Investments

6 Months Ended

Jun. 30, 2015

Note 7: Investments

Investments, excluding those elected under the fair value option, include debt and equity securities classified as either available-for-sale (“AFS”) or HTM. Other AFS investments primarily comprised money market funds.

The following tables present the amortized cost, fair value, corresponding gross unrealized gains and losses and other-than-temporary impairments (“OTTI”) for AFS and HTM investments in the Company’s consolidated investment portfolio as of June 30, 2015 and December 31, 2014:

				June 30, 2015
						Gross		Gross				Other-Than-
				Amortized		Unrealized		Unrealized		Fair		Temporary
In millions				Cost		Gains		Losses		Value		Impairments⁽¹⁾
AFS Investments
Fixed-maturity investments:
	U.S. Treasury and government agency			$	784	$	31	$	(2)	$	813	$	-
	State and municipal bonds				1,642		62		(16)		1,688		-
	Foreign governments				300		6		(1)		305		-
	Corporate obligations				1,899		30		(106)		1,823		(90)
	Mortgage-backed securities:
		Residential mortgage-backed agency			1,055		11		(10)		1,056		-
		Residential mortgage-backed non-agency			47		4		(4)		47		(4)
		Commercial mortgage-backed			22		-		-		22		-
	Asset-backed securities:
		Collateralized debt obligations			87		-		(21)		66		-
		Other asset-backed			372		2		(11)		363		-
			Total fixed-maturity investments		6,208		146		(171)		6,183		(94)
Money market securities					217		-		-		217		-
Perpetual debt and equity securities					12		1		-		13		-
Total AFS investments				$	6,437	$	147	$	(171)	$	6,413	$	(94)

HTM Investments
Assets of consolidated VIEs:
	Corporate obligations			$	2,724	$	47	$	(191)	$	2,580	$	-
Total HTM investments				$	2,724	$	47	$	(191)	$	2,580	$	-
_______________
(1) - Represents unrealized gains or losses on OTTI securities recognized in AOCI, which includes the non-credit component of impairments, as well as all subsequent changes in fair value of such impaired securities reported in AOCI.

				December 31, 2014
						Gross		Gross				Other-Than-
				Amortized		Unrealized		Unrealized		Fair		Temporary
In millions				Cost		Gains		Losses		Value		Impairments⁽¹⁾
AFS Investments
Fixed-maturity investments:
	U.S. Treasury and government agency			$	631	$	39	$	(3)	$	667	$	-
	State and municipal bonds				1,644		94		(8)		1,730		-
	Foreign governments				283		7		-		290		-
	Corporate obligations				1,984		44		(92)		1,936		(86)
	Mortgage-backed securities:
		Residential mortgage-backed agency			1,116		17		(7)		1,126		-
		Residential mortgage-backed non-agency			54		3		(4)		53		(4)
		Commercial mortgage-backed			19		1		-		20		-
	Asset-backed securities:
		Collateralized debt obligations			113		-		(21)		92		-
		Other asset-backed			231		3		(12)		222		-
			Total fixed-maturity investments		6,075		208		(147)		6,136		(90)
Money market securities					422		-		-		422		-
Perpetual debt and equity securities					12		1		-		13		-
Total AFS investments				$	6,509	$	209	$	(147)	$	6,571	$	(90)

HTM Investments
Assets of consolidated VIEs:
	Corporate obligations			$	2,757	$	77	$	(202)	$	2,632	$	-
Total HTM investments				$	2,757	$	77	$	(202)	$	2,632	$	-
_______________
(1) - Represents unrealized gains or losses on OTTI securities recognized in AOCI, which includes the non-credit component of impairments, as well as all subsequent changes in fair value of such impaired securities reported in AOCI.

The following table presents the distribution by contractual maturity of AFS and HTM fixed-maturity securities at amortized cost and fair value as of June 30, 2015. Contractual maturity may differ from expected maturity as borrowers may have the right to call or prepay obligations.

