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Fair Value Measurement (Tables)
 9 Months Ended
Sep. 30, 2013
Fair Value Disclosures [Abstract]  
Information by Credit Spread Type
Information by Credit Spread Type (1)
 
 
As of
September 30, 2013
 
As of
December 31, 2012
Based on actual collateral specific spreads
6
%
 
6
%
Based on market indices
87
%
 
88
%
Provided by the CDS counterparty
7
%
 
6
%
Total
100
%
 
100
%

 ____________________
(1)    Based on par.
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 September 30, 2013
 
 
 
 
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
$
717

 
$
—

 
$
717

 
$
—

Obligations of state and political subdivisions
5,249

 
—

 
5,208

 
41

Corporate securities
1,345

 
—

 
1,213

 
132

Mortgage-backed securities:
 

 
 
 
 
 
 
RMBS
1,120

 
—

 
833

 
287

Commercial mortgage-backed securities ("CMBS")
523

 
—

 
523

 
—

Asset-backed securities
614

 
—

 
274

 
340

Foreign government securities
305

 
—

 
305

 
—

Total fixed maturity securities
9,873


—

 
9,073

 
800

Short-term investments
761

 
516

 
245

 
—

Other invested assets (1)
79

 
—

 
73

 
6

Credit derivative assets
106

 
—

 
—

 
106

FG VIEs’ assets, at fair value
2,515

 
—

 
—

 
2,515

Other assets(2)
67

 
24

 
11

 
32

Total assets carried at fair value
$
13,401

 
$
540

 
$
9,402

 
$
3,459

Liabilities:
 

 
 

 
 

 
 

Credit derivative liabilities
$
2,027

 
$
—

 
$
—

 
$
2,027

FG VIEs’ liabilities with recourse, at fair value
1,828

 
—

 
—

 
1,828

FG VIEs’ liabilities without recourse, at fair value
1,047

 
—

 
—

 
1,047

Total liabilities carried at fair value
$
4,902

 
$
—

 
$
—

 
$
4,902

 
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of December 31, 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
$
794

 
$
—

 
$
794

 
$
—

Obligations of state and political subdivisions
5,631

 
—

 
5,596

 
35

Corporate securities
1,010

 
—

 
1,010

 
—

Mortgage-backed securities:
 

 
 

 
 

 
 

RMBS
1,266

 
—

 
1,047

 
219

CMBS
520

 
—

 
520

 
—

Asset-backed securities
531

 
—

 
225

 
306

Foreign government securities
304

 
—

 
304

 
—

Total fixed maturity securities
10,056

 
—

 
9,496

 
560

Short-term investments
817

 
446

 
371

 
—

Other invested assets (1)
120

 
—

 
112

 
8

Credit derivative assets
141

 
—

 
—

 
141

FG VIEs’ assets, at fair value
2,688

 
—

 
—

 
2,688

Other assets(2)
65

 
24

 
5

 
36

Total assets carried at fair value
$
13,887

 
$
470

 
$
9,984

 
$
3,433

Liabilities:
 

 
 

 
 

 
 

Credit derivative liabilities
$
1,934

 
$
—

 
$
—

 
$
1,934

FG VIEs’ liabilities with recourse, at fair value
2,090

 
—

 
—

 
2,090

FG VIEs’ liabilities without recourse, at fair value
1,051

 
—

 
—

 
1,051

Total liabilities carried at fair value
$
5,075

 
$
—

 
$
—

 
$
5,075

 ____________________
(1)
Includes mortgage loans that are recorded at fair value on a non-recurring basis. At September 30, 2013 and December 31, 2012, such investments were carried at their fair value of $6 million and $7 million, respectively.
 
(2)    Includes fair value of CCS and supplemental executive retirement plan assets.
Fair Value Level 3 Roll Forward
The table below presents a roll forward of the Company’s Level 3 financial instruments carried at fair value on a recurring basis during Third Quarter 2013 and 2012 and Nine Months 2013 and 2012.

