Investments

6 Months Ended

Jun. 30, 2018

Note 7: Investments

Investments, excluding those elected under the fair value option, include debt and equity securities classified as either AFS or held-to-maturity (“HTM”).

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 June 30, 2018 and December 31, 2017:

			June 30, 2018
					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		$	879	$	24	$	(14)	$	889	$	-
	State and municipal bonds			708		69		(10)		767		17
	Foreign governments			11		-		-		11		-
	Corporate obligations			1,589		7		(117)		1,479		(65)
	Mortgage-backed securities:
		Residential mortgage-backed agency		227		-		(6)		221		-
		Residential mortgage-backed non-agency		29		1		(3)		27		-
		Commercial mortgage-backed		61		-		(1)		60		-
	Asset-backed securities:
		Collateralized debt obligations		147		-		-		147		-
		Other asset-backed		202		1		(1)		202		1
Total AFS investments			$	3,853	$	102	$	(152)	$	3,803	$	(47)

HTM Investments
Assets of consolidated VIEs:
	Corporate obligations		$	890	$	3	$	(1)	$	892	$	-
Total HTM investments			$	890	$	3	$	(1)	$	892	$	-
_______________
(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, 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			$	1,317	$	34	$	(6)	$	1,345	$	-
	State and municipal bonds				840		29		(12)		857		-
	Foreign governments				10		-		-		10		-
	Corporate obligations				1,332		25		(80)		1,277		(72)
	Mortgage-backed securities:
		Residential mortgage-backed agency			365		1		(4)		362		-
		Residential mortgage-backed non-agency			35		1		(4)		32		-
		Commercial mortgage-backed			66		-		-		66		-
	Asset-backed securities:
		Collateralized debt obligations			116		-		-		116		-
		Other asset-backed			175		-		-		175		1
			Total fixed-maturity investments		4,256		90		(106)		4,240		(71)
Money market securities					179		-		-		179		-
Perpetual debt and equity securities					3		1		-		4		-
Total AFS investments				$	4,438	$	91	$	(106)	$	4,423	$	(71)

HTM Investments
Assets of consolidated VIEs:
	Corporate obligations			$	890	$	26	$	-	$	916	$	-
Total HTM investments				$	890	$	26	$	-	$	916	$	-
_______________
(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, 2018. 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	$	648	$	653	$	-	$	-
Due after one year through five years		770		774		-		-
Due after five years through ten years		646		570		-		-
Due after ten years		1,123		1,149		890		892
Mortgage-backed and asset-backed		666		657		-		-
Total fixed-maturity investments	$	3,853	$	3,803	$	890	$	892

Deposited and Pledged Securities

The fair value of securities on deposit with various regulatory authorities as of June 30, 2018 and December 31, 2017 was $10 million. 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 June 30, 2018 and December 31, 2017, the fair value of securities pledged as collateral for these investment agreements approximated $328 million and $353 million, respectively. The Company’s collateral as of June 30, 2018 consisted principally of U.S. Treasury and government agency and state and municipal bonds, and was primarily held with major U.S. banks.

Impaired Investments

The following tables present the gross unrealized losses related to AFS and HTM investments as of June 30, 2018 and December 31, 2017:

			June 30, 2018
			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		$	457	$	(7)	$	160	$	(7)	$	617	$	(14)
	State and municipal bonds			115		(2)		96		(8)		211		(10)
	Foreign governments			8		-		-		-		8		-
	Corporate obligations			1,070		(39)		169		(78)		1,239		(117)
	Mortgage-backed securities:
		Residential mortgage-backed agency		86		(2)		78		(4)		164		(6)
		Residential mortgage-backed non-agency		5		-		15		(3)		20		(3)
		Commercial mortgage-backed		45		(1)		1		-		46		(1)
	Asset-backed securities:
		Collateralized debt obligations		39		-		-		-		39		-
		Other asset-backed		147		(1)		21		-		168		(1)
Total AFS investments			$	1,972	$	(52)	$	540	$	(100)	$	2,512	$	(152)

