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Investments and Derivative Instruments Level 1 (Notes)
 3 Months Ended
Mar. 31, 2016
Derivative Instruments and Hedging Activities Disclosure [Text Block]
Derivative Instruments
The Company utilizes a variety of OTC, OTC-cleared and exchange traded derivative instruments as a part of its overall risk management strategy as well as to enter into replication transactions. Derivative instruments are used to manage risk associated with interest rate, equity market, commodity market, credit spread, issuer default, price, and currency exchange rate risk or volatility. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that are permissible investments under the Company’s investment policies. The Company also may enter into and has previously issued financial instruments and products that either are accounted for as free-standing derivatives, such as certain reinsurance contracts, or may contain features that are deemed to be embedded derivative instruments, such as the GMWB rider included with certain variable annuity products.
Strategies That Qualify for Hedge Accounting
Certain derivatives that the Company enters into satisfy the hedge accounting requirements as outlined in Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements, included in The Hartford’s 2015 Form 10-K Annual Report. Typically, these hedge relationships include interest rate swaps and, to a lesser extent, foreign currency swaps where the terms or expected cash flows of the hedged item closely match the terms of the swap. The interest rate swaps are typically used to manage interest rate duration of certain fixed maturity securities or liability contracts. The hedge strategies by hedge accounting designation include:
Cash Flow Hedges
Interest rate swaps are predominantly used to manage portfolio duration and better match cash receipts from assets with cash disbursements required to fund liabilities. These derivatives primarily convert interest receipts on floating-rate fixed maturity securities to fixed rates. The Company also enters into forward starting swap agreements to hedge the interest rate exposure related to the purchase of fixed-rate securities, primarily to hedge interest rate risk inherent in the assumptions used to price certain liabilities.
Foreign currency swaps are used to convert foreign currency-denominated cash flows related to certain investment receipts and liability payments to U.S. dollars in order to reduce cash flow fluctuations due to changes in currency rates.
Fair Value Hedges
Interest rate swaps are used to hedge the changes in fair value of fixed maturity securities due to fluctuations in interest rates. These swaps are typically used to manage interest rate duration.
Non-Qualifying Strategies
Derivative relationships that do not qualify for hedge accounting (“non-qualifying strategies”) primarily include the hedge program for the Company's variable annuity products as well as the hedging and replication strategies that utilize credit default swaps. In addition, hedges of interest rate, foreign currency and equity risk of certain fixed maturities, equities and liabilities do not qualify for hedge accounting.
The non-qualifying strategies include:
Interest Rate Swaps, Swaptions, and Futures
The Company uses interest rate swaps, swaptions, and futures to manage duration between assets and liabilities in certain investment portfolios. In addition, the Company enters into interest rate swaps to terminate existing swaps, thereby offsetting the changes in value of the original swap. As of March 31, 2016, and December 31, 2015, the notional amount of interest rate swaps in offsetting relationships was $12.8 billion and $12.9 billion, respectively.
Foreign Currency Swaps and Forwards
The Company enters into foreign currency swaps and forwards to convert the foreign currency exposures of certain foreign currency-denominated fixed maturity investments to U.S. dollars. During 2015, the Company entered into foreign currency forwards to hedge non-U.S. dollar denominated cash and equity securities, which matured in January 2016. Foreign currency forwards are also used to hedge currency impacts on changes in equity of a P&C runoff entity in the United Kingdom.
Fixed Payout Annuity Hedge
The Company reinsures certain yen denominated fixed payout annuities. The Company invests in U.S. dollar denominated assets to support the reinsurance liability. The Company entered into pay U.S. dollar, receive yen swap contracts to hedge the currency and yen interest rate exposure between the U.S. dollar denominated assets and the yen denominated fixed liability reinsurance payments.
Credit Contracts
Credit default swaps are used to purchase credit protection on an individual entity or referenced index to economically hedge against default risk and credit-related changes in value of fixed maturity securities. Credit default swaps are also used to assume credit risk related to an individual entity or referenced index as a part of replication transactions. These contracts require the Company to pay or receive a periodic fee in exchange for compensation from the counterparty should the referenced security issuers experience a credit event, as defined in the contract. The Company is also exposed to credit risk related to certain structured fixed maturity securities that have embedded credit derivatives, which reference a standard index of corporate securities. In addition, the Company enters into credit default swaps to terminate existing credit default swaps, thereby offsetting the changes in value of the original swap going forward.
Equity Index Swaps and Options
The Company enters into equity index options to hedge the impact of a decline in the equity markets on the investment portfolio. During 2015, the Company entered into a total return swap to hedge equity risk of specific common stock investments which were accounted for using the fair value option in order to align the accounting treatment within net realized capital gains (losses). The swap matured in January 2016 and the specific common stock investments were sold at that time. In addition, the Company formerly offered certain equity indexed products, a portion of which contain embedded derivatives that require bifurcation. The Company uses equity index swaps to economically hedge the equity volatility risk associated with the equity indexed products.
Commodity Contracts
During 2015, the Company purchased for $11 put option contracts on West Texas Intermediate oil futures with a strike of $35 dollars per barrel in order to partially offset potential losses related to certain fixed maturity securities that could arise if oil prices decline substantially. The Company has since reduced its exposure to the targeted fixed maturity securities and, therefore, these options were terminated at the end of 2015.
GMWB Derivatives, Net
The Company formerly offered certain variable annuity products with GMWB riders. The GMWB product is a bifurcated embedded derivative (“GMWB product derivatives”) that has a notional value equal to the GRB. The Company uses reinsurance contracts to transfer a portion of its risk of loss due to GMWB. The reinsurance contracts covering GMWB (“GMWB reinsurance contracts”) are accounted for as free-standing derivatives with a notional amount equal to the GRB amount.
The Company utilizes derivatives (“GMWB hedging instruments”) as part of an actively managed program designed to hedge a portion of the capital market risk exposures of the non-reinsured GMWB riders due to changes in interest rates, equity market levels, and equity volatility. These derivatives include customized swaps, interest rate swaps and futures, and equity swaps, options and futures, on certain indices including the S&P 500 index, EAFE index and NASDAQ index. The following table presents notional and fair value for GMWB hedging instruments.
 
Notional Amount
Fair Value
 
March 31,
2016
December 31, 2015
March 31,
2016
December 31, 2015
Customized swaps
$
5,622

$
5,877

$
150

$
131

Equity swaps, options, and futures
1,392

1,362

(6
)
2

Interest rate swaps and futures
3,773

3,740

48

25

Total
$
10,787

$
10,979

$
192

$
158


Macro Hedge Program
The Company utilizes equity swaps, options, and futures to partially hedge against a decline in the equity markets and the resulting statutory surplus and capital impact primarily arising from the guaranteed minimum death benefit ("GMDB") and GMWB obligations. The following table presents notional and fair value for the macro hedge program.
 
