Note 7: Investments

The Company’s fixed-maturity portfolio consists of high-quality (average rating Aa) taxable and tax-exempt investments of diversified maturities. Other investments primarily comprise equity investments, including those accounted for under the equity method, highly rated perpetual securities and loan receivables that bear interest.

The following tables present the amortized cost, fair value and other-than-temporary impairments of fixed-maturity investments and other investments designated as available-for-sale in the consolidated investment portfolio of the Company as of June 30, 2012 and December 31, 2011:


	June 30, 2012
In millions	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-Than- Temporary Impairments⁽¹⁾
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	1,036	$	49	$	-	$	1,085	$	-
Foreign governments		328		22		-		350		-
Corporate obligations		1,111		50		(24)		1,137		(2)
Mortgage-backed securities:
Residential mortgage-backed agency		1,032		47		-		1,079		-
Residential mortgage-backed non-agency		199		15		(39)		175		(113)
Commercial mortgage-backed		44		1		(5)		40		-
Asset-backed securities:
Collateralized debt obligations		184		-		(86)		98		(57)
Other asset-backed		212		2		(19)		195		(1)
State and municipal bonds		886		62		(11)		937		-

Total taxable bonds		5,032		248		(184)		5,096		(173)
Tax-exempt bonds:
State and municipal bonds		1,012		56		(1)		1,067		-

Total fixed-maturity investments		6,044		304		(185)		6,163		(173)
Other investments:
Perpetual preferred securities		50		-		(1)		49		-
Other investments		10		-		-		10		-
Money market securities		635		-		-		635		-

Total other investments		695		-		(1)		694		-
Assets of consolidated VIEs:
Corporate obligations		177		6		(7)		176		-
Mortgage-backed securities:
Residential mortgage-backed non-agency		106		-		(19)		87		-
Asset-backed securities:
Collateralized debt obligations		109		-		(14)		95		-
Other asset-backed		29		1		-		30		-
State and municipal bonds		37		3		-		40		-
Other investments:
Money market securities		109		-		-		109		-

Total available-for-sale investments	$	7,306	$	314	$	(226)	$	7,394	$	(173)

(1) - Represents the amount of other-than-temporary losses recognized in accumulated other comprehensive income (loss) since the adoption of the accounting guidance for other-than-temporary impairments.


	December 31, 2011
In millions	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-Than- Temporary Impairments⁽¹⁾
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	1,091	$	39	$	-	$	1,130	$	-
Foreign governments		326		23		-		349		-
Corporate obligations		1,698		43		(106)		1,635		(2)
Mortgage-backed securities:
Residential mortgage-backed agency		1,198		47		-		1,245		-
Residential mortgage-backed non-agency		325		31		(83)		273		(125)
Commercial mortgage-backed		58		1		(10)		49		-
Asset-backed securities:
Collateralized debt obligations		251		-		(118)		133		(69)
Other asset-backed		520		2		(82)		440		(37)
State and municipal bonds		903		35		(17)		921		-

Total taxable bonds		6,370		221		(416)		6,175		(233)
Tax-exempt bonds:
State and municipal bonds		1,122		41		(2)		1,161		-

Total fixed-maturity investments		7,492		262		(418)		7,336		(233)
Other investments:
Perpetual preferred securities		127		-		(19)		108		-
Other investments		22		1		-		23		-
Money market securities		911		-		-		911		-

Total other investments		1,060		1		(19)		1,042		-
Assets of consolidated VIEs:
Corporate obligations		2		-		-		2		-
Mortgage-backed securities:
Residential mortgage-backed non-agency		119		-		(26)		93		-
Asset-backed securities:
Collateralized debt obligations		112		-		(15)		97		-
Other asset-backed		41		-		-		41		-
Other investments:
Money market securities		199		-		-		199		-

Total available-for-sale investments	$	9,025	$	263	$	(478)	$	8,810	$	(233)

The fair value of securities on deposit with various regulatory authorities was $10 million and $11 million as of June 30, 2012 and December 31, 2011, respectively. These deposits are required to comply with state insurance laws.

