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, certain international series funds (Open Ended Investment Companies and Societes d’Investissement A Capital Variable) and private equity funds (collectively, “investment entities”), which are sponsored by the Company. In addition, the Company invests in structured investments other than CLOs and certain affordable housing partnerships which are considered VIEs. The Company consolidates certain investment entities (collectively, “consolidated investment entities”). If the Company is deemed to be the primary beneficiary, it will consolidate the VIE.

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, if any, is included in investments on the consolidated balance sheets.

Principles of Consolidation

Effective January 1, 2016, the Company adopted ASU 2015-02 using the modified retrospective approach. See Note 2 for additional information on the adoption impact.

A VIE is an entity that either has equity investors that lack certain essential characteristics of a controlling financial interest (including substantive voting rights, the obligation to absorb the entity’s losses, or the rights to receive the entity’s returns) or has equity investors that do not provide sufficient financial resources for the entity to support its activities.

Voting interest entities (“VOEs”) are those entities that do not qualify as a VIE. The Company consolidates VOEs in which it holds a greater than 50% voting interest. The Company generally accounts for entities using the equity method when it holds a greater than 20% but less than 50% voting interest or when the Company exercises significant influence over the entity. All other investments that are not reported at fair value as trading or Available-for-Sale securities are accounted for under the cost method when the Company owns less than a 20% voting interest and does not exercise significant influence.

Pre-adoption of ASU 2015-02

A VIE that meets one of these criteria is assessed for consolidation under one of the following models:


•	If the VIE is a registered money market fund, or is an investment company, or has the financial characteristics of an investment company, and the following are true:


(i)	the reporting entity does not have an explicit or implicit obligation to fund the investment company’s losses; and


(ii)	the investment company is not a securitization entity, asset backed financing entity, or an entity previously considered a qualifying special purpose entity,

then, the VIE will be consolidated by the entity that determines it stands to absorb a majority of the VIE’s expected losses or to receive a majority of the VIE’s expected residual returns. Entities that are assessed for consolidation under this framework include hedge funds, property funds, private equity funds, international series funds and venture capital funds.

When determining whether the Company will absorb the majority of a VIE’s expected losses or receive a majority of a VIE’s expected returns, it analyzes the purpose and design of the VIE and identifies the variable interests it holds including those of related parties and de facto agents of the Company. The Company then quantitatively determines whether its variable interests will absorb a majority of the VIE’s expected losses or residual returns. If the Company will absorb the majority of the VIE’s expected losses or residual returns, the Company consolidates the VIE.


•	If the VIE does not meet the criteria above, then the VIE will be consolidated by the reporting entity that determines it has both:


(i)	the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and


(ii)	the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Entities that are assessed for consolidation under this framework include asset-backed financing entities such as CLOs and investments in qualified affordable housing partnerships.

When evaluating entities for consolidation under this framework, the Company considers its contractual rights in determining whether it has the power to direct the activities of the VIE that most significantly impact the VIEs economic performance. In determining whether the Company has this power, it considers whether it is acting as an asset manager enabling it to direct the activities that most significantly impact the economic performance of an entity or if it is acting in a more passive role such as a limited partner without substantive rights to impact the economic performance of the entity.

Post-adoption of ASU 2015-02

A VIE will be consolidated by the reporting entity that determines it has both:


•	the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and


•	the obligation to absorb potentially significant losses or the right to receive potentially significant benefits to the VIE.

All VIEs are assessed for consolidation under this framework. When evaluating entities for consolidation, the Company considers its contractual rights in determining whether it has the power to direct the activities of the VIE that most significantly impact the VIEs economic performance. In determining whether the Company has this power, it considers whether it is acting in a role that enables it to direct the activities that most significantly impact the economic performance of an entity or if it is acting in an agent role.

In determining whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Company considers an analysis of its rights to receive benefits such as investment returns and its obligation to absorb losses associated with any investment in the VIE in conjunction with other qualitative factors. Management and incentive fees that are at market and commensurate with the level of services provided, and where the Company does not hold other interests in the VIE that would absorb more than an insignificant amount of the VIE’s expected losses or receive more than an insignificant amount of the VIE’s expected residual returns, are not considered a variable interest and are excluded from the analysis.

The updated guidance has a scope exception for reporting entities with interests in registered money market funds which do not have an explicit support agreement.

CLOs

CLOs are asset backed financing entities collateralized by a pool of assets, primarily syndicated loans and, to a lesser extent, high-yield bonds. 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 earns management fees from the CLOs based on the CLO’s collateral pool and, in certain instances, may also receive incentive fees. The fee arrangement is at market and commensurate with the level of effort required to provide those services. The Company has invested in a portion of the unrated, junior subordinated notes of certain CLOs.

