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 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 $97 million and $97 million as of March 31, 2013 and December 31, 2012, respectively.

Net Investment Income



	First Quarter
	2013			2012
	(in millions)
Income from fixed maturity securities in general investment portfolio	$	79		$	87
Income from fixed maturity securities purchased or obtained for loss mitigation purposes	16			12
Other (1)	1			1
Gross investment income	96			100
Investment expenses	(2		)	(2		)
Net investment income	$	94		$	98

____________________

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

Net Realized Investment Gains (Losses)



	First Quarter
	2013			2012
	(in millions)
Realized gains on investment portfolio	$	39		$	9
Realized losses on investment portfolio	(6		)	(3		)
Other-than-temporary impairment ("OTTI") (1)	(5		)	(5		)
Net realized investment gains (losses)	$	28		$	1

____________________


(1)	Substantially all amounts relate to the credit component of OTTI securities as opposed to OTTI due to intent to sell.

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



	First Quarter
	2013		2012
	(in millions)
Balance, beginning of period	$	64	$	47
Additions for credit losses on securities for which an OTTI was not previously recognized	1		2
Additions for credit losses on securities for which an OTTI was previously recognized	4		2
Balance, end of period	$	69	$	51

Fixed Maturity Securities and Short Term Investments

by Security Type

As of March 31, 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	8	%	$	819	$	58	$	0		$	877	$	—		AA+
Obligations of state and political subdivisions	51		5,161		452		(12		)	5,601		8			AA
Corporate securities	9		970		71		(1		)	1,040		0			A+
Mortgage-backed securities(4):	0
RMBS	12		1,210		54		(68		)	1,196		(51		)	A+
CMBS	5		474		31		0			505		0			AAA
Asset-backed securities	5		469		35		(8		)	496		18			BBB-
Foreign government securities	3		260		12		(2		)	270		0			AA+
Total fixed maturity securities	93		9,363		713		(91		)	9,985		(25		)	AA-
Short-term investments	7		729		0		0			729		0			AAA
Total investment portfolio	100	%	$	10,092	$	713	$	(91	)	$	10,714	$	(25	)	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 Other Comprehensive Income ("AOCI"). See also Note 17.


(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 60% of mortgage backed securities as of March 31, 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 following tables present the fair value of the Company’s available-for-sale municipal bond portfolio as of March 31, 2013 and December 31, 2012 by state, excluding $554 million and $496 million of pre-refunded bonds, respectively. The credit ratings are based on the underlying ratings and do not include any benefit from bond insurance.

Fair Value of Available-for-Sale Municipal Bond Portfolio by State

As of March 31, 2013



State	State General Obligation		Local General Obligation		Revenue		Fair Value		Amortized Cost		Average Credit Rating
	(in millions)
Texas	$	87	$	336	$	339	$	762	$	701	AA
New York	12		66		586		664		618		AA
California	27		73		360		460		428		A+
Florida	47		49		264		360		325		AA-
Illinois	14		78		189		281		257		A+
Massachusetts	41		18		163		222		199		AA
Washington	33		21		144		198		182		AA
Arizona	—		8		178		186		170		AA
Michigan	—		29		110		139		127		AA-
Pennsylvania	67		31		39		137		129		AA-
All others	238		222		1,178		1,638		1,512		AA
Total	$	566	$	931	$	3,550	$	5,047	$	4,648	AA-

Fair Value of Available-for-Sale Municipal Bond Portfolio by State

As of December 31, 2012



State	State General Obligation		Local General Obligation		Revenue		Fair Value		Amortized Cost		Average Credit Rating
	(in millions)
Texas	$	88	$	345	$	342	$	775	$	708	AA
New York	22		58		593		673		620		AA
California	23		77		359		459		425		A+
Florida	47		50		259		356		319		AA-
Illinois	15		84		188		287		260		A+
Massachusetts	42		18		165		225		199		AA
Washington	33		40		145		218		200		AA
Arizona	—		8		180		188		171		AA
Georgia	14		20		108		142		132		A+
Pennsylvania	68		32		40		140		129		AA-
All others	229		248		1,195		1,672		1,533		AA
Total	$	581	$	980	$	3,574	$	5,135	$	4,696	AA-

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

Revenue Sources



	As of March 31, 2013				As of December 31, 2012
Type	Fair Value		Amortized Cost		Fair Value		Amortized Cost
	(in millions)
Tax backed	$	712	$	654	$	720	$	656
Transportation	711		644		717		646
Municipal utilities	562		516		567		519
Water and sewer	549		508		567		520
Higher education	440		403		430		389
Healthcare	328		302		323		296
All others	248		246		250		247
Total	$	3,550	$	3,273	$	3,574	$	3,273

The Company’s investment portfolio is 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 March 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)
U.S. government and agencies	$	43	$	0		$	—	$	—		$	43	$	0
Obligations of state and political subdivisions	158		(12		)	—		—			158		(12		)
Corporate securities	76		(1		)	—		—			76		(1		)
Mortgage-backed securities:
RMBS	184		(15		)	99		(53		)	283		(68		)
CMBS	16		0			—		—			16		0
Asset-backed securities	19		0			38		(8		)	57		(8		)
Foreign government securities	62		(2		)	—		—			62		(2		)
Total	$	558	$	(30	)	$	137	$	(61	)	$	695	$	(91	)
Number of securities			105					12					117
Number of securities with OTTI			5					5					10

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 March 31, 2013, eight securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of March 31, 2013 was $60 million. The Company has determined that the unrealized losses recorded as of March 31, 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 March 31, 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 March 31, 2013



	Amortized Cost		Estimated Fair Value
	(in millions)
Due within one year	$	152	$	153
Due after one year through five years	1,623		1,700
Due after five years through 10 years	2,328		2,527
Due after 10 years	3,576		3,904
Mortgage-backed securities:
RMBS	1,210		1,196
CMBS	474		505
Total	$	9,363	$	9,985

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 $371 million and $368 million as of March 31, 2013 and December 31, 2012, respectively. In addition, to fulfill state licensing requirements the Company has placed on deposit eligible securities of $24 million and $27 million as of March 31, 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 March 31, 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 $709 million and $660 million as of March 31, 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 First Quarter 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. 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.

Loss Mitigation Assets

Carrying Value



	As of March 31, 2013		As of December 31, 2012
	(in millions)
Fixed maturity securities:
Obligations of state and political subdivisions	$	35	$	35
RMBS	216		215
Asset-backed securities	286		306
Other invested assets:
Assets acquired in refinancing transactions	67		72
Other	25		42
Total	$	629	$	670