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Fair Value Measurement (Tables)
 6 Months Ended
Jun. 30, 2012
Fair Value Disclosures [Abstract]  
Information by Credit Spread Type
Information by Credit Spread Type
 
 
As of
  June 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 June 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
$
828.1

 
$
—

 
$
828.1

 
$
—

Obligations of state and political subdivisions
5,676.7

 
—

 
5,667.0

 
9.7

Corporate securities
1,032.1

 
—

 
1,032.1

 
—

Mortgage-backed securities:
 

 


 


 


RMBS
1,395.6

 
—

 
1,228.9

 
166.7

Commercial mortgage-backed securities ("CMBS")
486.5

 
—

 
486.5

 
—

Asset-backed securities
488.3

 
—

 
214.3

 
274.0

Foreign government securities
300.2

 
—

 
300.2

 
—

Total fixed maturity securities
10,207.5


—

 
9,757.1

 
450.4

Short-term investments
919.8

 
62.8

 
857.0

 
—

Other invested assets(1)
85.2

 
—

 
75.4

 
9.8

Credit derivative assets
429.9

 
—

 
—

 
429.9

FG VIEs’ assets, at fair value
2,726.0

 
—

 
—

 
2,726.0

Other assets(2)
67.2

 
23.0

 
—

 
44.2

Total assets carried at fair value
$
14,435.6

 
$
85.8

 
$
10,689.5

 
$
3,660.3

Liabilities:
 

 
 

 
 

 
 

Credit derivative liabilities
$
2,095.9

 
$
—

 
$
—

 
$
2,095.9

FG VIEs’ liabilities with recourse, at fair value
2,239.0

 
—

 
—

 
2,239.0

FG VIEs’ liabilities without recourse, at fair value
1,042.3

 
—

 
—

 
1,042.3

Total liabilities carried at fair value
$
5,377.2

 
$
—

 
$
—

 
$
5,377.2

 
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
$
922.4

 
$
—

 
$
922.4

 
$
—

Obligations of state and political subdivisions
5,455.4

 
—

 
5,445.9

 
9.5

Corporate securities
1,038.4

 
—

 
1,038.4

 
—

Mortgage-backed securities:
 

 
 

 
 

 
 

RMBS
1,427.9

 
—

 
1,294.3

 
133.6

CMBS
500.0

 
—

 
500.0

 
—

Asset-backed securities
458.1

 
—

 
222.6

 
235.5

Foreign government securities
339.7

 
—

 
339.7

 
—

Total fixed maturity securities
10,141.9

 
—

 
9,763.3

 
378.6

Short-term investments
734.0

 
210.3

 
523.7

 
—

Other invested assets(1)
43.5

 
—

 
32.8

 
10.7

Credit derivative assets
468.9

 
—

 
—

 
468.9

FG VIEs’ assets, at fair value
2,819.1

 
—

 
—

 
2,819.1

Other assets(2)
79.5

 
25.7

 
—

 
53.8

Total assets carried at fair value
$
14,286.9

 
$
236.0

 
$
10,319.8

 
$
3,731.1

Liabilities:
 

 
 

 
 

 
 

Credit derivative liabilities
$
1,772.8

 
$
—

 
$
—

 
$
1,772.8

FG VIEs’ liabilities with recourse, at fair value
2,396.9

 
—

 
—

 
2,396.9

FG VIEs’ liabilities without recourse, at fair value
1,061.5

 
—

 
—

 
1,061.5

Total liabilities carried at fair value
$
5,231.2

 
$
—

 
$
—

 
$
5,231.2

 ____________________
(1)                               Includes mortgage loans that are recorded at fair value on a non-recurring basis. At June 30, 2012 and December 31, 2011, such investments were carried at their market value of $8.4 million and $9.0 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
 
 
Second 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 March 31, 2012
$
9.5

 
$
135.7

 
$
258.1

 
$
1.6

 
$
2,827.7

 
$
39.9

 
$
(1,952.7
)
 