Notional Amount
Fair Value
 
March 31,
2016
December 31, 2015
March 31,
2016
December 31, 2015
Equity swaps, options, and futures
$
4,605

$
4,548

$
145

$
147

Total
$
4,605

$
4,548

$
145

$
147


Contingent Capital Facility Put Option
The Company entered into a put option agreement that provides the Company the right to require a third-party trust to purchase, at any time, The Hartford’s junior subordinated notes in a maximum aggregate principal amount of $500. Under the put option agreement, The Hartford will pay premiums on a periodic basis and will reimburse the trust for certain fees and ordinary expenses.
Modified Coinsurance Reinsurance Contracts
As of March 31, 2016, and December 31, 2015, the Company had approximately $905 and $895, respectively, of invested assets supporting other policyholder funds and benefits payable reinsured under a modified coinsurance arrangement in connection with the sale of the Individual Life business, which was structured as a reinsurance transaction. The assets are primarily held in a trust established by the Company. The Company pays or receives cash quarterly to settle the results of the reinsured business, including the investment results. As a result of this modified coinsurance arrangement, the Company has an embedded derivative that transfers to the reinsurer certain unrealized changes in fair value due to interest rate and credit risks of these assets. The notional amount of the embedded derivative reinsurance contracts are the invested assets that are carried at fair value supporting the reinsured reserves.
Derivative Balance Sheet Classification
The following table summarizes the balance sheet classification of the Company’s derivative related net fair value amounts as well as the gross asset and liability fair value amounts. For reporting purposes, the Company has elected to offset within total assets or total liabilities based upon the net of the fair value amounts, income accruals, and related cash collateral receivables and payables of OTC derivative instruments executed in a legal entity and with the same counterparty under a master netting agreement, which provides the Company with the legal right of offset. The Company has also elected to offset within total assets or total liabilities based upon the net of the fair value amounts, income accruals and related cash collateral receivables and payables of OTC-cleared derivative instruments based on clearing house agreements. The following fair value amounts do not include income accruals or related cash collateral receivables and payables, which are netted with derivative fair value amounts to determine balance sheet presentation. Derivative fair value reported as liabilities after taking into account the master netting agreements was $1.3 billion and $1.1 billion, respectively, as of March 31, 2016, and December 31, 2015. Derivatives in the Company’s separate accounts, where the associated gains and losses accrue directly to policyholders, are not included in the table below. The Company’s derivative instruments are held for risk management purposes, unless otherwise noted in the following table. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presented in the table to quantify the volume of the Company’s derivative activity. Notional amounts are not necessarily reflective of credit risk. The following tables exclude investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note 4 - Fair Value Measurements of Notes to Condensed Consolidated Financial Statements.
 
Net Derivatives
 
Asset Derivatives
 
Liability Derivatives
 
Notional Amount
 
Fair Value
 
Fair Value
 
Fair Value
Hedge Designation/ Derivative Type
Mar. 31, 2016
Dec. 31, 2015
 
Mar. 31, 2016
Dec. 31, 2015
 
Mar. 31, 2016
Dec. 31, 2015
 
Mar. 31, 2016
Dec. 31, 2015
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
3,478

$
3,527

 
$
89

$
17

 
$
94

$
50

 
$
(5
)
$
(33
)
Foreign currency swaps
143

143

 
(18
)
(19
)
 
6

7

 
(24
)
(26
)
Total cash flow hedges
3,621

3,670

 
71

(2
)
 
100

57

 
(29
)
(59
)
Fair value hedges
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
23

23

 
—

—

 
—

—

 
—

—

Total fair value hedges
23

23

 
—

—

 
—

—

 
—

—

Non-qualifying strategies
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps, swaptions, and futures
14,545

14,290

 
(892
)
(814
)
 
475

297

 
(1,367
)
(1,111
)
Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
Foreign currency swaps and forwards
317

653

 
6

17

 
6

17

 
—

—

Fixed payout annuity hedge
1,063

1,063

 
(321
)
(357
)
 
—

—

 
(321
)
(357
)
Credit contracts
 
 
 
 
 
 
 
 
 
 
 
Credit derivatives that purchase credit protection
494

423

 
(11
)
18

 
2

22

 
(13
)
(4
)
Credit derivatives that assume credit risk [1]
1,397

2,458

 
(9
)
(13
)
 
8

9

 
(17
)
(22
)
Credit derivatives in offsetting positions
4,034

4,059

 
(2
)
(2
)
 
43

40

 
(45
)
(42
)
Equity contracts
 
 
 
 
 
 
 
 
 
 
 
Equity index swaps and options
1,429

419

 
5

15

 
34

41

 
(29
)
(26
)
Variable annuity hedge program
 
 
 
 
 
 
 
 
 
 
 
GMWB product derivatives [2]
14,597

15,099

 
(361
)
(262
)
 
—

—

 
(361
)
(262
)
GMWB reinsurance contracts
3,005

3,106

 
99

83

 
99

83

 
—

—

GMWB hedging instruments
10,787

10,979

 
192

158

 
338

264

 
(146
)
(106
)
Macro hedge program
4,605

4,548

 
145

147

 
178

179

 
(33
)
(32
)
Other
 
 
 
 
 
 
 
 
 
 
 
Contingent capital facility put option
500

500

 
5

7

 
5

7

 
—

—

Modified coinsurance reinsurance contracts
905

895

 
57

79

 
57

79

 
—

—

Total non-qualifying strategies
57,678

58,492

 
(1,087
)
(924
)
 
1,245

1,038

 
(2,332
)
(1,962
)
Total cash flow hedges, fair value hedges, and non-qualifying strategies
$
61,322

$
62,185

 
$
(1,016
)
$
(926
)
 
$
1,345

$
1,095

 
$
(2,361
)
$
(2,021
)
Balance Sheet Location
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities, available-for-sale
$
426

$
425

 
$
1

$
(3
)
 
$
1

$
—

 
$
—

$
(3
)
Other investments
23,359

23,253

 
100

1

 
566

409

 
(466
)
(408
)
Other liabilities
18,980

19,358

 
(887
)
(798
)
 
622

524

 
(1,509
)
(1,322
)
Reinsurance recoverables
3,910

4,000

 
156

162

 
156

162

 
—

—

Other policyholder funds and benefits payable
14,647

15,149

 
(386
)
(288
)
 
—

—

 
(386
)
(288
)
Total derivatives
$
61,322

$
62,185

 
$
(1,016
)
$
(926
)
 
$
1,345

$
1,095

 
$
(2,361
)
$
(2,021
)
[1]
The derivative instruments related to this strategy are held for other investment purposes.
[2]
These derivatives are embedded within liabilities and are not held for risk management purposes.
Change in Notional Amount
The net decrease in notional amount of derivatives since December 31, 2015, was primarily due to the following:
•
The decline in notional amount related to credit derivatives that assume credit risk was primarily due to the termination of replication transactions that had been used to earn credit spread while re-balancing within certain fixed maturity sectors.
•
The decline in notional amount related to currency derivatives was primarily driven by the expiration of yen currency forwards which were used to hedge Japanese yen-denominated cash and equity securities.
•
The decline in the combined notional amount associated with the GMWB hedging program, which includes the GMWB product, reinsurance, and hedging derivatives, was primarily driven by policyholder lapses and partial withdrawals.
•
The increase in notional amount related to equity derivatives primarily resulted from purchases of equity index options which are hedging the impact of a decline in the equity market on the investment portfolio.
Change in Fair Value
The net decline in the total fair value of derivative instruments since December 31, 2015, was primarily related to the following:
•
The decrease in fair value related to the combined GMWB hedging program, which includes the GMWB product, reinsurance, and hedging derivatives, was primarily driven by a decrease in the value of equity derivatives and liability model fund regression updates.
•
The decline in fair value of credit default swaps that purchase credit protection was primarily due to terminations.
•
The decrease in the fair value associated with modified coinsurance reinsurance contracts, which are accounted for as embedded derivatives and transfer to the reinsurer the investment experience related to the assets supporting the reinsured policies, was primarily driven by a decline in interest rates.
•
The increase in fair value associated with the fixed payout annuity hedges was primarily driven by an appreciation of the Japanese yen in comparison to the U.S. dollar, partially offset by an decline in U.S. interest rates.
•
The increase in fair value associated with qualifying cash flow interest rate swaps and the decrease in fair value related to non-qualifying interest rate swaps were primarily due to market changes in the quarter.
Offsetting of Derivative Assets/Liabilities
The following tables present the gross fair value amounts, the amounts offset, and net position of derivative instruments eligible for offset in the Company's Condensed Consolidated Balance Sheets. Amounts offset include fair value amounts, income accruals and related cash collateral receivables and payables associated with derivative instruments that are traded under a common master netting agreement, as described in the preceding discussion. Also included in the tables are financial collateral receivables and payables, which are contractually permitted to be offset upon an event of default, although are disallowed for offsetting under U.S. GAAP.
As of March 31, 2016
 
