For our second-lien insurance business, we project future premiums and losses for this business using historical results to  help determine future performance for both repayments and claims.  An estimated expense factor is then applied, and the result  is discounted using a rate of return that approximates our pre-tax investment yield.  This net present value, less any existing  reserves, is recorded as a premium deficiency and the reserve is updated at least quarterly based on actual results for that  quarter, along with updated transaction level projections. For our financial guaranty business, to determine whether a premium deficiency char ge is necessary, we compare  projected earned premiums and investment income to projected future losses, LAE, unamortized deferred acquisition costs and  maintenance costs. If the sum of the costs exceeds the amount of the revenues, the excess is first char ged against deferred  acquisition costs and is referred to as a premium deficiency char ge.  Evaluating the expected profitability of our existing mortgage insurance business and the need for a premium deficiency  reserve for our first-lien business involves significant reliance upon assumptions and estimates with regard to the likelihood,  magnitude and timing of potential losses and premium revenues.  The models, assumptions and estimates we use to evaluate the  need for a PDR may not prove to be accurate, especially during an extended economic downturn or a period of extreme market  volatility and uncertainty such as currently exists.  We cannot be certain that we have correctly estimated the expected  profitability of our existing first-lien mortgage portfolio or that the second-lien PDR established will be adequate to cover the  ultimate losses on our second-lien business. Our estimated fair value measurements are intended to reflect the assumptions market participants would use in pricing  an asset or liability based on the best information available.  Assumptions include the risks inherent in a particular valuation  technique (such as a pricing model) and the risks inherent in the inputs to the model. Changes in economic conditions and  capital market conditions, including but not limited to, credit spread changes, benchmark interest rate changes, market volatility  and declines in the value of underlying collateral, could cause actual results to dif fer materially from our estimated fair value  measurements. We define fair value as the current amount that would be received to sell an asset or paid to transfer a liability in  an orderly transaction between market participants at the measurement date. In the event that our investments or derivative  contracts were sold, commuted, terminated or settled with a counterparty or transferred in a forced liquidation, the amounts  received or paid may be materially dif ferent from those determined in accordance with the accounting standard regarding fair  value measurements. Differences may also arise between our recorded fair value and the settlement or termination value with a  counterparty based upon consideration of information that may not be available to another market participant.  Those  differences, which may be material, are recorded as transaction realized gains/(losses) in our consolidated statements of  operations in the period in which the transaction occurs.  In May 2011, the Financial Accounting Standards Board (“FASB”) issued an update to the accounting standard regarding  fair value measurements and disclosure.  This update changes the language used to describe the requirements in GAAP  for  measuring fair value and for disclosing information about fair value measurements.  The amendments: (i) clarify the F ASB’s  intent about the application of existing fair value measurement and disclosure requirements; and (ii) change a particular  principle or requirement for measuring fair value or for disclosing information about fair value measurements.  The amendments  in this update do not require additional fair value measurements and are not intended to establish valuation standards or af fect  valuation practices outside of financial reporting.  We adopted this standard ef fective January 1, 2012. The adoption of this  update did not have a significant impact on our fair value measurements.  Additional disclosures regarding unobservable market  inputs related to our Level III instruments required under this update are presented in Note 5  of Notes to Consolidated Financial  Statements.  When determining the fair value of our liabilities, we are required to incorporate into the fair value of those liabilities an  adjustment that reflects our own non-performance risk. Our CDS spread is an observable quantitative measure of our non- performance risk and is used by typical market participants to determine the likelihood of our default.  As our CDS spread  tightens or widens, it has the effect of increasing or decreasing, respectively , the fair value of our liabilities with a  corresponding impact on our results of operations. 147 Fair Value of Financial Instruments