$
(2,365.2
)
 
$
(1,085.6
)
 
Total pretax realized and unrealized gains/(losses) recorded in:(1)
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Net income (loss)
0.1

(2
)
4.0

(2
)
7.8

(2
)
—

 
42.8

(3
)
4.3

(4
)
260.7

(6
)
(17.7
)
(3
)
(13.5
)
(3
)
Other comprehensive income (loss)
0.1

 
(16.4
)
 
(12.0
)
 
(0.2
)
 
—

 
—

 
—

 
—

 
—

 
Purchases
—

 
54.4

 
21.6

 
—

 
—

 
—

 
—

 
—

 
—

 
Settlements
—

 
(11.0
)
 
(1.5
)
 
—

 
(144.5
)
 
—

 
26.0

 
143.9

 
56.8

 
FG VIE consolidations
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
Fair value as of June 30, 2012
$
9.7

 
$
166.7

 
$
274.0

 
$
1.4

 
$
2,726.0

 
$
44.2

 
$
(1,666.0
)
 
$
(2,239.0
)
 
$
(1,042.3
)
 
Change in unrealized gains/(losses) related to financial instruments held as of June 30, 2012
$
0.1

 
$
(16.4
)
 
$
(12.0
)
 
$
(0.2
)
 
$
72.0

 
$
4.3

 
$
282.5

 
$
(17.5
)
 
$
(37.2
)
 


 
Second Quarter 2011
 
Fixed Maturity Securities
 
 

 

 

 
 
 
 
 
 
RMBS
 
Asset-
Backed
Securities
 
Other
Invested
Assets
 
FG VIEs’
Assets at
Fair
Value
 
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 March 31, 2011
$
210.1

 

$
232.1

 

$
2.2

 
$
3,679.0

 

$
(2,140.0
)
 

$
(2,874.2
)
 
$
(1,373.0
)
 
Total pretax realized and unrealized gains/(losses) recorded in:(1)
 

 

 

 

 

 
 

 

 

 

 

 

 

 

Net income (loss)
(35.2
)
(2
)
2.1

(2
)
—

 
(211.6
)
(3
)
(64.8
)
(6
)
14.9

(3
)
86.5

(3
)
Other comprehensive income (loss)
(16.9
)
 

(7.3
)
 

(0.2
)
 
—

 

—

 

—

 

—

 

Purchases
1.6

 

47.1

 

—

 
—

 

—

 

—

 

—

 

Sales
(8.0
)
 
(0.1
)
 
—

 
—

 
—

 
—

 
—

 
Settlements
—

 
—

 
—

 
(257.6
)
 
17.3

 

282.8

 

67.1

 

FG VIE consolidations
(63.6
)
 
—

 
—

 
282.4

 
—

 
(272.4
)
 
(63.1
)
 

Fair value as of June 30, 2011
$
88.0

 

$
273.9

 

$
2.0

 
$
3,492.2

 

$
(2,187.5
)
 

$
(2,848.9
)
 
$
(1,282.5
)
 
Change in unrealized gains/(losses) related to financial instruments held as of June 30, 2011
$
(16.9
)
 
$
(7.3
)
 
$
(0.2
)
 
$
(84.7
)
 
$
(28.9
)
 
$
(7.1
)
 
$
52.9

 

 
Six 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
$
9.5

 

$
133.6

 

$
235.5

 

$
1.7

 
$
2,819.1

 

$
53.8

 

$
(1,303.9
)
 
$
(2,396.9
)
 
$
(1,061.5
)
 
Total pretax realized and unrealized gains/(losses) recorded in:(1)
 
 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

Net income (loss)
0.3

(2
)
4.8

(2
)
13.6

(2
)
—

 
177.9

(3
)
(9.6
)
(4
)
(430.0
)
(6
)
(135.7
)
(3
)
(93.3
)
(3
)
Other comprehensive income (loss)
0.5

