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 and certain non-U.S. series funds (OEICs and SICAVs) (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. 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.

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.

The Company’s maximum exposure to loss with respect to non-consolidated CLOs is limited to its amortized cost, which was $7 million and $6 million as of June 30, 2018 and December 31, 2017, respectively. 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 some 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 fee arrangement is at market and commensurate with the level of effort required to provide those services. The Company does not have a significant economic interest and is not required to consolidate any of the property funds. The carrying value of the Company’s investment in property funds is reflected in other investments and was $24 million as of both June 30, 2018 and December 31, 2017.

Hedge Funds and other Private Funds

The Company has determined that consolidation is not required for hedge funds and other private 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 $7 million as of both June 30, 2018 and December 31, 2017.

Non-U.S. Series Funds

The Company manages non-U.S. 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 investments and was $36 million and $25 million as of June 30, 2018 and December 31, 2017, respectively.

Affordable Housing Partnerships and Other Real Estate Partnerships

The Company is a limited partner in affordable housing partnerships that qualify for government-sponsored low income housing tax credit programs and partnerships that invest in multi-family residential properties that were originally developed with an affordable housing component. The Company has determined it is not the primary beneficiary and therefore does not consolidate these partnerships.

A majority of the limited partnerships are VIEs. The Company’s maximum exposure to loss as a result of its investment in the VIEs is limited to the carrying value. The carrying value is reflected in other investments and was $385 million and $408 million as of June 30, 2018 and December 31, 2017, respectively. The Company had a $66 million and a $97 million liability recorded as of June 30, 2018 and December 31, 2017, respectively, related to original purchase commitments not yet remitted to the VIEs. The Company has not provided any additional support and is not contractually obligated to provide additional support to the VIEs beyond the above mentioned funding commitments.

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 11 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, 2018
	Level 1		Level 2		Level 3		Total
	(in millions)
Assets
Investments:
Corporate debt securities	$	—	$	9	$	—	$	9
Common stocks	5		1		4		10
Other investments	4		—		—		4
Syndicated loans	—		1,163		111		1,274
Total investments	9		1,173		115		1,297
Receivables	—		17		—		17
Total assets at fair value	$	9	$	1,190	$	115	$	1,314

Liabilities
Debt ⁽¹⁾	$	—	$	1,416	$	—	$	1,416
Other liabilities	—		28		—		28
Total liabilities at fair value	$	—	$	1,444	$	—	$	1,444



	December 31, 2017
	Level 1		Level 2		Level 3		Total
	(in millions)
Assets
Investments:
Corporate debt securities	$	—	$	27	$	—	$	27
Common stocks	18		8		4		30
Other investments	5		—		—		5
Syndicated loans	—		1,889		180		2,069
Total investments	23		1,924		184		2,131
Receivables	—		25		—		25
Total assets at fair value	$	23	$	1,949	$	184	$	2,156

Liabilities
Debt ⁽¹⁾	$	—	$	2,206	$	—	$	2,206
Other liabilities	—		63		—		63
Total liabilities at fair value	$	—	$	2,269	$	—	$	2,269


⁽¹⁾	The carrying value of the CLOs’ debt is set equal to the fair value of the CLOs’ assets. The estimated fair value of the CLOs’ debt was $1.4 billion and $2.2 billion as of June 30, 2018 and December 31, 2017, respectively.

The following tables provide a summary of changes in Level 3 assets held by consolidated investment entities measured at fair value on a recurring basis:



	Common Stocks			Syndicated Loans
	(in millions)
Balance, April 1, 2018	$	11		$	200
Total gains (losses) included in:
Net income	—			(1		)	⁽¹⁾
Purchases	—			24
Sales	(4		)	(35		)
Settlements	—			(19		)
Transfers into Level 3	—			17
Transfers out of Level 3	(3		)	(75		)
Balance, June 30, 2018	$	4		$	111
Changes in unrealized gains (losses) included in income relating to assets held at June 30, 2018	$	—		$	—



