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Investments | 9 Months Ended
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Sep. 30, 2012
Investments | 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 September 30, 2012 and December 31, 2011:
|  | September 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 |  | $ | 896 |  |  | $ | 44 |  |  | $ | (1) |  |  | $ | 939 |  |  | $ | - |
Foreign governments |  |  | 318 |  |  |  | 22 |  |  |  | - |  |  |  | 340 |  |  |  | - |
Corporate obligations |  |  | 1,068 |  |  |  | 59 |  |  |  | (21) |  |  |  | 1,106 |  |  |  | 3 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | 988 |  |  |  | 48 |  |  |  | - |  |  |  | 1,036 |  |  |  | - |
Residential mortgage-backed non-agency |  |  | 187 |  |  |  | 16 |  |  |  | (36) |  |  |  | 167 |  |  |  | (24) |
Commercial mortgage-backed |  |  | 46 |  |  |  | 1 |  |  |  | (4) |  |  |  | 43 |  |  |  | - |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | 165 |  |  |  | - |  |  |  | (74) |  |  |  | 91 |  |  |  | (26) |
Other asset-backed |  |  | 195 |  |  |  | 3 |  |  |  | (14) |  |  |  | 184 |  |  |  | - |
State and municipal bonds |  |  | 895 |  |  |  | 73 |  |  |  | (11) |  |  |  | 957 |  |  |  | - |
Total taxable bonds |  |  | 4,758 |  |  |  | 266 |  |  |  | (161) |  |  |  | 4,863 |  |  |  | (47) |
Tax-exempt bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and municipal bonds |  |  | 886 |  |  |  | 60 |  |  |  | - |  |  |  | 946 |  |  |  | - |
Total fixed-maturity investments |  |  | 5,644 |  |  |  | 326 |  |  |  | (161) |  |  |  | 5,809 |  |  |  | (47) |
Other investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Perpetual preferred securities |  |  | 31 |  |  |  | - |  |  |  | - |  |  |  | 31 |  |  |  | - |
Other investments |  |  | 10 |  |  |  | - |  |  |  | - |  |  |  | 10 |  |  |  | - |
Money market securities |  |  | 583 |  |  |  | - |  |  |  | - |  |  |  | 583 |  |  |  | - |
Total other investments |  |  | 624 |  |  |  | - |  |  |  | - |  |  |  | 624 |  |  |  | - |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | 177 |  |  |  | 7 |  |  |  | (7) |  |  |  | 177 |  |  |  | - |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed non-agency |  |  | 99 |  |  |  | - |  |  |  | (12) |  |  |  | 87 |  |  |  | - |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | 108 |  |  |  | - |  |  |  | (11) |  |  |  | 97 |  |  |  | - |
Other asset-backed |  |  | 25 |  |  |  | 1 |  |  |  | - |  |  |  | 26 |  |  |  | - |
State and municipal bonds |  |  | 37 |  |  |  | 3 |  |  |  | - |  |  |  | 40 |  |  |  | - |
Other investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Money market securities |  |  | 15 |  |  |  | - |  |  |  | - |  |  |  | 15 |  |  |  | - |
Total available-for-sale investments |  | $ | 6,729 |  |  | $ | 337 |  |  | $ | (191) |  |  | $ | 6,875 |  |  | $ | (47) |
(1) - Represents unrealized gains or losses on other than temporarily impaired securities recognized in accumulated other comprehensive income (loss), which includes the non-credit component of impairments, as well as all subsequent changes in fair value of such impaired securities.
|  | 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 |  |  |  | (57) |
Commercial mortgage-backed |  |  | 58 |  |  |  | 1 |  |  |  | (10) |  |  |  | 49 |  |  |  | - |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | 251 |  |  |  | - |  |  |  | (118) |  |  |  | 133 |  |  |  | (43) |
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 |  |  |  | (139) |
Tax-exempt bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and municipal bonds |  |  | 1,122 |  |  |  | 41 |  |  |  | (2) |  |  |  | 1,161 |  |  |  | - |
Total fixed-maturity investments |  |  | 7,492 |  |  |  | 262 |  |  |  | (418) |  |  |  | 7,336 |  |  |  | (139) |
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 |  |  | $ | (139) |
(1) - Represents unrealized gains or losses on other than temporarily impaired securities recognized in accumulated other comprehensive income (loss), which includes the non-credit component of impairments, as well as all subsequent changes in fair value of such impaired securities. The fair value of securities on deposit with various regulatory authorities was $10 million and $11 million as of September 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 September 30, 2012 and December 31, 2011, the fair value of securities pledged as collateral with respect to these investment agreements approximated $885 million and $1.9 billion, respectively. The Company’s collateral as of September 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 $126 million and $224 million as of September 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 September 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 |  | $ | 828 |  |  | $ | 830 |  |  | $ | 7 |  |  | $ | 7 |
Due after one year through five years |  |  | 844 |  |  |  | 872 |  |  |  | 123 |  |  |  | 132 |
Due after five years through ten years |  |  | 591 |  |  |  | 635 |  |  |  | - |  |  |  | - |
Due after ten years through fifteen years |  |  | 437 |  |  |  | 468 |  |  |  | 84 |  |  |  | 78 |
Due after fifteen years |  |  | 1,363 |  |  |  | 1,483 |  |  |  | - |  |  |  | - |
Mortgage-backed |  |  | 1,221 |  |  |  | 1,246 |  |  |  | 99 |  |  |  | 87 |
Asset-backed |  |  | 360 |  |  |  | 275 |  |  |  | 133 |  |  |  | 123 |
Total fixed-maturity investments |  | $ | 5,644 |  |  | $ | 5,809 |  |  | $ | 446 |  |  | $ | 427 |
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 September 30, 2012, unrecognized gross gains were $20 million and unrecognized gross losses were $168 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 September 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 |  |  | - |  |  |  | - |  |  |  | 3,015 |  |  |  | 2,867 |
Total held-to-maturity investments |  | $ | 1 |  |  | $ | 1 |  |  | $ | 3,015 |  |  | $ | 2,867 |
(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 September 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.