 

(6.5
)
 

(11.9
)
 

(0.3
)
 
—

 

—

 

—

 

—

 

—

 

Purchases
—

 

54.4

 

39.6

 

—

 
—

 

—

 

—

 

—

 

—

 

Settlements
(0.6
)
 
(19.6
)
 
(2.8
)
 
—

 
(285.5
)
 
—

 

67.9

 

314.2

 

112.5

 

FG VIE consolidations
—

 

—

 

—

 

—

 
14.5

 

—

 

—

 

(20.6
)
 
—

 

Fair value as of June 30, 2012
$
9.7

 

$
166.7

 

$
274.0

 

$
1.4

 
$
2,726.0

 

$
44.2

 

$
(1,666.0
)
 
$
(2,239.0
)
 
$
(1,042.3
)
 
Change in unrealized gains/(losses) related to financial instruments held as of June 30, 2012
$
0.5

 
$
(6.5
)
 
$
(11.9
)
 
$
(0.3
)
 
$
303.4

 
$
(9.6
)
 
$
(352.1
)
 
$
(124.5
)
 
$
(155.3
)
 


 
Six Months 2011
 
Fixed Maturity Securities
 
 

 
 

 
 

 
 
 
 
 
 
RMBS
 
Asset-
Backed
Securities
 
Other
Invested
Assets
 
FG VIEs’
Assets at
Fair
Value
 
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
$
99.4

 

$
210.2

 

$
2.3

 
$
3,657.5

 

$
(1,869.9
)
 

$
(3,030.9
)
 
$
(1,337.2
)
 
Total pretax realized and unrealized gains/(losses) recorded in:(1)
 

 

 

 

 

 
 

 

 

 

 

 

 

 

Net income (loss)
(31.3
)
(2
)
3.7

(2
)
—

 
22.8

(3
)
(301.0
)
(6
)
3.8

(3
)
(49.0
)
(3
)
Other comprehensive income (loss)
(47.7
)
 

13.0

 

(0.3
)
 
—

 

—

 

—

 

—

 

Purchases
152.2

 

47.1

 

—

 
—

 

—

 

—

 

—

 

Sales
(21.0
)
 
(0.1
)
 
—

 
—

 
—

 
—

 
—

 
Settlements
—

 
—

 
—

 
(470.5
)
 
(16.6
)
 

450.6

 

166.8

 

FG VIE consolidations
(63.6
)
 

—

 

—

 
282.4

 

—

 

(272.4
)
 
(63.1
)
 

Fair value as of June 30, 2011
$
88.0

 

$
273.9

 

$
2.0

 
$
3,492.2

 

$
(2,187.5
)
 

$
(2,848.9
)
 
$
(1,282.5
)
 
Change in unrealized gains/(losses) related to financial instruments held as of June 30, 2011
$
(47.7
)
 
$
13.0

 
$
(0.3
)
 
$
263.6

 
$
(311.7
)
 
$
(43.0
)
 
$
(119.1
)
 
 ___________________
(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
June 30, 2012
(in millions)
 
Valuation
Technique
 
Significant Unobservable Inputs
 
Range
Assets:
 
 

 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 

 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
9.7

 
Discounted
 
Rate of inflation
 
1.0
%
-
3.0%
 
 
 cash flow
 
Timing of collateral sales
3 years

-
11 years
 
 
 
 
Assumed sale proceeds
0.0
%
-
11.9%
 
 
 
 
Collateral recovery period
3 years

-
11 years
 
 
 
 
 
 
 
 
 
 
 
RMBS
 
166.7

 
Discounted
 
CPR
 
0.0
%
-
7.4%
 
 
 cash flow
 
CDR
 
3.7
%
-
41.1%
 
 
 
 
Severity
 
48.9
%
-
104.4%
 
 
 
 
Yield
 
6.7
%
-
16.0%
Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
Whole business securitization
 
46.7

 
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
 
191.4

 
Discounted cash flow
 
Liquidation value (in millions)
 

$174

-
$281
 
 
 
Years to liquidation
 
0 years

-
3 years
 
 
 
Discount factor
 
0.0
%
-
11.0%
 
 
 
 
 
 
 
 
 
 
 
XXX life insurance transactions
 
35.6

 
Discounted
 
Yield
 
15.0%
 
 
 cash flow
 
Discount on asset cash flows
 
50.0%
 
 
 
 
 
 
 
 
 
 
 
Other asset-backed
 
0.3

 
Discounted
 
CPR
 
0.0
%
-
10.0%
 
 
 cash flow
 
CDR
 
2.0
%
-
10.0%
 
 
 
 
Severity
 
40.0
%
-
100.0%
 
 
 
 
Yield
 
3.0
%
-
15.0%
 
 
 
 
 
 
 
 
 
 
 
Other invested assets
 
9.8

 
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
 
2,726.0

 
Discounted
 
CPR
 
0.0
%
-
13.2%
 
 
 cash flow
 
CDR
 
1.8
%
-
39.1%
 
 
 
 
Loss severity
 
25.5
%
-
110.1%
 
 
 
 
Yield
 
4.7
%
-
22.4%


 
Financial Instrument Description
 
Fair Value at
June 30, 2012
(in millions)
 
Valuation
Technique
 
Significant Unobservable Inputs
 
Range
Other assets
 
44.2

 
Discounted cash flow
 
Quotes from third party pricing
 
$38
-
$42
 
 
 
Term (years)
 
3
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 
 
 
 
 
 
 
Credit derivative liabilities, net
 
(1,666.0
)
 
Discounted
 
Year 1 loss estimates
 
0.0
%
-
69.0%
 
 
cash flow
 
Hedge cost (in bps)
 
104.0 bps

-
904.0 bps
 
 
 
 
Bank profit (in bps)
 
1.0 bps

-
1,287.0 bps
 
 
 
 
Internal floor (in bps)
 
7.0 bps

-
40.0 bps
 
 
 
 
Internal credit rating
 
AAA

-
BIG
 
 
 
 
 
 
 
 
 
 
 
FG VIEs’ liabilities, at fair value
 
(3,281.3
)
 
Discounted
 
CPR
 
0.0
%
-
13.2%
 
 
cash flow
 
CDR
 
1.8
%
-
39.1%
 
 
 
 
Loss severity
 
25.5
%
-
110.1%
 
 
 
 
Yield
 
4.7
%
-
22.4%
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
June 30, 2012
 
As of
December 31, 2011
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
(in millions)
Assets:
 

 
 

 
 

 
 

Fixed maturity securities
$
10,207.5

 
$
10,207.5

 
$
10,141.9

 
$
10,141.9

Short-term investments
919.8

 
919.8

 
734.0

 
734.0

Other invested assets
153.6

 
165.8

 
170.4

 
182.4

Credit derivative assets
429.9

 
429.9

 
468.9

 
468.9

FG VIEs’ assets, at fair value
2,726.0

 
2,726.0

 
2,819.1

 
2,819.1

Other assets
243.3

 
243.3

 
185.6

 
185.6

Liabilities:
 

 
 

 
 

 
 

Financial guaranty insurance contracts(1)
4,663.2

 
5,555.2

 
4,664.0

 
4,319.8

Long-term debt(2)
846.4

 
1,027.0

 
1,038.3

 
1,186.3

Credit derivative liabilities
2,095.9

 
2,095.9

 
1,772.8

 
1,772.8

FG VIEs’ liabilities with recourse, at fair value
2,239.0

 
2,239.0

 
2,396.9

 
2,396.9

FG VIEs’ liabilities without recourse, at fair value
1,042.3

 
1,042.3

 
1,061.5

 
1,061.5

Other liabilities
93.6

 
93.6

 
15.7

 
15.7

___________________
(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.