XML 46 R29.htm IDEA: XBRL DOCUMENT v2.4.0.6
Fair Value Measurement (Tables)
 9 Months Ended
Sep. 30, 2012
Fair Value Disclosures [Abstract]  
Information by Credit Spread Type
Information by Credit Spread Type
 
 
As of
September 30, 2012
 
As of
December 31, 2011
Based on actual collateral specific spreads
5
%
 
5
%
Based on market indices
89
%
 
90
%
Provided by the CDS counterparty
6
%
 
5
%
Total
100
%
 
100
%
Schedule of example effects of change in gross spreads, company's own credit spread and cost to buy protection on the on the Company affect the amount of premium the company can demand for credit protection
Following is an example of how changes in gross spreads, the Company’s own credit spread and the cost to buy protection on the Company affect the amount of premium the Company can demand for its credit protection. The assumptions used in these examples are hypothetical amounts. Scenario 1 represents the market conditions in effect on the transaction date and Scenario 2 represents market conditions at a subsequent reporting date.
 
 
Scenario 1
 
Scenario 2
 
bps
 
% of Total
 
bps
 
% of Total
Original gross spread/cash bond price (in bps)
185

 
 

 
500

 
 

Bank profit (in bps)
115

 
62
%
 
50

 
10
%
Hedge cost (in bps)
30

 
16
%
 
440

 
88
%
The Company premium received per annum (in bps)
40

 
22
%
 
10

 
2
%
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of September 30, 2012
 
 
 
 
Fair Value Hierarchy
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 

 
 

 
 

 
 

Investment portfolio, available-for-sale:
 

 
 

 
 

 
 

Fixed maturity securities
 

 
 

 
 

 
 

U.S. government and agencies
$
810

 
$
—

 
$
810

 
$
—

Obligations of state and political subdivisions
5,714

 
—

 
5,703

 
11

Corporate securities
1,030

 
—

 
1,030

 
—

Mortgage-backed securities:
 

 
 
 
 
 
 
RMBS
1,384

 
—

 
1,175

 
209

Commercial mortgage-backed securities ("CMBS")
513

 
—

 
513

 
—

Asset-backed securities
561

 
—

 
262

 
299

Foreign government securities
306

 
—

 
306

 
—

Total fixed maturity securities
10,318


—

 
9,799

 
519

Short-term investments
564

 
268

 
296

 
—

Other invested assets(1)
103

 
—

 
95

 
8

Credit derivative assets
450

 
—

 
—

 
450

FG VIEs’ assets, at fair value
2,693

 
—

 
—

 
2,693

Other assets(2)
71

 
24

 
5

 
42

Total assets carried at fair value
$
14,199

 
$
292

 
$
10,195

 
$
3,712

Liabilities:
 

 
 

 
 

 
 

Credit derivative liabilities
$
2,151

 
$
—

 
$
—

 
$
2,151

FG VIEs’ liabilities with recourse, at fair value
2,169

 
—

 
—

 
2,169

FG VIEs’ liabilities without recourse, at fair value
1,018

 
—

 
—

 
1,018

Total liabilities carried at fair value
$
5,338

 
$
—

 
$
—

 
$
5,338

 
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of December 31, 2011
 
 
 
 
Fair Value Hierarchy
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 

 
 

 
 

 
 

Investment portfolio, available-for-sale:
 

 
 

 
 

 
 

Fixed maturity securities
 

 
 

 
 

 
 

U.S. government and agencies
$
922

 
$
—

 
$
922

 
$
—

Obligations of state and political subdivisions
5,456

 
—

 
5,446

 
10

Corporate securities
1,038

 
—

 
1,038

 
—

Mortgage-backed securities:
 

 
 

 
 

 
 

RMBS
1,428

 
—

 
1,294

 
134

CMBS
500

 
—

 
500

 
—

Asset-backed securities
458

 
—

 
223

 
235

Foreign government securities
340

 
—

 
340

 
—

Total fixed maturity securities
10,142

 
—

 
9,763

 
379

Short-term investments
734

 
210

 
524

 
—

Other invested assets(1)
43

 
—

 
32

 
11

Credit derivative assets
469

 
—

 
—

 
469

FG VIEs’ assets, at fair value
2,819

 
—

 
—

 
2,819

Other assets(2)
80

 
26

 
—

 
54

Total assets carried at fair value
$
14,287

 
$
236

 
$
10,319

 
$
3,732

Liabilities:
 

 
 

 
 

 
 

Credit derivative liabilities
$
1,773

 
$
—

 
$
—

 
$
1,773

FG VIEs’ liabilities with recourse, at fair value
2,397

 
—

 
—

 
2,397

FG VIEs’ liabilities without recourse, at fair value
1,061

 
—

 
—

 
1,061

Total liabilities carried at fair value
$
5,231

 
$
—

 
$
—

 
$
5,231

 ____________________
(1)                               Includes mortgage loans that are recorded at fair value on a non-recurring basis. At September 30, 2012 and December 31, 2011, such investments were carried at their market value of $7 million and $9 million, respectively.
 