|  | September 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 |  | $ | 197 |  |  | $ | (1) |  |  | $ | - |  |  | $ | - |  |  | $ | 197 |  |  | $ | (1) |
Foreign governments |  |  | 24 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 24 |  |  |  | - |
Corporate obligations |  |  | 60 |  |  |  | - |  |  |  | 49 |  |  |  | (21) |  |  |  | 109 |  |  |  | (21) |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | 8 |  |  |  | - |  |  |  | 41 |  |  |  | - |  |  |  | 49 |  |  |  | - |
Residential mortgage-backed non-agency |  |  | 2 |  |  |  | - |  |  |  | 102 |  |  |  | (36) |  |  |  | 104 |  |  |  | (36) |
Commercial mortgage-backed |  |  | 3 |  |  |  | - |  |  |  | 27 |  |  |  | (4) |  |  |  | 30 |  |  |  | (4) |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | 2 |  |  |  | - |  |  |  | 83 |  |  |  | (74) |  |  |  | 85 |  |  |  | (74) |
Other asset-backed |  |  | 1 |  |  |  | - |  |  |  | 88 |  |  |  | (14) |  |  |  | 89 |  |  |  | (14) |
State and municipal bonds |  |  | 6 |  |  |  | - |  |  |  | 66 |  |  |  | (11) |  |  |  | 72 |  |  |  | (11) |
Total taxable bonds |  |  | 303 |  |  |  | (1) |  |  |  | 456 |  |  |  | (160) |  |  |  | 759 |  |  |  | (161) |
Tax-exempt bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and municipal bonds |  |  | 1 |  |  |  | - |  |  |  | 22 |  |  |  | - |  |  |  | 23 |  |  |  | - |
Total fixed-maturity investments |  |  | 304 |  |  |  | (1) |  |  |  | 478 |  |  |  | (160) |  |  |  | 782 |  |  |  | (161) |
Other investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Perpetual preferred securities |  |  | - |  |  |  | - |  |  |  | 3 |  |  |  | - |  |  |  | 3 |  |  |  | - |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | - |  |  |  | - |  |  |  | 54 |  |  |  | (7) |  |  |  | 54 |  |  |  | (7) |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed non-agency |  |  | - |  |  |  | - |  |  |  | 87 |  |  |  | (12) |  |  |  | 87 |  |  |  | (12) |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | - |  |  |  | - |  |  |  | 96 |  |  |  | (11) |  |  |  | 96 |  |  |  | (11) |
Other asset-backed |  |  | - |  |  |  | - |  |  |  | 3 |  |  |  | - |  |  |  | 3 |  |  |  | - |
Total |  | $ | 304 |  |  | $ | (1) |  |  | $ | 721 |  |  | $ | (190) |  |  | $ | 1,025 |  |  | $ | (191) |
|  | 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 September 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 September 30, 2012 for which fair value was less than amortized cost. Of the total fair value and unrealized losses of ABS, $57 million of fair value and $52 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 September 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 |  | $ | 9 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 4 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 17 |  |  | $ | (51) |  |  | $ | - |  |  | $ | - |  |  | $ | 30 |  |  | $ | (51) |
Corporate CDO |  |  | 29 |  |  |  | (2) |  |  |  | 64 |  |  |  | (9) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 91 |  |  |  | (30) |  |  |  | 19 |  |  |  | (2) |  |  |  | 203 |  |  |  | (43) |
Small business/ student loans |  |  | 5 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 10 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 15 |  |  |  | - |
Other ABS |  |  | 3 |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | 3 |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | 10 |  |  |  | (2) |  |  |  | 7 |  |  |  | (3) |  |  |  | 25 |  |  |  | (5) |
Total |  | $ | 46 |  |  | $ | (2) |  |  | $ | 65 |  |  | $ | (9) |  |  | $ | 7 |  |  | $ | - |  |  | $ | 1 |  |  | $ | - |  |  | $ | 128 |  |  | $ | (83) |  |  | $ | 26 |  |  | $ | (5) |  |  | $ | 273 |  |  | $ | (99) |
The Company’s investments in ABS reported in the preceding table included 44% rated investment grade and 17% rated Aaa. Of the total ABS investments reported in the preceding table, $148 million include the benefit of guarantees provided by MBIA Corp. and $27 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 below investment grade 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., $135 million or 49% 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 September 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 September 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 |  | $ | 41 |  |  | $ | - |  |  | $ | 24 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 30 |  |  | $ | (5) |  |  | $ | 14 |  |  | $ | (7) |  |  | $ | 109 |  |  | $ | (12) |