Prior to adoption of ASU 2015-02, the Company considered management fees and incentive fees to be variable interests in the determination as to whether the Company had the obligation to absorb potentially significant losses or the right to receive potentially significant benefits to the VIE (significant economics) and therefore consolidated all CLOs it managed except one. The Company did not have an investment in the non-consolidated CLO. Subsequent to adoption, the fees earned from the CLOs, which are at market and commensurate with the level of effort required to provide those services, are excluded in consideration of significant economics. As a result of excluding these fees, the Company deconsolidated certain CLOs as its ownership interest was not considered significant. See Note 2 for additional information on the adoption impact.

The Company's maximum exposure to loss with respect to non-consolidated CLOs is limited to its amortized cost, which was $11 million as of March 31, 2016. The Company classifies these investments as Available-for-Sale securities. See Note 4 for additional information on these investments.

Property Funds

The Company provides investment advice and related services to property funds, 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 fee arrangement is at market and commensurate with the level of effort required to provide those services. Prior to adoption, the Company determined that consolidation was required for certain property funds as the Company was deemed to be a de facto agent of the third-party investors and required to consider their interest as its own. Subsequent to adoption, the Company deconsolidated all property funds. The Company is no longer required to consider the interest of the third-party investors as its own as the third-party investors are not under common control or a related party of the Company. As a result of excluding the interest of the third-party investors, the Company does not have significant economics and is not required to consolidate the property funds. See Note 2 for additional information on the adoption impact. The carrying value of the Company’s investment in property funds is reflected in other investments and was $32 million at March 31, 2016.

Hedge Funds and Private Equity Funds

The Company has determined that consolidation is not required for hedge funds and private equity funds which are sponsored by the Company and considered VIEs. For investment management services, the Company earns management fees based on the market value of assets under management, and in certain instances may also receive performance-based fees. The fee arrangement is at market and commensurate with the level of effort required to provide those services. 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 is reflected in other investments and was $24 million and $29 million at March 31, 2016 and December 31, 2015, respectively.

International Series Funds

The Company manages international series funds, which are considered VIEs. For investment management services, the Company earns management fees based on the market value of assets under management, and in certain instances may also receive performance-based fees. The fee arrangement is at market and commensurate with the level of effort required to provide those services. The Company does not consolidate these funds and its maximum exposure to loss is limited to its carrying value. The carrying value of the Company’s investment in these funds is reflected in other assets and was $38 million as of March 31, 2016.

Affordable Housing Partnerships

The Company has variable interests in certain 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 of the Company’s investment in affordable housing partnerships is reflected in other investments and was $517 million at both March 31, 2016 and December 31, 2015.

Structured Investments

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 on these structured investments.

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:



	March 31, 2016
	Level 1		Level 2		Level 3		Total
	(in millions)
Assets
Investments:
Corporate debt securities	$	—	$	59	$	—	$	59
Common stocks	1		12		2		15
Other investments	4		4		—		8
Syndicated loans	—		2,129		300		2,429
Total investments	5		2,204		302		2,511
Receivables	—		63		—		63
Total assets at fair value	$	5	$	2,267	$	302	$	2,574
Liabilities
Debt ⁽¹⁾	$	—	$	2,673	$	—	$	2,673
Other liabilities	—		29		—		29
Total liabilities at fair value	$	—	$	2,702	$	—	$	2,702

⁽¹⁾As the Company elected the measurement alternative effective January 1, 2016, the carrying value of the CLOs’ debt is set equal to the fair value of the CLOs’ assets. See Note 2 and below for additional discussion on the measurement alternative. The estimated fair value of the CLOs’ debt was $2.7 billion at March 31, 2016.



	December 31, 2015
	Level 1		Level 2		Level 3		Total
	(in millions)
Assets
Investments:
Corporate debt securities	$	—	$	154	$	—	$	154
Common stocks	74		46		3		123
Other investments	4		22		—		26
Syndicated loans	—		5,738		529		6,267
Total investments	78		5,960		532		6,570
Receivables	—		70		—		70
Other assets	—		—		2,065		2,065
Total assets at fair value	$	78	$	6,030	$	2,597	$	8,705
Liabilities
Debt	$	—	$	—	$	6,630	$	6,630
Other liabilities	—		221		—		221
Total liabilities at fair value	$	—	$	221	$	6,630	$	6,851

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 at January 1, 2016, previously reported	$	3		$	529			$	2,065		$	(6,630	)
Cumulative effect of change in accounting policies ⁽²⁾	(2		)	(304		)		(2,065		)	6,630
Balance at January 1, 2016, as adjusted	1			225				—			—
Total gains (losses) included in:
Net income	—			(9		)	⁽¹⁾	—			—
Purchases	—			15				—			—
Settlements	—			(10		)		—			—
Transfers into Level 3	2			139				—			—
Transfers out of Level 3	(1		)	(60		)		—			—
Balance, March 31, 2016	$	2		$	300			$	—		$	—
Changes in unrealized losses included in income relating to assets and liabilities held at March 31, 2016	$	—		$	(10	)	⁽¹⁾	$	—		$	—

⁽¹⁾ Included in net investment income in the Consolidated Statements of Operations.