(2)                                Includes fair value of CCS and supplemental executive retirement plan assets.
Fair Value Level 3 Roll Forward
Fair Value Level 3 Rollforward
Recurring Basis
 
 
Third Quarter 2012
 
Fixed Maturity Securities
 

 


 

 

 

 

 
 
Obligations
of State and
Political
Subdivisions
 
RMBS
 
Asset-
Backed
Securities
 
Other
Invested
Assets
 
FG VIEs’
Assets at
Fair
Value
 
Other
Assets
 
Credit
Derivative
Asset
(Liability),
net(5)
 
FG VIE's Liabilities
with
Recourse,
at Fair
Value
 
FG VIE's Liabilities
without
Recourse,
at Fair
Value
 
 
(in millions)
Fair value as of June 30, 2012
$
10

 
$
167

 
$
274

 
$
1

 
$
2,726

 
$
44

 
$
(1,666
)
 
$
(2,239
)
 
$
(1,042
)
 
Total pretax realized and unrealized gains/(losses) recorded in:(1)
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Net income (loss)
0

(2
)
4

(2
)
6

(2
)
—

 
91

(3
)
(2
)
(4
)
(36
)
(6
)
(76
)
(3
)
(19
)
(3
)
Other comprehensive income (loss)
0

 
13

 
20

 
—

 
—

 
—

 
—

 
—

 
—

 
Purchases
1

 
42

 
1

 
—

 
—

 
—

 
—

 
—

 
—

 
Settlements
—

 
(17
)
 
(2
)
 
—

 
(124
)
 
—

 
1

 
146

 
43

 
FG VIE consolidations
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
Fair value as of September 30, 2012
$
11

 
$
209

 
$
299

 
$
1

 
$
2,693

 
$
42

 
$
(1,701
)
 
$
(2,169
)
 
$
(1,018
)
 
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2012
$
0

 
$
10

 
$
20

 
$
—

 
$
165

 
$
(2
)
 
$
(39
)
 
$
(55
)
 
$
(58
)
 


 
Third Quarter 2011
 
Fixed Maturity Securities
 
 
 
 

 
 
 

 

 
 
 
 
 
 
RMBS
 
Asset-
Backed
Securities
 
Other
Invested
Assets
 
FG VIEs’
Assets at
Fair
Value
 
Other
Assets
 
Credit
Derivative
Asset
(Liability),
net(5)
 
FG VIE's Liabilities
with
Recourse,
at Fair
Value
 
FG VIE's Liabilities
without
Recourse,
at Fair
Value
 
 
(in millions)
Fair value as of June 30, 2011
$
88

 

$
274

 

$
2

 
$
3,492

 
$
—

 

$
(2,188
)
 

$
(2,849
)
 
$
(1,283
)
 
Total pretax realized and unrealized gains/(losses) recorded in:(1)
 

 

 

 

 

 
 

 
 
 

 

 

 

 

 

 

Net income (loss)
6

(2
)
(8
)
(2
)
—

 
(313
)
(3
)
2

(4
)
1,156

(6
)
97

(3
)
89

(3
)
Other comprehensive income (loss)
(37
)
 

(15
)
 

0

 
—

 
—

 

—

 

—

 

—

 

Purchases
43

 

—

 

—

 
—

 
—

 

—

 

—

 

—

 

Sales
(8
)
 
(1
)
 
—

 
—

 
—

 
—

 
—

 
—

 
Settlements
—

 
—

 
—

 
(174
)
 
—

 
4

 

176

 

61

 

FG VIE consolidations
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 

Transfers into Level 3
—

 
—

 
—

 
—

 
20

 
—

 
—

 
—

 
Fair value as of September 30, 2011
$
92

 

$
250

 

$
2

 
$
3,005

 
$
22

 

$
(1,028
)
 

$
(2,576
)
 
$
(1,133
)
 
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2011
$
(37
)
 
$
(15
)
 
$
0

 
$
(181
)
 
$
2

 
$
1,159

 
$
98

 
$
60

 

 
Nine Months 2012
 
Fixed Maturity Securities
 


 

 


 


 

 

 
 
Obligations
of State and
Political
Subdivisions
 
RMBS
 
Asset-
Backed
Securities
 
Other
Invested
Assets
 
FG VIEs’
Assets at
Fair
Value
 
Other
Assets
 
Credit
Derivative
Asset
(Liability),
net(5)
 
