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Financial Guaranty Insurance Losses
 9 Months Ended
Sep. 30, 2013
Financial Guaranty Insurance Losses [Abstract]  
Financial Guaranty Insurance Losses
Financial Guaranty Insurance Losses

Insurance Contracts' Loss Information

The following table provides balance sheet information on loss and loss adjustment expense ("LAE") reserves, net of reinsurance and salvage and subrogation recoverable.

Loss and LAE Reserve (Recovery)
and Salvage and Subrogation Recoverable
Net of Reinsurance
Insurance Contracts
 
 
As of September 30, 2013
 
As of December 31, 2012
 
Loss and
LAE
Reserve, net
 
Salvage and
Subrogation
Recoverable, net 
 
Net
 
Loss and
LAE
Reserve, net
 
Salvage and
Subrogation
Recoverable, net 
 
Net
 
(in millions)
U.S. RMBS:
 

 
 

 
 

 
 

 
 

 
 

First lien:
 

 
 

 
 

 
 

 
 

 
 

Prime first lien
$
3

 
$
—

 
$
3

 
$
3

 
$
—

 
$
3

Alt-A first lien
105

 
52

 
53

 
93

 
—

 
93

Option ARM
33

 
38

 
(5
)
 
52

 
216

 
(164
)
Subprime
131

 
1

 
130

 
82

 
0

 
82

Total first lien
272

 
91

 
181

 
230

 
216

 
14

Second lien:
 

 
 

 
 

 
 

 
 

 
 

Closed-end second lien
5

 
47

 
(42
)
 
5

 
72

 
(67
)
HELOC
6

 
141

 
(135
)
 
37

 
196

 
(159
)
Total second lien
11

 
188

 
(177
)
 
42

 
268

 
(226
)
Total U.S. RMBS
283

 
279

 
4

 
272

 
484

 
(212
)
TruPS
2

 
—

 
2

 
1

 
—

 
1

Other structured finance
143

 
5

 
138

 
197

 
4

 
193

U.S. public finance
177

 
48

 
129

 
104

 
134

 
(30
)
Non-U.S. public finance
31

 
—

 
31

 
31

 
—

 
31

Total financial guaranty
636

 
332

 
304

 
605

 
622

 
(17
)
Other
2

 
5

 
(3
)
 
2

 
5

 
(3
)
Subtotal
638

 
337

 
301

 
607

 
627

 
(20
)
Effect of consolidating FG VIEs
(96
)
 
(88
)
 
(8
)
 
(64
)
 
(217
)
 
153

Total (1)
$
542

 
$
249

 
$
293

 
$
543

 
$
410

 
$
133

____________________
(1)
See “Components of Net Reserves (Salvage)” table for loss and LAE reserve and salvage and subrogation recoverable components.
 
The following table reconciles the loss and LAE reserve and salvage and subrogation components on the consolidated balance sheet to the financial guaranty net reserves (salvage) in the financial guaranty BIG transaction loss summary tables.
 
Components of Net Reserves (Salvage)
Insurance Contracts
 
 
As of
September 30, 2013
 
As of
December 31, 2012
 
(in millions)
Loss and LAE reserve
$
601

 
$
601

Reinsurance recoverable on unpaid losses
(59
)
 
(58
)
Loss and LAE reserve, net
542

 
543

Salvage and subrogation recoverable
(275
)
 
(456
)
Salvage and subrogation payable(1)
26

 
46

Salvage and subrogation recoverable, net
(249
)
 
(410
)
Other recoveries(2)
(23
)
 
(30
)
Subtotal
(272
)
 
(440
)
  Total
270

 
103

Less: other (non-financial guaranty business)
(3
)
 
(3
)
Financial guaranty net reserves (salvage)
$
273

 
$
106

____________________
(1)
Recorded as a component of reinsurance balances payable.

(2)
R&W recoveries recorded in other assets on the consolidated balance sheet.
 
Balance Sheet Classification of
Net Expected Recoveries for Breaches of R&W
Insurance Contracts
 
 
As of September 30, 2013
 
As of December 31, 2012
 
For all
Financial
Guaranty
Insurance
Contracts
 
Effect of
Consolidating
FG VIEs
 
Reported on
Balance Sheet(1)
 
For all
Financial
Guaranty
Insurance
Contracts
 
Effect of
Consolidating
FG VIEs
 
Reported on
Balance Sheet(1)
 
(in millions)
Salvage and subrogation recoverable
$
203

 
$
(57
)
 
$
146

 
$
449

 
$
(169
)
 
$
280

Loss and LAE reserve
412

 
(29
)
 
383

 
571

 
(33
)
 
538

____________________
(1)
The remaining benefit for R&W is either recorded at fair value in FG VIE assets, or not recorded on the balance sheet until the expected loss, net of R&W, exceeds unearned premium reserve.