(i)
 
(ii)
 
(iii) = (i) - (ii)
(iv)
 
(v) = (iii) - (iv)
 
 
 
 
 
Net Amounts Presented in the Statement of Financial Position
 
Collateral Disallowed for Offset in the Statement of Financial Position
 
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Statement of Financial Position
 
Derivative Assets [1]
 
Accrued Interest and Cash Collateral Received [2]
 
Financial Collateral Received [4]
 
Net Amount
Description
 
 
 
 
 
 
 
 
 
 
 
Other investments
$
1,188

 
$
998

 
$
100

 
$
90

 
$
111

 
$
79

 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Derivative Liabilities [3]
 
Accrued Interest and Cash Collateral Pledged [3]
 
Financial Collateral Pledged [4]
 
Net Amount
Description
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
$
(1,975
)
 
$
(961
)
 
$
(887
)
 
$
(127
)
 
$
(950
)
 
$
(64
)

As of December 31, 2015
 
(i)
 
(ii)
 
(iii) = (i) - (ii)
(iv)
 
(v) = (iii) - (iv)
 
 
 
 
 
Net Amounts Presented in the Statement of Financial Position
 
Collateral Disallowed for Offset in the Statement of Financial Position
 
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Statement of Financial Position
 
Derivative Assets [1]
 
Accrued Interest and Cash Collateral Received [2]
 
Financial Collateral Received [4]
 
Net Amount
Description
 
 
 
 
 
 
 
 
 
 
 
Other investments
$
933

 
$
756

 
$
1

 
$
176

 
$
100

 
$
77


 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Derivative Liabilities [3]
 
Accrued Interest and Cash Collateral Pledged [3]
 
Financial Collateral Pledged [4]
 
Net Amount
Description
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
$
(1,730
)
 
$
(818
)
 
$
(798
)
 
$
(114
)
 
$
(889
)
 
$
(23
)

[1]
Included in other invested assets in the Company's Condensed Consolidated Balance Sheets.
[2]
Included in other assets in the Company's Condensed Consolidated Balance Sheets and amount presented is limited to the net derivative receivable associated with each counterparty.
[3]
Included in other liabilities in the Company's Condensed Consolidated Balance Sheets and amount presented is limited to the net derivative payable associated with each counterparty.
[4]
Excludes collateral associated with exchange-traded derivative instruments.
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current period earnings. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
The following tables present the components of the gain or loss on derivatives that qualify as cash flow hedges:
Derivatives in Cash Flow Hedging Relationships
 
Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Net Realized Capital Gains(Losses) Recognized in Income on Derivative (Ineffective Portion)
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2016
2015
 
2016
2015
Interest rate swaps
$
106

$
56

 
$
—

$
—

Foreign currency swaps
1

(7
)
 
—

—

Total
$
107

$
49

 
$
—

$
—

 
 
Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
 
 
Three Months Ended March 31,
 
Location
2016
2015
Interest rate swaps
Net realized capital gains (losses)
$
5

$
1

Interest rate swaps
Net investment income
15

16

Foreign currency swaps
Net realized capital gains (losses)
4

(10
)
Total
 
$
24

$
7

As of March 31, 2016, the before-tax deferred net gains on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months are $56. This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the Company will recognize the deferred net gains (losses) as an adjustment to net investment income over the term of the investment cash flows. The maximum term over which the Company is hedging its exposure to the variability of future cash flows for forecasted transactions, excluding interest payments on existing variable-rate financial instruments, is approximately two years.
During the three months ended March 31, 2016, and March 31, 2015, the Company had no net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring.
Fair Value Hedges
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current period earnings. The Company includes the gain or loss on the derivative in the same line item as the offsetting loss or gain on the hedged item. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
For the three months ended March 31, 2016 and 2015, the Company recognized in income losses of less than $1, respectively, representing the ineffective portion of fair value hedges for the derivative instrument and the hedged item.
Non-Qualifying Strategies
For non-qualifying strategies, including embedded derivatives that are required to be bifurcated from their host contracts and accounted for as derivatives, the gain or loss on the derivative is recognized currently in earnings within net realized capital gains (losses). The following table presents the gain or loss recognized in income on non-qualifying strategies:
Derivatives Used in Non-Qualifying Strategies
Gain or (Loss) Recognized within Net Realized Capital Gains and Losses
 
Three Months Ended March 31,
 
2016
2015
Interest rate contracts
 
 
Interest rate swaps, swaptions, and futures
$
(24
)
$
(12
)
Foreign exchange contracts
 
 
Foreign currency swaps and forwards
3

7

Fixed payout annuity hedge [1]
36

(14
)
Credit contracts
 
 
Credit derivatives that purchase credit protection
(5
)
(2
)
Credit derivatives that assume credit risk
(2
)
9

Equity contracts
 
 
Equity index swaps and options
18

(3
)
Commodity contracts
 
 
Commodity options
—

(5
)
Variable annuity hedge program
 
 
GMWB product derivatives
(79
)
(19
)
GMWB reinsurance contracts
12

7

GMWB hedging instruments
50

13

Macro hedge program
(14
)
(4
)
Other
 
 
Contingent capital facility put option
(2
)
(2
)
Modified coinsurance reinsurance contracts
(22
)
(11
)
Total [2]
$
(29
)
$
(36
)
[1]
Not included in this amount is the associated liability adjustment for changes in foreign exchange spot rates through realized capital gains (losses) of $(44) and $0 for the three months ended March 31, 2016 and 2015, respectively.
[2]
Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note 4 - Fair Value Measurements.
For the three months ended March 31, 2016, the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:
•
The net loss related to interest rate swaps was driven by market changes in the quarter.
•
The net gain on the fixed payout annuity hedge primarily resulted from an appreciation of the Japanese yen in comparison to the U.S. dollar, partially offset by a decline in U.S. interest rates.
•
The net gain associated with equity index swaps and options was primarily driven by a total return swap used to hedge equity securities where the value of the swap increased due to a decline in the Japanese equity markets. An offsetting change in value was recorded on the equity securities since the Company elected the fair value option in order to align the accounting with the derivative, resulting in changes in value on both the equity securities and the derivative recorded in net realized capital gains and losses. For further discussion, see the Fair Value Option section in Note 4 - Fair Value Measurements. The loss on equity index options was due to time decay and an increase in the equity market since the inception of the trade.
•
The net loss related to the combined GMWB hedging program which includes the GMWB product, reinsurance, and hedging derivatives, was primarily driven by a decrease in the value of equity derivatives and liability model fund regression updates.
•
The net loss on the macro hedge program was primarily driven by a decrease in the value of equity derivatives and time decay of options, partially offset by a gain due to a decline in interest rates.
•
The loss associated with modified coinsurance reinsurance contracts, which are accounted for as embedded derivatives and transfer to the reinsurer the investment experience related to the assets supporting the reinsured policies, was primarily driven by a decline in interest rates. The assets remain on the Company's books and the Company recorded an offsetting gain in OCI as a result of the increase in market value of the bonds.
For the three months ended March 31, 2015, the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:
•
The net loss related to interest derivatives was primarily due to a decline in U.S. interest rates.
•
The net loss related to the fixed payout annuity hedge was driven by a decline in U.S. interest rates.
•
The loss on the GMWB product derivatives was largely driven by a decline in interest rates and changes in volatility levels, offset by an increase in equity markets. These losses were offset by gains on the GMWB reinsurance contracts and GMWB hedging instruments.
•
The loss associated with modified coinsurance reinsurance contracts, which are accounted for as embedded derivatives and transfer to the reinsurer the investment experience related to the assets supporting the reinsured policies, was primarily driven by a decline in long-term interest rates during the period. The assets remain on the Company's books and the Company recorded an offsetting gain in OCI as a result of the increase in market value of the bonds.
For additional disclosures regarding contingent credit related features in derivative agreements, see Note 8 - Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements.
Credit Risk Assumed through Credit Derivatives
The Company enters into credit default swaps that assume credit risk of a single entity or referenced index in order to synthetically replicate investment transactions that would be permissible under the Company's investment policies. The Company will receive periodic payments based on an agreed upon rate and notional amount and will only make a payment if there is a credit event. A credit event payment will typically be equal to the notional value of the swap contract less the value of the referenced security issuer’s debt obligation after the occurrence of the credit event. A credit event is generally defined as a default on contractually obligated interest or principal payments or bankruptcy of the referenced entity. The credit default swaps in which the Company assumes credit risk primarily reference investment grade single corporate issuers and baskets, which include standard diversified portfolios of corporate and CMBS issuers. The diversified portfolios of corporate issuers are established within sector concentration limits and may be divided into tranches that possess different credit ratings.
The following tables present the notional amount, fair value, weighted average years to maturity, underlying referenced credit obligation type and average credit ratings, and offsetting notional amounts and fair value for credit derivatives in which the Company is assuming credit risk as of March 31, 2016, and December 31, 2015.
As of March 31, 2016
 
