Investments

6 Months Ended

Jun. 30, 2011

Investments

Investments

9. Investments

Fixed Maturity Securities and Short-Term Investments

Net Investment Income

	Second Quarter						Six Months
	2011			2010			2011			2010
	(in millions)
	(restated)
Income from fixed maturity securities	$	103.1		$	92.6		$	201.6		$	179.8
Income from short-term investments	0.3			—			0.6			(0.4		)
Gross investment income	103.4			92.6			202.2			179.4
Investment expenses	(2.3		)	(1.7		)	(5.0		)	(4.2		)
Net investment income	$	101.1		$	90.9		$	197.2		$	175.2

Net investment income increased due to a shift to longer duration assets, higher income on loss mitigation bonds, and additional earnings on cash received under Bank of America Agreement. Accrued investment income was $103.8 million and $97.9 million as of June 30, 2011 and December 31, 2010, respectively.

Net Realized Investment Gains (Losses)

	Second Quarter						Six Months
	2011			2010			2011			2010
	(in millions)
Realized gains on investment portfolio	$	10.8		$	12.1		$	20.8		$	25.3
Realized losses on investment portfolio	(4.3		)	(3.2		)	(6.9		)	(6.5		)
Other-than-temporary impairment (“OTTI”):
Intent to sell	(0.8		)	(1.3		)	(3.5		)	(1.7		)
Credit component of OTTI securities	(10.8		)	(16.0		)	(12.7		)	(16.1		)
OTTI(1)	(11.6		)	(17.3		)	(16.2		)	(17.8		)
Net realized investment gains (losses)	$	(5.1	)	$	(8.4	)	$	(2.3	)	$	1.0

(1) OTTI recorded in the consolidated statement of operations includes only the credit component of unrealized fair value adjustments of impaired securities. The full unrealized loss was $26.8 million in Second Quarter 2011, $17.4 million in Second Quarter 2010, $33.8 million in Six Months 2011 and $18.5 million in 2010 prior to impairment, as shown on the consolidated statement of operations.

The following table presents the roll forward of the credit losses of fixed maturity securities for which the Company has recognized OTTI and where the portion of the fair value adjustment related to other factors was recognized in other comprehensive income (“OCI”).

Roll Forward of Credit Losses in the Investment Portfolio

	Second Quarter					Six Months
	2011			2010		2011			2010
	(in millions)
Balance, beginning of period	$	29.2		$	20.0	$	27.3		$	19.9
Additions for credit losses on securities for which an OTTI was not previously recognized	9.1			—		10.5			—
Eliminations of securities issued by FG VIEs	(13.5		)	—		(13.5		)	—
Reductions for securities sold during the period	(5.0		)	—		(5.0		)	—
Additions for credit losses on securities for which an OTTI was previously recognized	1.8			—		2.3			0.1
Balance, end of period	$	21.6		$	20.0	$	21.6		$	20.0

Fixed Maturity Securities and Short-Term Investments

by Security Type

	As of June 30, 2011
Investments Category	Percent of Total(1)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI Gain (Loss) on Securities with OTTI(2)			Weighted Average Credit Quality(3)
	(dollars in millions)
			(restated)				(restated)			(restated)
Fixed maturity securities:
U.S. government and agencies	9	%	$	926.1	$	49.4	$	(0.2	)	$	975.3	$	—		AAA
Obligations of state and political subdivisions	47		5,038.7		162.3		(16.8		)	5,184.2		1.8			AA
Corporate securities	10		1,045.7		28.7		(8.9		)	1,065.5		(0.2		)	AA-
Mortgage-backed securities(4):
RMBS	11		1,208.8		59.9		(51.2		)	1,217.5		(23.0		)	AA+
CMBS	5		498.8		17.7		(0.4		)	516.1		2.7			AAA
Asset-backed securities	5		540.4		26.0		(5.5		)	560.9		19.6			BBB
Foreign government securities	3		337.6		8.1		(1.0		)	344.7		—			AAA
Total fixed maturity securities	90		9,596.1		352.1		(84.0		)	9,864.2		0.9			AA
Short-term investments	10		1,105.6		—		—			1,105.6		—			AAA
Total investment portfolio	100	%	$	10,701.7	$	352.1	$	(84.0	)	$	10,969.8	$	0.9		AA

	As of December 31, 2010(restated)
Investments Category	Percent of Total(1)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI Gain (Loss) on Securities with OTTI(2)			Weighted Average Credit Quality(3)
	(dollars in millions)
Fixed maturity securities:
U.S. government and agencies	10	%	$	1,000.3	$	48.3	$	(0.4	)	$	1,048.2	$	—		AAA
Obligations of state and political subdivisions	48		4,922.0		99.9		(62.0		)	4,959.9		(1.4		)	AA
Corporate securities	9		980.1		25.2		(12.8		)	992.5		0.2			AA-
Mortgage-backed securities(4):
RMBS	11		1,158.9		56.5		(44.3		)	1,171.1		(8.6		)	AA
CMBS	4		365.7		14.8		(1.4		)	379.1		2.5			AAA
Asset-backed securities	5		498.2		9.9		(5.2		)	502.9		(4.1		)	BBB+
Foreign government securities	3		349.5		5.3		(6.2		)	348.6		—			AA+
Total fixed maturity securities	90		9,274.7		259.9		(132.3		)	9,402.3		(11.4		)	AA
Short-term investments	10		1,055.3		0.3		—			1,055.6		—			AAA
Total investment portfolio	100	%	$	10,330.0	$	260.2	$	(132.3	)	$	10,457.9	$	(11.4	)	AA

(1) Based on amortized cost.

