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Investments and Cash
 12 Months Ended
Dec. 31, 2013
Investments 1 [abstract]  
Investments and Cash
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 98% based on fair value at December 31, 2013), 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. Credit losses on OTTI securities are recorded in the statement of operations and the non-credit component of OTTI securities are 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 bonds"). 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 includes:

•
assets acquired in refinancing transactions which are primarily comprised of franchise loans that are evaluated for impairment by assessing the probability of collecting expected cash flows with any impairment recorded in realized gain (loss) on investments and any subsequent increases in expected cash flows recorded as an increase in yield over the remaining life,

•
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 the Company intends to sell the security, or it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis, the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date is recorded as a realized loss.

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;

•
whether scheduled interest payments are past due; and

•
whether the Company has the intent to sell the security prior to its recovery in fair value.

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 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 best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. 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.

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 investment portfolio managed by third parties declined due to lower reinvestment rates. Accrued investment income on fixed maturity securities, short-term investments and assets acquired in refinancing transactions was $93 million and $97 million as of December 31, 2013 and December 31, 2012, respectively.
 
Net Investment Income
 
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
(in millions)
Income from fixed maturity securities managed by third parties
$
322


$
346


$
359

Income from internally managed securities:
 
 
 
 
 
Fixed maturities
74


60


39

Other invested assets
5

 
6

 
6

Other
0


1


1

Gross investment income
401


413


405

Investment expenses
(8
)

(9
)

(9
)
Net investment income
$
393

 
$
404

 
$
396



 
Net Realized Investment Gains (Losses)
 
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
(in millions)
Gross realized gains on available-for-sale securities
$
73

 
$
29

 
$
29

Gross realized gains on other assets in investment portfolio
40

 
14

 
8

Gross realized losses on available-for-sale securities
(12
)
 
(23
)
 
(6
)
Gross realized losses on other assets in investment portfolio
(7
)
 
(2
)
 
(4
)
Other-than-temporary impairment
(42
)
 
(17
)
 
(45
)
Net realized investment gains (losses)
$
52

 
$
1

 
$
(18
)

 
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,
 
2013
 
2012
 
2011
 
(in millions)
Balance, beginning of period
$
64

 
$
47

 
$
27

Additions for credit losses on securities for which an other-than-temporary-impairment was not previously recognized
18

 
14

 
27

Eliminations of securities issued by FG VIEs
—

 
—

 
(14
)
Reductions for securities sold during the period
(21
)
 
—

 
(6
)
Additions for credit losses on securities for which an other-than-temporary-impairment was previously recognized
19

 
3

 
13

Balance, end of period
$
80

 
$
64

 
$
47


 
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(2)
Gain
(Loss) on
Securities
with
OTTI
 
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
 
7

 
674

 
32

 
(6
)
 
700

 
—

 
AA+
Corporate securities
 
13

 
1,314

 
44

 
(18
)
 
1,340

 
0

 
A
Mortgage-backed securities(4):
 
0

 
 
 
 
 
 

 
 
 
 

 

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-

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:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
Obligations of state and political subdivisions
 
51
%
 
$
5,153

 
$
489

 
$
(11
)
 
$
5,631

 
$
9

 
AA
U.S. government and agencies
 
7

 
732

 
62

 
0

 
794

 
—

 
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 OCI ("AOCI"). 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 50% of mortgage backed securities as of December 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 portfolio of obligations of state and political subdivisions as of December 31, 2013 and December 31, 2012 by state.
 
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-
 
Fair Value of Available-for-Sale Portfolio of
Obligations of State and Political Subdivisions
As of December 31, 2012 (1)

State
 
State
General
Obligation
 
Local
General
Obligation
 
Revenue Bonds
 
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-
____________________
(1)
Excludes $525 million and $496 million as of December 31, 2013 and 2012, respectively, of pre-refunded bonds. 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, 2013
 
As of December 31, 2012
Type
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
 
(in millions)
Tax backed
 
$
708

 
$
686

 
$
720

 
$
656

Transportation
 
642

 
615

 
717

 
646

Municipal utilities
 
500

 
482

 
567

 
519

Water and sewer
 
459

 
453

 
567

 
520

Higher education
 
358

 
353

 
430

 
389

Healthcare
 
289

 
281

 
323

 
296

All others
 
200

 
192

 
250

 
247

Total
 
$
3,156

 
$
3,062

 
$
3,574

 
$
3,273


 
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. 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 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 OTTI
 

 
13

 
 

 
11

 
 

 
24

 
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)
Obligations of state and political subdivisions
$
79

 
$
(11
)
 
$
—

 
$
—

 
$
79

 
$
(11
)
U.S. government and agencies
62

 
0

 
—

 
—

 
62

 
0

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 December 31, 2013, eleven securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of December 31, 2013 was $52 million. The Company has determined that the unrealized losses recorded as of December 31, 2013 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, 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 December 31, 2013
 
 
Amortized
Cost
 
Estimated
Fair Value
 
(in millions)
Due within one year
$
272

 
$
275

Due after one year through five years
1,662

 
1,734

Due after five years through 10 years
2,420

 
2,505

Due after 10 years
3,438

 
3,526

Mortgage-backed securities:
 

 
 

RMBS
1,160

 
1,122

CMBS
536

 
549

Total
$
9,488

 
$
9,711

 
Under agreements with its cedants and in accordance with statutory requirements, the Company maintains fixed maturity securities and cash in trust accounts for the benefit of reinsured companies, which amounted to $377 million and $368 million as of December 31, 2013 and December 31, 2012, respectively, based on fair value. In addition, to fulfill state licensing requirements, the Company has placed on deposit eligible securities of $19 million and $27 million as of December 31, 2013 and December 31, 2012, respectively, based on fair value.
 
The fair value of the Company’s pledged securities under credit derivative contracts totaled $677 million and $660 million as of December 31, 2013 and December 31, 2012, respectively.
 
No material investments of the Company were non-income producing for years ended December 31, 2013 and 2012.
 
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 9% of the investment portfolio, on a fair value basis as of December 31, 2013. 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).

     The Company also purchases obligations and assets that it believes constitute good investment opportunities (the "trading portfolio"). During 2013, the Company purchased $630 million par amount outstanding of such obligations and sold an amount of par equal to $619 million. During 2012, the Company had purchased $782 million par amount outstanding of such obligations and sold $728 million. As of December 31, 2013 and 2012, the Company held $76 million and $65 million par amount outstanding of such obligations, respectively.

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,
 
2013
 
2012
 
(in millions)
Assets purchased for loss mitigation purposes:
 
 
 
Fixed maturity securities:
 
 
 
Obligations of state and political subdivisions
$
28

 
$
23

RMBS
284

 
213

Asset-backed securities
127

 
120

Other invested assets
47

 
72

Other risk management assets:
 
 
 
Fixed maturity securities:
 
 
 
Obligations of state and political subdivisions
8

 
12

Corporate Securities
136

 
—

RMBS
37

 
6

Asset-backed securities
141

 
186

Other
35

 
49

Trading portfolio (other invested assets)
88

 
91

Total
$
931

 
$
772