 
 
 
Underlying Referenced Credit
Obligation(s) [1]
 
 
Credit Derivative Type by Derivative Risk Exposure
Notional
Amount
[2]
Fair
Value
Weighted
Average
Years to
Maturity
Type
Average
Credit
Rating
Offsetting
Notional
Amount [3]
Offsetting
Fair
Value [3]
Single name credit default swaps
 
 
 
 
 
 
 
Investment grade risk exposure
$
102

$
—

2 years
Corporate Credit/
Foreign Gov.
A-
$
88

$
—

Below investment grade risk exposure
153

(1
)
1 year
Corporate Credit
BB-
153

—

Basket credit default swaps [4]
 
 
 
 
 
 
 
Investment grade risk exposure
2,046

18

3 years
Corporate Credit
BBB+
1,417

(12
)
Investment grade risk exposure
610

(18
)
5 years
CMBS Credit
AA+
206

2

Below investment grade risk exposure
153

(30
)
1 year
CMBS Credit
CCC
153

29

Embedded credit derivatives
 
 
 
 
 
 
 
Investment grade risk exposure
350

351

1 year
Corporate Credit
A+
—

—

Total [5]
$
3,414

$
320

 
 
 
$
2,017

$
19

As of December 31, 2015
 
 
 
 
Underlying Referenced
Credit Obligation(s) [1]
 
 
Credit Derivative Type by Derivative Risk Exposure
Notional
Amount [2]
Fair
Value
Weighted
Average
Years to
Maturity
Type
Average
Credit
Rating
Offsetting
Notional
Amount [3]
Offsetting
Fair
Value [3]
Single name credit default swaps
 
 
 
 
 
 
 
Investment grade risk exposure
$
190

$
(1
)
1 year
Corporate Credit/
Foreign Gov.
BBB+
$
176

$
(1
)
Below investment grade risk exposure
77

(2
)
2 years
Corporate Credit
B
77

1

Basket credit default swaps [4]
 
 
 
 
 
 
 
Investment grade risk exposure
3,036

22

4 years
Corporate Credit
BBB+
1,411

(13
)
Investment grade risk exposure
681

(19
)
6 years
CMBS Credit
AA+
212

1

Below investment grade risk exposure
153

(25
)
1 year
CMBS Credit
CCC
153

25

Embedded credit derivatives
 
 
 
 
 
 
 
Investment grade risk exposure
350

346

1 year
Corporate Credit
A+
—

—

Total [5]
$
4,487

$
321

 
 
 
$
2,029

$
13


[1]
The average credit ratings are based on availability and the midpoint of the applicable ratings among Moody’s, S&P, Fitch, and Morningstar. If no rating is available from a rating agency, then an internally developed rating is used.
[2]
Notional amount is equal to the maximum potential future loss amount. These derivatives are governed by agreements, clearing house rules, and applicable law, which include collateral posting requirements. There is no additional specific collateral related to these contracts or recourse provisions included in the contracts to offset losses.
[3]
The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby offsetting the future changes in value of, or losses paid related to, the original swap.
[4]
Includes $2.8 billion and $3.9 billion as of March 31, 2016, and December 31, 2015, respectively, of standard market indices of diversified portfolios of corporate and CMBS issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index.
[5]
Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note 4 - Fair Value Measurements.
Derivative Collateral Arrangements
The Company enters into various collateral arrangements in connection with its derivative instruments, which require both the pledging and accepting of collateral. As of March 31, 2016, and December 31, 2015, the Company pledged cash collateral associated with derivative instruments with a fair value of $447 and $488, respectively, for which the collateral receivable has been primarily included within other assets on the Company's Condensed Consolidated Balance Sheets. The Company also pledged securities collateral associated with derivative instruments with a fair value of $1.3 billion and $1.1 billion, respectively, as of March 31, 2016, and December 31, 2015, which have been included in fixed maturities on the Condensed Consolidated Balance Sheets. The counterparties have the right to sell or re-pledge these securities.
As of March 31, 2016, and December 31, 2015, the Company accepted cash collateral associated with derivative instruments of $419 and $369, respectively, which was invested and recorded in the Company's Condensed Consolidated Balance Sheets in fixed maturities and short-term investments with corresponding amounts recorded in other liabilities. The Company also accepted securities collateral as of March 31, 2016, and December 31, 2015, with a fair value of $116 and $100, respectively, of which the Company has the ability to sell or repledge $116 and $100, respectively. As of March 31, 2016, and December 31, 2015, the Company had no repledged securities and did not sell any securities. In addition, as of March 31, 2016, and December 31, 2015, non-cash collateral accepted was held in separate custodial accounts and was not included in the Company’s Condensed Consolidated Balance Sheets.
Investments and Derivative Instruments [Text Block]
Net Realized Capital Gains (Losses)
 
Three Months Ended March 31,
(Before tax)
2016
2015
Gross gains on sales
$
90

$
197

Gross losses on sales
(108
)
(148
)
Net OTTI losses recognized in earnings
(23
)
(12
)
Valuation allowances on mortgage loans
—

(3
)
Periodic net coupon settlements on credit derivatives
—

1

Results of variable annuity hedge program


GMWB derivatives, net
(17
)
1

Macro hedge program
(14
)
(4
)
Total results of variable annuity hedge program
(31
)
(3
)
Other, net [1]
(83
)
(27
)
Net realized capital gains (losses)
$
(155
)
$
5


