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Investments
 9 Months Ended
Sep. 30, 2019
Text Block [Abstract]  
Investments
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 September 30, 2019 and December 31, 2018:
                                                                                                               
 
  
September 30, 2019
  
In millions
  
Amortized
Cost
 
  
Gross
Unrealized
Gains
 
  
Gross
Unrealized
Losses
 
  
Fair
Value
 
  
Other-Than-
Temporary
Impairments
(1)
AFS Investments
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Fixed-maturity investments:
    
 
      
 
      
 
      
 
      
 
  
U.S. Treasury and government agency
   $
807
     $
59
     $
(1
 )   $
865
     $
-
  
State and municipal bonds
    
205
      
24
      
-
      
229
      
-
  
Foreign governments
    
8
      
-
      
-
      
8
      
-
  
Corporate obligations
    
1,239
      
58
      
(34
 )    
1,263
      
(33
 )
Mortgage-backed securities:
    
 
      
 
      
 
      
 
      
 
  
Residential mortgage-backed agency
    
297
      
4
      
(1
 )    
300
      
-
  
Residential mortgage-backed
non-agency
   
25
      
1
      
(5
 )    
21
      
-
  
Commercial mortgage-backed
    
23
      
1
      
-
      
24
      
-
  
Asset-backed securities:
    
 
      
 
      
 
      
 
      
 
  
Collateralized debt obligations
    
129
      
-
      
(2
 )    
127
      
-
  
Other asset-backed
    
275
      
1
      
-
      
276
      
-
  
                                         
Total AFS investments
   $
3,008
     $
148
     $
(43
 )   $
3,113
     $
(33
 )
                                         
HTM Investments
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Assets of consolidated VIEs:
    
 
      
 
      
 
      
 
      
 
  
Corporate obligations
   $
890
     $
87
     $
-
     $
977
     $
-
  
                                         
Total HTM investments
   $
890
     $
87
     $
-
     $
977
     $
-
  
                                         
 
(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, 2018
  
In millions
  
Amortized
Cost
 
  
Gross
Unrealized
Gains
 
  
Gross
Unrealized
Losses
 
  
Fair
Value
 
  
Other-Than-
Temporary
Impairments
(1)
AFS Investments
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Fixed-maturity investments:
    
 
      
 
      
 
      
 
      
 
  
U.S. Treasury and government agency
   $
1,093
     $
26
     $
(10
 )   $
1,109
     $
-
  
State and municipal bonds
    
641
      
97
      
(11
 )    
727
      
42
  
Foreign governments
    
9
      
-
      
-
      
9
      
-
  
Corporate obligations
    
1,473
      
6
      
(131
 )    
1,348
      
(68
 )
Mortgage-backed securities:
    
 
      
 
      
 
      
 
      
 
  
Residential mortgage-backed agency
    
218
      
1
      
(5
 )    
214
      
-
  
Residential mortgage-backed
non-agency
   
30
      
1
      
(4
 )    
27
      
-
  
Commercial mortgage-backed
    
53
      
-
      
(2
 )    
51
      
-
  
Asset-backed securities:
    
 
      
 
      
 
      
 
      
 
  
Collateralized debt obligations
    
122
      
-
      
(3
 )    
119
      
-
  
Other asset-backed
    
178
      
-
      
(1
 )    
177
      
-
  
                                         
Total AFS investments
   $
3,817
     $
131
     $
(167
 )   $
3,781
     $
(26
 )
HTM Investments
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Assets of consolidated VIEs:
    
 
      
 
      
 
      
 
      
 
  
Corporate obligations
   $
890
     $
35
     $
-
     $
925
     $
-
  
                                         
Total HTM investments
   $
890
     $
35
     $
-
     $
925
     $
-
  
                                         
 
(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 September 30, 2019. Contractual maturity may differ from expected maturity as borrowers may have the right to call or prepay obligations.
                                                                                         
 
  
AFS Securities
    
HTM Securities
  
 
  
 
 
  
 
 
  
Consolidated VIEs
  
In millions
  
Amortized
Cost
 
  
Fair
Value
 
  
Amortized
Cost
 
  
Fair
Value
 
Due in one year or less
   $
598
     $
599
     $
-
     $
-
  
Due after one year through five years
    
496
      
503
      
-
      
-
  
Due after five years through ten years
    
436
      
423
      
-
      
-
  
Due after ten years
    
729
      
840
      
890
      
977
  
Mortgage-backed and asset-backed
    
749
      
748
      
-
      
-
  
                                 
Total fixed-maturity investments
   $
3,008
     $
3,113
     $
890
     $
977
  
                                 
 
 
 
 
 
 
 
Deposited and Pledged Securities
The fair value of securities on deposit with various regulatory authorities as of September 30, 2019 and December 31, 2018 was $11 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 September 30, 2019 and December 31, 2018, the fair value of securities pledged as collateral for these investment agreements approximated $317 million and $314 million, respectively. The Company’s collateral as of September 30, 2019 consisted principally of U.S. Treasury and government agency and corporate obligations, and was primarily held with major U.S. banks. Additionally, the Company pledged cash as collateral under investment agreements in the amount of $6 million as of September 30, 2019.
Refer to “Note 8: Derivative Instruments” for information about securities posted to derivative counterparties.
Impaired Investments
The following tables present the gross unrealized losses related to AFS and HTM investments as of September 30, 2019 and December 31, 2018:
                                                                                                                                     
 
  
September 30, 2019
  
 
  