Fair Value Level 3 Rollforward
Recurring Basis
Third Quarter 2013
 
 
Fixed Maturity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations
of State and
Political
Subdivisions
 
RMBS
 
Asset-
Backed
Securities
 
Corporate 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 June 30, 2013
$
36

 

$
276

 

$
300

 

$
—

 
$
2

 
$
2,674

 

$
23

 

$
(2,248
)
 
$
(1,940
)
 
$
(1,134
)
 
Total pretax realized and unrealized gains/(losses) recorded in:(1)
 
 

 

 

 

 

 
 
 

 
 

 

 

 

 

 

 

 

 

 

Net income (loss)
—

(2
)
4

(2
)
6

(2
)
1

(2
)
0

(7
)
(30
)
(3
)
9

(4
)
354

(6
)
28

(3
)
35

(3
)
Other comprehensive income (loss)
6

 

12

 

(2
)
 

4

 
0

 
—

 

—

 

—

 

—

 

—

 

Purchases
—

 

9

 

38

 

130

(8
)
—

 
—

 

—

 

—

 

—

 

—

 

Settlements
(1
)
 
(14
)
 
(2
)
 
(3
)
 
(2
)
 
(113
)
 
—

 

(27
)
 

84

 

36

 

FG VIE consolidations
—

 

—

 

—

 

—

 
—

 
—

 

—

 

—

 

—

 
—

 

FG VIE deconsolidations
—

 
—

 
—

 
—

 
—

 
(16
)
 
—

 
—

 
—

 
16

 
Fair value as of September 30, 2013
$
41

 

$
287

 

$
340

 

$
132

 
$
0

 
$
2,515

 

$
32

 

$
(1,921
)
 
$
(1,828
)
 
$
(1,047
)
 
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2013
$
5

 
$
12

 
$
(2
)
 
$
4

 
$
0

 
$
20

 
$
9

 
$
331

 
$
24

 
$
(20
)
 

Fair Value Level 3 Rollforward
Recurring Basis
Third 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 VIEs’ Liabilities
with
Recourse,
at Fair
Value
 
FG VIEs’ Liabilities
without
Recourse,
at Fair
Value
 
 
(in millions)
Fair value as of June 30, 2012
$
10

 
$
167

 

$
274

 

$
1

 
$
2,726

 

$
44

 
$
(1,666
)
 

$
(2,239
)
 
(1,042
)
 
Total pretax realized and unrealized gains/(losses) recorded in:(1)
 
 
 

 

 
 

 
 
 
 

 
 
 
 

 
 

 
 

Net income (loss)
0

 
4

(2
)
6

(2
)
—

 
91

(3
)
(2
)
(4
)
(36
)
(6
)
(51
)
(3
)
(19
)
(3
)
Other comprehensive income (loss)
0

 
13

 

20

 

—

 
—

 

—

 
—

 

—

 

—

 

Purchases
1

 
42

 

1

 

—

 
—

 

—

 
—

 

—

 

—

 

Settlements
—

 
(17
)
 
(2
)
 
—

 
(124
)
 
—

 
1

 

121

 

43

 

FG VIE consolidations
—

 
—

 

—

 

—

 
—

 

—

 
—

 

—

 
—

 

Fair value as of September 30, 2012
$
11

 
$
209

 

$
299

 

$
1

 
$
2,693

 

$
42

 
$
(1,701
)
 

$
(2,169
)
 
(1,018
)
 
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2012
$
0

 
$
10

 
$
20

 
$
—

 
$
165

 
$
(2
)
 
$
(39
)
 
$
(55
)
 
(58
)
 


Fair Value Level 3 Rollforward
Recurring Basis
Nine Months 2013
 
Fixed Maturity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations
of State and
Political
Subdivisions
 
RMBS
 
Asset-
Backed
Securities
 
Corporate 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, 2012
$
35

 

