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Variable Interest Entities
 12 Months Ended
Dec. 31, 2016
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, 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. See Note 2 for further discussion of the Company’s accounting policy on consolidation.
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.
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 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 3 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 $9 million as of December 31, 2016. The Company classifies these investments as Available-for-Sale securities. See Note 5 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 of ASU 2015-02, 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 a significant economic interest and is not required to consolidate the property funds. See Note 3 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 $26 million at December 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 and the Company does not have a significant economic interest in any fund. 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 $13 million and $29 million at December 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 $33 million as of December 31, 2016.
Affordable Housing Partnerships and Other Real Estate 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 $574 million and $517 million at December 31, 2016 and December 31, 2015, respectively.
In addition, the Company has variable interests in partnerships that invest in multi-family residential properties that were originally developed with an affordable housing component. The purpose of the partnership is to improve the properties to be sold to affordable housing developers. The Company is not the primary beneficiary and therefore does not consolidate the partnerships. The Company’s maximum exposure to loss as a result of its investment in the partnerships is limited to the carrying value of the investment, which is reflected in other investments and was $20 million at December 31, 2016.
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 5 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 14 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:
 
December 31, 2016
Level 1
 
Level 2
 
Level 3
 
Total
(in millions)
Assets
 

 
 

 
 

 
 

Investments:
 

 
 

 
 

 
 

Corporate debt securities
$
—

 
$
19

 
$
—

 
$
19

Common stocks
22

 
6

 
5

 
33

Other investments
4

 
—

 
—

 
4

Syndicated loans
—

 
1,944

 
254

 
2,198

Total investments
26

 
1,969

 
259

 
2,254

Receivables
—

 
11

 
—

 
11

Total assets at fair value
$
26

 
$
1,980

 
$
259

 
$
2,265

Liabilities
 

 
 

 
 

 
 

Debt(1)
$
—

 
$
2,319

 
$
—

 
$
2,319

Other liabilities
—

 
95

 
—

 
95

Total liabilities at fair value
$
—

 
$
2,414

 
$
—

 
$
2,414

 
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

(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 3 and below for additional discussion on the measurement alternative. The estimated fair value of the CLOs’ debt was $2.3 billion at December 31, 2016.
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, January 1, 2016
$
3

 
$
529

 
$
2,065

 
$
(6,630
)
 
Cumulative effect of change in accounting policies(3)
(2
)
 
(304
)
 
(2,065
)
 
6,630

 
Balance, January 1, 2016, as adjusted
1

 
225

 
—

 
—

 
Total gains included in:
 
 
 
 
 
 
 
 
Net income
2

(1) 
7

(1) 
1

(2) 
—

 
Purchases
1

 
145

 
—

 
—

 
Sales
—

 
(24
)
 
(1
)
 
—

 
Settlements
—

 
(69
)
 
—

 
—

 
Transfers into Level 3
3

 
405

 
—

 
—

 
Transfers out of Level 3
(2
)
 
(435
)
 
—

 
—

 
Balance, December 31, 2016
$
5

 
$
254

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
Changes in unrealized gains included in income relating to assets and liabilities held at December 31, 2016
$
1

(1) 
$
3

(1) 
$
—

 
$
—

 

 
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) 
(24
)
(1) 
170

(2) 
215

(1) 
Other comprehensive loss
—

 
—

 
(154
)
 
—

 
Purchases
—

 
303

 
638

 
—

 
Sales
—

 
(36
)
 
(524
)
 
—

 
Issues
—

 
—

 
—

 
(1,267
)
 
Settlements
—

 
(161
)
 
—

 
452

 
Transfers into Level 3
7

 
776

 
—

 
—

 
Transfers out of Level 3
(10
)
 
(813
)
 
—

 
—

 
Balance, December 31, 2015
$
3

 
$
529

 
$
2,065

 
$
(6,630
)
 
 
 
 
 
 
 
 
 
 
Changes in unrealized gains (losses) included in income relating to assets and liabilities held at December 31, 2015
$
—

 
$
(19
)
(1) 
$
20

(2) 
$
219

(1) 

 
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) 
1

(1) 
2

(1) 
421

(2) 
(34
)
(1) 
Other comprehensive income
—

 
—

 
—

 
(175
)
 
—

 
Purchases
2

 
—

 
417

 
289

 
—

 
Sales
(9
)
 
(2
)
 
(42
)
 
(547
)
 
—

 
Issues
—

 
—

 
—

 
—

 
(1,670
)
 
Settlements
—

 
—

 
(100
)
 
—

 
478

 
Transfers into Level 3
10

 
13

 
551

 
11

 
—

 
Transfers out of Level 3
(6
)
 
(19
)
 
(712
)
 
—

 
—

 
Balance, December 31, 2014
$
—

 
$
7

 
$
484

 
$
1,935

 
$
(6,030
)
 
 
 
 
 
 
 
 
 
 
 
 
Changes in unrealized gains (losses) included in income relating to assets and liabilities held at December 31, 2014
$
—

 
$
—

 
$
(3
)
(1) 
$
362

(2) 
$
1

(1) 

(1) Included in net investment income in the Consolidated Statements of Operations.
(2) Included in other revenues in the Consolidated Statements of Operations.
(3) 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”).
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:
 
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 December 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 14 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 primarily 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.
The consolidated CLOs hold an immaterial amount of stock warrants recorded in other assets. 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
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 3 for additional information on ASU 2014-13. The fair value of the CLOs’ assets, typically syndicated bank loans, 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:
 
December 31,
2016
 
2015
(in millions)
Syndicated loans
 

 
 

Unpaid principal balance
$
2,281

 
$
6,635

Excess unpaid principal over fair value
(83
)
 
(368
)
Fair value
$
2,198

 
$
6,267

Fair value of loans more than 90 days past due
$
8

 
$
24

Fair value of loans in nonaccrual status
8

 
24

Difference between fair value and unpaid principal of loans more than 90 days past due, loans in nonaccrual status or both
34

 
72

Debt
 

 
 

Unpaid principal balance
$
2,459

 
$
7,063

Excess unpaid principal over fair value
(140
)
 
(433
)
Fair value
$
2,319

(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 3 and above for additional discussion on the measurement alternative. The estimated fair value of the CLOs’ debt was $2.3 billion at December 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 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 $38 million, $35 million and $46 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Debt of the consolidated investment entities and the stated interest rates were as follows:
 
Carrying Value
 
Weighted Average Interest Rate
December 31,
December 31,
2016
 
2015
2016
 
2015
(in millions)
 
Debt of consolidated CLOs due 2019-2026
$
2,319

 
$
6,630

 
2.5
%
 
1.6
%
Floating rate revolving credit borrowings due 2017-2020
—

(1) 
901

 
—

 
2.8

Total
$
2,319

 
$
7,531

 
 

 
 

(1) The floating rate revolving credit borrowings of 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 6.9%. 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% as of December 31, 2015.
At December 31, 2016, future maturities of debt were as follows:
 
(in millions)
2017
$
—

2018
—

2019
54

2020
—

2021
—

Thereafter
2,405

Total future maturities
$
2,459