	AFS Securities				HTM Securities
					Consolidated VIEs
	Amortized				Amortized
In millions	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	809	$	812	$	-	$	-
Due after one year through five years		1,433		1,453		-		-
Due after five years through ten years		919		937		-		-
Due after ten years		1,464		1,427		2,724		2,580
Mortgage-backed and asset-backed		1,583		1,554		-		-
Total fixed-maturity investments	$	6,208	$	6,183	$	2,724	$	2,580

Deposited and Pledged Securities

The fair value of securities on deposit with various regulatory authorities as of June 30, 2015 and December 31, 2014 was $10 million. These deposits are required to comply with state insurance laws.

Investment agreement obligations require the Company to pledge securities as collateral. Securities pledged in connection with investment agreements may not be repledged by the investment agreement counterparty. As of June 30, 2015 and December 31, 2014, the fair value of securities pledged as collateral for these investment agreements approximated $482 million and $532 million, respectively. The Company’s collateral as of June 30, 2015 consisted principally of U.S. Treasury and government agency and state and municipal bonds, and was primarily held with major U.S. banks. Additionally, the Company pledged cash and money market securities as collateral under investment agreements in the amount of $42 million and $26 million as of June 30, 2015 and December 31, 2014, respectively.

Impaired Investments

The following tables present the gross unrealized losses related to AFS and HTM investments as of June 30, 2015 and December 31, 2014:

				June 30, 2015
				Less than 12 Months				12 Months or Longer				Total
				Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
In millions				Value		Losses		Value		Losses		Value		Losses
AFS Investments
Fixed-maturity investments:
	U.S. Treasury and government agency			$	109	$	(1)	$	50	$	(1)	$	159	$	(2)
	State and municipal bonds				412		(11)		60		(5)		472		(16)
	Foreign governments				68		(1)		-		-		68		(1)
	Corporate obligations				482		(12)		79		(94)		561		(106)
	Mortgage-backed securities:
		Residential mortgage-backed agency			323		(4)		191		(6)		514		(10)
		Residential mortgage-backed non-agency			7		-		17		(4)		24		(4)
		Commercial mortgage-backed			10		-		1		-		11		-
	Asset-backed securities:
		Collateralized debt obligations			-		-		63		(21)		63		(21)
		Other asset-backed			157		(1)		34		(10)		191		(11)
			Total fixed-maturity investments		1,568		(30)		495		(141)		2,063		(171)
Perpetual debt and equity securities					4		-		-		-		4		-
Total AFS investments				$	1,572	$	(30)	$	495	$	(141)	$	2,067	$	(171)

HTM Investments
Assets of consolidated VIEs:
	Corporate obligations			$	-	$	-	$	384	$	(191)	$	384	$	(191)
Total HTM investments				$	-	$	-	$	384	$	(191)	$	384	$	(191)

				December 31, 2014
				Less than 12 Months				12 Months or Longer				Total
				Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
In millions				Value		Losses		Value		Losses		Value		Losses
AFS Investments
Fixed-maturity investments:
	U.S. Treasury and government agency			$	197	$	-	$	175	$	(3)	$	372	$	(3)
	State and municipal bonds				60		(1)		257		(7)		317		(8)
	Foreign governments				20		-		-		-		20		-
	Corporate obligations				468		(1)		251		(91)		719		(92)
	Mortgage-backed securities:
		Residential mortgage-backed agency			16		-		387		(7)		403		(7)
		Residential mortgage-backed non-agency			10		-		19		(4)		29		(4)
		Commercial mortgage-backed			4		-		6		-		10		-
	Asset-backed securities:
		Collateralized debt obligations			1		-		81		(21)		82		(21)
		Other asset-backed			69		-		44		(12)		113		(12)
			Total fixed-maturity investments		845		(2)		1,220		(145)		2,065		(147)
Perpetual debt and equity securities					6		-		-		-		6		-
Total AFS investments				$	851	$	(2)	$	1,220	$	(145)	$	2,071	$	(147)

HTM Investments
Assets of consolidated VIEs:
	Corporate obligations			$	-	$	-	$	373	$	(202)	$	373	$	(202)
Total HTM investments				$	-	$	-	$	373	$	(202)	$	373	$	(202)

Gross unrealized losses on AFS securities increased as of June 30, 2015 compared with December 31, 2014 primarily due to market price depreciation driven by higher interest rates. Gross unrealized losses on HTM securities decreased as of June 30, 2015 compared with December 31, 2014 primarily due to market price appreciation caused by the narrowing of credit spreads offset by higher interest rates.