$
219

 

$
306

 

$
—

 
$
1

 
$
2,688

 

$
36

 

$
(1,793
)
 
$
(2,090
)
 
$
(1,051
)
 
Total pretax realized and unrealized gains/(losses) recorded in:(1)


 



 



 

 
 


 


 



 



 



 



 

Net income (loss)
1

(2
)
15

(2
)
15

(2
)
1

(2
)
(1
)
(7
)
526

(3
)
(4
)
(4
)
(164
)
(6
)
(135
)
(3
)
(157
)
(3
)
Other comprehensive income (loss)
7

 

16

 

(24
)
 

4

 
2

 
—

 

—

 

—

 

—

 

—

 

Purchases
—

 

79

 

49

 

130

(8
)
—

 
—

 

—

 

—

 

—

 

—

 

Settlements
(2
)
 
(42
)
 
(6
)
 
(3
)
 
(2
)
 
(553
)
 
—

 

36

 

274

 

135

 

FG VIE consolidations
—

 

—

 

—

 

—

 
—

 
48

 

—

 

—

 

(12
)
 
(37
)
 

FG VIE deconsolidations
—

 
—

 
—

 
—

 
—

 
(194
)
 
—

 
—

 
135

 
63

 
Fair value as of September 30, 2013
$
41

 

$
287

 

$
340

 

$
132

 
$
0

 
$
2,515

 

$
32

 

$
(1,921
)
 
$
(1,828
)
 
$
(1,047
)
 
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2013
$
7

 
$
16

 
$
(23
)
 
$
4

 
$
2

 
$
450

 
$
(4
)
 
$
14

 
$
(141
)
 
$
(246
)
 
 

Fair Value Level 3 Rollforward
Recurring Basis
Nine 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
$
10

 

$
134

 

$
235

 

$
2

 
$
2,819

 

$
54

 

$
(1,304
)
 
$
(2,397
)
 
$
(1,061
)
 
Total pretax realized and unrealized gains/(losses) recorded in:(1)
 
 



 



 



 


 



 



 



 



 

Net income (loss)
0

(2
)
9

(2
)
20

(2
)
—

 
266

(3
)
(12
)
(4
)
(466
)
(6
)
(150
)
(3
)
(112
)
(3
)
Other comprehensive income (loss)
1

 

6

 

8

 

(1
)
 
—

 

—

 

—

 

—

 

—

 

Purchases
1

 

97

 

41

 

—

 
—

 

—

 

—

 

—

 

—

 

Settlements
(1
)
 
(37
)
 
(5
)
 
—

 
(407
)
 
—

 

69

 

398

 

155

 

FG VIE consolidations
—

 

—

 

—

 

—

 
15

 

—

 

—

 

(20
)
 
—

 

Fair value as of September 30, 2012
$
11

 

$
209

 
$
299

 
$
1

 
$
2,693

 
$
42

 
$
(1,701
)
 
$
(2,169
)
 
$
(1,018
)
 
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2012
$
1

 
$
2

 
$
8

 
$
(1
)
 
$
468

 
$
(12
)
 
$
(391
)
 
$
(180
)
 
$
(213
)
 
______________
(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 gains (losses) on CCS.

(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.

(7)
Reported in other income.

(8)
Non-cash transaction.
Schedule of Quantitative Information About Level 3 Fair Value Measurements
res
 
Quantitative Information About Level 3 Fair Value Inputs
At September 30, 2013
 
Financial Instrument Description
 
Fair Value at
September 30, 2013
(in millions)
 
Valuation
Technique
 
Significant Unobservable Inputs
 
Range
Assets:
 
 

 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 

 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
41

 
Discounted
 
Rate of inflation
 
1.0
%
-
3.0%
 
 
cash flow
 
Cash flow receipts
0.5
%
-
94.4%
 
 
 
 
Yield
4.6
%
 
9.0%
 
 
 
