Investments

12 Months Ended

Dec. 31, 2016

Note 8: Investments

Investments, excluding those elected under the fair value option, include debt and equity securities classified as either AFS or HTM. Other AFS investments primarily comprise money market funds.

The following tables present the amortized cost, fair value, corresponding gross unrealized gains and losses and OTTI for AFS and HTM investments in the Company’s consolidated investment portfolio as of December 31, 2016 and 2015:

				December 31, 2016
						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			$	909	$	30	$	(10)	$	929	$	-
	State and municipal bonds				1,382		72		(15)		1,439		-
	Foreign governments				8		-		-		8		-
	Corporate obligations				1,352		20		(102)		1,270		(73)
	Mortgage-backed securities:
		Residential mortgage-backed agency			871		3		(12)		862		-
		Residential mortgage-backed non-agency			50		1		(6)		45		(3)
		Commercial mortgage-backed			41		-		-		41		-
	Asset-backed securities:
		Collateralized debt obligations			22		-		-		22		-
		Other asset-backed			294		2		(3)		293		1
			Total fixed-maturity investments		4,929		128		(148)		4,909		(75)
Money market securities					517		-		-		517		-
Perpetual debt and equity securities					4		1		-		5		-
Total AFS investments				$	5,450	$	129	$	(148)	$	5,431	$	(75)

HTM Investments
Assets of consolidated VIEs:
	Corporate obligations			$	890	$	-	$	(14)	$	876	$	-
Total HTM investments				$	890	$	-	$	(14)	$	876	$	-
_______________
(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, 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			$	947	$	32	$	(3)	$	976	$	-
	State and municipal bonds				1,674		65		(14)		1,725		-
	Foreign governments				197		3		(2)		198		-
	Corporate obligations				1,516		21		(103)		1,434		(85)
	Mortgage-backed securities:
		Residential mortgage-backed agency			995		7		(9)		993		-
		Residential mortgage-backed non-agency			55		2		(6)		51		(4)
		Commercial mortgage-backed			31		-		-		31		-
	Asset-backed securities:
		Collateralized debt obligations			51		-		(18)		33		-
		Other asset-backed			331		1		(17)		315		-
			Total fixed-maturity investments		5,797		131		(172)		5,756		(89)
Money market securities					351		-		-		351		-
Perpetual debt and equity securities					12		1		-		13		-
Total AFS investments				$	6,160	$	132	$	(172)	$	6,120	$	(89)

HTM Investments
Assets of consolidated VIEs:
	Corporate obligations			$	2,689	$	24	$	(312)	$	2,401	$	-
Total HTM investments				$	2,689	$	24	$	(312)	$	2,401	$	-
_______________
(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 December 31, 2016. 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	$	334	$	334	$	-	$	-
Due after one year through five years		1,206		1,221		-		-
Due after five years through ten years		784		725		-		-
Due after ten years		1,327		1,366		890		876
Mortgage-backed and asset-backed		1,278		1,263		-		-
Total fixed-maturity investments	$	4,929	$	4,909	$	890	$	876

Deposited and Pledged Securities

The fair value of securities on deposit with various regulatory authorities as of December 31, 2016 and 2015 was $11 million and $10 million, respectively. These deposits are required to comply with state insurance laws.

Pursuant to the Company’s tax sharing agreement, securities held by MBIA Inc. in the Tax Escrow Account are included as “Investments pledged as collateral, at fair value” on the Company’s consolidated balance sheets.

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 December 31, 2016 and 2015, the fair value of securities pledged as collateral for these investment agreements approximated $416 million and $457 million, respectively. The Company’s collateral as of December 31, 2016 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 $6 million and $12 million as of December 31, 2016 and 2015, respectively.

Impaired Investments

The following tables present the gross unrealized losses related to AFS and HTM investments as of December 31, 2016 and 2015:

			December 31, 2016
			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		$	432	$	(10)	$	-	$	-	$	432	$	(10)
	State and municipal bonds			339		(13)		18		(2)		357		(15)
	Foreign governments			5		-		-		-		5		-
	Corporate obligations			534		(29)		52		(73)		586		(102)
	Mortgage-backed securities:
		Residential mortgage-backed agency		436		(9)		122		(3)		558		(12)
		Residential mortgage-backed non-agency		1		-		29		(6)		30		(6)
		Commercial mortgage-backed		6		-		15		-		21		-
	Asset-backed securities:
		Collateralized debt obligations		7		-		15		-		22		-
		Other asset-backed		112		(1)		49		(2)		161		(3)
Total AFS investments			$	1,872	$	(62)	$	300	$	(86)	$	2,172	$	(148)

HTM Investments
Assets of consolidated VIEs:
	Corporate obligations		$	-	$	-	$	876	$	(14)	$	876	$	(14)
Total HTM investments			$	-	$	-	$	876	$	(14)	$	876	$	(14)