[1]
Primarily consists of changes in the value of non-qualifying derivatives, transactional foreign currency revaluation gains (losses) on yen denominated fixed payout annuity liabilities and gains (losses) on non-qualifying derivatives used to hedge the foreign currency exposure of the liabilities. For the three months ended March 31, 2016 and 2015, gains (losses) from transactional foreign currency revaluation of $(50) and $0, respectively, were primarily related to the yen denominated fixed payout annuity liabilities. For the three months ended March 31, 2016 and 2015, gains (losses) on instruments used to hedge the foreign currency exposure on the fixed payout annuities were $36 and $(14), respectively.
Net realized capital gains and losses from investment sales are reported as a component of revenues and are determined on a specific identification basis. Before tax, net gains and losses on sales and impairments previously reported as unrealized gains in AOCI were $41 and $37 for the three months ended March 31, 2016 and 2015, respectively. Proceeds from sales of AFS securities totaled $4.9 billion and $6.2 billion for three months ended March 31, 2016 and 2015, respectively.
Recognition and Presentation of Other-Than-Temporary Impairments
The Company deems bonds and certain equity securities with debt-like characteristics (collectively “debt securities”) to be other-than-temporarily impaired (“impaired”) if a security meets the following conditions: a) the Company intends to sell or it is more likely than not that the Company will be required to sell the security before a recovery in value, or b) the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell or it is more likely than not that the Company will be required to sell the security before a recovery in value, a charge is recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the security. For those impaired debt securities which do not meet the first condition and for which the Company does not expect to recover the entire amortized cost basis, the difference between the security’s amortized cost basis and the fair value is separated into the portion representing a credit OTTI, which is recorded in net realized capital losses, and the remaining non-credit impairment, which is recorded in OCI. Generally, the Company determines a security’s credit impairment as the difference between its amortized cost basis and its best estimate of expected future cash flows discounted at the security’s effective yield prior to impairment. The remaining non-credit impairment is the difference between the security’s fair value and the Company’s best estimate of expected future cash flows discounted at the security’s effective yield prior to the impairment, which typically includes current market liquidity and risk premiums. The previous amortized cost basis less the impairment recognized in net realized capital losses becomes the security’s new cost basis. The Company accretes the new cost basis to the estimated future cash flows over the expected remaining life of the security by prospectively adjusting the security’s yield, if necessary.
The Company’s evaluation of whether a credit impairment exists for debt securities includes but is not limited to, the following factors: (a) changes in the financial condition of the security’s underlying collateral, (b) whether the issuer is current on contractually obligated interest and principal payments, (c) changes in the financial condition, credit rating and near-term prospects of the issuer, (d) the extent to which the fair value has been less than the amortized cost of the security and (e) the payment structure of the security. The Company’s best estimate of expected future cash flows used to determine the credit loss amount is a quantitative and qualitative process that incorporates information received from third-party sources along with certain internal assumptions and judgments regarding the future performance of the security. The Company’s best estimate of future cash flows involves assumptions including, but not limited to, earnings multiples, underlying asset valuations and various performance indicators, such as historical and projected default and recovery rates, credit ratings, current and projected delinquency rates, and loan-to-value ("LTV") ratios. In addition, for structured securities, the Company considers factors including, but not limited to, average cumulative collateral loss rates that vary by vintage year, commercial and residential property value declines that vary by property type and location and commercial real estate delinquency levels. These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries which may include estimating the underlying collateral value. In addition, projections of expected future debt security cash flows may change based upon new information regarding the performance of the issuer and/or underlying collateral such as changes in the projections of the underlying property value estimates.
For equity securities where the decline in the fair value is deemed to be other-than-temporary, a charge is recorded in net realized capital losses equal to the difference between the fair value and cost basis of the security. The previous cost basis less the impairment becomes the security’s new cost basis. The Company asserts its intent and ability to retain those equity securities deemed to be temporarily impaired until the price recovers. Once identified, these securities are systematically restricted from trading unless approved by investment and accounting professionals.
The primary factors considered in evaluating whether an impairment exists for an equity security may include, but are not limited to: (a) the length of time and extent to which the fair value has been less than the cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on preferred stock dividends and (d) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery.
The following table presents the Company's impairments by impairment type.
 
Three Months Ended March 31,
 
2016
2015
Credit impairments
$
18

$
3

Intent-to-sell impairments
2

9

Impairments on equity securities
3

—

Total impairments
$
23

$
12


The following table presents a roll-forward of the Company’s cumulative credit impairments on fixed maturities held.
 
Three Months Ended March 31,
(Before tax)
2016
2015
Balance as of beginning of period
$
(324
)
$
(424
)
Additions for credit impairments recognized on [1]:


Securities not previously impaired
(17
)
(3
)
Securities previously impaired
(1
)
—

Reductions for credit impairments previously recognized on:


Securities that matured or were sold during the period
1

4

Securities the Company made the decision to sell or more likely than not will be required to sell
—

2

Securities due to an increase in expected cash flows
5

9

Balance as of end of period
$
(336
)
$
(412
)
[1]
These additions are included in the net OTTI losses recognized in earnings in the Condensed Consolidated Statements of Operations.
Available-for-Sale Securities
The following table presents the Company’s AFS securities by type.
 
March 31, 2016
 
December 31, 2015
 
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Non-Credit
OTTI [1]
 
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Non-Credit
OTTI [1]
ABS
$
2,683

$
29

$
(47
)
$
2,665

$
—

 
$
2,520

$
24

$
(45
)
$
2,499

$
—

CDOs [2]
3,075

68

(37
)
3,107

—

 
2,989

75

(23
)
3,038

—

CMBS
5,132

155

(63
)
5,224

(8
)
 
4,668

105

(56
)
4,717

(8
)
Corporate
25,723

1,818

(244
)
27,297

(17
)
 
25,876

1,342

(416
)
26,802

(3
)
Foreign govt./govt. agencies
1,146

57

(14
)
1,189

—

 
1,321

34

(47
)
1,308

—

Municipal
11,186

1,124

(7
)
12,303

—

 
11,124

1,008

(11
)
12,121

—

RMBS
4,263

103

(28
)
4,338

—

 
3,986

82

(22
)
4,046

—

U.S. Treasuries
4,170

403

(3
)
4,570

—

 
4,481

222

(38
)
4,665

—

Total fixed maturities, AFS
$
57,378

$
3,757

$
(443
)
$
60,693

$
(25
)
 
$
56,965

$
2,892

$
(658
)
$
59,196

$
(11
)
Equity securities, AFS [3]
767

56

(25
)
798

—

 
842

38

(41
)
839

—

Total AFS securities
$
58,145

$
3,813

$
(468
)
$
61,491

$
(25
)
 
$
57,807

$
2,930

$
(699
)
$
60,035

$
(11
)
[1]
Represents the amount of cumulative non-credit OTTI losses recognized in OCI on securities that also had credit impairments. These losses are included in gross unrealized losses as of March 31, 2016, and December 31, 2015.
[2]
Gross unrealized gains (losses) exclude the fair value of bifurcated embedded derivatives within certain securities. Subsequent changes in value are recorded in net realized capital gains (losses).
[3]
Excluded equity securities, FVO, with a cost and fair value of $293 and $282 as of December 31, 2015. The Company held no equity securities, FVO as of March 31, 2016.
The following table presents the Company’s fixed maturities, AFS, by contractual maturity year.
 
March 31, 2016
December 31, 2015
Contractual Maturity
Amortized Cost
Fair Value
Amortized Cost
Fair Value
One year or less
$
2,509

$
2,527

$
2,373

$
2,405

Over one year through five years
10,591

10,986

10,929

11,200

Over five years through ten years
8,816

9,242

9,322

9,497

Over ten years
20,309

22,604

20,178

21,794

Subtotal
42,225

45,359

42,802

44,896

Mortgage-backed and asset-backed securities
15,153

15,334

14,163

14,300

Total fixed maturities, AFS
$
57,378

$
60,693

$
56,965

$
59,196


Estimated maturities may differ from contractual maturities due to security call or prepayment provisions. Due to the potential for variability in payment speeds (i.e. prepayments or extensions), mortgage-backed and asset-backed securities are not categorized by contractual maturity.
Concentration of Credit Risk
The Company aims to maintain a diversified investment portfolio including issuer, sector and geographic stratification, where applicable, and has established certain exposure limits, diversification standards and review procedures to mitigate credit risk. The Company had no investment exposure to any credit concentration risk of a single issuer greater than 10% of the Company's stockholders' equity, other than the U.S. government and certain U.S. government agencies as of March 31, 2016, or December 31, 2015.
Unrealized Losses on AFS Securities
The following tables present the Company’s unrealized loss aging for AFS securities by type and length of time the security was in a continuous unrealized loss position.
 
