been collectible. The fair value of these receivables is classified as Level 2.
Other Assets
Other assets consist primarily of properties held in consolidated pooled investment vehicles managed by Threadneedle. The fair value of these properties is calculated by a third party appraisal service by discounting future cash flows generated by the expected market rental value for the property using the equivalent yield of a similar investment property. Inputs used in determining the equivalent yield and expected rental value of the property may include: rental cash flows, current occupancy, historical vacancy rates, tenant history and assumptions regarding how quickly the property can be occupied and at what rental rates. Management reviews the valuation report and assumptions used to ensure that the valuation was performed in accordance with applicable independence, appraisal and valuation standards. Given the significance of the unobservable inputs to these measurements, these assets are classified as Level 3.
The CLOs hold an immaterial amount of warrants recorded in other assets. Loans within the CLOs may default and go through a restructuring that can result in the CLO receiving warrants for the issuer’s equity securities. Warrants are classified as Level 2 when the price is derived from observable market data. Warrants from an issuer whose securities are not priced in active markets are classified as Level 3.
Liabilities
Debt
The fair value of the CLOs’ debt is determined using a discounted cash flow model. Inputs used to determine the expected cash flows include assumptions about default, discount, prepayment and recovery rates of the CLOs’ underlying assets. Given the significance of the unobservable inputs to this fair value measurement, the fair value of the CLOs’ debt is classified as Level 3.
Other Liabilities
Other liabilities consist primarily of securities purchased but not yet settled held by consolidated CLOs. The carrying value approximates fair value as the nature of these liabilities has historically been short term. The fair value of these liabilities is classified as Level 2.
Fair Value Option
The Company has elected the fair value option for the financial assets and liabilities of the consolidated CLOs. Management believes that the use of the fair value option better matches the changes in fair value of assets and liabilities related to the CLOs.
The following table presents the fair value and unpaid principal balance of loans and debt for which the fair value option has been elected:
 
June 30, 
 2015
 
December 31, 
 2014
 
(in millions)
Syndicated loans
 

 
 

Unpaid principal balance
$
6,320

 
$
5,871

Excess unpaid principal over fair value
(129
)
 
(100
)
Fair value
$
6,191

 
$
5,771

Fair value of loans more than 90 days past due
$
26

 
$
32

Fair value of loans in nonaccrual status
26

 
32

Difference between fair value and unpaid principal of loans more than 90 days past due, loans in nonaccrual status or both
32

 
25

Debt
 

 
 

Unpaid principal balance
$
6,739

 
$
6,248

Excess unpaid principal over fair value
(252
)
 
(218
)
Fair value
$
6,487

 
$
6,030


Interest income from syndicated loans, bonds and structured investments is recorded based on contractual rates in net investment income. Gains and losses related to changes in the fair value of investments and gains and losses on sales of investments are also recorded in net investment income. Interest expense on debt is recorded in interest and debt expense with gains and losses related to changes in the fair value of debt recorded in net investment income.
Total net losses recognized in net investment income related to changes in the fair value of financial assets and liabilities for which the fair value option was elected were $12 million and $1 million for the three months ended June 30, 2015 and 2014, respectively. Total net gains recognized in net investment income related to changes in the fair value of financial assets and liabilities for which the fair value option was elected were $29 million and $20 million for the six months ended June 30, 2015 and 2014, respectively. The majority of the syndicated loans and debt have floating rates; as such, changes in their fair values are primarily attributable to changes in credit spreads.
Debt of the consolidated investment entities and the stated interest rates were as follows:
 
Carrying Value
 
Weighted Average
Interest Rate
 
June 30, 
 2015
 
December 31, 
 2014
 
June 30, 
 2015
 
December 31, 
 2014
 
(in millions)
 
 
 
 
Debt of consolidated CLOs due 2016-2026
$
6,487

 
$
6,030

 
1.4
%
 
1.3
%
Floating rate revolving credit borrowings due 2016-2020
866

 
837

 
2.8

 
2.7

Total
$
7,353

 
$
6,867

 
 

 
 


The debt of the consolidated CLOs has both fixed and floating interest rates, which range from 0% to 9.2%. The interest rates on the debt of CLOs are weighted average rates based on the outstanding principal and current interest rates. The carrying value of the debt of the consolidated CLOs represents the fair value of the aggregate debt. The carrying value of the floating rate revolving credit borrowings represents the outstanding principal amount of debt of certain consolidated pooled investment vehicles managed by Threadneedle. The fair value of this debt was $866 million and $837 million as of June 30, 2015 and December 31, 2014, respectively. The property funds have entered into interest rate swaps and collars to manage the interest rate exposure on the floating rate revolving credit borrowings. The fair value of these derivative instruments is recorded gross and was a liability of $9 million and $10 million at June 30, 2015 and December 31, 2014, respectively. The overall effective interest rate reflecting the impact of the derivative contracts was 3.2% and 3.1% as of June 30, 2015 and December 31, 2014, respectively.