Home equity |  |  | - |  |  |  | - |  |  |  | 57 |  |  |  | (10) |  |  |  | - |  |  |  | - |  |  |  | 3 |  |  |  | (1) |  |  |  | 56 |  |  |  | (21) |  |  |  | - |  |  |  | - |  |  |  | 116 |  |  |  | (32) |
Pass-through securities |  |  | 8 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 8 |  |  |  | - |
Other |  |  | - |  |  |  | - |  |  |  | 8 |  |  |  | (3) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 8 |  |  |  | (3) |
CMBS |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 27 |  |  |  | (4) |  |  |  | 2 |  |  |  | (1) |  |  |  | - |  |  |  | - |  |  |  | 29 |  |  |  | (5) |
Total |  | $ | 49 |  |  | $ | - |  |  | $ | 89 |  |  | $ | (13) |  |  | $ | - |  |  | $ | - |  |  | $ | 30 |  |  | $ | (5) |  |  | $ | 88 |  |  | $ | (27) |  |  | $ | 14 |  |  | $ | (7) |  |  | $ | 270 |  |  | $ | (52) |
The Company’s investments in MBS reported in the preceding table included 62% rated investment grade and 18% rated Aaa. Of the total MBS investments reported in the preceding table, $10 million include the benefit of guarantees provided by MBIA Corp. and $184 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., $197 million or 73% 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 September 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 September 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 |  |  | $ | - |  |  | $ | 74 |  |  | $ | (6) |  |  | $ | 59 |  |  | $ | (7) |  |  | $ | 14 |  |  | $ | (3) |  |  | $ | 12 |  |  | $ | (12) |  |  | $ | 163 |  |  | $ | (28) |
The Company’s investments in corporate obligations reported in the preceding table included 84% rated investment grade. 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 Baa and the average underlying credit rating of these guaranteed corporate obligations without giving effect to the guarantees was Baa. Without giving effect to the benefit of guarantees provided by financial guarantors, $14 million or 9% 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 September 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.
|  | September 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 |  | $ | - |  |  | $ | - |  |  | $ | 2,350 |  |  | $ | (168) |  |  | $ | 2,350 |  |  | $ | (168) |
|  | 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) |
As of September 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 $359 million and $849 million, respectively. The weighted average contractual maturity of securities in an unrealized loss position as of September 30, 2012 and December 31, 2011 was 21 years. As of September 30, 2012, there were 193 securities that were in an unrealized loss position for a continuous twelve-month period or longer with aggregate unrealized losses of $358 million. Within these securities, the book value of 118 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% |  |  | 35 |  |  | $ | 279 |  |  | $ | 250 |
16% to less than 26% |  |  | 23 |  |  |  | 791 |  |  |  | 621 |
26% to 50% |  |  | 34 |  |  |  | 120 |  |  |  | 75 |
Greater than 50% |  |  | 26 |  |  |  | 87 |  |  |  | 18 |
Total |  |  | 118 |  |  | $ | 1,277 |  |  | $ | 964 |
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 September 30, 2012 compared with December 31, 2011 resulted from the sales and impairments of securities during the first nine 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 September 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) |  | $ | 148 |  |  | $ | (63) |  |  | $ | 18 |
Other |  |  | 27 |  |  |  | (7) |  |  |  | - |
Total asset-backed |  |  | 175 |  |  |  | (70) |  |  |  | 18 |
Mortgage-backed: |  |  |  |  |  |  |  |  |  |  |  |
MBIA(1) |  |  | 10 |  |  |  | (1) |  |  |  | - |
Other |  |  | 184 |  |  |  | (43) |  |  |  | - |
Total mortgage-backed |  |  | 194 |  |  |  | (44) |  |  |  | - |
Corporate obligations: |  |  |  |  |  |  |  |  |  |  |  |
Other |  |  | 9 |  |  |  | (12) |  |  |  | - |
Total corporate obligations |  |  | 9 |  |  |  | (12) |  |  |  | - |
Other: |  |  |  |  |  |  |  |  |  |  |  |
MBIA(1) |  |  | 72 |  |  |  | (11) |  |  |  | - |
Other |  |  | 8 |  |  |  | - |  |  |  | - |
Total other |  |  | 80 |  |  |  | (11) |  |  |  | - |
Total |  | $ | 458 |  |  | $ | (137) |  |  | $ | 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 September 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.

X
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