Investments and Cash

Accounting Policy

The vast majority of the Company's investment portfolio is composed of fixed-maturity and short-term investments, classified as available-for-sale at the time of purchase (approximately 99% based on fair value at December 31, 2014), and therefore carried at fair value. Changes in fair value for other-than-temporarily-impaired ("OTTI") securities are bifurcated between credit losses and non-credit changes in fair value. The credit loss on OTTI securities is recorded in the statement of operations and the non-credit component of the change in fair value of securities, whether OTTI or not, is recorded in OCI. For securities where the Company has the intent to sell or it is more-likely-than-not that it will be required to sell the security before recovery, declines in fair value are recorded in the consolidated statements of operations.

Credit losses reduce the amortized cost of impaired securities. The amortized cost basis is adjusted for accretion and amortization (using the effective interest method) with a corresponding entry recorded in net investment income.

Realized gains and losses on sales of investments are determined using the specific identification method. Realized loss includes amounts recorded for other-than-temporary impairments on debt securities and the declines in fair value of securities for which the Company has the intent to sell the security or inability to hold until recovery of amortized cost.

For mortgage‑backed securities, and any other holdings for which there is prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any necessary adjustments due to changes in effective yields and maturities are recognized in net investment income.

The Company purchases 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 ("loss mitigation securities"). These securities were purchased at a discount and are accounted for excluding the effects of the Company’s insurance.

Short-term investments, which are those investments with a maturity of less than one year at time of purchase, are carried at fair value and include amounts deposited in money market funds.

Other invested assets primarily include:


•	preferred stocks, which are carried at fair value with changes in unrealized gains and losses recorded in OCI,


•	trading securities, which are carried at fair value with unrealized gains and losses recorded in net income,


•	a 50% equity investment acquired in a restructuring of an insured CDS carried at its proportionate share of the underlying entity's U.S. GAAP equity value.

Cash consists of cash on hand and demand deposits. As a result of the lag in reporting FG VIEs, cash and short-term investments do not reflect cash outflow to the holders of the debt issued by the FG VIEs for claim payments made by the Company's insurance subsidiaries to the consolidated FG VIEs until the subsequent reporting period.

Assessment for Other-Than Temporary Impairments

The amount of other-than-temporary-impairment recognized in earnings depends on whether (1) an entity intends to sell the security or (2) it is more-likely-than-not that the entity will be required to sell the security before recovery of its amortized cost basis.

If an entity does not intend to sell the security and it is not more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary-impairment is separated into (1) the amount representing the credit loss and (2) the amount related to all other factors.

The Company has a formal review process to determine other-than-temporary-impairment for securities in its investment portfolio where there is no intent to sell and it is not more-likely-than-not that it will be required to sell the security before recovery. Factors considered when assessing impairment include:


•	a decline in the market value of a security by 20% or more below amortized cost for a continuous period of at least six months;


•	a decline in the market value of a security for a continuous period of 12 months;


•	recent credit downgrades of the applicable security or the issuer by rating agencies;


•	the financial condition of the applicable issuer;


•	whether loss of investment principal is anticipated;


•	the impact of foreign exchange rates; and


•	whether scheduled interest payments are past due.

The Company assesses the ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. If the security is impaired and the net present value is less than the amortized cost of the investment, an other-than-temporary impairment is recorded. The net present value is calculated by discounting the Company's estimate of projected future cash flows at the effective interest rate implicit in the debt security at the time of purchase. The Company's estimates of projected future cash flows are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company develops these estimates using information based on historical experience, credit analysis and market observable data, such as industry analyst reports and forecasts, sector credit ratings and other relevant data. For mortgage‑backed and asset backed securities, cash flow estimates also include prepayment and other assumptions regarding the underlying collateral including default rates, recoveries and changes in value. The assumptions used in these projections requires the use of significant management judgment.