March 31, 2016
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Amortized Cost
Fair Value
Unrealized Losses
 
Amortized Cost
Fair Value
Unrealized Losses
 
Amortized Cost
Fair Value
Unrealized Losses
ABS
$
1,121

$
1,112

$
(9
)
 
$
368

$
330

$
(38
)
 
$
1,489

$
1,442

$
(47
)
CDOs [1]
1,543

1,523

(21
)
 
1,108

1,092

(16
)
 
2,651

2,615

(37
)
CMBS
1,370

1,322

(48
)
 
250

235

(15
)
 
1,620

1,557

(63
)
Corporate
3,810

3,662

(148
)
 
890

794

(96
)
 
4,700

4,456

(244
)
Foreign govt./govt. agencies
217

210

(7
)
 
78

71

(7
)
 
295

281

(14
)
Municipal
272

267

(5
)
 
33

31

(2
)
 
305

298

(7
)
RMBS
919

909

(10
)
 
743

725

(18
)
 
1,662

1,634

(28
)
U.S. Treasuries
248

246

(2
)
 
25

24

(1
)
 
273

270

(3
)
Total fixed maturities, AFS
$
9,500

$
9,251

$
(250
)
 
$
3,495

$
3,302

$
(193
)
 
$
12,995

$
12,553

$
(443
)
Equity securities, AFS [2]
276

257

(19
)
 
56

50

(6
)
 
332

307

(25
)
Total securities in an unrealized loss position
$
9,776

$
9,508

$
(269
)
 
$
3,551

$
3,352

$
(199
)
 
$
13,327

$
12,860

$
(468
)
 
December 31, 2015
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Amortized Cost
Fair Value
Unrealized Losses
 
Amortized Cost
Fair Value
Unrealized Losses
 
Amortized Cost
Fair Value
Unrealized Losses
ABS
$
1,619

$
1,609

$
(10
)
 
$
357

$
322

$
(35
)
 
$
1,976

$
1,931

$
(45
)
CDOs [1]
1,164

1,154

(10
)
 
1,243

1,227

(13
)
 
2,407

2,381

(23
)
CMBS
1,726

1,681

(45
)
 
189

178

(11
)
 
1,915

1,859

(56
)
Corporate
9,206

8,866

(340
)
 
656

580

(76
)
 
9,862

9,446

(416
)
Foreign govt./govt. agencies
679

646

(33
)
 
124

110

(14
)
 
803

756

(47
)
Municipal
440

430

(10
)
 
18

17

(1
)
 
458

447

(11
)
RMBS
1,349

1,340

(9
)
 
415

402

(13
)
 
1,764

1,742

(22
)
U.S. Treasuries
2,432

2,394

(38
)
 
8

8

—

 
2,440

2,402

(38
)
Total fixed maturities, AFS
$
18,615

$
18,120

$
(495
)
 
$
3,010

$
2,844

$
(163
)
 
$
21,625

$
20,964

$
(658
)
Equity securities, AFS [2]
480

449

(31
)
 
62

52

(10
)
 
542

501

(41
)
Total securities in an unrealized loss position
$
19,095

$
18,569

$
(526
)
 
$
3,072

$
2,896

$
(173
)
 
$
22,167

$
21,465

$
(699
)
[1]
Unrealized losses exclude the change in fair value of bifurcated embedded derivatives within certain securities, for which changes in fair value are recorded in net realized capital gains (losses).
[2]
As of March 31, 2016, and December 31, 2015, excludes equity securities, FVO which are included in equity securities, AFS on the Condensed Consolidated Balance Sheets.
As of March 31, 2016, AFS securities in an unrealized loss position, consisted of 3,531 securities, primarily in the corporate sector, which were depressed primarily due to widening of credit spreads and/or an increase in interest rates since the securities were purchased. As of March 31, 2016, 92% of these securities were depressed less than 20% of cost or amortized cost. The decrease in unrealized losses during the first quarter of 2016 was primarily attributable to a decline in interest rates.
Most of the securities depressed for twelve months or more relate to corporate securities concentrated in the financial services and energy sectors, student loan ABS, and structured securities with exposure to commercial and residential real estate. Corporate financial services securities and student loan ABS were primarily depressed because the securities have floating-rate coupons and have long-dated maturities, and current credit spreads are wider than when these securities were purchased. Corporate securities within the energy sector were primarily depressed due to a decline in oil and gas prices. For certain commercial and residential real estate securities, current market spreads are wider than spreads at the securities' respective purchase dates. The Company neither has an intention to sell nor does it expect to be required to sell the securities outlined in the preceding discussion.
Mortgage Loans
Mortgage Loan Valuation Allowances
The Company’s security monitoring process reviews mortgage loans on a quarterly basis to identify potential credit losses. Commercial mortgage loans are considered to be impaired when management estimates that, based upon current information and events, it is probable that the Company will be unable to collect amounts due according to the contractual terms of the loan agreement. Criteria used to determine if an impairment exists include, but are not limited to: current and projected macroeconomic factors, such as unemployment rates, and property-specific factors such as rental rates, occupancy levels, LTV ratios and debt service coverage ratios (“DSCR”). In addition, the Company considers historic, current and projected delinquency rates and property values. These assumptions require the use of significant management judgment and include the probability and timing of borrower default and loss severity estimates. In addition, projections of expected future cash flows may change based upon new information regarding the performance of the borrower and/or underlying collateral such as changes in the projections of the underlying property value estimates.
For mortgage loans that are deemed impaired, a valuation allowance is established for the difference between the carrying amount and the Company’s share of either (a) the present value of the expected future cash flows discounted at the loan’s effective interest rate, (b) the loan’s observable market price or, most frequently, (c) the fair value of the collateral. A valuation allowance has been established for either individual loans or as a projected loss contingency for loans with an LTV ratio of 90% or greater and after consideration of other credit quality factors, including DSCR. Changes in valuation allowances are recorded in net realized capital gains and losses. Interest income on impaired loans is accrued to the extent it is deemed collectible and the loans continue to perform under the original or restructured terms. Interest income ceases to accrue for loans when it is probable that the Company will not receive interest and principal payments according to the contractual terms of the loan agreement. Loans may resume accrual status when it is determined that sufficient collateral exists to satisfy the full amount of the loan and interest payments as well as when it is probable cash will be received in the foreseeable future. Interest income on defaulted loans is recognized when received.
 
March 31, 2016
 
December 31, 2015
 
Amortized Cost [1]
Valuation Allowance
Carrying Value
 
Amortized Cost [1]
Valuation Allowance
Carrying Value
Total commercial mortgage loans
$
5,659

$
(22
)
$
5,637

 
$
5,647

$
(23
)
$
5,624

[1]
Amortized cost represents carrying value prior to valuation allowances, if any.
As of March 31, 2016, and December 31, 2015, the carrying value of mortgage loans associated with the valuation allowance was $34 and $82, respectively. There were no mortgage loans held-for-sale as of March 31, 2016, or December 31, 2015. As of March 31, 2016, loans within the Company’s mortgage loan portfolio that have had extensions or restructurings other than what is allowable under the original terms of the contract are immaterial.
The following table presents the activity within the Company’s valuation allowance for mortgage loans. These loans have been evaluated both individually and collectively for impairment. Loans evaluated collectively for impairment are immaterial.
 
