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Investments | 9 Months Ended
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Sep. 30, 2022
Text Block [Abstract] |
Investments | Note 7: Investments Investments, excluding equity instruments, those elected under the fair value option and those classified as trading, consist of debt instruments classified as available-for-sale (“AFS”). The following tables present the amortized cost, allowance for credit losses, corresponding gross unrealized gains and losses and fair value for AFS investments in the Company’s consolidated investment portfolio as of September 30, 2022 and December 31, 2021:
|  | September 30, 2022
In millions |  | Amortized Cost |  | Allowance for Credit Losses |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
AFS Investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agency |  | $ | 749 |  |  | $ | - |  |  | $ | 6 |  |  | $ | (39 | ) |  | $ | 716 |
State and municipal bonds |  |  | 143 |  |  |  | - |  |  |  | 1 |  |  |  | (12 | ) |  |  | 132 |
Foreign governments |  |  | 23 |  |  |  | - |  |  |  | - |  |  |  | (4 | ) |  |  | 19 |
Corporate obligations |  |  | 872 |  |  |  | - |  |  |  | 1 |  |  |  | (162 | ) |  |  | 711 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | 207 |  |  |  | - |  |  |  | - |  |  |  | (25 | ) |  |  | 182 |
Residential mortgage-backed non-agency |  |  | 135 |  |  |  | - |  |  |  | 2 |  |  |  | (19 | ) |  |  | 118 |
Commercial mortgage-backed |  |  | 13 |  |  |  | - |  |  |  | - |  |  |  | (1 | ) |  |  | 12 |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | 118 |  |  |  | - |  |  |  | - |  |  |  | (7 | ) |  |  | 111 |
Other asset-backed |  |  | 109 |  |  |  | - |  |  |  | - |  |  |  | (4 | ) |  |  | 105 |
Total AFS investments |  | $ | 2,369 |  |  | $ | - |  |  | $ | 10 |  |  | $ | (273 | ) |  | $ | 2,106 |
|  | December 31, 2021
In millions |  | Amortized Cost |  | Allowance for Credit Losses |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
AFS Investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agency |  | $ | 782 |  |  | $ | - |  |  | $ | 54 |  |  | $ | (2 | ) |  | $ | 834 |
State and municipal bonds |  |  | 140 |  |  |  | - |  |  |  | 27 |  |  |  | - |  |  |  | 167 |
Foreign governments |  |  | 13 |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | 14 |
Corporate obligations |  |  | 905 |  |  |  | - |  |  |  | 53 |  |  |  | (5 | ) |  |  | 953 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | 190 |  |  |  | - |  |  |  | 3 |  |  |  | (1 | ) |  |  | 192 |
Residential mortgage-backed non-agency |  |  | 80 |  |  |  | - |  |  |  | 12 |  |  |  | - |  |  |  | 92 |
Commercial mortgage-backed |  |  | 10 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 10 |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | 101 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 101 |
Other asset-backed |  |  | 95 |  |  |  | - |  |  |  | - |  |  |  | (1 | ) |  |  | 94 |
Total AFS investments |  | $ | 2,316 |  |  | $ | - |  |  | $ | 150 |  |  | $ | (9 | ) |  | $ | 2,457 |
The following table presents the distribution by contractual maturity of AFS fixed-maturity securities at amortized cost, net of allowance for credit losses, and fair value as of September 30, 2022. Contractual maturity may differ from expected maturity as borrowers may have the right to call or prepay obligations.