The Company's assessment of a decline in value included management's current assessment of the factors noted above. The Company also seeks advice from its outside investment managers. If that assessment changes in the future, the Company may ultimately record a loss after having originally concluded that the decline in value was temporary.

Net Investment Income and Realized Gains (Losses)

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. Accrued investment income was $98 million and $93 million as of December 31, 2014 and December 31, 2013, respectively.

Net Investment Income



	Year Ended December 31,
	2014			2013			2012
	(in millions)
Income from fixed-maturity securities managed by third parties	$	324		$	322		$	346
Income from internally managed securities:
Fixed maturities	74			74			60
Other invested assets	13			5			6
Other	1			0			1
Gross investment income	412			401			413
Investment expenses	(9		)	(8		)	(9		)
Net investment income	$	403		$	393		$	404

Net Realized Investment Gains (Losses)



	Year Ended December 31,
	2014			2013			2012
	(in millions)
Gross realized gains on available-for-sale securities	$	14		$	73		$	29
Gross realized gains on other assets in investment portfolio	8			40			14
Gross realized losses on available-for-sale securities	(5		)	(12		)	(23		)
Gross realized losses on other assets in investment portfolio	(2		)	(7		)	(2		)
Other-than-temporary impairment	(75		)	(42		)	(17		)
Net realized investment gains (losses)	$	(60	)	$	52		$	1

The following table presents the roll-forward of the credit losses of fixed-maturity securities for which the Company has recognized an other-than-temporary-impairment and where the portion of the fair value adjustment related to other factors was recognized in OCI.

Roll Forward of Credit Losses

in the Investment Portfolio



	Year Ended December 31,
	2014			2013			2012
	(in millions)
Balance, beginning of period	$	80		$	64		$	47
Additions for credit losses on securities for which an other-than-temporary-impairment was not previously recognized	64			18			14
Eliminations of securities issued by FG VIEs	(15		)	—			—
Reductions for securities sold during the period	(12		)	(21		)	—
Additions for credit losses on securities for which an other-than-temporary-impairment was previously recognized	7			19			3
Balance, end of period	$	124		$	80		$	64

Investment Portfolio

Fixed-Maturity Securities and Short-Term Investments

by Security Type

As of December 31, 2014



Investment Category	Percent of Total(1)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI(2) Gain (Loss) on Securities with Other-Than-Temporary Impairment			Weighted Average Credit Quality (3)
	(dollars in millions)
Fixed-maturity securities:
Obligations of state and political subdivisions	50	%	$	5,416	$	380	$	(1	)	$	5,795	$	7		AA
U.S. government and agencies	6		635		31		(1		)	665		—			AA+
Corporate securities	12		1,320		53		(5		)	1,368		(2		)	A
Mortgage-backed securities(4):	—
RMBS	12		1,255		51		(21		)	1,285		0			A-
CMBS	6		639		20		0			659		—			AAA
Asset-backed securities	4		411		9		(3		)	417		3			BBB-
Foreign government securities	3		296		8		(2		)	302		—			AA+
Total fixed-maturity securities	93		9,972		552		(33		)	10,491		8			AA-
Short-term investments	7		767		0		0			767		0			AA+
Total investment portfolio	100	%	$	10,739	$	552	$	(33	)	$	11,258	$	8		AA-

Fixed-Maturity Securities and Short-Term Investments

by Security Type

As of December 31, 2013



Investment Category	Percent of Total(1)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI Gain (Loss) on Securities with Other-Than-Temporary Impairment			Weighted Average Credit Quality (3)
	(dollars in millions)
Fixed-maturity securities:
Obligations of state and political subdivisions	47	%	$	4,899	$	219	$	(39	)	$	5,079	$	4		AA
U.S. government and agencies	6		674		32		(6		)	700		—			AA+
Corporate securities	13		1,314		44		(18		)	1,340		0			A
Mortgage-backed securities(4):
RMBS	11		1,160		34		(72		)	1,122		(43		)	A
CMBS	5		536		17		(4		)	549		—			AAA
Asset-backed securities	6		605		10		(7		)	608		2			BBB+
Foreign government securities	3		300		14		(1		)	313		—			AA+
Total fixed-maturity securities	91		9,488		370		(147		)	9,711		(37		)	AA-
Short-term investments	9		904		0		0			904		—			AAA
Total investment portfolio	100	%	$	10,392	$	370	$	(147	)	$	10,615	$	(37	)	AA-

____________________


(1)	Based on amortized cost.