The table below provides a reconciliation of net expected loss to be paid to net expected loss to be expensed. Expected loss to be paid differs from expected loss to be expensed due to: (1) the contra-paid which represent the payments that have been made but have not yet been expensed, (2) for transactions with a net expected recovery, the addition of claim payments that have been made (and therefore are not included in expected loss to be paid) that are expected to be recovered in the future (and therefore have reduced expected loss to be paid), and (3) loss reserves that have already been established (and therefore expensed but not yet paid).
 
Reconciliation of Net Expected Loss to be Paid and
Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts
 
 
As of
September 30, 2013
 
(in millions)
Net expected loss to be paid
$
604

Less: net expected loss to be paid for FG VIEs
52

Total
552

Contra-paid, net
94

Salvage and subrogation recoverable, net of reinsurance
244

Loss and LAE reserve, net of reinsurance
(540
)
Other recoveries (1)
23

Net expected loss to be expensed (2)
$
373

____________________
(1)
R&W recoveries recorded in other assets on the consolidated balance sheet.
 
(2)
Excludes $109 million as of September 30, 2013, related to consolidated FG VIEs.

The following table provides a schedule of the expected timing of net expected losses to be expensed. The amount and timing of actual loss and LAE may differ from the estimates shown below due to factors such as refundings, accelerations, commutations, changes in expected lives and updates to loss estimates. A loss and LAE reserve is only recorded for the amount by which expected loss to be expensed exceeds deferred premium revenue determined on a contract-by-contract basis. This table excludes amounts related to consolidated FG VIEs, which are eliminated in consolidation.
 
Net Expected Loss to be Expensed
Insurance Contracts
 
 
As of September 30, 2013
 
(in millions)
2013 (October 1–December 31)
$
12

2014
43

2015
40

2016
34

2017
29

2018 - 2022
103

2023 - 2027
54

2028 - 2032
30

After 2032
28

Total present value basis(1)
373

Discount
421

Total future value
$
794

 
____________________
(1)
Consolidation of FG VIEs resulted in reductions of $109 million in net expected loss to be expensed.


The following table presents the loss and LAE recorded in the consolidated statements of operations by sector for non-derivative contracts. Amounts presented are net of reinsurance.

Loss and LAE
Reported on the
Consolidated Statements of Operations
 
 
Third Quarter
 
Nine Months
 
2013
 
2012
 
2013
 
2012
 
(in millions)
U.S. RMBS:
 
 
 
 
 
 
 
First lien:
 
 
 
 
 
 
 
Prime first lien
$
1

 
$
1

 
$
1

 
$
2

Alt-A first lien
(7
)
 
9

 
(7
)
 
37

Option ARM
22

 
25

 
(39
)
 
94

Subprime
31

 
9

 
65

 
33

Total first lien
47

 
44

 
20

 
166

Second lien:
 
 
 
 
 
 
 
Closed end second lien
—

 
(1
)
 
19

 
1

HELOC
(28
)
 
2

 
(44
)
 
21

Total second lien
(28
)
 
1

 
(25
)
 
22

Total U.S. RMBS
19

 
45

 
(5
)
 
188

TruPS
—

 
2

 
(1
)
 
(4
)
Other structured finance
(12
)
 
1

 
(33
)
 
2

U.S. public finance
47

 
2

 
121

 
47

Non-U.S. public finance
12

 
38

 
13

 
233

Subtotal
66

 
88

 
95

 
466

Other
—

 
—

 
—

 
(6
)
Total insurance contracts before FG VIE consolidation
66

 
88

 
95

 
460

Effect of consolidating FG VIEs
(11
)
 
(2
)
 
(26
)
 
(14
)
Total loss and LAE
$
55

 
$
86

 
$
69

 
$
446



 
The following table provides information on non-derivative financial guaranty insurance contracts categorized as BIG. Previously, the Company had included securities purchased for loss mitigation purposes in its descriptions of its invested assets and its financial guaranty insured portfolio. Beginning with Third Quarter 2013, the Company will be excluding such loss mitigation securities from its disclosure about its financial guaranty insured portfolio (unless otherwise indicated); it has taken this approach as of both September 30, 2013 and December 31, 2012.
 
