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Investments and Cash
 9 Months Ended
Sep. 30, 2013
Investments, Debt and Equity Securities [Abstract]  
Investments and Cash
Investments and Cash
 
Investment Portfolio
 
Net investment income is a function of the yield that the Company earns on invested assets and the size of the portfolio. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets. Income earned on the general investment portfolio, excluding loss mitigation bonds, declined due to lower reinvestment rates. Accrued investment income on fixed maturity securities, short-term investments and assets acquired in refinancing transactions was $96 million and $97 million as of September 30, 2013 and December 31, 2012, respectively.
 
Net Investment Income
 
 
Third Quarter
 
Nine Months
 
2013
 
2012
 
2013
 
2012
 
(in millions)
Income from fixed maturity securities in general investment portfolio
$
81

 
$
87

 
$
241

 
$
262

Income from fixed maturity securities purchased or obtained for loss mitigation purposes
19

 
15

 
47

 
42

Other (1)
1

 
2

 
4

 
4

Gross investment income
101

 
104

 
292

 
308

Investment expenses
(2
)
 
(2
)
 
(6
)
 
(7
)
Net investment income
$
99

 
$
102

 
$
286

 
$
301


____________________
(1)    Includes income from short-term investments and assets acquired in refinancing transactions.

Net Realized Investment Gains (Losses)
 
 
Third Quarter
 
Nine Months
 
2013
 
2012
 
2013
 
2012
 
(in millions)
Gross realized gains on investment portfolio
$
6

 
$
8

 
$
61

 
$
34

Gross realized losses on investment portfolio
(5
)
 
(2
)
 
(18
)
 
(23
)
Other-than-temporary impairment ("OTTI")
(8
)
 
(4
)
 
(20
)
 
(11
)
Net realized investment gains (losses)
$
(7
)

$
2

 
$
23

 
$
0


 
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

 
Third Quarter
 
Nine Months
 
2013
 
2012
 
2013
 
2012
 
(in millions)
Balance, beginning of period
$
72

 
$
53

 
$
64

 
$
47

Additions for credit losses on securities for which an OTTI was not previously recognized
1

 
1

 
2

 
8

Reductions for securities sold during the period
—

 
(3
)
 
—

 
(4
)
Additions for credit losses on securities for which an OTTI was previously recognized
6

 
3

 
13

 
3

Balance, end of period
$
79

 
$
54

 
$
79

 
$
54


 
Fixed Maturity Securities and Short Term Investments
by Security Type 
As of September 30, 2013

Investment Category
 
Percent
of
Total(1)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
AOCI(2)
Gain
(Loss) on
Securities
with
OTTI
 
Weighted
Average
Credit
Quality
 (3)
 
 
(dollars in millions)
Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
U.S. government and agencies
 
6
%
 
$
684

 
$
37

 
$
(4
)
 
$
717

 
$
—

 
AA+
Obligations of state and political subdivisions
 
49

 
5,047

 
241

 
(39
)
 
5,249

 
1

 
AA
Corporate securities
 
13

 
1,308

 
50

 
(13
)
 
1,345

 
0

 
A
Mortgage-backed securities(4):
 
0

 
 
 
 
 
 

 
 
 
 

 

RMBS
 
11

 
1,157

 
33

 
(70
)
 
1,120

 
(53
)
 
A
CMBS
 
5

 
507

 
19

 
(3
)
 
523

 
—

 
AAA
Asset-backed securities
 
6

 
592

 
31

 
(9
)
 
614

 
16

 
BBB-
Foreign government securities
 
3

 
292

 
13

 
0

 
305

 
—

 
AA+
Total fixed maturity securities
 
93

 
9,587

 
424

 
(138
)
 
9,873

 
(36
)
 
AA-
Short-term investments
 
7

 
761

 
0

 
0

 
761

 
—

 
AAA
Total investment portfolio
 
100
%
 
$
10,348

 
$
424

 
$
(138
)
 
$
10,634

 
$
(36
)
 
AA-

Fixed Maturity Securities and Short Term Investments
by Security Type 
As of December 31, 2012 

Investment Category
 
Percent
of
Total(1)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
AOCI
Gain
(Loss) on
Securities
with
OTTI
 
Weighted
Average
Credit
Quality
 (3)
 
 
(dollars in millions)
Fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
U.S. government and agencies
 
7
%
 
$
732

 
$
62

 
$
0

 
$
794

 
$
—

 
AA+
Obligations of state and political subdivisions
 
51

 
5,153

 
489

 
(11
)
 
5,631

 
9

 
AA
Corporate securities
 
9

 
930

 
80

 
0

 
1,010

 
0

 
AA-
Mortgage-backed securities(4):
 
 

 
 

 
 

 
 

 
 

 
 

 
 
RMBS
 
13

 
1,281

 
62

 
(77
)
 
1,266

 
(59
)
 
A+
CMBS
 
5

 
482

 
38

 
0

 
520

 
—

 
AAA
Asset-backed securities
 
5

 
482

 
59

 
(10
)
 
531

 
43

 
BIG
Foreign government securities
 
2

 
286

 
18

 
0

 
304

 
0

 
AAA
Total fixed maturity securities
 
92

 
9,346

 
808

 
(98
)
 
10,056

 
(7
)
 
AA-
Short-term investments
 
8

 
817

 
0

 
0

 
817

 
—

 
AAA
Total investment portfolio
 
100
%
 
$
10,163

 
$
808

 
$
(98
)
 
$
10,873

 
$
(7
)
 
AA-
____________________
(1)
Based on amortized cost.
 