(2)	Accumulated OCI. See also Note 21, 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 44% of mortgage backed securities as of December 31, 2014 and 50% as of December 31, 2013 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 following tables present the fair value of the Company’s available-for-sale portfolio of obligations of state and political subdivisions as of December 31, 2014 and December 31, 2013 by state.

Fair Value of Available-for-Sale Portfolio of

Obligations of State and Political Subdivisions

As of December 31, 2014 (1)



State	State General Obligation		Local General Obligation		Revenue Bonds		Fair Value		Amortized Cost		Average Credit Rating
	(in millions)
Texas	$	60	$	293	$	305	$	658	$	613	AA
New York	13		41		551		605		571		AA
California	45		70		377		492		449		A+
Florida	47		34		256		337		311		AA-
Illinois	20		99		177		296		275		A+
Washington	67		48		163		278		262		AA
Massachusetts	46		8		169		223		204		AA
Arizona	—		7		170		177		165		AA
Michigan	—		—		132		132		122		AA-
Ohio	6		40		82		128		119		AA
All others	276		251		1,096		1,623		1,528		AA-
Total	$	580	$	891	$	3,478	$	4,949	$	4,619

Fair Value of Available-for-Sale Portfolio of

Obligations of State and Political Subdivisions

As of December 31, 2013 (1)



State	State General Obligation		Local General Obligation		Revenue Bonds		Fair Value		Amortized Cost		Average Credit Rating
	(in millions)
Texas	$	77	$	299	$	277	$	653	$	629	AA
New York	12		58		519		589		575		AA
California	32		86		354		472		452		A+
Florida	33		59		242		334		318		AA-
Illinois	14		70		156		240		234		A+
Massachusetts	44		16		147		207		200		AA
Washington	31		19		153		203		199		AA
Arizona	—		7		166		173		170		AA
Michigan	—		28		102		130		125		AA-
Georgia	13		18		97		128		128		A+
All others	254		228		943		1,425		1,381		AA-
Total	$	510	$	888	$	3,156	$	4,554	$	4,411	AA-

____________________


(1)	Excludes $846 million and $525 million as of December 31, 2014 and 2013, respectively, of pre-refunded bonds, at fair value. The credit ratings are based on the underlying ratings and do not include any benefit from bond insurance.

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

Revenue Bonds

Sources of Funds



	As of December 31, 2014				As of December 31, 2013
Type	Fair Value		Amortized Cost		Fair Value		Amortized Cost
	(in millions)
Transportation	$	796	$	733	$	642	$	615
Water and sewer	563		527		459		453
Tax backed	551		514		708		686
Higher education	527		492		358		353
Municipal utilities	512		479		500		482
Healthcare	346		317		289		281
All others	183		173		200		192
Total	$	3,478	$	3,235	$	3,156	$	3,062

The majority of the investment portfolio is managed by four outside managers. The Company has established detailed guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector.