(2) Accumulated OCI (“AOCI”).

(3) Ratings in the tables above represent the lower of the Moody’s and S&P classifications except for bonds purchased for loss mitigation or risk management strategies, which use internal ratings classifications. The Company’s portfolio consists primarily of high-quality, liquid instruments.

(4) As of June 30, 2011 and December 31, 2010, respectively, approximately 63% and 64% of the Company’s total mortgage-backed securities were government-agency obligations.

The Company continues to receive sufficient information to value its investments and has not had to modify its valuation approach due to the current market conditions. As of June 30, 2011, amounts, net of tax, in AOCI included a net unrealized gain of $2.9 million for securities for which the Company had recognized OTTI and a net unrealized gain of $199.3 million for securities for which the Company had not recognized OTTI. As of December 31, 2010, amounts, net of tax, in AOCI included a net unrealized loss of $5.6 million for securities for which the Company had recognized OTTI and a net unrealized gain of $115.3 million for securities for which the Company had not recognized OTTI.

The Company’s investment portfolio in tax-exempt and taxable municipal securities includes issuances by a wide number of municipal authorities across the U.S. and its territories. This is a high quality portfolio of municipal securities with an average rating of AA as of June 30, 2011 and December 31, 2010. Securities rated lower than A-/A3 by S&P or Moody’s are not eligible to be purchased for the Company’s portfolio. The Company reports the lowest of the rating agency ratings in its disclosures.

The following tables present the fair value of the Company’s available-for-sale municipal bond portfolio as of June 30, 2011 and December 31, 2010 by state, excluding $369.8 million and $478.3 million of pre-refunded bonds, respectively. The credit ratings are based on the underlying ratings and do not include any benefit from bond insurance.

Fair Value of Available-for-Sale Municipal Bond Portfolio by State

	As of June 30, 2011
State	State General Obligation		Local General Obligation		Revenue		Fair Value		Amortized Cost		Average Credit Rating
	(in millions)
Texas	$	73.0	$	331.6	$	284.1	$	688.7	$	670.1	AA
New York	11.7		54.5		565.6		631.8		616.0		AA
California	17.8		61.6		285.2		364.6		352.9		AA
Florida	44.5		53.6		235.8		333.9		323.8		AA
Illinois	15.6		90.8		200.3		306.7		300.9		AA
Washington	63.0		37.8		105.4		206.2		201.1		AA
Massachusetts	39.8		8.9		154.3		203.0		198.5		AA
Arizona	—		7.2		154.7		161.9		158.8		AA
Michigan	—		39.7		81.4		121.1		117.6		AA
Georgia	19.5		38.7		61.6		119.8		119.5		AA
All others	320.9		263.2		1,092.6		1,676.7		1,631.7		AA
Total	$	605.8	$	987.6	$	3,221.0	$	4,814.4	$	4,690.9	AA

	As of December 31, 2010
State	State General Obligation		Local General Obligation		Revenue		Fair Value		Amortized Cost		Average Credit Rating
	(in millions)
Texas	$	76.8	$	294.4	$	251.9	$	623.1	$	620.7	AA
New York	11.4		40.0		496.2		547.6		545.1		AA
California	17.2		56.0		330.2		403.4		401.0		AA
Florida	45.2		45.1		213.6		303.9		300.5		AA
Illinois	10.5		91.0		195.6		297.1		300.9		AA
Washington	80.0		37.2		89.2		206.4		204.6		AA
Massachusetts	38.0		8.6		137.3		183.9		185.8		AA
Arizona	—		0.6		144.5		145.1		145.5		AA
Michigan	—		39.5		93.1		132.6		131.4		A
Georgia	19.3		38.4		67.1		124.8		125.4		AA
All others	220.8		220.8		1,072.1		1,513.7		1,504.4		AA
Total	$	519.2	$	871.6	$	3,090.8	$	4,481.6	$	4,465.3	AA

The revenue bond portfolio is comprised primarily of essential service revenue bonds issued by water and sewer authorities and other utilities, transportation authorities, universities and healthcare providers.

Revenue Sources

	As of June 30, 2011				As of December 31, 2010
State	Fair Value		Amortized Cost		Fair Value		Amortized Cost
	(in millions)
Transportation	$	760.7	$	742.2	$	725.5	$	718.9
Municipal utilities	502.9		487.8		457.8		456.8
Water and sewer	486.8		478.6		470.6		471.3
Higher education	299.3		293.1		298.2		302.1
Tax backed	634.4		616.6		609.0		607.2
Healthcare	241.1		234.9		207.3		206.5
All others	295.8		291.9		322.4		323.1
Total	$	3,221.0	$	3,145.1	$	3,090.8	$	3,085.9

The Company’s investment portfolio is managed by four outside managers. As municipal investments are a material portion of the Company’s overall investment portfolio, the Company has established detailed guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector. Each of the portfolio managers perform independent analysis on every municipal security they purchase for the Company’s portfolio. The Company meets with each of its portfolio managers each quarter and reviews all investments with a change in credit rating as well as any investments on the manager’s watch list of securities with the potential for downgrade. The Company does not independently assign investments within the Company’s portfolio an individual rating.