(2)
Accumulated OCI ("AOCI"). See also Note 17, Other Comprehensive Income.
 
(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)
Government-agency obligations were approximately 51% of mortgage backed securities as of September 30, 2013 and 61% as of December 31, 2012 based on fair value.

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. Securities rated lower than A-/A3 by S&P or Moody’s are not eligible to be purchased for the Company’s portfolio unless acquired for loss mitigation or risk management strategies.
 
The Company’s investment portfolio is substantially 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 quarterly 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 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 September 30, 2013
 
 
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
$
175

 
$
(4
)
 
$
—

 
$
—

 
$
175

 
$
(4
)
Obligations of state and political subdivisions
731

 
(39
)
 
—

 
—

 
731

 
(39
)
Corporate securities
341

 
(13
)
 
—

 
—

 
341

 
(13
)
Mortgage-backed securities:
 
 
 
 
 
 
 

 


 


RMBS
373

 
(13
)
 
170

 
(57
)
 
543

 
(70
)
CMBS
59

 
(3
)
 
—

 
—

 
59

 
(3
)
Asset-backed securities
117

 
(2
)
 
40

 
(7
)
 
157

 
(9
)
Foreign government securities
58

 
0

 
—

 
—

 
58

 
0

Total
$
1,854

 
$
(74
)
 
$
210

 
$
(64
)
 
$
2,064

 
$
(138
)
Number of securities
 

 
385

 
 

 
18

 
 

 
403

Number of securities with OTTI
 

 
11

 
 

 
10

 
 

 
21

 
Fixed Maturity Securities
Gross Unrealized Loss by Length of Time
As of December 31, 2012

 
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
$
62

 
$
0

 
$
—

 
$
—

 
$
62

 
$
0

Obligations of state and political subdivisions
79

 
(11
)
 
—

 
—

 
79

 
(11
)
Corporate securities
25

 
0

 
—

 
—

 
25

 
0

Mortgage-backed securities:
 

 
 

 
 

 
 

 


 


RMBS
108

 
(19
)
 
121

 
(58
)
 
229

 
(77
)
CMBS
5

 
0

 
—

 
—

 
5

 
0

Asset-backed securities
16

 
0

 
35

 
(10
)
 
51

 
(10
)
Foreign government securities
8

 
0

 
—

 
—

 
8

 
0

Total
$
303

 
$
(30
)
 
$
156

 
$
(68
)
 
$
459

 
$
(98
)
Number of securities
 

 
58

 
 

 
16

 
 

 
74

Number of securities with OTTI
 

 
5

 
 

 
6

 
 

 
11

 
Of the securities in an unrealized loss position for 12 months or more as of September 30, 2013, 11 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of September 30, 2013 was $63 million. The Company has determined that the unrealized losses recorded as of September 30, 2013 are yield related and not the result of OTTI.
 
The amortized cost and estimated fair value of available-for-sale fixed maturity securities by contractual maturity as of September 30, 2013 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 September 30, 2013
 
 
Amortized
Cost
 
Estimated
Fair Value
 
(in millions)
Due within one year
$
269

 
$
273

Due after one year through five years
1,602

 
1,674

Due after five years through 10 years
2,451

 
2,554

Due after 10 years
3,601

 
3,729

Mortgage-backed securities:
 

 
 

RMBS
1,157

 
1,120

CMBS
507

 
523

Total
$
9,587

 
$
9,873


 
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 $360 million and $368 million as of September 30, 2013 and December 31, 2012, respectively. In addition, to fulfill state licensing requirements the Company has placed on deposit eligible securities of $22 million and $27 million as of September 30, 2013 and December 31, 2012, respectively. To provide collateral for a letter of credit, the Company holds a fixed maturity investment in a segregated account equal to 120% of the letter of credit, which amounted to $3.5 million and $3.5 million as of September 30, 2013 and December 31, 2012, respectively.

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 fair value assessments in excess of contractual thresholds. The fair value of the Company’s pledged securities totaled $681 million and $660 million as of September 30, 2013 and December 31, 2012, respectively. See Note 8, Financial Guaranty Contracts Accounted for as Credit Derivatives, for the effect of the downgrade on collateral posted.
 
No material investments of the Company were non-income producing for Nine Months 2013 and 2012, respectively.
 
Loss Mitigation Assets

One of the Company's strategies for mitigating losses has been to purchase insured securities that have expected losses at discounted prices. In addition, the Company may also obtain the obligations referenced in CDS transactions that have triggered the insured's obligation to put these bonds to AGM or AGC, or assets may be obtained as part of a negotiated agreement.

Loss Mitigation Assets
Carrying Value

 
As of
September 30, 2013
 
As of
December 31, 2012
 
(in millions)
Fixed maturity securities:
 
 
 
Obligations of state and political subdivisions
$
41

 
$
35

Corporate Securities
132

 
—

RMBS
268

 
215

Asset-backed securities
340

 
306

Other invested assets:
 
 
 
Assets acquired in refinancing transactions
51

 
72

Other
21

 
42

Total
$
853

 
$
670