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 December 31, 2014



	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(dollars in millions)
Obligations of state and political subdivisions	$	64	$	0		$	25	$	(1	)	$	89	$	(1	)
U.S. government and agencies	139		0			68		(1		)	207		(1		)
Corporate securities	189		(3		)	104		(2		)	293		(5		)
Mortgage-backed securities:
RMBS	205		(3		)	159		(18		)	364		(21		)
CMBS	36		0			19		0			55		0
Asset-backed securities	56		(2		)	18		(1		)	74		(3		)
Foreign government securities	108		(2		)	0		0			108		(2		)
Total	$	797	$	(10	)	$	393	$	(23	)	$	1,190	$	(33	)
Number of securities(1)			125					82					198
Number of securities with other-than-temporary impairment			3					7					10

Fixed-Maturity Securities

Gross Unrealized Loss by Length of Time

As of December 31, 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)
Obligations of state and political subdivisions	$	781	$	(39	)	$	5	$	0		$	786	$	(39	)
U.S. government and agencies	173		(6		)	—		—			173		(6		)
Corporate securities	401		(18		)	3		0			404		(18		)
Mortgage-backed securities:
RMBS	414		(21		)	186		(51		)	600		(72		)
CMBS	121		(4		)	—		—			121		(4		)
Asset-backed securities	196		(2		)	42		(5		)	238		(7		)
Foreign government securities	54		(1		)	1		0			55		(1		)
Total	$	2,140	$	(91	)	$	237	$	(56	)	$	2,377	$	(147	)
Number of securities			425					33					458
Number of securities with other-than-temporary impairment			13					11					24

___________________


(1)	The number of securities does not add across because of lots of the same securities that have been purchased at different times and appear in both categories above (i.e., Less than 12 months and 12 months or more). If a security appears in both categories, it is counted only once in the Total column.

Of the securities in an unrealized loss position for 12 months or more as of December 31, 2014, three securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of December 31, 2014 was $15 million. The Company has determined that the unrealized losses recorded as of December 31, 2014 are yield related and not the result of other-than-temporary-impairment.

The amortized cost and estimated fair value of available-for-sale fixed-maturity securities by contractual maturity as of December 31, 2014 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 December 31, 2014



	Amortized Cost		Estimated Fair Value
	(in millions)
Due within one year	$	111	$	112
Due after one year through five years	1,961		2,028
Due after five years through 10 years	2,286		2,422
Due after 10 years	3,720		3,985
Mortgage-backed securities:
RMBS	1,255		1,285
CMBS	639		659
Total	$	9,972	$	10,491

The investment portfolio contains securities that are either held in trust for the benefit of reinsurers in accordance with statutory requirements, placed on deposit to fulfill state licensing requirements, or otherwise restricted in the amount of $268 million and $396 million as of December 31, 2014 and December 31, 2013, respectively, based on fair value.

The fair value of the Company’s pledged securities to secure its obligations under its CDS exposure totaled $376 million and $677 million as of December 31, 2014 and December 31, 2013, respectively.

No material investments of the Company were non-income producing for years ended December 31, 2014 and 2013, respectively.

Internally Managed Portfolio

The investment portfolio tables shown above include both assets managed externally and internally. In the table below, more detailed information is provided for the component of the total investment portfolio that is internally managed (excluding short-term investments). The internally managed portfolio, as defined below, represents approximately 8% and 9% of the investment portfolio, on a fair value basis as of December 31, 2014 and December 31, 2013, respectively. The internally managed portfolio consists primarily of the Company's investments in securities for (i) loss mitigation purposes, (ii) other risk management purposes and (iii) where the Company believes a particular security presents an attractive investment opportunity.

One of the Company's strategies for mitigating losses has been to purchase securities it has insured that have expected losses, at discounted prices (assets purchased for loss mitigation purposes). In addition, the Company holds other invested assets that were obtained or purchased as part of negotiated settlements with insured counterparties or under the terms of our financial guaranties (other risk management assets).

Additional detail about the types and amounts of securities acquired by the Company for loss mitigation, other risk management and in the trading portfolio is set forth in the table below.

Internally Managed Portfolio

Carrying Value



	As of December 31,
	2014		2013
	(in millions)
Assets purchased for loss mitigation and other risk management purposes:
Fixed maturity securities	$	835	$	761
Other invested assets	46		82
Other	79		88
Total	$	960	$	931