				December 31, 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			$	434	$	(2)	$	50	$	(1)	$	484	$	(3)
	State and municipal bonds				536		(11)		42		(3)		578		(14)
	Foreign governments				32		(2)		-		-		32		(2)
	Corporate obligations				693		(14)		78		(89)		771		(103)
	Mortgage-backed securities:
		Residential mortgage-backed agency			399		(4)		159		(5)		558		(9)
		Residential mortgage-backed non-agency			24		(2)		17		(4)		41		(6)
		Commercial mortgage-backed			25		-		1		-		26		-
	Asset-backed securities:
		Collateralized debt obligations			2		-		29		(18)		31		(18)
		Other asset-backed			242		(1)		34		(16)		276		(17)
			Total fixed-maturity investments		2,387		(36)		410		(136)		2,797		(172)
Perpetual debt and equity securities					2		-		3		-		5		-
Total AFS investments				$	2,389	$	(36)	$	413	$	(136)	$	2,802	$	(172)

HTM Investments
Assets of consolidated VIEs:
	Corporate obligations			$	1,093	$	(17)	$	280	$	(295)	$	1,373	$	(312)
Total HTM investments				$	1,093	$	(17)	$	280	$	(295)	$	1,373	$	(312)

Gross unrealized losses on AFS investments decreased as of December 31, 2016 compared with December 31, 2015 primarily due to narrowing of credit spreads, partially offset by higher interest rates.

Gross unrealized losses on HTM investments decreased as of December 31, 2016 compared with December 31, 2015 principally due to an increase in forecasted cash flows used in the Company’s fair value modeling. The increase in forecasted cash flows was primarily due to new and positive market information indicating a higher probability that cash flows will be adequate to repay principal and interest owing on the securities.

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 December 31, 2016 and 2015 was 22 and 17 years, respectively. As of December 31, 2016 and 2015, there were 46 and 65 securities, respectively, that were in an unrealized loss position for a continuous twelve-month period or longer, of which, fair values of 12 and 22 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 December 31, 2016:

	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%	6	$	53	$	50	-	$	-	$	-
> 15% to 25%	4		32		26	-		-		-
> 25% to 50%	1		1		1	-		-		-
> 50%	1		102		29	-		-		-
Total	12	$	188	$	106	-	$	-	$	-

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 December 31, 2016, for which fair value was less than amortized cost. The credit ratings are based on ratings from Moody’s as of December 31, 2016 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		$	115	$	(1)	$	25	$	-	$	3	$	-	$	3	$	-	$	37	$	(2)	$	-	$	-	$	183	$	(3)
MBS			563		(12)		13		-		-		-		3		-		18		(3)		12		(3)		609		(18)
Corporate obligations			102		(10)		143		(7)		237		(9)		72		(3)		3		-		29		(73)		586		(102)
	Total	$	780	$	(23)	$	181	$	(7)	$	240	$	(9)	$	78	$	(3)	$	58	$	(5)	$	41	$	(76)	$	1,378	$	(123)

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 and MBS 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	$	37	72	%
MBS	Below Investment Grade	Below Investment Grade	$	17	100	%

Refer to the table 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 December 31, 2016 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 uses 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 uses 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 uses 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” included herein for information about the Company’s loss reserving policy and “Note 6: 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 December 31, 2016 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⁾	$	51	$	(2)	$	4
Mortgage-backed:
	MBIA⁽¹⁾		17		(3)		15
Other:
	MBIA⁽¹⁾		14		(1)		-
Total		$	82	$	(6)	$	19
_______________
(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 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 impairments for the years ended December 31, 2016, 2015 and 2014, primarily related to a corporate obligation that incurred liquidity concerns, ongoing credit risk and other adverse financial conditions.

In millions		Years Ended December 31,
Credit Losses Recognized in Earnings Related to OTTI		2016		2015		2014
Beginning balance		$	26	$	16	$	175
Additions for credit loss impairments recognized in the
	current period on securities not previously impaired		-		-		15
Additions for credit loss impairments recognized in the
	current period on securities previously impaired		4		10		1
Reductions for credit loss impairments previously recognized
	on securities sold during the period		(1)		-		(174)
Reductions for increases in cash flows expected to be collected over the
	remaining life of the security		-		-		(1)
Ending balance		$	29	$	26	$	16

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 increase in proceeds and net gains on the sales of investments for the year ended December 31, 2016 compared with 2015 and 2014 was primarily due to sales as a result of favorable market conditions and to generate liquidity for payments on certain Puerto Rico exposures. The proceeds and the gross realized gains and losses from sales of fixed-maturity securities held as AFS for the years ended December 31, 2016, 2015 and 2014 are as follows:

	Years Ended December 31,
In millions	2016		2015		2014
Proceeds from sales	$	2,412	$	1,145	$	757
Gross realized gains	$	84	$	32	$	66
Gross realized losses	$	(23)	$	(16)	$	(15)