2016
2015
Balance, as of January 1
$
(23
)
$
(18
)
(Additions)/Reversals
—

(3
)
Deductions
1

—

Balance, as of March 31
$
(22
)
$
(21
)

The weighted-average LTV ratio of the Company’s commercial mortgage loan portfolio was 55% as of March 31, 2016, while the weighted-average LTV ratio at origination of these loans was 63%. LTV ratios compare the loan amount to the value of the underlying property collateralizing the loan. The loan values are updated no less than annually through property level reviews of the portfolio. Factors considered in the property valuation include, but are not limited to, actual and expected property cash flows, geographic market data and capitalization rates. DSCR compares a property’s net operating income to the borrower’s principal and interest payments. The weighted average DSCR of the Company’s commercial mortgage loan portfolio was 2.64x as of March 31, 2016. As of March 31, 2016, and December 31, 2015, the Company held two delinquent commercial mortgage loans past due by 90 days or more. The loans had a total carrying value and valuation allowance of $17 and $20, respectively, and were not accruing income.
The following table presents the carrying value of the Company’s commercial mortgage loans by LTV and DSCR.
Commercial Mortgage Loans Credit Quality
 
March 31, 2016
 
December 31, 2015
Loan-to-value
Carrying Value
Avg. Debt-Service Coverage Ratio
 
Carrying Value
Avg. Debt-Service Coverage Ratio
Greater than 80%
$
17

0.77x
 
$
24

0.81x
65% - 80%
753

1.94x
 
623

1.82x
Less than 65%
4,867

2.78x
 
4,977

2.75x
Total commercial mortgage loans
$
5,637

2.64x
 
$
5,624

2.63x
 
The following tables present the carrying value of the Company’s mortgage loans by region and property type.
Mortgage Loans by Region
 
March 31, 2016
 
December 31, 2015
 
Carrying Value
Percent of Total
 
Carrying Value
Percent of Total
East North Central
$
315

5.6
%
 
$
289

5.1
%
East South Central
14

0.2
%
 
14

0.2
%
Middle Atlantic
383

6.8
%
 
384

6.8
%
Mountain
35

0.6
%
 
32

0.6
%
New England
445

7.9
%
 
446

7.9
%
Pacific
1,636

29.1
%
 
1,669

29.7
%
South Atlantic
1,175

20.8
%
 
1,174

20.9
%
West North Central
29

0.5
%
 
29

0.5
%
West South Central
339

6.0
%
 
318

5.7
%
Other [1]
1,266

22.5
%
 
1,269

22.6
%
Total mortgage loans
$
5,637

100.0
%
 
$
5,624

100.0
%
[1]
Primarily represents loans collateralized by multiple properties in various regions.
Mortgage Loans by Property Type
 
March 31, 2016
 
December 31, 2015
 
Carrying Value
Percent of Total
 
Carrying
Value
Percent of Total
Commercial
 
 
 
 
 
Agricultural
$
19

0.3
%
 
$
26

0.5
%
Industrial
1,444

25.6
%
 
1,422

25.3
%
Lodging
25

0.4
%
 
26

0.5
%
Multifamily
1,397

24.8
%
 
1,345

23.9
%
Office
1,509

26.8
%
 
1,547

27.5
%
Retail
1,093

19.4
%
 
1,109

19.7
%
Other
150

2.7
%
 
149

2.6
%
Total mortgage loans
$
5,637

100.0
%
 
$
5,624

100.0
%

Mortgage Servicing
The Company originates, sells and services commercial mortgage loans on behalf of third parties and recognizes servicing fees over the period that services are performed in fee income. As of March 31, 2016, the Company serviced commercial mortgage loans under this program with a total outstanding principal of $455, of which $158 was serviced on behalf of third parties and $297 was retained and reported on the Company’s Condensed Consolidated Balance Sheets, including $79 in separate account assets. As of December 31, 2015, the Company serviced commercial mortgage loans under this program with a total outstanding principal of $359, of which $129 was serviced on behalf of third parties and $230 was retained and reported on the Company’s Condensed Consolidated Balance Sheets, including $54 in separate account assets. Servicing rights are carried at the lower of cost or fair value and were zero as of March 31, 2016 and December 31, 2015, because servicing fees were market-level fees at origination and remain adequate to compensate the Company to administer the servicing.
Variable Interest Entities
The Company is involved with various special purpose entities and other entities that are deemed to be VIEs primarily as a collateral or investment manager and as an investor through normal investment activities as well as a means of accessing capital through a contingent capital facility.
A VIE is an entity that either has investors that lack certain essential characteristics of a controlling financial interest, such as simple majority kick-out rights, or lacks sufficient funds to finance its own activities without financial support provided by other entities. The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company has a controlling financial interest in the VIE and therefore is the primary beneficiary. The Company is deemed to have a controlling financial interest when it has both the ability to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. Based on the Company’s assessment, if it determines it is the primary beneficiary, the Company consolidates the VIE in the Company’s Condensed Consolidated Financial Statements.
Consolidated VIEs
The following table presents the carrying value of assets and liabilities, and the maximum exposure to loss relating to the VIEs for which the Company is the primary beneficiary. Creditors have no recourse against the Company in the event of default by these VIEs nor does the Company have any implied or unfunded commitments to these VIEs. The Company’s financial or other support provided to these VIEs is limited to its collateral or investment management services and original investment.
 
March 31, 2016
 
December 31, 2015
 
Total Assets
Total Liabilities [1]
Maximum Exposure to Loss [2]
 
