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This excerpt taken from the ALL 8-K filed Oct 23, 2008. Auction Rate Securities
Included in our municipal bond portfolio at September 30, 2008 are $1.9 billion of auction rate securities (“ARS”) that have long-term stated maturities, with the interest rate reset based on auctions that generally occur every 7, 28 or 35 days depending on the specific security. This is compared to a balance of ARS at December 31, 2007 of $2.6 billion, with the decline representing primarily redemptions from calls or refunding proceeds since December 31, 2007. Our holdings primarily have a Moody’s equivalent rating of Aaa. We make our investment decisions based on the underlying credit of each security. Approximately $1.8 billion of our holdings are pools of student loans for which at least 85% of the collateral was insured by the U.S. Department of Education at the time we purchased the security. As of September 30, 2008, $1.3 billion of our ARS backed by student loans was 100% insured by the U.S. Department of Education, $267 million was 90% to 99% insured and $246 million was 80% to 89% insured. During the third quarter of 2008, all of our student loan ARS holdings experienced failed auctions and we received the failed auction rate or, for those which contain maximum reset rate formulas, we received the contractual maximum rate. We anticipate that failed auctions may persist and most of our holdings will continue to pay the failed auction rate or, for those that contain maximum rate reset formulas, the maximum rate, as described below. Auctions continue to be conducted as scheduled for each of the securities.
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During the third quarter, regulatory authorities announced preliminary settlements in principle with some of the largest broker-dealers of ARS following extensive investigations into the February 2008 ARS market collapse. According to press releases, the settlements require broker-dealers to expeditiously provide liquidity solutions to institutional customers within specified timeframes. While the press release descriptions of the preliminary settlement terms vary in details for institutional investors, at least one description calls for liquidation at par, while other descriptions call for a “best efforts” approach.
Due to a continued deterioration in liquidity for the segment of the ARS market backed by student loans, certain market observable data utilized for valuation purposes became unavailable during the second quarter of 2008. As a result, as of September 30, 2008, $1.8 billion or 97.5% of our total ARS holdings continue to be valued using a discounted cash flow model; a valuation method that is widely accepted in the financial services industry. Certain inputs to the valuation model that are significant to the overall valuation and not market observable included: estimates of future coupon rates if auction failures continue, maturity assumptions, and illiquidity premium. As a result of the reliance on certain non-market observable inputs, the portion of the ARS portfolio backed by student loans are classified as a Level 3 measurement under Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”) for the quarters ended June 30, 2008 and September 30, 2008. These same securities were classified as Level 2 measurements for the period ended March 31, 2008. Our ARS holdings that are not backed by student loans have a fair value equal to their corresponding par value based on market observable inputs and, therefore, continue to have a Level 2 classification.
(1) Level 3 ARS have an amortized cost of $1.9 billion; fair value represents 96.1% of amortized cost.
Also included in our municipal bond holdings at September 30, 2008 are $1.1 billion of municipal securities which are not rated by third party credit rating agencies, but are rated by the National Association of Insurance Commissioners (“NAIC”) and also internally rated by the Company. These holdings mainly comprise the high yield portion of our overall municipal bond portfolio. The high yield municipal bonds generally provide a higher yield than the municipals rated investment grade by the third party credit rating agencies and provide the opportunity to achieve incremental returns and enhanced diversification of our overall investments portfolio. Our initial investment decisions and ongoing monitoring procedures for these securities are based on a thorough due diligence process that includes, among other things, an assessment of the credit, structure, and liquidity risks of the issue and issuer. The Company’s internal ratings are generally updated annually.
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This excerpt taken from the ALL 8-K filed Jul 24, 2008. Auction Rate Securities
Included in our municipal bond portfolio at June 30, 2008 are $2.0 billion of auction rate securities (“ARS”) that have long-term stated maturities, with the interest rate reset based on auctions every 7, 28 or 35 days depending on the specific security. This is compared to a balance of ARS at March 31, 2008 of $2.2 billion, with the decline representing primarily redemptions during the second quarter of 2008. Our holdings primarily have a Moody’s equivalent rating of Aaa. During the second quarter of 2008, all of our ARS holdings experienced failed auctions and we received the failed auction rate or, for those which contain maximum reset rate formulas, we received the contractual maximum rate. We anticipate that failed auctions may persist and most of our holdings will continue to pay the failed auction rate or, for those that contain maximum rate reset formulas, the maximum rate.
Due to a further deterioration in liquidity for the segment of the ARS market backed by student loans, certain market observable data utilized for valuation purposes became unavailable during the second quarter of 2008. As a result, as of June 30, 2008, $1.9 billion or 95.5% of our total ARS holdings were valued using a discounted cash flow model; a valuation method that is widely accepted in the financial services industry. Certain inputs to the valuation model that are significant to the overall valuation and not market observable included: estimates of future coupon rates if auction failures continue, maturity assumptions, and illiquidity premium. As a result of the reliance on certain non-market observable inputs, the portion of the ARS portfolio backed by student loans are classified as a Level 3 measurement under Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” for the period ended June 30, 2008. These same securities were classified as Level 2 measurements for the period ended March 31, 2008. Our ARS holdings that are not backed by student loans have a fair value equal to their corresponding par value based on market observable inputs and, therefore, continue to have a Level 2 classification.
(1) Level 3 ARS have an amortized cost of $2.0 billion; fair value represents 97.0% of amortized cost.
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This excerpt taken from the ALL 8-K filed Apr 23, 2008. Auction Rate Securities
Included in our municipal bond portfolio at March 31, 2008 are $2.2 billion of auction rate securities (“ARS”) that have long-term stated maturities, with the interest rate reset based on auctions every 7, 28 or 35 days depending on the specific security. This is compared to a balance of ARS at December 31, 2007 of $2.6 billion, with the decline representing sales and redemptions during the first quarter of 2008. Our holdings primarily have a Moody’s equivalent rating of Aaa and fair value is estimated at the corresponding par value based on market observable inputs. During the first quarter of 2008, all of our ARS holdings experienced failed auctions and we are currently receiving the maximum interest rate. We anticipate that failed auctions may persist and most of our holdings will continue to reset at the maximum rate. Auctions continue to be conducted as scheduled for each of the securities.
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