	Corporate Debt Securities			Common Stocks			Syndicated Loans
	(in millions)
Balance, April 1, 2017	$	2		$	4		$	223
Total gains (losses) included in:
Net income	—			—			(2		)	⁽¹⁾
Purchases	—			3			72
Sales	(2		)	(1		)	(7		)
Settlements	—			—			(30		)
Transfers into Level 3	—			1			41
Transfers out of Level 3	—			—			(112		)
Balance, June 30, 2017	$	—		$	7		$	185
Changes in unrealized gains (losses) included in income relating to assets held at June 30, 2017	$	—		$	—		$	(3	)	⁽¹⁾



	Common Stocks				Syndicated Loans

Balance, January 1, 2018	$	4			$	180
Total gains (losses) included in:
Net income	4			⁽¹⁾	1			⁽¹⁾
Purchases	—				42
Sales	(4		)		(36		)
Settlements	—				(30		)
Transfers into Level 3	4				78
Transfers out of Level 3	(4		)		(124		)
Balance, June 30, 2018	$	4			$	111
Changes in unrealized gains (losses) included in income relating to assets held at June 30, 2018	$	2		⁽¹⁾	$	—



	Corporate Debt Securities			Common Stocks			Syndicated Loans
	(in millions)
Balance, January 1, 2017	$	—		$	5		$	254
Total gains (losses) included in:
Net income	—			—			1			⁽¹⁾
Purchases	—			3			127
Sales	(2		)	(1		)	(15		)
Settlements	—			—			(53		)
Transfers into Level 3	2			2			113
Transfers out of Level 3	—			(2		)	(242		)
Balance, June 30, 2017	$	—		$	7		$	185
Changes in unrealized gains (losses) included in income relating to assets held at June 30, 2017	$	—		$	—		$	(1	)	⁽¹⁾

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

Securities and loans transferred from Level 3 primarily represent assets with fair values that are now obtained from a third-party pricing service with observable inputs or priced in active markets. Transfers out of Level 3 for the three months and six months ended June 30, 2018 included $2 million of common stock and $24 million of syndicated loans related to the deconsolidation of a CLO. Securities and loans transferred to Level 3 represent assets with fair values that are now based on a single non-binding broker quote. The Company recognizes transfers between levels of the fair value hierarchy as of the beginning of the quarter in which each transfer occurred. For assets and liabilities held at the end of the reporting periods that are measured at fair value on a recurring basis, there were no transfers between Level 1 and Level 2.

All Level 3 measurements as of June 30, 2018 and December 31, 2017 were obtained from non-binding broker quotes where unobservable inputs utilized in the fair value calculation are not reasonably available to the Company.

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 11 for a description of the Company’s determination of the fair value of corporate debt securities, 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.

Liabilities

Debt

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. The fair value of the CLOs’ debt is classified as Level 2.

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, 2018			December 31, 2017
	(in millions)
Syndicated loans
Unpaid principal balance	$	1,298		$	2,140
Excess unpaid principal over fair value	(24		)	(71		)
Fair value	$	1,274		$	2,069
Fair value of loans more than 90 days past due	$	7		$	24
Fair value of loans in nonaccrual status	7			24
Difference between fair value and unpaid principal of loans more than 90 days past due, loans in nonaccrual status or both	5			35

Debt
Unpaid principal balance	$	1,557		$	2,340
Excess unpaid principal over fair value	(141		)	(134		)
Carrying value ⁽¹⁾	$	1,416		$	2,206

⁽¹⁾ The carrying value of the CLOs’ debt is set equal to the fair value of the CLOs’ assets. The estimated fair value of the CLOs’ debt was $1.4 billion and $2.2 billion as of June 30, 2018 and December 31, 2017, respectively.

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 $25 million and $1 million for the three months ended June 30, 2018 and 2017, respectively.

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 $24 million and $(2) million for the six months ended June 30, 2018 and 2017, respectively.

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



	Carrying Value				Weighted Average Interest Rate
	June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017
	(in millions)
Debt of consolidated CLOs due 2025-2026	$	1,416	$	2,206	3.5	%	2.8	%

The debt of the consolidated CLOs has both fixed and floating interest rates, which range from 0% to 8.1%. The interest rates on the debt of CLOs are weighted average rates based on the outstanding principal and contractual interest rates.