FG VIEs' Liabilities
with
Recourse,
at Fair
Value
 
FG VIEs’ Liabilities
without
Recourse,
at Fair
Value
 
 
(in millions)
Fair value as of December 31, 2011
$
10

 

$
134

 

$
235

 

$
2

 
$
2,819

 

$
54

 

$
(1,304
)
 
$
(2,397
)
 
$
(1,061
)
 
Total pretax realized and unrealized gains/(losses) recorded in:(1)
 
 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

Net income (loss)
—

(2
)
9

(2
)
20

(2
)
—

 
269

(3
)
(12
)
(4
)
(466
)
(6
)
(212
)
(3
)
(112
)
(3
)
Other comprehensive income (loss)
1

 

6

 

8

 

(1
)
 
—

 

—

 

—

 

—

 

—

 

Purchases
1

 

97

 

41

 

—

 
—

 

—

 

—

 

—

 

—

 

Settlements
(1
)
 
(37
)
 
(5
)
 
—

 
(410
)
 
—

 

69

 

461

 

155

 

FG VIE consolidations
—

 

—

 

—

 

—

 
15

 

—

 

—

 

(21
)
 
—

 

Fair value as of September 30, 2012
$
11

 

$
209

 

$
299

 

$
1

 
$
2,693

 

$
42

 

$
(1,701
)
 
$
(2,169
)
 
$
(1,018
)
 
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2012
$
1

 
$
2

 
$
8

 
$
(1
)
 
$
468

 
$
(12
)
 
$
(391
)
 
$
(180
)
 
$
(213
)
 


 
Nine Months 2011
 
Fixed Maturity Securities
 
 

 
 

 
 
 
 

 
 
 
 
 
 
RMBS
 
Asset-
Backed
Securities
 
Other
Invested
Assets
 
FG VIEs’
Assets at
Fair
Value
 
Other
Assets
 
Credit
Derivative
Asset
(Liability),
net(5)
 
FG VIEs’ Liabilities
with
Recourse,
at Fair
Value
 
FG VIEs’ Liabilities
without
Recourse,
at Fair
Value
 
 
(in millions)
Fair value as of December 31, 2010
$
100

 

$
210

 

$
2

 
$
3,657

 

$
—

 
$
(1,870
)
 

$
(3,031
)
 
$
(1,337
)
 
Total pretax realized and unrealized gains/(losses) recorded in:(1)
 

 

 

 

 

 
 

 

 
 
 

 

 

 

 

 

Net income (loss)
(25
)
(2
)
(4
)
(2
)
—

 
(290
)
(3
)
2

(4
)
855

(6
)
101

(3
)
40

(3
)
Other comprehensive income (loss)
(85
)
 

(2
)
 

—

 
—

 

—

 
—

 

—

 

—

 

Purchases
195

 

47

 

—

 
—

 

—

 
—

 

—

 

—

 

Sales
(29
)
 
(1
)
 
—

 
—

 
—

 
—

 
—

 
—

 
Settlements
—

 
—

 
—

 
(644
)
 
—

 
(13
)
 

626

 

227

 

FG VIE consolidations
(64
)
 

—

 

—

 
282

 

—

 
—

 

(272
)
 
(63
)
 

Transfers into Level 3
—

 
—

 
—

 
—

 
20

 
—

 
—

 
—

 
Fair value as of September 30, 2011
$
92

 

$
250

 

$
2

 
$
3,005

 

$
22

 
$
(1,028
)
 

$
(2,576
)
 
$
(1,133
)
 
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2011
$
(85
)
 
$
(2
)
 
$
—

 
$
(158
)
 
$
2

 
$
848

 
$
101

 
$
11

 
 ___________________
(1)
Realized and unrealized gains (losses) from changes in values of Level 3 financial instruments represent gains (losses) from changes in values of those financial instruments only for the periods in which the instruments were classified as Level 3.

(2)
Included in net realized investment gains (losses) and net investment income.

(3)
Included in fair value gains (losses) on FG VIEs.

(4)
Recorded in fair value gain (loss) on committed capital securities.

(5)
Represents net position of credit derivatives. The consolidated balance sheet presents gross assets and liabilities based on net counterparty exposure.