With the weighting applied on the fair value of each security relative to the total fair value, the weighted average contractual maturity of securities in an unrealized loss position as of June 30, 2015 and December 31, 2014 was 17 and 13 years, respectively. As of June 30, 2015 and December 31, 2014, there were 62 and 143 securities, respectively, that were in an unrealized loss position for a continuous twelve-month period or longer, of which the fair values of 21 and 23 securities, respectively, were below book value by more than 5%.

The following table presents the distribution of securities in an unrealized loss position for a continuous twelve-month period or longer where fair value was below book value by more than 5% as of June 30, 2015:

	AFS Securities					HTM Securities
Percentage of Fair Value	Number of	Book Value		Fair Value		Number of	Book Value		Fair Value
Below Book Value	Securities	(in millions)		(in millions)		Securities	(in millions)		(in millions)
> 5% to 15%	8	$	59	$	55	-	$	-	$	-
> 15% to 25%	6		80		62	-		-		-
> 25% to 50%	3		1		1	1		575		384
> 50%	3		124		17	-		-		-
Total	20	$	264	$	135	1	$	575	$	384

The following table presents the fair value and gross unrealized loss by credit rating category of ABS, MBS and corporate obligations included in the Company’s consolidated AFS investment portfolio, as of June 30, 2015, for which fair value was less than amortized cost. The credit ratings are based on ratings from Moody’s as of June 30, 2015 or an alternate ratings source, such as S&P, when a security is not rated by Moody’s. For investments that are insured by various third-party guarantee insurers, the credit rating reflects the higher of the insurer’s rating or the underlying bond’s rating.

																		Below
In millions		Aaa				Aa				A				Baa				Investment Grade				Not Rated				Total
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Asset Type		Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss
ABS		$	111	$	-	$	69	$	(1)	$	1	$	-	$	4	$	-	$	69	$	(31)	$	-	$	-	$	254	$	(32)
MBS			499		(10)		16		-		-		-		9		-		11		(1)		14		(3)		549		(14)
Corporate obligations			69		(2)		131		(5)		279		(6)		65		(3)		3		-		14		(90)		561		(106)
	Total	$	679	$	(12)	$	216	$	(6)	$	280	$	(6)	$	78	$	(3)	$	83	$	(32)	$	28	$	(93)	$	1,364	$	(152)

Corporate obligations in the table above include a security in the not rated category, for which the Company recorded an additional credit loss impairment for the three and six months ended June 30, 2015. Refer to “Credit Loss Rollforward” section within the OTTI section for further information.

The total ABS, MBS and corporate obligations reported in the preceding table include those which are guaranteed by financial guarantors. In addition, the following table presents information on ABS, MBS and corporate obligations guaranteed by the Company and third-party financial guarantors.

			Insured Securities Rated Below
			Investment Grade without the
			Effect of Guarantee
	Average Credit Rating with the	Average Credit Rating without the	(in millions)
Asset Type	Effect of Guarantee	Effect of Guarantee	Fair Value		Percentage
ABS	Below Investment Grade	Below Investment Grade	$	68	65	%
MBS	Below Investment Grade	Below Investment Grade	$	7	100	%
Corporate obligations	A	Below Investment Grade	$	6	100	%

Refer to the table in the “Determination of Credit Loss Guaranteed by the Company and Other Third-Party Guarantors” section within the OTTI section of this note for information on the insured securities included in the table above.

