XML 96 R19.htm IDEA: XBRL DOCUMENT v2.4.0.8
Investments and Cash
 6 Months Ended
Jun. 30, 2014
Investments, Debt and Equity Securities [Abstract]  
Investments and Cash
Investments and Cash
 
Net Investment Income and Realized Gains (Losses)

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. Accrued investment income was $95 million and $93 million as of June 30, 2014 and December 31, 2013, respectively.
 
Net Investment Income
 
 
 
Second Quarter
 
Six Months
 
 
2014
 
2013
 
2014

2013
 
 
(in millions)
Income from fixed-maturity securities managed by third parties
 
$
81

 
$
80

 
$
161

 
$
159

Income from internally managed securities:
 
 
 
 
 
 
 
 
Fixed maturities
 
17

 
14

 
37

 
30

Other invested assets
 
0

 
1

 
5

 
2

Gross investment income
 
98

 
95

 
203

 
191

Investment expenses
 
(2
)
 
(2
)
 
(4
)
 
(4
)
Net investment income
 
$
96

 
$
93

 
$
199

 
$
187



Net Realized Investment Gains (Losses)
 
 
 
Second Quarter
 
Six Months
 
 
2014

2013
 
2014
 
2013
 
 
(in millions)
Gross realized gains on available-for-sale securities
 
$
3

 
$
12

 
$
7

 
$
18

Gross realized gains on other assets in investment portfolio
 
2

 
3

 
7

 
36

Gross realized losses on available-for-sale securities
 
(1
)
 
(5
)
 
(3
)
 
(9
)
Gross realized losses on other assets in investment portfolio
 
0

 
(1
)
 
0

 
(3
)
Other-than-temporary impairment
 
(12
)
 
(7
)
 
(17
)
 
(12
)
Net realized investment gains (losses)
 
$
(8
)
 
$
2

 
$
(6
)
 
$
30


 
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 other comprehensive income ("OCI").
 
Roll Forward of Credit Losses
in the Investment Portfolio

 
 
Second Quarter
 
Six Months
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Balance, beginning of period
 
$
85

 
$
69

 
$
80

 
$
64

Additions for credit losses on securities for which an other-than-temporary-impairment was not previously recognized
 
9

 
—

 
10

 
1

Reductions for securities sold during the period
 
(12
)
 
—

 
(12
)
 
—

Additions for credit losses on securities for which an other-than-temporary-impairment was previously recognized
 
2

 
3

 
6

 
7

Balance, end of period
 
$
84

 
$
72

 
$
84

 
$
72



Investment Portfolio

Fixed-Maturity Securities and Short-Term Investments
by Security Type 
As of June 30, 2014

Investment Category
 
Percent
of
Total(1)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
AOCI(2)
Gain
(Loss) on
Securities
with
Other-Than-Temporary Impairment
 
Weighted
Average
Credit
Quality
 (3)
 
 
(dollars in millions)
Fixed-maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
Obligations of state and political subdivisions
 
47
%
 
$
5,163

 
$
342

 
$
(5
)
 
$
5,500

 
$
8

 
AA
U.S. government and agencies
 
7

 
823

 
33

 
(3
)
 
853

 
—

 
AA+
Corporate securities
 
12

 
1,376

 
59

 
(22
)
 
1,413

 
(17
)
 
A+
Mortgage-backed securities(4):
 
0

 
 
 
 
 
 

 
 
 
 

 

RMBS
 
11

 
1,170

 
46

 
(45
)
 
1,171

 
(28
)
 
A
CMBS
 
6

 
691

 
21

 
0

 
712

 
—

 
AAA
Asset-backed securities
 
5

 
538

 
13

 
(3
)
 
548

 
3

 
BBB+
Foreign government securities
 
3

 
317

 
17

 
(1
)
 
333

 
—

 
AA+
Total fixed-maturity securities
 
91

 
10,078

 
531

 
(79
)
 
10,530

 
(34
)
 
AA-
Short-term investments
 
9

 
979

 
0

 
0

 
979

 
—

 
AAA
Total investment portfolio
 
100
%
 
$
11,057

 
$
531

 
$
(79
)
 
$
11,509

 
$
(34
)
 
AA-

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
Gain
(Loss) on
Securities
with
Other-Than-Temporary Impairment
 
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):
 
 

 
 

 
 

 
 

 
 

 
 

 
 
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-
____________________
(1)
Based on amortized cost.
 
(2)
Accumulated OCI ("AOCI"). See also Note 17, Shareholders' Equity.
 
(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 44% of mortgage backed securities as of June 30, 2014 and 50% as of December 31, 2013 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 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.
 
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 June 30, 2014
 
 
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
$
53

 
$
(1
)
 
$
217

 
$
(4
)
 
$
270

 
$
(5
)
U.S. government and agencies
7

 
0

 
172

 
(3
)
 
179

 
(3
)
Corporate securities
122

 
(17
)
 
156

 
(5
)
 
278

 
(22
)
Mortgage-backed securities:
 
 
 
 
 
 
 

 


 


RMBS
89

 
(2
)
 
317

 
(43
)
 
406

 
(45
)
CMBS
—

 
—

 
26

 
0

 
26

 
0

Asset-backed securities
9

 
0

 
48

 
(3
)
 
57

 
(3
)
Foreign government securities
44

 
0

 
10

 
(1
)
 
54

 
(1
)
Total
$
324

 
$
(20
)
 
$
946

 
$
(59
)
 
$
1,270

 
$
(79
)
Number of securities
 

 
58

 
 

 
165

 
 

 
223

Number of securities with other-than-temporary impairment
 

 
2

 
 

 
11

 
 

 
13

 
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 other-than-temporary impairment
 

 
13

 
 

 
11

 
 

 
24


 
Of the securities in an unrealized loss position for 12 months or more as of June 30, 2014, nine securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of June 30, 2014 was $34 million. The Company has determined that the unrealized losses recorded as of June 30, 2014 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 June 30, 2014 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 June 30, 2014
 
 
Amortized
Cost
 
Estimated
Fair Value
 
(in millions)
Due within one year
$
169

 
$
171

Due after one year through five years
2,206

 
2,292

Due after five years through 10 years
2,248

 
2,381

Due after 10 years
3,594

 
3,803

Mortgage-backed securities:
 

 
 

RMBS
1,170

 
1,171

CMBS
691

 
712

Total
$
10,078

 
$
10,530


 
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 $421 million and $377 million as of June 30, 2014 and December 31, 2013, respectively, based on fair value. In addition, to fulfill state licensing requirements the Company has placed on deposit eligible securities of $19 million as of both June 30, 2014 and December 31, 2013, based on fair value.

The fair value of the Company’s pledged securities under credit derivative contracts totaled $472 million and $677 million as of June 30, 2014 and December 31, 2013, respectively.
 
No material investments of the Company were non-income producing for Six Months 2014 and 2013, respectively.
 
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 8% and 9% of the investment portfolio, on a fair value basis as of June 30, 2014 and December 31, 2013, respectively. 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 (the "trading portfolio").
    
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).

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 June 30,
 
As of December 31,
 
2014
 
2013
 
(in millions)
Assets purchased for loss mitigation purposes:
 
 
 
Fixed maturity securities:
 
 
 
Obligations of state and political subdivisions
$
30

 
$
28

RMBS
275

 
284

Asset-backed securities
133

 
127

Other invested assets
24

 
47

Other risk management assets:
 
 
 
Fixed maturity securities
369

 
322

Other
83

 
35

Trading portfolio (other invested assets)
19

 
88

Total
$
933

 
$
931