Financial Guaranty Insurance BIG Transaction Loss Summary
September 30, 2013
 
 
BIG  Categories (1)
 
BIG 1
 
BIG 2
 
BIG 3
 
Total
BIG, Net
 
Effect of
Consolidating
FG VIEs
 
Total
 
Gross
 
Ceded
 
Gross
 
Ceded
 
Gross
 
Ceded
 
 
 
 
(dollars in millions)
Number of risks(2)
154

 
(52
)
 
76

 
(24
)
 
136

 
(40
)
 
366

 
—

 
366

Remaining weighted-average contract period (in years)
9.8

 
7.2

 
8.5

 
9.5

 
10.7

 
7.8

 
10.1

 
—

 
10.1

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Principal
$
8,795

 
$
(1,342
)
 
$
2,772

 
$
(235
)
 
$
3,884

 
$
(296
)
 
$
13,578

 
$
—

 
$
13,578

Interest
4,432

 
(499
)
 
1,350

 
(142
)
 
1,531

 
(93
)
 
6,579

 
—

 
6,579

Total(3)
$
13,227

 
$
(1,841
)
 
$
4,122

 
$
(377
)
 
$
5,415

 
$
(389
)
 
$
20,157

 
$
—

 
$
20,157

Expected cash outflows (inflows)
$
1,593

 
$
(508
)
 
$
806

 
$
(93
)
 
$
2,686

 
$
(123
)
 
$
4,361

 
$
(703
)
 
$
3,658

Potential recoveries(4)
(1,759
)
 
512

 
(395
)
 
25

 
(1,766
)
 
97

 
(3,286
)
 
601

 
(2,685
)
Subtotal
(166
)
 
4

 
411

 
(68
)
 
920

 
(26
)
 
1,075

 
(102
)
 
973

Discount
23

 
(1
)
 
(135
)
 
26

 
(391
)
 
7

 
(471
)
 
50

 
(421
)
Present value of expected cash flows
$
(143
)
 
$
3

 
$
276

 
$
(42
)
 
$
529

 
$
(19
)
 
$
604

 
$
(52
)
 
$
552

Deferred premium revenue
$
359

 
$
(60
)
 
$
163

 
$
(23
)
 
$
447

 
$
(52
)
 
$
834

 
$
(190
)
 
$
644

Reserves (salvage)(5)
$
(180
)
 
$
8

 
$
142

 
$
(32
)
 
$
351

 
$
(8
)
 
$
281

 
$
(8
)
 
$
273

 
Financial Guaranty Insurance BIG Transaction Loss Summary
December 31, 2012
 
 
BIG Categories(1)
 
BIG 1
 
BIG 2
 
BIG 3
 
Total
BIG, Net
 
Effect of
Consolidating
FG VIEs
 
Total
 
Gross
 
Ceded
 
Gross
 
Ceded
 
Gross
 
Ceded
 
 
(dollars in millions)
Number of risks(2)
163

 
(66
)
 
76

 
(22
)
 
131

 
(41
)
 
370

 
—

 
370

Remaining weighted-average contract period (in years)
10.2

 
9.2

 
10.6

 
15.1

 
9.0

 
6.0

 
10.0

 
—

 
10.0

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Principal
$
9,462

 
$
(1,533
)
 
$
2,248

 
$
(132
)
 
$
6,024

 
$
(481
)
 
$
15,588

 
$
—

 
$
15,588

Interest
4,475

 
(591
)
 
1,357

 
(127
)
 
1,881

 
(117
)
 
6,878

 
—

 
6,878

Total(3)
$
13,937

 
$
(2,124
)
 
$
3,605

 
$
(259
)
 
$
7,905

 
$
(598
)
 
$
22,466

 
$
—

 
$
22,466

Expected cash outflows (inflows)
$
1,914

 
$
(687
)
 
$
863

 
$
(58
)
 
$
2,720

 
$
(146
)
 
$
4,606

 
$
(738
)
 
$
3,868

Potential recoveries(4)
(2,356
)
 
677

 
(509
)
 
18

 
(1,911
)
 
117

 
(3,964
)
 
798

 
(3,166
)
Subtotal
(442
)
 
(10
)
 