Substantially all of the obligations under investment agreements require the Company to pledge securities as collateral. As of June 30, 2012 and December 31, 2011, the fair value of securities pledged as collateral with respect to these investment agreements approximated $1.0 billion and $1.9 billion, respectively. The Company’s collateral as of June 30, 2012 consisted principally of RMBS, U.S. Treasury and government agency bonds and state and municipal bonds, and was primarily held with major U.S. banks. Additionally, the Company pledged cash and money market securities as collateral under investment agreements in the amount of $174 million and $224 million as of June 30, 2012 and December 31, 2011, respectively.

The following table presents the distribution by contractual maturity of available-for-sale fixed-maturity investments at amortized cost and fair value as of June 30, 2012. Contractual maturity may differ from expected maturity as borrowers may have the right to call or prepay obligations.


					Consolidated VIEs
In millions	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	870	$	872	$	7	$	7
Due after one year through five years		834		862		124		132
Due after five years through ten years		667		703		-		-
Due after ten years through fifteen years		438		462		81		75
Due after fifteen years		1,564		1,677		2		2
Mortgage-backed		1,275		1,294		106		87
Asset-backed		396		293		138		125

Total fixed-maturity investments	$	6,044	$	6,163	$	458	$	428

Investments that are held-to-maturity are reported on the Company’s consolidated balance sheets at amortized cost. These investments, which primarily relate to the Company’s consolidated VIEs, principally consist of ABS and other fixed-income debt obligations issued by major national and international corporations and other structured finance clients. As of June 30, 2012, unrecognized gross gains were $5 million and unrecognized gross losses were $160 million. As of December 31, 2011, unrecognized gross gains were $17 million and unrecognized gross losses were $371 million. The following table presents the distribution of held-to-maturity investments by contractual maturity at amortized cost and fair value as of June 30, 2012:


					Consolidated VIEs
In millions	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	-	$	-	$	-	$	-
Due after one year through five years⁽¹⁾		1		1		-		-
Due after five years through ten years		-		-		-		-
Due after ten years through fifteen years		-		-		-		-
Due after fifteen years		-		-		-		-
Mortgage-backed		-		-		-		-
Asset-backed		-		-		3,051		2,896

Total held-to-maturity investments	$	1	$	1	$	3,051	$	2,896

(1) - Relates to tax credit investments reported in “Other investments” on the Company’s consolidated balance sheets.

Impaired Investments

The following tables present the gross unrealized losses included in accumulated other comprehensive income (loss) as of June 30, 2012 and December 31, 2011 related to available-for-sale fixed-maturity and other investments. These tables segregate investments that have been in a continuous unrealized loss position for less than twelve months from those that have been in a continuous unrealized loss position for twelve months or longer.


	June 30, 2012
	Less than 12 Months				12 Months or Longer				Total
In millions	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	471	$	-	$	-	$	-	$	471	$	-
Foreign governments		40		-		-		-		40		-
Corporate obligations		211		(2)		41		(22)		252		(24)
Mortgage-backed securities:
Residential mortgage-backed agency		3		-		43		-		46		-
Residential mortgage-backed non-agency		7		(1)		113		(38)		120		(39)
Commercial mortgage-backed		5		-		26		(5)		31		(5)
Asset-backed securities:
Collateralized debt obligations		7		(1)		87		(85)		94		(86)
Other asset-backed		4		-		91		(19)		95		(19)
State and municipal bonds		7		-		76		(11)		83		(11)

Total taxable bonds		755		(4)		477		(180)		1,232		(184)
Tax-exempt bonds:
State and municipal bonds		17		-		23		(1)		40		(1)

Total fixed-maturity investments		772		(4)		500		(181)		1,272		(185)
Other investments:
Perpetual preferred securities		46		(1)		1		-		47		(1)
Assets of consolidated VIEs:
Corporate obligations		-		-		53		(7)		53		(7)
Mortgage-backed securities:
Residential mortgage-backed non-agency		-		-		87		(19)		87		(19)
Asset-backed securities:
Collateralized debt obligations		5		-		90		(14)		95		(14)
Other asset-backed		-		-		4		-		4		-

Total	$	823	$	(5)	$	735	$	(221)	$	1,558	$	(226)