 
Collateral recovery period
1 month

-
41 years
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
132

 
Discounted
 
Yield
 
8.0%
 
 
 cash flow
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RMBS
 
287

 
Discounted
 
CPR
 
1.0
%
-
7.5%
 
 
 cash flow
 
CDR
 
4.4
%
-
27.8%
 
 
 
 
Severity
 
48.0
%
-
102.7%
 
 
 
 
Yield
 
3.0
%
-
10.8%
Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
Whole business securitization
 
63

 
Discounted cash flow
 
Annual gross revenue projections (in millions)
 

$54

-
$96
 
 
 
Value of primary financial guaranty policy
 
54.5%
 
 
 
Liquidity discount
 
5.0
%
-
20.0%
 
 
 
 
 
 
 
 
 
 
 
Investor owned utility
 
165

 
Discounted cash flow
 
Liquidation value (in millions)
 

$215

-
$287
 
 
 
Years to liquidation
 
0 years

-
1.25 years
 
 
 
Collateral recovery period
 
3 months

-
6 years
 
 
 
Discount factor
 
15.3%
 
 
 
 
 
 
 
 
 
 
 
XXX life insurance transactions
 
112

 
Discounted
 
Yield
 
12.5%
 
 
 cash flow
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other invested assets
 
6

 
Discounted cash flow
 
Discount for lack of liquidity
 
10.0
%
-
20.0%
 
 
 
Recovery on delinquent loans
 
20.0
%
-
60.0%
 
 
 
Default rates
 
1.0
%
-
12.0%
 
 
 
Loss severity
 
40.0
%
-
90.0%
 
 
 
Prepayment speeds
 
6.0
%
-
15.0%
 
 
 
 
 
 
 
 
 
 
 
FG VIEs’ assets, at fair value
 
2,515

 
Discounted
 
CPR
 
0.6
%
-
11.8%
 
 
 cash flow
 
CDR
 
2.8
%
-
27.8%
 
 
 
 
Loss severity
 
38.1
%
-
106.4%
 
 
 
 
Yield
 
4.4
%
-
9.0%

Financial Instrument Description
 
Fair Value at
September 30, 2013
(in millions)
 
Valuation
Technique
 
Significant Unobservable Inputs
 
Range
Other assets
 
32

 
Discounted cash flow
 
Quotes from third party pricing
 
$45
-
$51
 
 
 
 
Term (years)
 
3 years
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 
 
 
 
 
 
 
Credit derivative liabilities, net
 
(1,921
)
 
Discounted
 
Year 1 loss estimates
 
0.0
%
-
58.0%
 
 
 
cash flow
 
Hedge cost (in bps)
 
46.3

-
502.0
 
 
 
 
 
Bank profit (in bps)
 
1.0

-
1,389.9
 
 
 
 
 
Internal floor (in bps)
 
7.0

-
100.0
 
 
 
 
 
Internal credit rating
 
AAA

-
BIG
 
 
 
 
 
 
 
 
 
 
 
FG VIEs’ liabilities, at fair value
 
(2,875
)
 
Discounted
 
CPR
 
0.6
%
-
11.8%
 
 
cash flow
 
CDR
 
2.8
%
-
27.8%
 
 
 
 
Loss severity
 
38.1
%
-
106.4%
 
 
 
 
Yield
 
4.4
%
-
9.0%

 

Quantitative Information About Level 3 Fair Value Inputs
At December 31, 2012 
Financial Instrument Description
 
Fair Value at
December 31, 2012
(in millions)
 
Valuation
Technique
 
Significant Unobservable Inputs
 
Range
Assets:
 
 

 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 

 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
35

 
Discounted
 
Rate of inflation
 
1.0
%
-
3.0%
 
 
cash flow
 
Cash flow receipts
4.9
%
-
85.8%
 
 
 
 
Discount rates
4.3
%
 
9.0%
 
 
 
 
Collateral recovery period
1 month

-
43 years
 
 
 