|  | AFS Securities
In millions |  | Net Amortized Cost |  | Fair Value
Due in one year or less |  | $ | 379 |  |  | $ | 378 |
Due after one year through five years |  |  | 294 |  |  |  | 278 |
Due after five years through ten years |  |  | 342 |  |  |  | 292 |
Due after ten years |  |  | 772 |  |  |  | 630 |
Mortgage-backed and asset-backed |  |  | 582 |  |  |  | 528 |
Total fixed-maturity investments |  | $ | 2,369 |  |  | $ | 2,106 |
Deposited and Pledged Securities The fair value of securities on deposit with various regulatory authorities as of September 30, 2022 and December 31, 2021 was $10 million and $11 million, respectively. These deposits are required to comply with state insurance laws. 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, 2022 and December 31, 2021, the fair value of securities pledged as collateral for these investment agreements approximated $282 million and $280 million, respectively. The Company’s collateral as of September 30, 2022 consisted principally of U.S. Treasury and government agency and corporate obligations, and was primarily held with major U.S. banks. Refer to “Note 8: Derivative Instruments” for information about securities posted to derivative counterparties. Impaired Investments The following tables present the non-credit related gross unrealized losses related to AFS investments as of September 30, 2022 and December 31, 2021:
|  | September 30, 2022
|  | Less than 12 Months |  | 12 Months or Longer |  | Total
In millions |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
AFS Investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agency |  | $ | 307 |  |  | $ | (36 | ) |  | $ | 14 |  |  | $ | (3 | ) |  | $ | 321 |  |  | $ | (39 | )
State and municipal bonds |  |  | 95 |  |  |  | (11 | ) |  |  | 1 |  |  |  | (1 | ) |  |  | 96 |  |  |  | (12 | )
Foreign governments |  |  | 18 |  |  |  | (4 | ) |  |  | - |  |  |  | - |  |  |  | 18 |  |  |  | (4 | )
Corporate obligations |  |  | 597 |  |  |  | (134 | ) |  |  | 74 |  |  |  | (28 | ) |  |  | 671 |  |  |  | (162 | )
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | 127 |  |  |  | (13 | ) |  |  | 55 |  |  |  | (12 | ) |  |  | 182 |  |  |  | (25 | )
Residential mortgage-backed non-agency |  |  | 102 |  |  |  | (19 | ) |  |  | - |  |  |  | - |  |  |  | 102 |  |  |  | (19 | )
Commercial mortgage-backed |  |  | 11 |  |  |  | (1 | ) |  |  | 1 |  |  |  | - |  |  |  | 12 |  |  |  | (1 | )
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | 67 |  |  |  | (3 | ) |  |  | 43 |  |  |  | (4 | ) |  |  | 110 |  |  |  | (7 | )
Other asset-backed |  |  | 103 |  |  |  | (4 | ) |  |  | 1 |  |  |  | - |  |  |  | 104 |  |  |  | (4 | )
Total AFS investments |  | $ | 1,427 |  |  | $ | (225 | ) |  | $ | 189 |  |  | $ | (48 | ) |  | $ | 1,616 |  |  | $ | (273 | )
|  | December 31, 2021
|  | Less than 12 Months |  | 12 Months or Longer |  | Total
In millions |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
AFS Investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agency |  | $ | 161 |  |  | $ | (1 | ) |  | $ | 16 |  |  | $ | (1 | ) |  | $ | 177 |  |  | $ | (2 | )
State and municipal bonds |  |  | 11 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 11 |  |  |  | - |
Foreign governments |  |  | 3 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3 |  |  |  | - |
Corporate obligations |  |  | 270 |  |  |  | (5 | ) |  |  | 8 |  |  |  | - |  |  |  | 278 |  |  |  | (5 | )
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | 94 |  |  |  | (1 | ) |  |  | 1 |  |  |  | - |  |  |  | 95 |  |  |  | (1 | )
Residential mortgage-backed non-agency |  |  | 3 |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | 4 |  |  |  | - |
Commercial mortgage-backed |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2 |  |  |  | - |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | 60 |  |  |  | - |  |  |  | 29 |  |  |  | - |  |  |  | 89 |  |  |  | - |
Other asset-backed |  |  | 72 |  |  |  | (1 | ) |  |  | - |  |  |  | - |  |  |  | 72 |  |  |  | (1 | )
Total AFS investments |  | $ | 676 |  |  | $ | (8 | ) |  | $ | 55 |  |  | $ | (1 | ) |  | $ | 731 |  |  | $ | (9 | )
Gross unrealized losses on AFS investments increased as of September 30, 2022 compared with December 31, 2021 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 September 30, 2022 and December 31, 2021 was 14 and 11 years, respectively. As of September 30, 2022 and December 31, 2021, there were 140 and 36 securities, respectively, that were in an unrealized loss position for a continuous twelve-month period or longer, of which, fair values of 135 and 7 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, 2022:
|  | AFS Securities
Percentage of Fair Value Below Book Value |  | Number of Securities |  | Book Value (in millions) |  | Fair Value (in millions)
> 5% to 15% |  |  | 34 |  |  | $ | 80 |  |  | $ | 72 |
> 15% to 25% |  |  | 45 |  |  |  | 71 |  |  |  | 56 |
> 25% to 50% |  |  | 53 |  |  |  | 73 |  |  |  | 49 |
> 50% |  |  | 3 |  |  |  | - |  |  |  | - |
Total |  |  | 135 |  |  | $ | 224 |  |  | $ | 177 |