	December 31, 2011
	Less than 12 Months				12 Months or Longer				Total
In millions	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	200	$	-	$	-	$	-	$	200	$	-
Foreign governments		20		-		-		-		20		-
Corporate obligations		297		(15)		418		(91)		715		(106)
Mortgage-backed securities:
Residential mortgage-backed agency		20		-		49		-		69		-
Residential mortgage-backed non-agency		34		(5)		167		(78)		201		(83)
Commercial mortgage-backed		17		(2)		22		(8)		39		(10)
Asset-backed securities:
Collateralized debt obligations		13		(2)		117		(116)		130		(118)
Other asset-backed		53		(7)		328		(75)		381		(82)
State and municipal bonds		152		(2)		76		(15)		228		(17)

Total taxable bonds		806		(33)		1,177		(383)		1,983		(416)
Tax-exempt bonds:
State and municipal bonds		14		-		75		(2)		89		(2)

Total fixed-maturity investments		820		(33)		1,252		(385)		2,072		(418)
Other investments:
Perpetual preferred securities		47		(3)		45		(16)		92		(19)
Assets of consolidated VIEs:
Corporate obligations		2		-		-		-		2		-
Mortgage-backed securities:
Residential mortgage-backed non-agency		3		-		90		(26)		93		(26)
Asset-backed securities:
Collateralized debt obligations		9		-		88		(15)		97		(15)
Other asset-backed		31		-		-		-		31		-

Total	$	912	$	(36)	$	1,475	$	(442)	$	2,387	$	(478)

Gross unrealized losses on available-for-sale securities presented in the preceding tables decreased as of June 30, 2012 compared with December 31, 2011 primarily due to the sale of several impaired securities included in the Company’s asset/liability products investment portfolio and the other-than-temporary impairment to fair value of several other impaired securities since there was an intent to sell them. Investments with unrealized losses that met the criteria described in the “Other-Than-Temporary Impairments” section below were tested for other-than-temporary impairments and principally related to ABS, MBS, and corporate obligations.

The following table presents the fair values and gross unrealized losses by credit rating category of ABS included in the Company’s consolidated investment portfolio as of June 30, 2012 for which fair value was less than amortized cost. Of the total fair value and unrealized losses of ABS, $65 million of fair value and $57 million of unrealized losses are included in the Company’s asset/liability products investment portfolio. Fair values include the benefit of guarantees provided by financial guarantors, including MBIA. The credit ratings are based on ratings from Moody’s as of June 30, 2012 or an alternate ratings source, such as S&P, when a security is not rated by Moody’s. For investments that are insured by various third-party guarantee insurers, the credit rating reflects the higher of the insurer’s rating or the underlying bond’s rating.


																	Below
In millions	Aaa				Aa				A				Baa				Investment Grade				Not Rated				Total
Asset- backed Sector	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
ABS CDO	$	5	$	-	$	5	$	-	$	6	$	-	$	1	$	(3)	$	15	$	(52)	$	-	$	-	$	32	$	(55)
Corporate CDO		36		(3)		63		(10)		16		(3)		1		-		88		(40)		1		(1)		205		(57)
Auto loans		-		-		-		-		-		-		-		-		-		-		2		-		2		-
Credit cards		2		-		-		-		-		-		-		-		-		-		-		-		2		-
Small business/ student loans		5		-		-		-		-		-		-		-		11		-		-		-		16		-
Other ABS		2		-		4		-		4		-		4		(1)		10		(2)		7		(4)		31		(7)

Total	$	50	$	(3)	$	72	$	(10)	$	26	$	(3)	$	6	$	(4)	$	124	$	(94)	$	10	$	(5)	$	288	$	(119)

Of the Company’s investments in ABS reported in the preceding table, 53% were rated investment grade with 17% rated Aaa. Of the total ABS investments reported in the preceding table, $147 million include the benefit of guarantees provided by MBIA Corp. and $31 million include the benefit of guarantees provided by third-party financial guarantors. The average credit rating of all guaranteed ABS investments using the higher of the guarantors’ ratings or the underlying bond ratings was Baa and the average underlying credit rating of guaranteed ABS investments, without giving effect to the guarantees was below investment grade. Without giving effect to the benefit of guarantees provided by financial guarantors, including MBIA Corp., $134 million or 47% of the securities included in the preceding table were rated below investment grade.

