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Investments | 9 Months Ended
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Sep. 30, 2018
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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”). T h e f o l l o w i n g t a b l e s p r e s en t t h e a m o r t i z e d c o st, f a i r v a l u e, corresponding gross unrealized gains and losses and OTTI for AFS and HTM investments in the Company’s c o n s o l i d a te d i n v es t m en t p o r tf o l i o a s o f September 30, 2018 a nd December 31, 2017:
|  |  |  |  |  | September 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 |  | $ | 843 |  | $ | 20 |  | $ | (19) |  | $ | 844 |  | $ | -
| State and municipal bonds |  |  | 659 |  |  | 111 |  |  | (14) |  |  | 756 |  |  | 47
| Foreign governments |  |  | 10 |  |  | - |  |  | - |  |  | 10 |  |  | -
| Corporate obligations |  |  | 1,672 |  |  | 6 |  |  | (122) |  |  | 1,556 |  |  | (68)
| Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Residential mortgage-backed agency |  |  | 222 |  |  | - |  |  | (7) |  |  | 215 |  |  | -
|  | Residential mortgage-backed non-agency |  |  | 32 |  |  | 1 |  |  | (3) |  |  | 30 |  |  | -
|  | Commercial mortgage-backed |  |  | 57 |  |  | - |  |  | (2) |  |  | 55 |  |  | -
| Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Collateralized debt obligations |  |  | 143 |  |  | - |  |  | - |  |  | 143 |  |  | -
|  | Other asset-backed |  |  | 214 |  |  | 1 |  |  | (1) |  |  | 214 |  |  | 1
Total AFS investments |  | $ | 3,852 |  | $ | 139 |  | $ | (168) |  | $ | 3,823 |  | $ | (20)
HTM Investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Corporate obligations |  | $ | 890 |  | $ | 13 |  | $ | (2) |  | $ | 901 |  | $ | -
Total HTM investments |  | $ | 890 |  | $ | 13 |  | $ | (2) |  | $ | 901 |  | $ | -
_______________ |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(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.
T h e f ol l owin g t abl e p r e s en t s t h e di s t r i bu t io n b y c on t r a c t u a l m a t u r i t y o f AFS and HTM f i x ed-m a t u r i t y securities at a m o r t i z e d c o st a n d f ai r v alu e a s o f September 30, 2018. Con t r a c t ua l m a t u r i t y m a y d i f f e r f r o m e x pe c t e d m a t u r i t y a s bo rr ow e r s m a y h a v e t h e r igh t t o c a l l o r p r e p a y ob l iga t ion s.
|  | AFS Securities |  | HTM Securities
|  |  |  |  |  |  |  | Consolidated VIEs
|  | Amortized |  |  |  |  | Amortized |  |  |
In millions |  | Cost |  | Fair Value |  | Cost |  | Fair Value
Due in one year or less |  | $ | 790 |  | $ | 802 |  | $ | - |  | $ | -
Due after one year through five years |  |  | 677 |  |  | 702 |  |  | - |  |  | -
Due after five years through ten years |  |  | 670 |  |  | 589 |  |  | - |  |  | -
Due after ten years |  |  | 1,047 |  |  | 1,073 |  |  | 890 |  |  | 901
Mortgage-backed and asset-backed |  |  | 668 |  |  | 657 |  |  | - |  |  | -
Total fixed-maturity investments |  | $ | 3,852 |  | $ | 3,823 |  | $ | 890 |  | $ | 901
Deposited and Pledged Securities T h e f ai r v alu e o f s e c u r i t ie s o n depo s i t wi t h v a r io u s r egu l a t o r y au t ho r i t ie s a s o f September 30, 2018 and December 31, 2017 wa s $10 million. T h e se d epo s i t s a re r equi r e d t o c o m p l y wi t h s t a t e in s u r an ce law s. 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. I n v e s t m en t ag r ee m en t obligations r equ i re t h e Co m pan y t o ple d g e s e c u r i t i e s a s c o lla t e r al. Securities pledged in connection with investment agreement s may not be repled ged by the investment agreement counterparty. As o f September 30, 2018 a nd December 31, 2017, t h e f ai r v a l u e o f s e c u r i t ie s p ledge d a s c olla t e r a l for these in v e s t m en t ag r e e m e n t s app r o x i m a t e d $320 m i llio n an d $353 m i l lion, r e s p e c t i v e l y. T h e Co m pan y’s c olla t e r a l a s o f September 30, 2018 c on s i s t e d p r i n c ipal l y o f U.S. T r ea s u ry a n d go v e r n m en t ag e n cy and state and municipal bonds, and wa s p r i m a r il y hel d wi t h m a j o r U.S. ban ks. Impaired Investments The following tables present the gross unrealized losses related to AFS and HTM investments as of September 30, 2018 and December 31, 2017:
|  |  |  |  |  | September 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 |  | $ | 396 |  | $ | (7) |  | $ | 206 |  | $ | (12) |  | $ | 602 |  | $ | (19)
| State and municipal bonds |  |  | 92 |  |  | (3) |  |  | 123 |  |  | (11) |  |  | 215 |  |  | (14)
| Foreign governments |  |  | 9 |  |  | - |  |  | - |  |  | - |  |  | 9 |  |  | -
| Corporate obligations |  |  | 1,116 |  |  | (38) |  |  | 213 |  |  | (84) |  |  | 1,329 |  |  | (122)
| Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Residential mortgage-backed agency |  |  | 119 |  |  | (2) |  |  | 95 |  |  | (5) |  |  | 214 |  |  | (7)
|  | Residential mortgage-backed non-agency |  |  | - |  |  | - |  |  | 14 |  |  | (3) |  |  | 14 |  |  | (3)