As of September 30, 2022, 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, 2022 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. For the three and nine months ended September 30, 2022, impairment loss due to intent to sell securities in an unrealized loss position was $2 million and $21 million, respectively, and reported in “Other net realized gains (losses)” on the Company’s consolidated results of operation. For the three months ended September 30, 2022, the impairment loss was previously recognized as an allowance for credit loss, but was impaired to fair value during the third quarter of 2022 due to the intent to sell these securities. Credit Losses on Investments 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. If the Company determines that the declines in the fair value are related to credit loss, the Company will establish an allowance for credit losses and recognize the credit component through earnings. 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, 2021 for a discussion of the Company’s policy for its determination of credit losses. The Company did not purchase any credit-deteriorated assets for the nine months ended September 30, 2022 and 2021. Allowance for Credit Losses Rollforward The following tables present the rollforward of allowance for credit losses on AFS investments for the three and nine months ended September 30, 2022:
|  | Three Months Ended September 30, 2022
In millions |  | Balance as of June 30, 2022 |  | Additions not previously recorded |  | Additions arising from PCD Assets |  | Reductions from Securities Sold |  | Reductions- Intent to sell or MLTN |  | Change in Allowance Previously Recorded |  | Write Offs |  | Recoveries |  | Balance as of September 30, 2022
AFS Investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  | $ | 3 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 3 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Total Allowance on AFS investments |  | $ | 3 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 3 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
|  | Nine Months Ended September 30, 2022
In millions |  | Balance as of December 31, 2021 |  | Additions not previously recorded |  | Additions arising from PCD Assets |  | Reductions from Securities Sold |  | Reductions- Intent to sell or MLTN |  | Change in Allowance Previously Recorded |  | Write Offs |  | Recoveries |  | Balance as of September 30, 2022
AFS Investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  | $ | - |  |  | $ | 3 |  |  | $ | - |  |  | $ | - |  |  | $ | 3 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Total Allowance on AFS investments |  | $ | - |  |  | $ | 3 |  |  | $ | - |  |  | $ | - |  |  | $ | 3 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
The additions to credit losses for the nine months ended September 30, 2022 were related to concerns on an issuer’s credit deterioration as a result of the Ukraine and Russia conflict. In the third quarter of 2022, these securities were impaired to fair value due to the Company’s intent to sell and the credit losses were reversed. The Company does not recognize credit losses 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, 2022 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. The Company did not hold any securities in an unrealized loss position that were insured by a third-party financial guarantor as of September 30, 2022.
In millions |  | Fair Value |  |  | Unrealized Loss |  |  | Insurance Loss Reserve (1) |
Mortgage-backed |  | $ | 93 |  |  | $ | (17) |  |  | $ | 111 |
Corporate obligations |  |  | 74 |  |  |  | (31) |  |  |  | - |
Other |  |  | 6 |  |  |  | - |  |  |  | - |
Total |  | $ | 173 |  |  | $ | (48) |  |  | $ | 111 |
(1) - | Insurance loss reserve estimates are based on the proportion of par value owned to the total amount of par value insured and are discounted using a discount rate equal to the risk-free rate applicable to the currency and weighted average remaining life of the insurance contract and may differ from the fair value.
Sales of Available-for-Sale Investments Gross realized gains and losses from sales of AFS investments are recorded within “Net realized investment gains (losses)” 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, 2022 and 2021 are as follows:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
In millions |  | 2022 |  | 2021 |  | 2022 |  | 2021
Proceeds from sales |  | $ | 339 |  |  | $ | 73 |  |  | $ | 859 |  |  | $ | 469 |
Gross realized gains |  | $ | 2 |  |  | $ | 1 |  |  | $ | 3 |  |  | $ | 7 |
Gross realized losses |  | $ | (17 | ) |  | $ | - |  |  | $ | (42 | ) |  | $ | (8 | )
Equity and Trading Investments Equity and trading investments are included within “Investments carried at fair value” on the Company’s consolidated balance sheets. Unrealized gains and losses recognized on equity and trading investments held as of the end of each period for the three and nine months ended September 30, 2022 and 2021 are as follows:
In millions |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2022 |  | 2021 |  | 2022 |  | 2021
Net gains (losses) recognized during the period on equity and trading securities |  | $ | (3 | ) |  | $ | - |  |  | $ | (31 | ) |  | $ | 5 |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net gains (losses) recognized during the period on equity and trading securities sold during the period |  |  | (6 | ) |  |  | 1 |  |  |  | (6 | ) |  |  | 1 |
Unrealized gains (losses) recognized during the period on equity and trading securities still held at the reporting date |  | $ | 3 |  |  | $ | (1 | ) |  | $ | (25 | ) |  | $ | 4 |

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