The following table presents the fair values and gross unrealized losses by credit rating category of MBS included in the Company’s consolidated investment portfolio as of June 30, 2012 for which fair value was less than amortized cost. Fair values include the benefit of guarantees provided by financial guarantors, including MBIA. The credit ratings are based on ratings from Moody’s as of June 30, 2012 or an alternate ratings source, such as S&P, when a security is not rated by Moody’s. For investments that are insured by various third-party guarantee insurers, the credit rating reflects the higher of the insurer’s rating or the underlying bond’s rating.


																	Below
In millions	Aaa				Aa				A				Baa				Investment Grade				Not Rated				Total
Mortgage- backed Securities	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
RMBS:
Collateralized	$	49	$	-	$	24	$	(3)	$	-	$	-	$	1	$	-	$	34	$	(3)	$	15	$	(9)	$	123	$	(15)
Home equity		2		-		58		(13)		1		-		-		-		57		(27)		-		-		118		(40)
Pass-through securities		3		-		-		-		-		-		-		-		-		-		-		-		3		-
Other		-		-		8		(3)		-		-		-		-		-		-		-		-		8		(3)
CMBS		-		-		-		-		2		-		26		(4)		4		(1)		-		-		32		(5)

Total	$	54	$	-	$	90	$	(19)	$	3	$	-	$	27	$	(4)	$	95	$	(31)	$	15	$	(9)	$	284	$	(63)

Of the Company’s investments in MBS reported in the preceding table, 61% were rated investment grade with 19% rated Aaa. Of the total MBS investments reported in the preceding table, $11 million include the benefit of guarantees provided by MBIA Corp. and $189 million include the benefit of guarantees provided by third-party financial guarantors. The average credit rating of all guaranteed MBS investments using the higher of the guarantors’ ratings or the underlying bond ratings was below investment grade and the average underlying credit rating of guaranteed MBS investments, without giving effect to the guarantees, was below investment grade. Without giving effect to the benefit of guarantees provided by financial guarantors, including MBIA Corp., $209 million or 74% of the securities included in the preceding table were rated below investment grade.

The following table presents the fair values and gross unrealized losses by credit rating category of direct corporate obligations included in the Company’s consolidated investment portfolio as of June 30, 2012 for which fair value was less than amortized cost. Fair values include the benefit of guarantees provided by financial guarantors, including MBIA. The credit ratings are based on ratings from Moody’s as of June 30, 2012 or an alternate ratings source, such as S&P, when a security is not rated by Moody’s. For investments that are insured by various third-party guarantee insurers, the credit rating reflects the higher of the insurer’s rating or the underlying bond’s rating.


In millions	Aaa				Aa				A				Baa				Below Investment Grade				Not Rated				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Corporate Obligations	$	4	$	-	$	39	$	-	$	130	$	(6)	$	107	$	(9)	$	13	$	(4)	$	12	$	(12)	$	305	$	(31)

Of the Company’s investments in corporate obligations reported in the preceding table, 92% were rated investment grade with 1% rated Aaa. Of the total corporate obligations reported in the preceding table, $9 million include the benefit of guarantees provided by third-party financial guarantors. The average credit rating of all guaranteed corporate obligations included in the preceding table using the higher of the guarantors’ ratings or the underlying bond ratings was A and the average underlying credit rating of these guaranteed corporate obligations without giving effect to the guarantees was A. Without giving effect to the benefit of guarantees provided by financial guarantors, including MBIA Corp., $13 million or 4% of the securities included in the preceding table were rated below investment grade.

The following tables present the gross unrealized losses of held-to-maturity investments as of June 30, 2012 and December 31, 2011. Held-to-maturity investments are reported at amortized cost on the Company’s consolidated balance sheets. The tables segregate investments that have been in a continuous unrealized loss position for less than twelve months from those that have been in a continuous unrealized loss position for twelve months or longer.