HTM Investments
Assets of consolidated VIEs:
	Corporate obligations		$	314	$	(1)	$	-	$	-	$	314	$	(1)
Total HTM investments			$	314	$	(1)	$	-	$	-	$	314	$	(1)

			December 31, 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		$	353	$	(1)	$	124	$	(5)	$	477	$	(6)
	State and municipal bonds			203		(8)		116		(4)		319		(12)
	Foreign governments			8		-		-		-		8		-
	Corporate obligations			425		(3)		163		(77)		588		(80)
	Mortgage-backed securities:
		Residential mortgage-backed agency		105		(1)		156		(3)		261		(4)
		Residential mortgage-backed non-agency		-		-		14		(4)		14		(4)
		Commercial mortgage-backed		27		-		5		-		32		-
	Asset-backed securities:
		Collateralized debt obligations		12		-		-		-		12		-
		Other asset-backed		71		-		39		-		110		-
Total AFS investments			$	1,204	$	(13)	$	617	$	(93)	$	1,821	$	(106)

Gross unrealized losses on AFS investments increased as of June 30, 2018 compared with December 31, 2017 primarily due to higher interest rates and widening 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 June 30, 2018 and December 31, 2017 was 13 and 12 years, respectively. As of June 30, 2018 and December 31, 2017, there were 103 and 133 securities, respectively, that were in an unrealized loss position for a continuous twelve-month period or longer, of which, fair values of 50 and 24 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, 2018:

	AFS Securities
Percentage of Fair Value	Number of	Book Value		Fair Value
Below Book Value	Securities	(in millions)		(in millions)
> 5% to 15%	40	$	242	$	222
> 15% to 25%	6		47		38
> 25% to 50%	-		-		-
> 50%	4		100		35
Total	50	$	389	$	295

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, 2018 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, 2017 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 impairments for the three and six months ended June 30, 2018 were primarily related to an impaired security for which a loss was recognized as the difference between the amortized cost and net present value of projected cash flows. This OTTI resulted from liquidity concerns and other adverse financial conditions of the issuer. The additional credit loss impairment on securities not previously impaired for the three and six months ended June 30, 2017, primarily related to municipal bonds for which a loss was recognized as a difference between its amortized cost and estimated recovery values.

In millions		Three Months Ended June 30,				Six Months Ended June 30,
Credit Losses Recognized in Earnings Related to Other-Than-Temporary Impairments		2018			2017	2018			2017
Beginning balance		$	33	$	31	$	32	$	29
Additions for credit loss impairments recognized in the current period on securities
	not previously impaired		-		11		-		11
Additions for credit loss impairments recognized in the current period on securities
	previously impaired		1		-		2		2
Ending balance		$	34	$	42	$	34	$	42

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 June 30, 2018 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	$	(3)	$	14
Corporate obligations:
	MBIA⁽¹⁾			73		(7)		-
Other:
	MBIA⁽¹⁾			6		-		-
	Other			1		-		-
		Total other		7		-		-
Total			$	95	$	(10)	$	14
_______________
(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 six months ended June 30, 2018 and 2017 are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
In millions	2018		2017		2018		2017
Proceeds from sales	$	413	$	716	$	1,064	$	987
Gross realized gains	$	1	$	15	$	3	$	19
Gross realized losses	$	(7)	$	(3)	$	(13)	$	(4)

Equity Investments

Unrealized gains and losses recognized on equity investments held as of June 30, 2018 for the three and six months ended June 30, 2018 are as follows:

In millions		Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
Net gains (losses) recognized during the period on equity securities		$	-	$	-
Less:
	Net gains (losses) recognized during the period on equity securities sold during the period		1		1
Unrealized gains (losses) recognized during the period on equity securities still held as of June 30, 2018		$	(1)	$	(1)