Total Assets
Total Liabilities [1]
Maximum Exposure to Loss [2]
CDO [3]
$
5

$
5

$
—

 
$
5

$
5

$
—

Investment funds [4]
—

—

—

 
159

7

151

Limited partnerships and other alternative investments [5]
458

—

458

 
2

—

2

Total
$
463

$
5

$
458

 
$
166

$
12

$
153

[1]
Included in other liabilities on the Company’s Condensed Consolidated Balance Sheets.
[2]
The maximum exposure to loss represents the maximum loss amount that the Company could recognize as a reduction in net investment income or as a realized capital loss and is the cost basis of the Company’s investment.
[3]
Total assets included in cash on the Company’s Condensed Consolidated Balance Sheets.
[4]
Total assets included in fixed maturities, FVO, short-term investments, equity, AFS, and cash on the Company’s Condensed Consolidated Balance Sheets.
[5]
Total assets included in limited partnerships and other alternative investments, short-term investments, and other assets on the Company’s Condensed Consolidated Balance Sheets.
Effective January 1, 2016, the Company adopted new consolidation guidance which resulted in a hedge fund of funds that is part of limited partnerships and other alternative investments and which was previously consolidated as a voting interest entity, to be consolidated instead as a VIE. Accordingly, this investment in this hedge fund of funds has been included in the above table beginning with the March 31, 2016 reporting. This hedge fund of funds limited partnership is considered a VIE under the updated guidance and the Company has determined it is the primary beneficiary and will continue to consolidate the VIE. As of March 31, 2016, this limited partnership has outstanding commitments totaling $55, which may be called by the underlying partnerships during the commitment period to fund the purchase of new investments. For further information on the adoption, see Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements.
Also as a result of the adoption, the Company determined that two investment funds, that were previously identified as consolidated VIEs and for which the Company has management and control of the investments, are voting interest entities under the new consolidation guidance. The Company still owns a majority interest in the investment funds and the funds are still consolidated on the Company's Condensed Consolidated Financial Statements; however, as of March 31, 2016, these investment funds are not included as VIEs in the table above. CDO represents a structured investment vehicle for which the Company has a controlling financial interest as it provides collateral management services, earns a fee for those services and also holds investments in the security issued by this vehicle.
Non-Consolidated VIEs
The Company, through normal investment activities, makes passive investments in limited partnerships and other alternative investments. Upon the adoption of the new consolidation guidance, discussed above, these investments are now considered VIEs. For these non-consolidated VIEs, the Company has determined it is not the primary beneficiary as it has no ability to direct activities that could significantly affect the economic performance of the investments. The Company’s maximum exposure to loss as of March 31, 2016 and December 31, 2015, is limited to the total carrying value of $1.6 billion and $1.5 billion, respectively, which are included in limited partnerships and other alternative investments in the Company's Condensed Consolidated Balance Sheets. As of March 31, 2016 and December 31, 2015, the Company has outstanding commitments totaling $736 and $692, respectively, which is committed to fund these investments and may be called by the partnership during the commitment period to fund the purchase of new investments and partnership expenses. These investments are generally of a passive nature in that the Company does not take an active role in management. For further discussion of these investments, see Equity Method Investments within Note 6 - Investments and Derivatives of Notes to Consolidated Financial Statements included in the Company’s 2015 Form 10-K Annual Report.
In addition, the Company also makes passive investments in structured securities issued by VIEs for which the Company is not the manager and are included in ABS, CDOs, CMBS and RMBS in the Available-for-Sale Securities table and fixed maturities, FVO, in the Company’s Condensed Consolidated Balance Sheets. The Company has not provided financial or other support with respect to these investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the relative size of the Company’s investment in comparison to the principal amount of the structured securities issued by the VIEs, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits and the Company’s inability to direct the activities that most significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss on these investments is limited to the amount of the Company’s investment.
The Company holds a significant variable interest in a VIE for which it is not the primary beneficiary and, therefore, was not consolidated on the Company’s Condensed Consolidated Balance Sheets. This VIE represents a contingent capital facility ("facility") that has been held by the Company since February 2007 and for which the Company has no implied or unfunded commitments. Assets and liabilities recorded for the contingent capital facility were $5 and $6, respectively, as of March 31, 2016, and $7 and $8, respectively, as of December 31, 2015. Additionally, the Company has a maximum exposure to loss of $3 and $3, respectively, as of March 31, 2016, and December 31, 2015, which represents the issuance costs that were incurred to establish the facility. The Company does not have a controlling financial interest as it does not manage the assets of the facility nor does it have the obligation to absorb losses or the right to receive benefits that could potentially be significant to the facility, as the asset manager has significant variable interest in the vehicle. The Company’s financial or other support provided to the facility is limited to providing ongoing support to cover the facility’s operating expenses. For further information on the facility, see Note 11 - Debt of Notes to Consolidated Financial Statements included in The Hartford’s 2015 Form 10-K Annual Report.
Securities Lending, Repurchase Agreements, and Similar Transactions and Other Collateral Transactions
The Company participates in securities lending programs to generate additional income. Through these programs, certain fixed maturities within the corporate, foreign government/government agencies, and municipal sectors as well as equity securities are loaned from the Company’s portfolio to qualifying third-party borrowers in return for collateral in the form of cash or securities. Borrowers of these securities provide collateral of 102% and 105% of the fair value of the securities lent at the time of the loan for domestic and non-domestic securities, respectively. The borrower will return the securities to the Company for cash or securities collateral at maturity dates generally of 90 days or less. Security collateral on deposit from counterparties in connection with securities lending transactions may not be sold or re-pledged, except in the event of default, and is not reflected on the Company’s consolidated balance sheets. The fair value of the loaned securities is monitored and additional collateral is obtained if the fair value of the collateral falls below 100% of the fair value of the loaned securities. The agreements provide the counterparty the right to sell or re-pledge the securities transferred. If cash, rather than securities, is received as collateral, the cash is typically invested in short-term investments or fixed maturities and is reported as an asset on the consolidated balance sheets. Income associated with securities lending transactions is reported as a component of net investment income on the Company’s consolidated statements of operations. As of March 31, 2016, the fair value of securities on loan and the associated liability for cash collateral received was $96 and $98, respectively. As of December 31, 2015, the fair value of securities on loan and the associated liability for cash collateral received was $67 and $68, respectively.
From time to time, the Company enters into repurchase agreements and similar transactions to manage liquidity or to earn incremental spread income. A repurchase agreement is a transaction in which one party (transferor) agrees to sell securities to another party (transferee) in return for cash (or securities), with a simultaneous agreement to repurchase the same securities at a specified price at a later date. A dollar roll is a type of repurchase agreement where a mortgage backed security is sold with an agreement to repurchase substantially the same security at a specified time in the future. Repurchase transactions generally have a contractual maturity of ninety days or less.
As part of repurchase agreements, the Company transfers collateral of U.S. government and government agency securities and receives cash. For repurchase agreements, the Company obtains cash in an amount equal to at least 95% of the fair value of the securities transferred. The agreements contain contractual provisions that require additional collateral to be transferred when necessary and provide the counterparty the right to sell or re-pledge the securities transferred. The cash received from the repurchase program is typically invested in short-term investments or fixed maturities. Repurchase agreements include master netting provisions that provide the counterparties the right to offset claims and apply securities held by them with respect to their obligations in the event of a default. Although the Company has the contractual right to offset claims, fixed maturities do not meet the specific conditions for net presentation under U.S. GAAP. The Company accounts for the repurchase agreements as collateralized borrowings. The securities transferred under repurchase agreements are included in fixed maturities, AFS with the obligation to repurchase those securities recorded in other liabilities on the Company's Condensed Consolidated Balance Sheets.
As of March 31, 2016, the Company reported in fixed maturities, AFS on the Condensed Consolidated Balance Sheets financial collateral pledged relating to repurchase agreements of $458. The Company reported a corresponding obligation to repurchase the pledged securities of $452 in other liabilities on the Condensed Consolidated Balance Sheets. As of December 31, 2015, the Company reported financial collateral pledged relating to repurchase agreements $440 in fixed maturities, AFS and $5 in cash. The Company reported a corresponding obligation to repurchase the pledged securities of $445 in other liabilities on the Condensed Consolidated Balance Sheets. The Company had no outstanding dollar roll transactions as of March 31, 2016 or December 31, 2015.
The Company is required by law to deposit securities with government agencies in certain states in which it conducts business. As of March 31, 2016, and December 31, 2015, the fair value of securities on deposit was approximately $2.6 billion and $2.5 billion, respectively.
As of March 31, 2016, and December 31, 2015, the Company has pledged as collateral $17 and $35, respectively, of U.S. government securities and government agency securities or cash for letters of credit.
For disclosure of collateral in support of derivative transactions, refer to the Derivative Collateral Arrangements section of this note.
Schedule of Derivative Instruments [Table Text Block]
Macro Hedge Program
The Company utilizes equity swaps, options, and futures to partially hedge against a decline in the equity markets and the resulting statutory surplus and capital impact primarily arising from the guaranteed minimum death benefit ("GMDB") and GMWB obligations. The following table presents notional and fair value for the macro hedge program.
 
Notional Amount
Fair Value
 
March 31,
2016
December 31, 2015
March 31,
2016
December 31, 2015
Equity swaps, options, and futures
$
4,605

$
4,548

$
145

$
147

Total
$
4,605

$
4,548

$
145

$
147

 
Notional Amount
Fair Value
 
March 31,
2016
December 31, 2015
March 31,
2016
December 31, 2015
Customized swaps
$
5,622

$
5,877

$
150

$
131

Equity swaps, options, and futures
1,392

1,362

(6
)
2

Interest rate swaps and futures
3,773

3,740

48

25

Total
$
10,787

$
10,979

$
192

$
158