	June 30, 2012
	Less than 12 Months				12 Months or Longer				Total
In millions	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Assets of consolidated VIEs:
Other asset-backed securities	$	-	$	-	$	2,361	$	(160)	$	2,361	$	(160)

Total	$	-	$	-	$	2,361	$	(160)	$	2,361	$	(160)


	December 31, 2011
	Less than 12 Months				12 Months or Longer				Total
In millions	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Assets of consolidated VIEs:
Other asset-backed securities	$	284	$	(31)	$	2,185	$	(340)	$	2,469	$	(371)

Total	$	284	$	(31)	$	2,185	$	(340)	$	2,469	$	(371)

As of June 30, 2012 and December 31, 2011, the Company’s available-for-sale fixed-maturity investment, other investment and held-to-maturity investment portfolios’ gross unrealized losses totaled $386 million and $849 million, respectively. The weighted average contractual maturity of securities in an unrealized loss position as of June 30, 2012 and December 31, 2011 was 20 years and 21 years, respectively. As of June 30, 2012, there were 204 securities that were in an unrealized loss position for a continuous twelve-month period or longer with aggregate unrealized losses of $381 million. Within these securities, the book value of 131 securities exceeded market value by more than 5% as presented in the following table:


Percentage Book Value Exceeded Market Value	Number of Securities		Book Value (in millions)		Fair Value (in millions)
Greater than 5% to less than 16%		39	$	1,784	$	1,615
16% to less than 26%		19		159		124
26% to 50%		39		170		105
Greater than 50%		34		99		22

Total		131	$	2,212	$	1,866

As of December 31, 2011, there were 290 securities that were in an unrealized loss position for a continuous twelve-month period or longer with aggregate unrealized losses of $782 million. Within these securities, the book value of 218 securities exceeded market value by more than 5%. The decrease in the number of securities in an unrealized loss position as of June 30, 2012 compared with December 31, 2011 resulted from the sales and impairments of securities during the first six months of 2012.

Other-Than-Temporary Impairments

The Company has an ongoing review process for all securities in its investment portfolio, including a quarterly assessment of other-than-temporary impairments. This evaluation includes both qualitative and quantitative considerations. In assessing whether a decline in value is related to a credit loss, the Company considers several factors, including but not limited to (i) the magnitude and duration of declines in fair value; (ii) the reasons for the declines in fair value, such as general credit spread movements in each asset-backed sector, transaction-specific changes in credit spreads, credit rating downgrades, modeled defaults, and principal and interest payment priorities within each investment structure; and (iii) any guarantees associated with a security such as those provided by financial guarantee insurance companies, including MBIA Corp. and National.

In calculating credit-related losses, the Company utilizes cash flow modeling based on the type of security. The Company’s cash flow analysis considers all sources of cash, including credit enhancement, that support the payment of amounts owed by an issuer of a security. This includes the consideration of cash expected to be provided by financial guarantors, including MBIA Corp., resulting from an actual or potential insurance policy claim. In general, any change in the amount and/or timing of cash flows received or expected to be received, whether or not such cash flows are contractually defined, is reflected in the Company’s cash flow analysis for purposes of assessing an other-than-temporary impairment loss on an impaired security.

ABS investments are evaluated for other-than-temporary impairments using historical collateral performance, deal waterfall and structural protections, credit ratings, and forward looking projections of collateral performance based on business and economic conditions specific to each collateral type and risk. The underlying collateral is evaluated to identify any specific performance concerns, and stress scenarios are considered in forecasting ultimate returns of principal. Based on this evaluation, if a principal default is projected for a security, estimated future cash flows are discounted at the security’s purchase yield. If the present value of cash flows is less than the Company’s amortized cost for the security, the difference is recorded as an other-than-temporary impairment loss.

RMBS investments are evaluated for other-than-temporary impairments using industry-standard quantitative tools. Loan level data is obtained and analyzed in a model that produces prepayment, default, and severity vectors. The model utilizes macro inputs, including housing price assumptions and interest rates, which are consistent with industry views. The vector outputs are used as inputs to a third-party cash flow model, which considers deal waterfall dynamics and structural features, to generate cash flows for an RMBS investment. These cash flows are then discounted at the security’s purchase yield. If the present value of the cash flows is less than the Company’s amortized cost for the investment, the difference is recorded as an other-than-temporary impairment loss. For CDO investments, the Company utilizes the same tools as for RMBS securities, aggregating the bond level cash flows to the CDO investment level.