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
   $
102
     $
-
 
   $
84
     $
(1
)
   $
186
     $
(1
)
State and municipal bonds
    
5
      
-
 
    
26
      
-
 
    
31
      
-
 
Foreign governments
    
5
      
-
 
    
-
      
-
 
    
5
      
-
 
Corporate obligations
    
182
      
(1
)
    
55
      
(33
)
    
237
      
(34
)
Mortgage-backed securities:
    
 
      
 
 
    
 
      
 
 
    
 
      
 
 
Residential mortgage-backed agency
    
35
      
(1
)
    
32
      
-
 
    
67
      
(1
)
Residential mortgage-backed
non-agency
   
-
      
-
 
    
11
      
(5
)
    
11
      
(5
)
Commercial mortgage-backed
    
6
      
-
 
    
-
      
-
 
    
6
      
-
 
Asset-backed securities:
    
 
      
 
 
    
 
      
 
 
    
 
      
 
 
Collateralized debt obligations
    
43
      
-
 
    
68
      
(2
)
    
111
      
(2
)
Other asset-backed
    
16
      
-
 
    
9
      
-
 
    
25
      
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total AFS investments
   $
394
     $
(2
)
   $
285
     $
(41
)
   $
679
     $
(43
)
               
 
                                
 
 
 
 
 
 
 
                                                                                                                                   
 
  
December 31, 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
   $
231
     $
(1
)
   $
278
     $
(9
 )   $
509
     $
(10)
State and municipal bonds
    
60
      
(1
)
    
135
      
(10
 )    
195
      
(11)
Foreign governments
    
5
      
-
 
    
2
      
-
      
7
      
-
Corporate obligations
    
900
      
(41
)
    
335
      
(90
 )    
1,235
      
(131)
Mortgage-backed securities:
    
 
      
 
 
    
 
      
 
      
 
      
 
Residential mortgage-backed agency
    
29
      
(1
)
    
118
      
(4
 )    
147
      
(5)
Residential mortgage-backed
non-agency
   
2
      
-
 
    
13
      
(4
 )    
15
      
(4)
Commercial mortgage-backed
    
24
      
-
 
    
21
      
(2
 )    
45
      
(2)
Asset-backed securities:
    
 
      
 
 
    
 
      
 
      
 
      
 
Collateralized debt obligations
    
98
      
(3
)
    
7
      
-
      
105
      
(3)
Other asset-backed
    
127
      
-
 
    
35
      
(1
 )    
162
      
(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total AFS investments
   $
1,476
     $
(47
)
   $
944
     $
(120
 )   $
2,420
     $
(167)
                                               
 
 
 
 
 
 
Gross unrealized losses on AFS investments decreased as of September 30, 2019 compared with December 31, 2018 primarily due to lower interest rates and 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, 2019 and December 31, 2018 was 7 and 11 years, respectively. As of September 30, 2019 and December 31, 2018, there were 68 and 182 securities, respectively, that were in an unrealized loss position for a continuous twelve-month period or longer, of which, fair values of 15 and 64 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, 2019:
                                                                   
 
  
AFS Securities
  
Percentage of Fair Value Below Book Value
  
Number of
Securities
 
 
  
Book Value
(in millions)
 
  
Fair Value
(in millions)
 
> 5% to 15%
    
9
     $
19
     $
19
  
> 15% to 25%
    
1
      
1
      
-
  
> 25% to 50%
    
2
      
14
      
10
  
> 50%
    
3
      
63
      
30
  
                         
Total
    
15
     $
97
     $
59
  
                         
 
 
 
 
 
 
 
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, 2019 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, 2018 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
nine months ended September 30, 2019 and the
 
three and nine months ended September 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.
                                                                                       
In millions
  
Three Months Ended September 30,
    
Nine Months Ended September 30,
Credit Losses Recognized in Earnings Related to

Other-Than-
Temporary Impairments
  
2019
    
2018
    
2019
    
2018
Beginning balance
   $
74 
     $
34 
     $
37 
     $
32 
Additions for credit loss impairments recognized in the current period on securities previously impaired
    
- 
      
1 
      
37 
      
3 
                               
Ending balance
   $
74 
     $
35 
     $
74 
     $
35 
                               
 
 
 
 
 
 
 
 
 
 
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, 2019 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:
                                                               
In millions
  
Fair
Value
  
Unrealized
Loss
  
Insurance Loss
Reserve
(2)
Mortgage-backed:
    
            
 
      
           
 
   
 
    
                  
 
MBIA
(1)
   $
11
     $
(5)
   $
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.    
 
 
 
 
 
 
 
 
 
 
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, 2019 and 2018 are as follows:
                                                                                         
 
  
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
In millions
  
2019
  
2018
  
2019
  
2018
Proceeds from sales
   $
508
     $
583
     $
1,875
     $
1,647
  
Gross realized gains
   $
79
     $
1
     $
100
     $
4
  
Gross realized losses
   $
- 
     $
(2
 )   $
(3
 )   $
(15
 )
 
 
 
 
 
 
 
 
 
 
 
Equity Investments
Unrealized gains and losses recognized on equity investments held as of the end of each period for the three and nine months ended September 30, 2019 and 2018 are as follows:
                                                                                         
 
  
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
In millions
  
2019
  
2018
  
2019
  
2018
Net gains (losses) recognized during the period on equity securities
   $
2
     $
3
     $
9
     $
3
  
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 at the reporting date
   $
2
     $
3
     $
8
     $
2