 
 
 
 
 
 
 
 
RMBS
 
219

 
Discounted
 
CPR
 
0.8
%
-
7.5%
 
 
 cash flow
 
CDR
 
4.4
%
-
28.6%
 
 
 
 
Severity
 
48.1
%
-
102.8%
 
 
 
 
Yield
 
3.5
%
-
12.8%
Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
Whole business securitization
 
63

 
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
 
186

 
Discounted cash flow
 
Liquidation value (in millions)
 

$212

-
$242
 
 
 
Years to liquidation
 
0 years

-
3 years
 
 
 
Discount factor
 
15.3%
 
 
 
 
 
 
 
 
 
 
 
XXX life insurance transactions
 
57

 
Discounted
 
Yield
 
12.5%
 
 
 cash flow
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other invested assets
 
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
%
-
12.0%
 
 
 
Loss severity
 
40.0
%
-
90.0%
 
 
 
Prepayment speeds
 
6.0
%
-
15.0%
 
 
 
 
 
 
 
 
 
 
 
FG VIEs’ assets, at fair value
 
2,688

 
Discounted
 
CPR
 
0.5
%
-
10.9%
 
 
 cash flow
 
CDR
 
3.0
%
-
28.6%
 
 
 
 
Loss severity
 
37.5
%
-
103.8%
 
 
 
 
Yield
 
4.5
%
-
20.0%


 
Financial Instrument Description
 
Fair Value at
December 31, 2012
(in millions)
 
Valuation
Technique
 
Significant Unobservable Inputs
 
Range
Other assets
 
36

 
Discounted cash flow
 
Quotes from third party pricing
 
$38
-
$51
 
 
 
 
Term (years)
 
3 years
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 
 
 
 
 
 
 
Credit derivative liabilities, net
 
(1,793
)
 
Discounted
 
Year 1 loss estimates
 
0.0
%
-
58.7%
 
 
 
cash flow
 
Hedge cost (in bps)
 
64.2

-
678.4
 
 
 
 
 
Bank profit (in bps)
 
1.0

-
1,312.9
 
 
 
 
 
Internal floor (in bps)
 
7.0

-
60.0
 
 
 
 
 
Internal credit rating
 
AAA

-
BIG
 
 
 
 
 
 
 
 
 
 
 
FG VIEs’ liabilities, at fair value
 
(3,141
)
 
Discounted
 
CPR
 
0.5
%
-
10.9%
 
 
cash flow
 
CDR
 
3.0
%
-
28.6%
 
 
 
 
Loss severity
 
37.5
%
-
103.8%
 
 
 
 
Yield
 
4.5
%
-
20.0%
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
September 30, 2013
 
As of
December 31, 2012
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
(in millions)
Assets:
 

 
 

 
 

 
 

Fixed maturity securities
$
9,873

 
$
9,873

 
$
10,056

 
$
10,056

Short-term investments
761

 
761

 
817

 
817

Other invested assets
102

 
110

 
177

 
182

Credit derivative assets
106

 
106

 
141

 
141

FG VIEs’ assets, at fair value
2,515

 
2,515

 
2,688

 
2,688

Other assets
164

 
164

 
166

 
166

Liabilities:
 

 
 

 
 

 
 

Financial guaranty insurance contracts(1)
3,694

 
5,786

 
3,918

 
6,537

Long-term debt
819

 
992

 
836

 
1,091

Credit derivative liabilities
2,027

 
2,027

 
1,934

 
1,934

FG VIEs’ liabilities with recourse, at fair value
1,828

 
1,828

 
2,090

 
2,090

FG VIEs’ liabilities without recourse, at fair value
1,047

 
1,047

 
1,051

 
1,051

Other liabilities
42

 
42

 
47

 
47

____________________
(1)
Carrying amount includes the assets and liabilities related to financial guaranty insurance contract premiums, losses, and salvage and subrogation and other recoverables net of reinsurance.