⁽²⁾ The cumulative effect of change in accounting policies includes the adoption impact of ASU 2015-02 and ASU 2014-13 – Consolidation: Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (“ASU 2014-13”).



	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⁾	(1		)	⁽¹⁾	31			⁽²⁾	51			⁽¹⁾
Other comprehensive loss	—				—				(110		)		—
Purchases	—				37				342				—
Sales	—				(3		)		(309		)		—
Settlements	—				(31		)		—				46
Transfers into Level 3	5				255				—				—
Transfers out of Level 3	—				(274		)		—				—
Balance, March 31, 2015	$	11			$	467			$	1,889			$	(5,933	)
Changes in unrealized gains (losses) included in income relating to assets and liabilities held at March 31, 2015	$	(1	)	⁽¹⁾	$	(1	)	⁽¹⁾	$	(58	)	⁽²⁾	$	51		⁽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 table provides 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 at December 31, 2015:



	Fair Value		Valuation Technique	Unobservable Input	Range				Weighted Average
	(in millions)
Other assets (property funds)	$	2,060	Discounted cash flow/ market comparables	Equivalent yield	2.6	%	–	11.5%	5.8	%
				Expected rental value (per square foot)	$3		–	$159	$51
CLO debt	$	6,630	Discounted cash flow	Annual default rate	2.5%
				Discount rate	2.0	%	–	11.8%	3.4	%
				Constant prepayment rate	5.0	%	–	10.0%	9.9	%
				Loss recovery	36.4	%	–	63.6%	62.9	%

Level 3 measurements at December 31, 2015 not included in the table above and all Level 3 measurements at March 31, 2016 were obtained from non-binding broker quotes where unobservable inputs utilized in the fair value calculation 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 property funds 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

At December 31, 2015, other assets consisted of properties held in consolidated property funds managed by Threadneedle and were classified as Level 3. The property funds were deconsolidated effective January 1, 2016 upon the adoption of ASU 2015-02.

Liabilities

Debt

Effective January 1, 2016, the Company adopted ASU 2014-13 and elected the measurement alternative, which allows an entity to measure both the financial assets and financial liabilities at the fair value of the more observable of the fair value of the financial assets or financial liabilities. See Note 2 for additional information on ASU 2014-13. The fair value of the CLOs’ assets, typically syndicated bank loans with active secondary trading markets, is more observable than the fair value of the CLOs’ debt tranches for which market activity is limited and less transparent. As a result, the fair value of the CLOs’ debt is set equal to the fair value of the CLOs’ assets. Under ASU 2014-13, the fair value of the CLOs’ debt is classified as Level 2.

Prior to adoption of ASU 2014-13, the fair value of the CLOs’ debt was determined using a discounted cash flow model. Inputs used to determine the expected cash flows included 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 was classified as Level 3 prior to adoption of ASU 2014-13.

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:



	March 31, 2016				December 31, 2015
	(in millions)
Syndicated loans
Unpaid principal balance	$	2,689			$	6,635
Excess unpaid principal over fair value	(260		)		(368		)
Fair value	$	2,429			$	6,267
Fair value of loans more than 90 days past due	$	24			$	24
Fair value of loans in nonaccrual status	24				24
Difference between fair value and unpaid principal of loans more than 90 days past due, loans in nonaccrual status or both	84				72
Debt
Unpaid principal balance	$	2,970			$	7,063
Excess unpaid principal over carrying value	(297		)		(433		)
Fair value	$	2,673		⁽¹⁾	$	6,630

⁽¹⁾ As the Company elected the measurement alternative effective January 1, 2016, the carrying value of the CLOs’ debt is set equal to the fair value of the CLOs’ assets. See Note 2 and above for additional discussion on the measurement alternative. The estimated fair value of the CLOs’ debt was $2.7 billion at March 31, 2016.

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 gains (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 $(4) million and $41 million for the three months ended March 31, 2016 and 2015, respectively.

Debt of the consolidated investment entities and the stated interest rates were as follows:



	Carrying Value					Weighted Average Interest Rate
	March 31, 2016			December 31, 2015		March 31, 2016		December 31, 2015
	(in millions)
Debt of consolidated CLOs due 2016-2026	$	2,673		$	6,630	1.8	%	1.6	%
Floating rate revolving credit borrowings due 2017-2020	—		⁽¹⁾	901		—		2.8
Total	$	2,673		$	7,531

⁽¹⁾The property funds were deconsolidated effective January 1, 2016 upon adoption of ASU 2015-02.

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 contractual interest rates.

The carrying value of the floating rate revolving credit borrowings represents the outstanding principal amount of debt of certain consolidated property funds. The fair value of this debt was $901 million as of December 31, 2015. 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 $8 million at December 31, 2015. The overall effective interest rate reflecting the impact of the derivative contracts was 3.2% at December 31, 2015.