The Company concluded that it does not have the intent to sell securities in an unrealized loss position and it is more likely than not, that it would not have to sell these securities before recovery of their cost basis. In making this conclusion, the Company examined the cash flow projections for its investment portfolios, the potential sources and uses of cash in its businesses, and the cash resources available to its business other than sales of securities. It also considered the existence of any risk management or other plans as of June 30, 2015 that would require the sale of impaired securities. Impaired securities that the Company intends to sell before the expected recovery of such securities’ fair values have been written down to fair value.

Other-Than-Temporary Impairments

Evaluating AFS Securities for OTTI

The Company has an ongoing review process for all securities in its investment portfolio, including a quarterly assessment of OTTI. This evaluation includes both qualitative and quantitative considerations. In assessing whether a decline in value is related to a credit loss, the Company considers several factors, including but not limited to (i) the magnitude and duration of declines in fair value; (ii) the reasons for the declines in fair value, such as general credit spread movements in each asset-backed sector, transaction-specific changes in credit spreads, credit rating downgrades, modeled defaults, and principal and interest payment priorities within each investment structure; and (iii) any guarantees associated with a security such as those provided by financial guarantee insurance companies, including MBIA Corp. and National.

In calculating credit-related losses, the Company utilizes cash flow modeling based on the type of security. The Company’s cash flow analysis considers all sources of cash, including credit enhancement, that support the payment of amounts owed by an issuer of a security. This includes the consideration of cash expected to be provided by financial guarantors, including MBIA Corp. and National, resulting from an actual or potential insurance policy claim. In general, any change in the amount and/or timing of cash flows received or expected to be received, whether or not such cash flows are contractually defined, is reflected in the Company’s cash flow analysis for purposes of assessing an OTTI loss on an impaired security.

Each quarter, an internal committee, comprising staff that is independent of the Company’s evaluation process for determining OTTI of securities, reviews and approves the valuation of investments. Among other responsibilities, this committee ensures that the Company’s process for identifying and calculating OTTI, including the use of models and assumptions, is reasonable and complies with the Company’s internal policy.

Determination of Credit Loss on ABS, MBS and Corporate Obligations

ABS investments are evaluated for OTTI using historical collateral performance, deal waterfall and structural protections, credit ratings, and forward looking projections of collateral performance based on business and economic conditions specific to each collateral type and risk. The underlying collateral is evaluated to identify any specific performance concerns, and stress scenarios are considered in forecasting ultimate returns of principal. Based on this evaluation, if a principal default is projected for a security, estimated future cash flows are discounted at the security’s interest rate used to recognize interest income on the security. For CDO investments, the Company utilizes the same tools as its RMBS investments discussed below, aggregating the bond level cash flows to the CDO investment level. If the present value of cash flows is less than the Company’s amortized cost for the security, the difference is recorded as an OTTI loss.

RMBS investments are evaluated for OTTI using several quantitative tools. Loan level data is obtained and analyzed in a model that produces prepayment, default, and severity vectors. The model utilizes macro inputs, including housing price assumptions and interest rates. The vector outputs are used as inputs to a third-party cash flow model, which considers deal waterfall dynamics and structural features, to generate cash flows for an RMBS investment. The expected cash flows of the security are then discounted at the interest rate used to recognize interest income of the security to arrive at a present value amount. If the present value of the cash flows is less than the Company’s amortized cost for the investment, the difference is recorded as an OTTI loss.

Corporate obligation investments are evaluated for OTTI using credit analysis techniques. The Company’s analysis includes a detailed review of a number of quantitative and qualitative factors impacting the value of an individual security. These factors include the interest rate of the security (fixed or floating), the security’s current market spread, any collateral supporting the security, the security’s position in the issuer’s capital structure, and credit rating upgrades or downgrades. Additionally, these factors include an assessment of various issuer-related credit metrics including market capitalization, earnings, cash flow, capitalization, interest coverage, leverage, liquidity, management and a third-party quantitative default probability model. The Company’s analysis is augmented by comparing market prices for similar securities of other issuers in the same sector, as well as any recent corporate or government actions that may impact the ultimate return of principal. If the Company determines that a principal default is projected, a recovery analysis is performed using the above data. If the Company’s estimated recovery value for the security is less than its amortized cost, the difference is recorded as an OTTI loss.

