Note 7: 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 September 30, 2017 and December 31, 2016:

				September 30, 2017
						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			$	785	$	32	$	(5)	$	812	$	-
	State and municipal bonds				1,054		65		(6)		1,113		-
	Foreign governments				8		-		-		8		-
	Corporate obligations				1,489		28		(75)		1,442		(64)
	Mortgage-backed securities:
		Residential mortgage-backed agency			699		2		(8)		693		-
		Residential mortgage-backed non-agency			38		2		(4)		36		-
		Commercial mortgage-backed			49		-		-		49		-
	Asset-backed securities:
		Collateralized debt obligations			70		-		-		70		-
		Other asset-backed			311		1		-		312		1
			Total fixed-maturity investments		4,503		130		(98)		4,535		(63)
Money market securities					267		-		-		267		-
Perpetual debt and equity securities					4		1		-		5		-
Total AFS investments				$	4,774	$	131	$	(98)	$	4,807	$	(63)

HTM Investments
Assets of consolidated VIEs:
	Corporate obligations			$	890	$	7	$	-	$	897	$	-
Total HTM investments				$	890	$	7	$	-	$	897	$	-
_______________
(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, 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.

	AFS Securities				HTM Securities
					Consolidated VIEs
	Amortized				Amortized
In millions	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	508	$	509	$	-	$	-
Due after one year through five years		874		883		-		-
Due after five years through ten years		684		635		-		-
Due after ten years		1,270		1,348		890		897
Mortgage-backed and asset-backed		1,167		1,160		-		-
Total fixed-maturity investments	$	4,503	$	4,535	$	890	$	897

Deposited and Pledged Securities

The fair value of securities on deposit with various regulatory authorities as of September 30, 2017 and December 31, 2016 was $10 million and $11 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 September 30, 2017 and December 31, 2016, the fair value of securities pledged as collateral for these investment agreements approximated $380 million and $416 million, respectively. The Company’s collateral as of September 30, 2017 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 of $1 million and $6 million as of September 30, 2017 and December 31, 2016.

Impaired Investments

The following tables present the gross unrealized losses related to AFS and HTM investments as of September 30, 2017 and December 31, 2016:

			September 30, 2017
			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		$	279	$	(2)	$	87	$	(3)	$	366	$	(5)
	State and municipal bonds			162		(3)		53		(3)		215		(6)
	Foreign governments			4		-		-		-		4		-
	Corporate obligations			388		(4)		135		(71)		523		(75)
	Mortgage-backed securities:
		Residential mortgage-backed agency		344		(4)		140		(4)		484		(8)
		Residential mortgage-backed non-agency		9		-		15		(4)		24		(4)
		Commercial mortgage-backed		25		-		6		-		31		-
	Asset-backed securities:													-
		Collateralized debt obligations		5		-		-		-		5		-
		Other asset-backed		149		-		2		-		151		-
Total AFS investments			$	1,365	$	(13)	$	438	$	(85)	$	1,803	$	(98)

			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)

Gross unrealized losses on AFS investments decreased as of September 30, 2017 compared with December 31, 2016 primarily due to tightening credit spreads and lower long-term interest rates. Gross unrealized losses on HTM investments decreased as of September 30, 2017 compared with December 31, 2016 primarily due to tightening credit spreads.

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 September 30, 2017 and December 31, 2016 was 15 and 22 years, respectively. As of September 30, 2017 and December 31, 2016, there were 59 and 46 securities, respectively, that were in an unrealized loss position for a continuous twelve-month period or longer, of which, fair values of 27 and 12 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 September 30, 2017:

	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%	21	$	136	$	126	-	$	-	$	-
> 15% to 25%	2		15		12	-		-		-
> 25% to 50%	1		1		-	-		-		-
> 50%	3		101		37	-		-		-
Total	27	$	253	$	175	-	$	-	$	-

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 September 30, 2017 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

The Company’s fixed-maturity securities for which fair value is less than amortized cost are reviewed quarterly in order to determine whether a credit loss exists. The portion of certain OTTI losses on fixed-maturity securities that does not represent credit losses is recognized in AOCI. Refer to “Note 8: Investments” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for a discussion of the Company’s policy for OTTI and its determination of credit loss. 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 nine months ended September 30, 2017 was primarily related to municipal bonds for which a loss was recognized as the difference between their amortized cost and their fair values in the second quarter of 2017. This OTTI resulted from liquidity concerns, recent credit rating downgrades and other adverse financial conditions of the issuer. The reduction from credit loss impairment for the three and nine months ended September 30, 2017 was primarily related to municipal bonds previously impaired which were further impaired to fair value during the third quarter of 2017.

In millions		Three Months Ended September 30,				Nine Months Ended September 30,
Credit Losses Recognized in Earnings Related to Other-Than-Temporary Impairments		2017			2016	2017			2016
Beginning balance		$	42	$	26	$	29	$	26
Additions for credit loss impairments recognized in the current period on securities
	not previously impaired		-		-		11		-
Additions for credit loss impairments recognized in the current period on securities
	previously impaired		2		-		4		-
Reductions for credit loss impairments previously recognized on securities sold during
	the period		(2)		-		(2)		-
Reductions for credit loss impairments previously recognized on securities impaired to
	fair value during the period		(11)		-		(11)		-
Ending balance		$	31	$	26	$	31	$	26

The Company does not recognize OTTI on securities insured by MBIA Corp. and National since those securities, whether or not owned by the Company, are evaluated for impairments in accordance with its loss reserving policy. The following table provides information about securities held by the Company as of September 30, 2017 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⁾
Mortgage-backed:
	MBIA⁽¹⁾	$	15	$	(4)	$	16
Corporate obligations:
	MBIA⁽¹⁾		13		(1)		-
Other:
	Other		2		-		-
Total		$	30	$	(5)	$	16
_______________
(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.

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 nine months ended September 30, 2017 and 2016 are as follows: