INVESTMENTS

Overview



In millions of dollars	September 30, 2014		December 31, 2013
Securities available-for-sale (AFS)	$	298,678	$	286,511
Debt securities held-to-maturity (HTM)⁽¹⁾	24,038		10,599
Non-marketable equity securities carried at fair value⁽²⁾	3,504		4,705
Non-marketable equity securities carried at cost⁽³⁾	6,827		7,165
Total investments	$	333,047	$	308,980


(1)	Recorded at amortized cost less impairment for securities that have credit-related impairment.


(2)	Unrealized gains and losses for non-marketable equity securities carried at fair value are recognized in earnings.


(3)	Non-marketable equity securities carried at cost primarily consist of shares issued by the Federal Reserve Bank, Federal Home Loan Banks, foreign central banks and various clearing houses of which Citigroup is a member.

The following table presents interest and dividends on investments for the three and nine months ended September 30, 2014 and 2013:



	Three Months Ended September 30,				Nine Months Ended September 30,
In millions of dollars	2014		2013		2014		2013
Taxable interest	$	1,627	$	1,389	$	4,638	$	4,280
Interest exempt from U.S. federal income tax	96		197		407		567
Dividends	101		103		343		331
Total interest and dividends	$	1,824	$	1,689	$	5,388	$	5,178

The following table presents realized gains and losses on the sale of investments for the three and nine months ended September 30, 2014 and 2013. The gross realized investment losses exclude losses from other-than-temporary impairment (OTTI):



	Three Months Ended September 30,						Nine Months Ended September 30,
In millions of dollars	2014			2013			2014			2013
Gross realized investment gains	$	229		$	375		$	689		$	1,489
Gross realized investment losses	(93		)	(312		)	(341		)	(725		)
Net realized gains on sale of investments	$	136		$	63		$	348		$	764

The Company has sold various debt securities that were classified as HTM. These sales were in response to a significant deterioration in the creditworthiness of the issuers or securities. In addition, certain securities were reclassified to AFS investments in response to significant credit deterioration and, because the Company intends to sell the securities, Citi recorded OTTI on the securities. The following table sets forth, for the periods indicated, gain (loss) on HTM securities sold, securities reclassified to AFS and OTTI recorded on AFS securities reclassified.



	Three Months Ended September 30,						Nine Months Ended September 30,
In millions of dollars	2014			2013			2014			2013
Carrying value of HTM securities sold	$	—		$	235		$	5		$	720
Net realized gain (loss) on sale of HTM securities	—			(39		)	—			$	(105	)
Carrying value of securities reclassified to AFS	700			—			766			$	902
OTTI losses on securities reclassified to AFS	(2		)	—			(11		)	$	(155	)

Securities Available-for-Sale

The amortized cost and fair value of AFS securities at September 30, 2014 and December 31, 2013 were as follows:



	September 30, 2014								December 31, 2013
In millions of dollars	Amortized cost		Gross unrealized gains⁽¹⁾		Gross unrealized losses⁽¹⁾		Fair value		Amortized cost		Gross unrealized gains⁽¹⁾		Gross unrealized losses⁽¹⁾		Fair value
Debt securities AFS
Mortgage-backed securities⁽²⁾
U.S. government-sponsored agency guaranteed	$	36,654	$	522	$	308	$	36,868	$	42,494	$	391	$	888	$	41,997
Prime	13		—		—		13		33		2		3		32
Alt-A	2		—		—		2		84		10		—		94
Subprime	—		—		—		—		12		—		—		12
Non-U.S. residential	9,200		84		9		9,275		9,976		95		4		10,067
Commercial	562		6		4		564		455		6		8		453
Total mortgage-backed securities	$	46,431	$	612	$	321	$	46,722	$	53,054	$	504	$	903	$	52,655
U.S. Treasury and federal agency securities
U.S. Treasury	$	95,175	$	356	$	190	$	95,341	$	68,891	$	476	$	147	$	69,220
Agency obligations	16,513		61		29		16,545		18,320		123		67		18,376
Total U.S. Treasury and federal agency securities	$	111,688	$	417	$	219	$	111,886	$	87,211	$	599	$	214	$	87,596
State and municipal⁽³⁾	$	13,894	$	144	$	1,125	$	12,913	$	20,761	$	184	$	2,005	$	18,940
Foreign government	95,314		639		293		95,660		96,608		403		540		96,471
Corporate	13,767		290		99		13,958		11,039		210		119		11,130
Asset-backed securities⁽²⁾	12,830		41		28		12,843		15,352		42		120		15,274
Other debt securities	711		—		1		710		710		1		—		711
Total debt securities AFS	$	294,635	$	2,143	$	2,086	$	294,692	$	284,735	$	1,943	$	3,901	$	282,777
Marketable equity securities AFS	$	3,916	$	105	$	35	$	3,986	$	3,832	$	85	$	183	$	3,734
Total securities AFS	$	298,551	$	2,248	$	2,121	$	298,678	$	288,567	$	2,028	$	4,084	$	286,511


(1)	Gross unrealized gains and losses, as presented, do not include the impact of minority investments and the related allocations and pick-up of unrealized gains and losses of AFS securities. These amounts totaled $16 million of unrealized gains and $36 million of unrealized gains as of September 30, 2014 and December 31, 2013, respectively.

(2)

The Company invests in mortgage-backed and asset-backed securities. These securitizations are generally considered VIEs. The Company’s maximum exposure to loss from these VIEs is equal to the carrying amount of the securities, which is reflected in the table above. For mortgage-backed and asset-backed securitizations in which the Company has other involvement, see Note 20 to the Consolidated Financial Statements.

(3)

The gross unrealized losses on state and municipal debt securities are primarily attributable to the effects of fair value hedge accounting. Specifically, Citi hedges the LIBOR-benchmark interest rate component of certain fixed-rate tax-exempt state and municipal debt securities utilizing LIBOR-based interest rate swaps. During the hedge period, losses incurred on the LIBOR-hedging swaps recorded in earnings were substantially offset by gains on the state and municipal debt securities attributable to changes in the LIBOR swap rate being hedged. However, because the LIBOR swap rate decreased significantly during the hedge period while the overall fair value of the municipal debt securities was relatively unchanged, the effect of reclassifying fair value gains on these securities from Accumulated other comprehensive income (loss) (AOCI) to earnings, attributable solely to changes in the LIBOR swap rate, resulted in net unrealized losses remaining in AOCI that relate to the unhedged components of these securities.

As discussed in more detail below, the Company conducts and documents periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other-than-temporary. Any credit-related impairment related to debt securities that the Company does not plan to sell and is not likely to be required to sell is recognized in the Consolidated Statement of Income, with the non-credit-related impairment recognized in AOCI. For other debt securities with OTTI, the entire impairment is recognized in the Consolidated Statement of Income.

The table below shows the fair value of AFS securities that have been in an unrealized loss position for less than 12 months or for 12 months or longer as of September 30, 2014 and December 31, 2013:



	Less than 12 months				12 months or longer				Total
In millions of dollars	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
September 30, 2014
Securities AFS
Mortgage-backed securities
U.S. government-sponsored agency guaranteed	$	5,606	$	32	$	9,447	$	276	$	15,053	$	308
Prime	4		—		2		—		6		—
Non-U.S. residential	382		2		547		7		929		9
Commercial	140		1		131		3		271		4
Total mortgage-backed securities	$	6,132	$	35	$	10,127	$	286	$	16,259	$	321
U.S. Treasury and federal agency securities
U.S. Treasury	$	45,334	$	177	$	1,173	$	13	$	46,507	$	190
Agency obligations	4,680		16		1,552		13		6,232		29
Total U.S. Treasury and federal agency securities	$	50,014	$	193	$	2,725	$	26	$	52,739	$	219
State and municipal	$	429	$	15	$	6,154	$	1,110	$	6,583	$	1,125
Foreign government	22,487		176		7,447		117		29,934		293
Corporate	2,873		69		1,472		30		4,345		99
Asset-backed securities	1,117		1		3,936		27		5,053		28
Other debt securities	49		1		—		—		49		1
Marketable equity securities AFS	43		3		231		32		274		35
Total securities AFS	$	83,144	$	493	$	32,092	$	1,628	$	115,236	$	2,121
December 31, 2013
Securities AFS
Mortgage-backed securities
U.S. government-sponsored agency guaranteed	$	19,377	$	533	$	5,643	$	355	$	25,020	$	888
Prime	85		3		3		—		88		3
Non-U.S. residential	2,103		4		5		—		2,108		4
Commercial	206		6		28		2		234		8
Total mortgage-backed securities	$	21,771	$	546	$	5,679	$	357	$	27,450	$	903
U.S. Treasury and federal agency securities
U.S. Treasury	$	34,780	$	133	$	268	$	14	$	35,048	$	147
Agency obligations	6,692		66		101		1		6,793		67
Total U.S. Treasury and federal agency securities	$	41,472	$	199	$	369	$	15	$	41,841	$	214
State and municipal	$	595	$	29	$	11,447	$	1,976	$	12,042	$	2,005
Foreign government	35,783		477		5,778		63		41,561		540
Corporate	4,565		108		387		11		4,952		119
Asset-backed securities	11,207		57		1,931		63		13,138		120
Marketable equity securities AFS	1,271		92		806		91		2,077		183
Total securities AFS	$	116,664	$	1,508	$	26,397	$	2,576	$	143,061	$	4,084

The following table presents the amortized cost and fair value of AFS debt securities by contractual maturity dates as of September 30, 2014 and December 31, 2013:



	September 30, 2014				December 31, 2013
In millions of dollars	Amortized cost		Fair value		Amortized cost		Fair value
Mortgage-backed securities⁽¹⁾
Due within 1 year	$	63	$	63	$	87	$	87
After 1 but within 5 years	593		599		346		354
After 5 but within 10 years	1,932		1,957		2,898		2,932
After 10 years⁽²⁾	43,843		44,103		49,723		49,282
Total	$	46,431	$	46,722	$	53,054	$	52,655
U.S. Treasury and federal agency securities
Due within 1 year	$	13,172	$	13,198	$	15,789	$	15,853
After 1 but within 5 years	93,519		93,588		66,232		66,457
After 5 but within 10 years	2,301		2,321		2,129		2,185
After 10 years⁽²⁾	2,696		2,779		3,061		3,101
Total	$	111,688	$	111,886	$	87,211	$	87,596
State and municipal
Due within 1 year	$	307	$	300	$	576	$	581
After 1 but within 5 years	3,878		3,803		3,731		3,735
After 5 but within 10 years	530		546		439		482
After 10 years⁽²⁾	9,179		8,264		16,015		14,142
Total	$	13,894	$	12,913	$	20,761	$	18,940
Foreign government
Due within 1 year	$	36,864	$	36,881	$	37,005	$	36,959
After 1 but within 5 years	42,217		42,326		51,344		51,304
After 5 but within 10 years	15,207		15,356		7,314		7,216
After 10 years⁽²⁾	1,026		1,097		945		992
Total	$	95,314	$	95,660	$	96,608	$	96,471
All other⁽³⁾
Due within 1 year	$	1,585	$	1,589	$	2,786	$	2,733
After 1 but within 5 years	12,016		12,181		10,934		11,020
After 5 but within 10 years	7,053		7,099		5,632		5,641
After 10 years⁽²⁾	6,654		6,642		7,749		7,721
Total	$	27,308	$	27,511	$	27,101	$	27,115
Total debt securities AFS	$	294,635	$	294,692	$	284,735	$	282,777


(1)	Includes mortgage-backed securities of U.S. government-sponsored agencies.


(2)	Investments with no stated maturities are included as contractual maturities of greater than 10 years. Actual maturities may differ due to call or prepayment rights.


(3)	Includes corporate, asset-backed and other debt securities.

Debt Securities Held-to-Maturity

The carrying value and fair value of debt securities HTM at September 30, 2014 and December 31, 2013 were as follows:



In millions of dollars	Amortized cost⁽¹⁾		Net unrealized gains (losses) recognized in AOCI			Carrying value⁽²⁾		Gross unrealized gains		Gross unrealized (losses)			Fair value
September 30, 2014
Debt securities held-to-maturity
Mortgage-backed securities⁽³⁾
U.S. government agency guaranteed	$	8,247	$	96		$	8,343	$	27	$	(28	)	$	8,342
Prime	63		(14		)	49		5		(1		)	53
Alt-A	1,214		(238		)	976		546		(281		)	1,241
Subprime	2		—			2		1		—			3
Non-U.S. residential	1,165		(170		)	995		103		—			1,098
Commercial	9		—			9		1		—			10
Total mortgage-backed securities	$	10,700	$	(326	)	$	10,374	$	683	$	(310	)	$	10,747
State and municipal⁽⁴⁾	$	8,323	$	(525	)	$	7,798	$	162	$	(50	)	$	7,910
Foreign government	5,279		—			5,279		78		—			5,357
Corporate	38		(1		)	37		2		—			39
Asset-backed securities⁽³⁾	569		(19		)	550		49		(10		)	589
Total debt securities held-to-maturity ⁽⁵⁾	$	24,909	$	(871	)	$	24,038	$	974	$	(370	)	$	24,642
December 31, 2013
Debt securities held-to-maturity
Mortgage-backed securities⁽³⁾
Prime	$	72	$	(16	)	$	56	$	5	$	(2	)	$	59
Alt-A	1,379		(287		)	1,092		449		(263		)	1,278
Subprime	2		—			2		1		—			3
Non-U.S. residential	1,372		(206		)	1,166		60		(20		)	1,206
Commercial	10		—			10		1		—			11
Total mortgage-backed securities	$	2,835	$	(509	)	$	2,326	$	516	$	(285	)	$	2,557
State and municipal	$	1,394	$	(62	)	$	1,332	$	50	$	(70	)	$	1,312
Foreign government	5,628		—			5,628		70		(10		)	5,688
Corporate	818		(78		)	740		111		—			851
Asset-backed securities⁽³⁾	599		(26		)	573		22		(10		)	585
Total debt securities held-to-maturity	$	11,274	$	(675	)	$	10,599	$	769	$	(375	)	$	10,993

(1)

For securities transferred to HTM from Trading account assets, amortized cost is defined as the fair value of the securities at the date of transfer plus any accretion income and less any impairments recognized in earnings subsequent to transfer. For securities transferred to HTM from AFS, amortized cost is defined as the original purchase cost, adjusted for the cumulative accretion or amortization of any purchase discount or premium, plus or minus any cumulative fair value hedge adjustments, net of accretion or amortization, and less any other-than-temporary impairment recognized in earnings.

(2)

HTM securities are carried on the Consolidated Balance Sheet at amortized cost, plus or minus any unamortized unrealized gains and losses and fair value hedge adjustments recognized in AOCI prior to reclassifying the securities from AFS to HTM. Changes in the values of these securities are not reported in the financial statements, except for the amortization of any difference between the carrying value at the transfer date and par value of the securities, and the recognition of any non-credit fair value adjustments in AOCI in connection with the recognition of any credit impairment in earnings related to securities the Company continues to intend to hold until maturity.

(3)

(4)

The net unrealized losses recognized in AOCI on state and municipal debt securities are primarily attributable to the effects of fair value hedge accounting applied when these debt securities were classified as AFS. Specifically, Citi hedged the LIBOR-benchmark interest rate component of certain fixed-rate tax-exempt state and municipal debt securities utilizing LIBOR-based interest rate swaps. During the hedge period, losses incurred on the LIBOR-hedging swaps recorded in earnings were substantially offset by gains on the state and municipal debt securities attributable to changes in the LIBOR swap rate being hedged. However, because the LIBOR swap rate decreased significantly during the hedge period while the overall fair value of the municipal debt securities was relatively unchanged, the effect of reclassifying fair value gains on these securities from AOCI to earnings attributable solely to changes in the LIBOR swap rate resulted in net unrealized losses remaining in AOCI that relate to the unhedged components of these securities. Upon transfer of these debt securities to HTM, all hedges have been de-designated and hedge accounting has ceased.


(5)	During the second quarter of 2014, securities with a total fair value of approximately $11.8 billion were transferred from AFS to HTM. For additional information, see Note 13 in Citi’s Second Quarter of 2014 Form 10-Q.

The Company has the positive intent and ability to hold these securities to maturity or, where applicable, the exercise of any issuer call options, absent any unforeseen significant changes in circumstances, including deterioration in credit or changes in regulatory capital requirements.

The net unrealized losses classified in AOCI primarily relate to debt securities previously classified as AFS that have been transferred to HTM, and include any cumulative fair

value hedge adjustments. The net unrealized loss amount also includes any non-credit-related changes in fair value of HTM securities that have suffered credit impairment recorded in earnings. The AOCI balance related to HTM securities is amortized over the remaining contractual life of the related securities as an adjustment of yield in a manner consistent with the accretion of any difference between the carrying value at the transfer date and par value of the same debt securities.

The table below shows the fair value of debt securities in HTM that have been in an unrecognized loss position as of September 30, 2014 and December 31, 2013 for less than 12 months and for 12 months or longer:



	Less than 12 months				12 months or longer				Total
In millions of dollars	Fair value		Gross unrecognized losses		Fair value		Gross unrecognized losses		Fair value		Gross unrecognized losses
September 30, 2014
Debt securities held-to-maturity
Mortgage-backed securities	$	4	$	—	$	4,312	$	310	$	4,316	$	310
State and municipal	2,228		18		551		32		2,779		50
Foreign government	—		—		—		—		—		—
Asset-backed securities	11		1		175		9		186		10
Total debt securities held-to-maturity	$	2,243	$	19	$	5,038	$	351	$	7,281	$	370
December 31, 2013
Debt securities held-to-maturity
Mortgage-backed securities	$	—	$	—	$	358	$	285	$	358	$	285
State and municipal	235		20		302		50		537		70
Foreign government	920		10		—		—		920		10
Asset-backed securities	98		6		198		4		296		10
Total debt securities held-to-maturity	$	1,253	$	36	$	858	$	339	$	2,111	$	375

Excluded from the gross unrecognized losses presented in the above table are the $(871) million and $(675) million of net unrealized losses recorded in AOCI as of September 30, 2014 and December 31, 2013, respectively, primarily related to the difference between the amortized cost and carrying value of HTM securities that were reclassified from AFS. Substantially all of these net unrecognized losses relate to securities that have been in a loss position for 12 months or longer at September 30, 2014 and December 31, 2013.

The following table presents the carrying value and fair value of HTM debt securities by contractual maturity dates as of September 30, 2014 and December 31, 2013:



	September 30, 2014				December 31, 2013
In millions of dollars	Carrying value		Fair value		Carrying value		Fair value
Mortgage-backed securities
Due within 1 year	$	—	$	—	$	—	$	—
After 1 but within 5 years	—		—		—		—
After 5 but within 10 years	780		777		10		11
After 10 years⁽¹⁾	9,594		9,970		2,316		2,546
Total	$	10,374	$	10,747	$	2,326	$	2,557
State and municipal
Due within 1 year	$	39	$	39	$	8	$	9
After 1 but within 5 years	21		21		17		17
After 5 but within 10 years	144		149		69		72
After 10 years⁽¹⁾	7,594		7,701		1,238		1,214
Total	$	7,798	$	7,910	$	1,332	$	1,312
Foreign government
Due within 1 year	$	—	$	—	$	—	$	—
After 1 but within 5 years	5,279		5,357		5,628		5,688
After 5 but within 10 years	—		—		—		—
After 10 years⁽¹⁾	—		—		—		—
Total	$	5,279	$	5,357	$	5,628	$	5,688
All other⁽²⁾
Due within 1 year	$	—	$	—	$	—	$	—
After 1 but within 5 years	37		39		740		851
After 5 but within 10 years	—		—		—		—
After 10 years⁽¹⁾	550		589		573		585
Total	$	587	$	628	$	1,313	$	1,436
Total debt securities held-to-maturity	$	24,038	$	24,642	$	10,599	$	10,993


(1)	Investments with no stated maturities are included as contractual maturities of greater than 10 years. Actual maturities may differ due to call or prepayment rights.


(2)	Includes corporate and asset-backed securities.

Evaluating Investments for Other-Than-Temporary Impairment

Overview

The Company conducts and documents periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other-than-temporary.

An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in AOCI for AFS securities. Losses related to HTM securities generally are not recorded, as these investments are carried at amortized cost. However, for HTM securities with credit-related losses, the credit loss is recognized in earnings as OTTI, and any remainder between the cost basis adjusted for the OTTI and fair value is recognized in AOCI and amortized as an adjustment of yield over the remaining contractual life of the security. For securities transferred to HTM from Trading account assets, amortized cost is defined as the fair value of the securities at the date of transfer, plus any accretion income and less any impairment recognized in earnings subsequent to transfer. For securities transferred to HTM from AFS, amortized cost is defined as the original purchase cost, adjusted for the cumulative accretion or amortization of any purchase discount or premium, plus or minus any cumulative fair value hedge adjustments, net of accretion or amortization, and less any impairment recognized in earnings.

Regardless of the classification of the securities as AFS or HTM, the Company assesses each position with an unrealized loss for OTTI. Factors considered in determining whether a loss is temporary include:


•	the length of time and the extent to which fair value has been below cost;


•	the severity of the impairment;


•	the cause of the impairment and the financial condition and near-term prospects of the issuer;


•	activity in the market of the issuer that may indicate adverse credit conditions; and


•	the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.

The Company’s review for impairment generally entails:


•	identification and evaluation of investments that have indications of possible impairment;


•	analysis of individual investments that have fair values less than amortized cost, including consideration of the length of time the investment has been in an unrealized loss position and the expected recovery period;


•	discussion of evidential matter, including an evaluation of factors or triggers that could cause individual investments to qualify as having other-than-temporary impairment and those that would not support other-than-temporary impairment; and


•	documentation of the results of these analyses, as required under business policies.

Debt

The entire difference between amortized cost and fair value is recognized in earnings as OTTI for impaired debt securities that the Company has an intent to sell or for which the Company believes it is more-likely-than-not that it will be required to sell prior to recovery of the amortized cost basis. However, for those securities that the Company does not intend to sell and is not likely to be required to sell, only the credit-related impairment is recognized in earnings and any non-credit-related impairment is recorded in AOCI.

For debt securities, credit impairment exists where management does not expect to receive contractual principal and interest cash flows sufficient to recover the entire amortized cost basis of a security.

Equity

For equity securities, management considers the various factors described above, including its intent and ability to hold the equity security for a period of time sufficient for recovery to cost or whether it is more-likely-than-not that the Company will be required to sell the security prior to recovery of its cost basis. Where management lacks that intent or ability, the security’s decline in fair value is deemed to be other-than-temporary and is recorded in earnings. AFS equity securities deemed other-than-temporarily impaired are written down to fair value, with the full difference between fair value and cost recognized in earnings.

Management assesses equity method investments that have fair values that are less than their respective carrying values for OTTI. Fair value is measured as price multiplied by quantity if the investee has publicly listed securities. If the investee is not publicly listed, other methods are used (see Note 22 to the Consolidated Financial Statements).

For impaired equity method investments that Citi plans to sell prior to recovery of value or would likely be required to sell, with no expectation that the fair value will recover prior to the expected sale date, the full impairment is recognized in earnings as OTTI regardless of severity and duration. The measurement of the OTTI does not include partial projected recoveries subsequent to the balance sheet date.

For impaired equity method investments that management does not plan to sell prior to recovery of value and is not likely to be required to sell, the evaluation of whether an impairment is other-than-temporary is based on (i) whether and when an equity method investment will recover in value and (ii) whether the investor has the intent and ability to hold that investment for a period of time sufficient to recover the value. The determination of whether the impairment is considered other-than-temporary considers the following indicators, regardless of the time and extent of impairment:


•	the cause of the impairment and the financial condition and near-term prospects of the issuer, including any specific events that may influence the operations of the issuer;


•	the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value; and


•	the length of time and extent to which fair value has been less than the carrying value.

The sections below describe the Company’s process for identifying credit-related impairments in its security types with the most significant unrealized losses as of September 30, 2014.

Mortgage-backed securities

For U.S. mortgage-backed securities (and in particular for Alt-A and other mortgage-backed securities that have significant unrealized losses as a percentage of amortized cost), credit impairment is assessed using a cash flow model that estimates the principal and interest cash flows on the underlying mortgages using the security-specific collateral and transaction structure. The model distributes the estimated cash flows to the various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in that structure. The cash flow model incorporates actual cash flows on the mortgage-backed securities through the current period and then estimates the remaining cash flows using a number of assumptions, including default rates, prepayment rates, recovery rates (on foreclosed properties) and loss severity rates (on non-agency mortgage-backed securities).

Management develops specific assumptions using market data, internal estimates, and estimates published by rating agencies and other third-party sources. Default rates are projected by considering current underlying mortgage loan performance, generally assuming the default of (i) 10% of current loans, (ii) 25% of 30-59 day delinquent loans, (iii) 70% of 60-90 day delinquent loans and (iv) 100% of 91+ day delinquent loans. These estimates are extrapolated along a default timing curve to estimate the total lifetime pool default rate. Other assumptions contemplate the actual collateral attributes, including geographic concentrations, rating actions and current market prices.

Cash flow projections are developed using different stress test scenarios. Management evaluates the results of those stress tests (including the severity of any cash shortfall indicated and the likelihood of the stress scenarios actually occurring based on the underlying pool’s characteristics and performance) to assess whether management expects to recover the amortized cost basis of the security. If cash flow projections indicate that the Company does not expect to recover its amortized cost basis, the Company recognizes the estimated credit loss in earnings.

State and municipal securities

The process for identifying credit impairments in Citigroup’s AFS and HTM state and municipal bonds is primarily based on a credit analysis that incorporates third-party credit ratings. Citigroup monitors the bond issuers and any insurers providing default protection in the form of financial guarantee insurance. The average external credit rating, ignoring any insurance, is Aa3/AA-. In the event of an external rating downgrade or other indicator of credit impairment (i.e., based on instrument-specific estimates of cash flows or probability of issuer default), the subject bond is specifically reviewed for adverse changes in the amount or timing of expected contractual principal and interest.

For state and municipal bonds with unrealized losses that Citigroup plans to sell (for AFS only), would likely be required to sell (for AFS only) or will be subject to an issuer call deemed probable of exercise prior to the expected recovery of its amortized cost basis (for AFS or HTM), the full impairment is recognized in earnings.

Recognition and Measurement of OTTI

The following table presents the total OTTI recognized in earnings for the three and nine months ended September 30, 2014:



OTTI on Investments and Other Assets	Three Months Ended September 30, 2014								Nine Months Ended September 30, 2014
In millions of dollars	AFS⁽¹⁾		HTM		Other Assets		Total		AFS⁽¹⁾		HTM		Other Assets		Total
Impairment losses related to securities that the Company does not intend to sell nor will likely be required to sell:
Total OTTI losses recognized during the period	$	11	$	—	$	—	$	11	$	13	$	—	$	—	$	13
Less: portion of impairment loss recognized in AOCI (before taxes)	8		—		—		8		8		—		—		8
Net impairment losses recognized in earnings for securities that the Company does not intend to sell nor will likely be required to sell	$	3	$	—	$	—	$	3	$	5	$	—	$	—	$	5
Impairment losses recognized in earnings for securities that the Company intends to sell or more-likely-than-not will be required to sell before recovery	88		—		—		88		324		—		—		324
Total impairment losses recognized in earnings	$	91	$	—	$	—	$	91	$	329	$	—	$	—	$	329


(1)	Includes OTTI on non-marketable equity securities.

The following table presents the total OTTI recognized in earnings for the three and nine months ended September 30, 2013:



OTTI on Investments and Other Assets	Three Months Ended September 30, 2013								Nine Months Ended September 30, 2013
In millions of dollars	AFS⁽¹⁾		HTM		Other Assets		Total		AFS⁽¹⁾		HTM		Other Assets ⁽²⁾		Total
Impairment losses related to securities that the Company does not intend to sell nor will likely be required to sell:
Total OTTI losses recognized during the period	$	2	$	42	$	—	$	44	$	7	$	65	$	—	$	72
Less: portion of impairment loss recognized in AOCI (before taxes)	—		27		—		27		—		38		—		38
Net impairment losses recognized in earnings for securities that the Company does not intend to sell nor will likely be required to sell	$	2	$	15	$	—	$	17	$	7	$	27	$	—	$	34
Impairment losses recognized in earnings for securities that the Company intends to sell or more-likely-than-not will be required to sell before recovery ⁽²⁾	22		—		—		22		236		—		192		428
Total impairment losses recognized in earnings	$	24	$	15	$	—	$	39	$	243	$	27	$	192	$	462


(1)	Includes OTTI on non-marketable equity securities.


(2)	The impairment charge relates to the carrying value of Citi’s then-remaining 35% interest in the Morgan Stanley Smith Barney joint venture (MSSB), offset by the equity pickup from MSSB during the respective periods which was recorded in Other revenue.