(6)
Reported in net change in fair value of credit derivatives.
Schedule of Quantitative Information About Level 3 Fair Value Measurements
Quantitative Information About Level 3 Fair Value Inputs
 
Financial Instrument Description
 
Fair Value at
September 30, 2012
(in millions)
 
Valuation
Technique
 
Significant Unobservable Inputs
 
Range
Assets:
 
 

 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 

 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
11

 
Discounted
 
Rate of inflation
 
1.0
%
-
3.0%
 
 
cash flow
 
Cash flow receipts
4.9
%
-
29.1%
 
 
 
 
Collateral recovery period
1 month

-
10 years
 
 
 
 
 
 
 
 
 
 
 
RMBS
 
209

 
Discounted
 
CPR
 
0.8
%
-
7.5%
 
 
 cash flow
 
CDR
 
4.4
%
-
28.6%
 
 
 
 
Severity
 
48.0
%
-
102.8%
 
 
 
 
Yield
 
4.3
%
-
14.8%
Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
Whole business securitization
 
54

 
Discounted cash flow
 
Annual gross revenue projections (in millions)
 

$54

-
$96
 
 
 
Value of primary financial guaranty policy
 
43.8%
 
 
 
Liquidity discount
 
5.0
%
-
20.0%
 
 
 
 
 
 
 
 
 
 
 
Investor owned utility
 
192

 
Discounted cash flow
 
Liquidation value (in millions)
 

$174

-
$281
 
 
 
Years to liquidation
 
0 years

-
2 years
 
 
 
Discount factor
 
14.5%
 
 
 
 
 
 
 
 
 
 
 
XXX life insurance transactions
 
53

 
Discounted
 
Yield
 
12.8%
 
 
 cash flow
 
 
 

 
 
 
 
 
 
 
 
 
 
 
Other invested assets
 
8

 
Discounted cash flow
 
Discount for lack of liquidity
 
10.0
%
-
20.0%
 
 
 
Recovery on delinquent loans
 
20.0
%
-
60.0%
 
 
 
Default rates
 
1.0
%
-
10.0%
 
 
 
Loss severity
 
40.0
%
-
90.0%
 
 
 
Prepayment speeds
 
6.0
%
-
15.0%
 
 
 
 
 
 
 
 
 
 
 
FG VIEs’ assets, at fair value
 
2,693

 
Discounted
 
CPR
 
0.0
%
-
11.8%
 
 
 cash flow
 
CDR
 
2.6
%
-
37.6%
 
 
 
 
Loss severity
 
37.5
%
-
103.8%
 
 
 
 
Yield
 
4.6
%
-
20.0%


 
Financial Instrument Description
 
Fair Value at
September 30, 2012
(in millions)
 
Valuation
Technique
 
Significant Unobservable Inputs
 
Range
Other assets
 
42

 
Discounted cash flow
 
Quotes from third party pricing
 
$39
-
$44
 
 
 
 
Term (years)
 
3
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 
 
 
 
 
 
 
Credit derivative liabilities, net
 
(1,701
)
 
Discounted
 
Year 1 loss estimates
 
0.0
%
-
60.0%
 
 
 
cash flow
 
Hedge cost (in bps)
 
83.2

-
780.0
 
 
 
 
 
Bank profit (in bps)
 
1.0

-
1,293.0
 
 
 
 
 
Internal floor (in bps)
 
7.0

-
40.0
 
 
 
 
 
Internal credit rating
 
AAA

-
BIG
 
 
 
 
 
 
 
 
 
 
 
FG VIEs’ liabilities, at fair value
 
(3,187
)
 
Discounted
 
CPR
 
0.0
%
-
11.8%
 
 
cash flow
 
CDR
 
2.6
%
-
37.6%
 
 
 
 
Loss severity
 
37.5
%
-
103.8%
 
 
 
 
Yield
 
4.6
%
-
20.0%
Fair Value of Financial Instruments
The carrying amount and estimated fair value of the Company’s financial instruments are presented in the following table.
 
Fair Value of Financial Instruments
 
 
As of
September 30, 2012
 
As of
December 31, 2011
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
(in millions)
Assets:
 

 
 

 
 

 
 

Fixed maturity securities
$
10,318

 
$
10,318

 
$
10,142

 
$
10,142

Short-term investments 
564

 
564

 
734

 
734

Other invested assets
165

 
176

 
170

 
182

Credit derivative assets
450

 
450

 
469

 
469

FG VIEs’ assets, at fair value
2,693

 
2,693

 
2,819

 
2,819

Other assets
183

 
183

 
186

 
186

Liabilities:
 

 
 

 
 

 
 

Financial guaranty insurance contracts(1)
4,102

 
6,929

 
4,657

 
4,313

Long-term debt(2)
840

 
1,058

 
1,038

 
1,186

Credit derivative liabilities
2,151

 
2,151

 
1,773

 
1,773

FG VIEs’ liabilities with recourse, at fair value
2,169

 
2,169

 
2,397

 
2,397

FG VIEs’ liabilities without recourse, at fair value
1,018

 
1,018

 
1,061

 
1,061

Other liabilities
64

 
64

 
16

 
16

___________________
(1)                                  Carrying amount includes the balance sheet amounts related to financial guaranty insurance contract premiums and losses, net of reinsurance.
 
(2)                                  Carrying amount represented principal less accumulated discount or plus accumulated premium.