|  | Commercial mortgage-backed |  |  | 29 |  |  | - |  |  | 19 |  |  | (2) |  |  | 48 |  |  | (2)
| Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Collateralized debt obligations |  |  | 73 |  |  | - |  |  | - |  |  | - |  |  | 73 |  |  | -
|  | Other asset-backed |  |  | 121 |  |  | (1) |  |  | 30 |  |  | - |  |  | 151 |  |  | (1)
Total AFS investments |  | $ | 1,955 |  | $ | (51) |  | $ | 700 |  | $ | (117) |  | $ | 2,655 |  | $ | (168)
HTM Investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Corporate obligations |  | $ | 313 |  | $ | (2) |  | $ | - |  | $ | - |  | $ | 313 |  | $ | (2)
Total HTM investments |  | $ | 313 |  | $ | (2) |  | $ | - |  | $ | - |  | $ | 313 |  | $ | (2)
|  |  |  |  |  | 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 September 30, 2018 compared with December 31, 2017 primarily due to 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 September 30, 2018 and December 31, 2017 was 13 and 12 years, respectively. As of September 30, 2018 and December 31, 2017, there were 131 and 133 securities, respectively, that were in an unrealized loss position for a conti nuous twelve-month period or longer, of which, fair value s of 75 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 tha n 5% as of September 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% |  | 60 |  | $ | 368 |  | $ | 338
| > 15% to 25% |  | 11 |  |  | 61 |  |  | 50
| > 25% to 50% |  | - |  |  | - |  |  | -
| > 50% |  | 4 |  |  | 100 |  |  | 32
| Total |  | 75 |  | $ | 529 |  | $ | 420
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 w ould 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, 2018 that would require the sale of impaired securities. Impaired securities tha t 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 determin e 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 Con solidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for a disc ussion of the Company’s policy for OTTI and its determination of credit loss. The following table presents the amount of credi t loss impairments recognized in earnings on fixed-maturity securities held by MBIA as of the dates indica ted, 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 nine months ended September 30, 2018 were primarily related to an impaired security for which a loss was rec ognized 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 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 recovery value in the second quarter of 2017. This OTTI resulted from liquidity concerns, recent credi t 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 impai red to fair value during the third quarter 2017.
In millions |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
Credit Losses Recognized in Earnings Related to Other-Than-Temporary Impairments |  | 2018 |  |  | 2017 |  | 2018 |  |  | 2017
Beginning balance |  | $ | 34 |  | $ | 42 |  | $ | 32 |  | $ | 29
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 |  |  | 1 |  |  | 2 |  |  | 3 |  |  | 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 |  | $ | 35 |  | $ | 31 |  | $ | 35 |  | $ | 31
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, 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 pa r amount owned by the Company:
|  |  |  |  |  |  | Unrealized |  | Insurance Loss |
| In millions |  | Fair Value |  | Loss |  | Reserve (2) |
| Mortgage-backed: |  |  |  |  |  |  |  |  |  |
|  | MBIA(1) |  | $ | 14 |  | $ | (3) |  | $ | 14 |
| Corporate obligations: |  |  |  |  |  |  |  |  |  |
|  | MBIA(1) |  |  | 70 |  |  | (12) |  |  | - |
| Other: |  |  |  |  |  |  |  |  |  |
|  | MBIA(1) |  |  | 6 |  |  | - |  |  | - |
|  | Other |  |  | 2 |  |  | - |  |  | - |
|  |  | Total other |  |  | 8 |  |  | - |  |  | - |
| Total |  | $ | 92 |  | $ | (15) |  | $ | 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 r eali z e d ga i n s and l o s s e s 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, 2018 and 2017 are as follows:
|  |  |  | Three Months Ended September 30, |  | Nine Months Ended September 30, |
| In millions |  | 2018 |  | 2017 |  | 2018 |  | 2017 |
| Proceeds from sales |  | $ | 583 |  | $ | 312 |  | $ | 1,647 |  | $ | 1,300 |
| Gross realized gains |  | $ | 1 |  | $ | 5 |  | $ | 4 |  | $ | 24 |
| Gross realized losses |  | $ | (2) |  | $ | (5) |  | $ | (15) |  | $ | (9) |
Equity Investments Unrealized gains and losses recognized on equity investments held as of September 30, 2018 for the three and nine months ended September 30, 2018 are as follo ws:
In millions |  | Three Months Ended September 30, 2018 |  | Nine Months Ended September 30, 2018
Net gains (losses) recognized during the period on equity securities | $ | 3 |  | $ | 3
Less: |  |  |  |  |
| Net gains (losses) recognized during the period on equity securities sold during the period |  | - |  |  | 1
Unrealized gains (losses) recognized during the period on equity securities still held as of September 30, 2018 | $ | 3 |  | $ | 2

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