Determination of Credit Loss Guaranteed by the Company and Other Third-Party Guarantors

The Company does not record OTTI related to credit concerns about issuers of securities insured by MBIA Corp. and National since investors in these securities, including MBIA, are guaranteed payment of principal and interest when due by MBIA. Securities insured by the Company, whether or not owned by the Company, are evaluated for impairment as part of its insurance surveillance process and, therefore, losses on securities insured by the Company are recorded in accordance with its loss reserving policy. Refer to “Note 2: Significant Accounting Policies” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for information about the Company’s loss reserving policy and “Note 5: Loss and Loss Adjustment Expense Reserves” for information about loss reserves.

In considering cash expected to be provided from other third-party financial guarantors, the Company assesses the financial guarantor’s ability to make claim payments under a variety of scenarios that test the guarantor’s ultimate claims paying ability. The weighted average outcome of these scenarios, combined with the cash flows provided by the insured security, are used to determine the recoverability of the Company’s amortized cost.

The following table provides information about securities held by the Company as of June 30, 2015 that were in an unrealized loss position and insured by a financial guarantor, along with the amount of insurance loss reserves corresponding to the par amount owned by the Company:

					Unrealized		Insurance Loss
In millions			Fair Value		Loss		Reserve ⁽²⁾
Asset-backed:
	MBIA⁽¹⁾		$	104	$	(31)	$	67
Mortgage-backed:
	MBIA⁽¹⁾			7		-		9
Corporate obligations:
	MBIA⁽¹⁾			6		-		-
Other:
	MBIA⁽¹⁾			23		(5)		-
	Other			1		-		-
		Total other		24		(5)		-
Total			$	141	$	(36)	$	76
_______________
(1) - Includes investments insured by MBIA Corp. and National.
(2) - Insurance loss reserve estimates are based on the proportion of par value owned to the total amount of par value insured.

Credit Loss Rollforward

The portion of certain OTTI losses on fixed-maturity securities that does not represent credit losses is recognized in accumulated other comprehensive income (loss) (“AOCI”). For these impairments, the net amount recognized in earnings represents the difference between the amortized cost of the security and the net present value of its projected future discounted cash flows prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in AOCI. The following table presents the amount of credit loss impairments recognized in earnings on fixed-maturity securities held by MBIA as of the dates indicated, for which a portion of the OTTI losses was recognized in AOCI, and the corresponding changes in such amounts. The additional credit loss impairment for the three and six months ended June 30, 2015, related to a corporate obligation security that has ongoing credit risk and other adverse financial conditions.

In millions		Three Months Ended June 30,				Six Months Ended June 30,
Credit Losses Recognized in Earnings Related to Other-Than-Temporary Impairments		2015			2014	2015			2014
Beginning balance		$	16	$	173	$	16	$	175
Additions for credit loss impairments recognized in the current period on securities
	previously impaired		6		-		6		-
Reductions for credit loss impairments previously recognized on securities sold during
	the period		-		(173)		-		(174)
Reductions for increases in cash flows expected to be collected over the remaining
	life of the security		-		-		-		(1)
Ending balance		$	22	$	-	$	22	$	-

Sales of Available-for-Sale Investments

Gross realized gains and losses are recorded within “Net gains (losses) on financial instruments at fair value and foreign exchange” on the Company’s consolidated statements of operations. The proceeds and the gross realized gains and losses from sales of fixed-maturity securities held as AFS for the three and six months ended June 30, 2015 and 2014 are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
In millions	2015		2014		2015		2014
Proceeds from sales	$	187	$	439	$	379	$	463

Gross realized gains	$	3	$	55	$	8	$	57

Gross realized losses	$	(2)	$	(13)	$	(9)	$	(13)