The following tables summarize, for all securities in an unrealized loss position, the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.

Fixed Maturity Securities

Gross Unrealized Loss by Length of Time

	As of June 30, 2011
	Less than 12 months					12 months or more					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(dollars in millions)
U.S. government and agencies	$	54.4	$	(0.2	)	$	—	$	—		$	54.4	$	(0.2	)
Obligations of state and political subdivisions	851.4		(16.0		)	9.5		(0.8		)	860.9		(16.8		)
Corporate securities	355.8		(8.9		)	—		—			355.8		(8.9		)
Mortgage-backed securities:
RMBS	218.4		(27.9		)	10.1		(23.3		)	228.5		(51.2		)
CMBS	72.3		(0.4		)	—		—			72.3		(0.4		)
Asset-backed securities	43.7		(5.5		)	2.2		(0.0		)	45.9		(5.5		)
Foreign government securities	80.1		(1.0		)	—		—			80.1		(1.0		)
Total	$	1,676.1	$	(59.9	)	$	21.8	$	(24.1	)	$	1,697.9	$	(84.0	)
Number of securities			264					13					277
Number of securities with OTTI			5					3					8

	As of December 31, 2010(restated)
	Less than 12 months					12 months or more					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(dollars in millions)
U.S. government and agencies	$	20.5	$	(0.4	)	$	—	$	—		$	20.5	$	(0.4	)
Obligations of state and political subdivisions	1,694.5		(58.9		)	23.5		(3.1		)	1,718.0		(62.0		)
Corporate securities	403.6		(12.8		)	—		—			403.6		(12.8		)
Mortgage-backed securities:
RMBS	143.4		(32.1		)	37.3		(12.2		)	180.7		(44.3		)
CMBS	92.6		(1.4		)	—		—			92.6		(1.4		)
Asset-backed securities	228.3		(5.1		)	2.3		(0.1		)	230.6		(5.2		)
Foreign government securities	245.3		(6.2		)	—		—			245.3		(6.2		)
Total	$	2,828.2	$	(116.9	)	$	63.1	$	(15.4	)	$	2,891.3	$	(132.3	)
Number of securities			405					18					423
Number of securities with OTTI			10					3					13

The decrease in gross unrealized losses for Six Months 2011 was primarily attributable to municipal securities. Of the securities in an unrealized loss position for 12 months or more as of June 30, 2011, five securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of June 30, 2011 was $23.3 million. The unrealized loss is yield-related and not specific to individual issuer credit. The Company has determined that these securities were not other-than-temporarily-impaired as of June 30, 2011.

The amortized cost and estimated fair value of available-for-sale fixed maturity securities by contractual maturity as of June 30, 2011 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Distribution of Fixed Maturity Securities

by Contractual Maturity

	As of June 30, 2011
	Amortized Cost		Estimated Fair Value
	(in millions)
Due within one year	$	279.4	$	281.2
Due after one year through five years	1,636.1		1,685.5
Due after five years through 10 years	2,515.4		2,626.0
Due after 10 years	3,457.6		3,537.9
Mortgage-backed securities:
RMBS	1,208.8		1,217.5
CMBS	498.8		516.1
Total	$	9,596.1	$	9,864.2

Under agreements with its cedants and in accordance with statutory requirements, the Company maintains fixed maturity securities in trust accounts for the benefit of reinsured companies, which amounted to $374.1 million and $365.3 million as of June 30, 2011 and December 31, 2010, respectively. In addition, to fulfill state licensing requirements, the Company has placed on deposit eligible securities of $19.1 million and $19.2 million as of June 30, 2011 and December 31, 2010, respectively, for the protection of policyholders.

Under certain derivative contracts, the Company is required to post eligible securities as collateral. The need to post collateral under these transactions is generally based on mark-to-market valuations in excess of contractual thresholds. The fair market value of the Company’s pledged securities totaled $768.6 million and $765.9 million as of June 30, 2011 and December 31, 2010, respectively.

No material investments of the Company were non-income-producing for Six Months 2011 and 2010, respectively.

The Company purchased securities that it has insured, and for which it has expected losses to be paid, in order to mitigate the economic effect of insured losses. These securities were purchased at a discount and are accounted for excluding the effects of the Company’s insurance on the securities. As of June 30, 2011, securities purchased for loss mitigation purposes had a fair value of $168.1 million, representing $406.6 million of par. Under the terms of certain credit derivative contracts, the Company has obtained the obligations referenced in the transactions and recorded such assets in fixed maturity securities in the consolidated balance sheets. Such amounts totaled $193.4 million, representing $246.9 million in par.