The following is a three-month roll-forward of the credit-related impairments recognized in earnings for AFS and HTM debt securities held as of September 30, 2014 that the Company does not intend to sell nor likely will be required to sell:



	Cumulative OTTI credit losses recognized in earnings on HTM Securities Still Held
In millions of dollars	Jun. 30, 2014 balance		Credit impairments recognized in earnings on securities not previously impaired		Credit impairments recognized in earnings on securities that have been previously impaired		Reductions due to credit-impaired securities sold, transferred or matured			Sept. 30, 2014 balance
AFS debt securities
Mortgage-backed securities	$	295	$	—	$	—	$	—		$	295
Foreign government securities	171		—		—		—			171
Corporate	112		—		—		—			112
All other debt securities	146		3		—		—			149
Total OTTI credit losses recognized for AFS debt securities	$	724	$	3	$	—	$	—		$	727
HTM debt securities
Mortgage-backed securities⁽¹⁾	$	665	$	—	$	—	$	—		$	665
Corporate	56		—		—		(56		)	—
All other debt securities	133		—		—		—			133
Total OTTI credit losses recognized for HTM debt securities	$	854	$	—	$	—	$	(56	)	$	798

(1) Primarily consists of Alt-A securities.

The following is a nine-month roll-forward of the credit-related impairments recognized in earnings for AFS and HTM debt securities held as of September 30, 2014 that the Company does not intend to sell nor likely will be required to sell:



	Cumulative OTTI credit losses recognized in earnings on HTM Securities Still Held
In millions of dollars	Dec. 31, 2013 balance		Credit impairments recognized in earnings on securities not previously impaired		Credit impairments recognized in earnings on securities that have been previously impaired		Reductions due to credit-impaired securities sold, transferred or matured			Sept. 30, 2014 balance
AFS debt securities
Mortgage-backed securities	$	295	$	—	$	—	$	—		$	295
Foreign government securities	171		—		—		—			171
Corporate	113		—		—		(1		)	112
All other debt securities	144		5		—		—			149
Total OTTI credit losses recognized for AFS debt securities	$	723	$	5	$	—	$	(1	)	$	727
HTM debt securities
Mortgage-backed securities⁽¹⁾	$	678	$	—	$	—	$	(13	)	$	665
Corporate	56		—		—		(56		)	—
All other debt securities	133		—		—		—			133
Total OTTI credit losses recognized for HTM debt securities	$	867	$	—	$	—	$	(69	)	$	798

(1) Primarily consists of Alt-A securities.

Investments in Alternative Investment Funds That Calculate Net Asset Value per Share

The Company holds investments in certain alternative investment funds that calculate net asset value (NAV) per share, including hedge funds, private equity funds, funds of funds and real estate funds. The Company’s investments include co-investments in funds that are managed by the Company and investments in funds that are managed by third parties. Investments in funds are generally classified as non-marketable equity securities carried at fair value. The fair values of these investments are estimated using the NAV per share of the Company’s ownership interest in the funds, where it is not probable that the Company will sell an investment at a price other than the NAV.



	Fair value				Unfunded commitments				Redemption frequency (if currently eligible) monthly, quarterly, annually	Redemption notice period
In millions of dollars	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
Hedge funds	$	16	$	751	$	—	$	—	Generally quarterly	10-95 days
Private equity funds⁽¹⁾⁽²⁾	849		794		153		170		—	—
Real estate funds ⁽²⁾⁽³⁾	173		294		25		36		—	—
Total⁽⁴⁾	$	1,038	$	1,839	$	178	$	206	—	—


(1)	Private equity funds include funds that invest in infrastructure, leveraged buyout transactions, emerging markets and venture capital.

(2)

With respect to the Company’s investments in private equity funds and real estate funds, distributions from each fund will be received as the underlying assets held by these funds are liquidated. It is estimated that the underlying assets of these funds will be liquidated over a period of several years as market conditions allow. Private equity and real estate funds do not allow redemption of investments by their investors. Investors are permitted to sell or transfer their investments, subject to the approval of the general partner or investment manager of these funds, which generally may not be unreasonably withheld.


(3)	Includes several real estate funds that invest primarily in commercial real estate in the U.S., Europe and Asia.


(4)	Included in the total fair value of investments above are $0.8 billion and $1.6 billion of fund assets that are valued using NAVs provided by third-party asset managers as of September 30, 2014 and December 31, 2013, respectively.