Corporate obligation investments are evaluated for other-than-temporary impairments using industry-standard credit analysis techniques. The Company’s analysis includes a detailed review of a number of quantitative and qualitative factors impacting the value of an individual security. These factors include the interest rate of the security (fixed or floating), the security’s current market spread, any collateral supporting the security, the security’s position in the issuer’s capital structure, and credit rating upgrades or downgrades. Additionally, these factors include an assessment of various issuer-related credit metrics including market capitalization, earnings, cash flow, capitalization, interest coverage, leverage, liquidity, management and a third-party quantitative default probability model. The Company’s analysis is augmented by comparing market prices for similar securities of other issuers in the same sector, as well as any recent corporate or government actions that may impact the ultimate return of principal. If the Company determines that, after considering these factors, a principal default is projected, a recovery analysis is performed using the above data. If the Company’s estimated recovery value for the security is less than its amortized cost, the difference is recorded as an other-than-temporary impairment loss.

The Company does not record other-than-temporary impairments related to credit concerns about issuers of securities insured by MBIA Corp. and National since investors in these securities, including MBIA, are guaranteed payment of principal and interest when due by MBIA. Securities insured by the Company, whether or not owned by the Company, are evaluated for impairment as part of its insurance surveillance process and, therefore, losses on securities insured by the Company are recorded in accordance with its loss reserving policy. Refer to “Note 2: Significant Accounting Policies” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 for information about the Company’s loss reserving policy and “Note 5: Loss and Loss Adjustment Expense Reserves” for information about loss reserves.

In considering cash expected to be provided from other third-party financial guarantors, the Company assesses the financial guarantor’s ability to make claim payments under a variety of scenarios that test the guarantor’s ultimate claims paying ability. The weighted average outcome of these scenarios, combined with the cash flows provided by the insured security, are used to determine the recoverability of the Company’s amortized cost.

The following table provides information about securities held by the Company as of June 30, 2012 that were in an unrealized loss position and insured by a financial guarantor, along with the amount of insurance loss reserves corresponding to the par amount owned by the Company:


In millions	Fair Value		Unrealized Loss		Insurance Loss Reserve ⁽²⁾
Asset-backed:
MBIA⁽¹⁾	$	147	$	(68)	$	18
Other		31		(9)		-

Total asset-backed		178		(77)		18
Mortgage-backed:
MBIA⁽¹⁾		11		(1)		-
Other		189		(50)		-

Total mortgage-backed		200		(51)		-
Corporate obligations:
MBIA⁽¹⁾		-		-		-
Other		9		(12)		-

Total corporate obligations		9		(12)		-
Other:
MBIA⁽¹⁾		77		(11)		-
Other		14		-		-

Total other		91		(11)		-

Total	$	478	$	(151)	$	18

(1) - Includes investments insured by MBIA Corp. and National.

(2) - Insurance loss reserve estimates are based on the proportion of par value owned to the total amount of par value insured.

The Company concluded that it does not have the intent to sell securities in an unrealized loss position and it is more likely than not, that it will not have to sell these securities before recovery of their cost basis. In making this conclusion, the Company examined the cash flow projections for its investment portfolios, the potential sources and uses of cash in its businesses, and the cash resources available to its business other than sales of securities. It also considered the existence of any risk management or other plans as of June 30, 2012 that would require the sale of impaired securities. Impaired securities that the Company intends to sell before the expected recovery of such securities’ fair values have been written down to their fair values.

Each quarter, an internal committee, comprising staff that is independent of the Company’s evaluation process for determining other-than-temporary impairments of securities, reviews and approves the valuation of investments. Among other responsibilities, this committee ensures that the Company’s process for identifying and calculating other-than-temporary impairments, including the use of models and assumptions, is reasonable and complies with the Company’s internal policy.

Refer to “Note 8: Investment Income and Gains and Losses” for information on realized losses due to other-than-temporary impairments.