354

 
(40
)
 
809

 
(29
)
 
642

 
60

 
702

Discount
12

 
8

 
(107
)
 
14

 
(216
)
 
2

 
(287
)
 
36

 
(251
)
Present value of expected cash flows
$
(430
)
 
$
(2
)
 
$
247

 
$
(26
)
 
$
593

 
$
(27
)
 
$
355

 
$
96

 
$
451

Deferred premium revenue
$
265

 
$
(32
)
 
$
227

 
$
(15
)
 
$
604

 
$
(83
)
 
$
966

 
$
(251
)
 
$
715

Reserves (salvage)(5)
$
(485
)
 
$
10

 
$
102

 
$
(18
)
 
$
347

 
$
(3
)
 
$
(47
)
 
$
153

 
$
106

 ____________________
(1)
In Third Quarter 2013, the Company adjusted its approach to assigning internal ratings. See "Refinement of Approach to Internal Credit Ratings and Surveillance Categories" in Note 3, Outstanding Exposure. This approach is reflected in the "Financial Guaranty Insurance BIG Transaction Loss Summary" tables as of both September 30, 2013 and December 31, 2012. 

(2)
A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making Debt Service payments. The ceded number of risks represents the number of risks for which the Company ceded a portion of its exposure.

(3)
Includes BIG amounts related to FG VIEs.

(4)
Includes estimated future recoveries for breaches of R&W as well as excess spread, and draws on HELOCs.

(5)
See table “Components of net reserves (salvage).”

Ratings Impact on Financial Guaranty Business
 
A downgrade of one of the Company’s insurance subsidiaries may result in increased claims under financial guaranties issued by the Company, if the insured obligors were unable to pay.
 
For example, AGM has issued financial guaranty insurance policies in respect of the obligations of municipal obligors under interest rate swaps. Under the swaps, AGM insures periodic payments owed by the municipal obligors to the bank counterparties. Under certain of the swaps, AGM also insures termination payments that may be owed by the municipal obligors to the bank counterparties. If (i) AGM has been downgraded below the rating trigger set forth in a swap under which it has insured the termination payment, which rating trigger varies on a transaction by transaction basis; (ii) the municipal obligor has the right to cure by, but has failed in, posting collateral, replacing AGM or otherwise curing the downgrade of AGM; (iii) the transaction documents include as a condition that an event of default or termination event with respect to the municipal obligor has occurred, such as the rating of the municipal obligor being downgraded past a specified level, and such condition has been met; (iv) the bank counterparty has elected to terminate the swap; (v) a termination payment is payable by the municipal obligor; and (vi) the municipal obligor has failed to make the termination payment payable by it, then AGM would be required to pay the termination payment due by the municipal obligor, in an amount not to exceed the policy limit set forth in the financial guaranty insurance policy. At AGM's current financial strength ratings, if the conditions giving rise to the obligation of AGM to make a termination payment under the swap termination policies were all satisfied, then AGM could pay claims in an amount not exceeding approximately $101 million in respect of such termination payments. Taking into consideration whether the rating of the municipal obligor is below any applicable specified trigger, if the financial strength ratings of AGM were further downgraded below "A" by S&P or below "A2" by Moody's, and the conditions giving rise to the obligation of AGM to make a payment under the swap policies were all satisfied, then AGM could pay claims in an additional amount not exceeding approximately $296 million in respect of such termination payments.
     
As another example, with respect to variable rate demand obligations ("VRDOs") for which a bank has agreed to provide a liquidity facility, a downgrade of AGM or AGC may provide the bank with the right to give notice to bondholders that the bank will terminate the liquidity facility, causing the bondholders to tender their bonds to the bank. Bonds held by the bank accrue interest at a “bank bond rate” that is higher than the rate otherwise borne by the bond (typically the prime rate plus 2.00% — 3.00%, and capped at the lesser of 25% and the maximum legal limit). In the event the bank holds such bonds for longer than a specified period of time, usually 90-180 days, the bank has the right to demand accelerated repayment of bond principal, usually through payment of equal installments over a period of not less than five years. In the event that a municipal obligor is unable to pay interest accruing at the bank bond rate or to pay principal during the shortened amortization period, a claim could be submitted to AGM or AGC under its financial guaranty policy. As of September 30, 2013, AGM and AGC had insured approximately $7.4 billion net par of VRDOs, of which approximately $0.4 billion of net par constituted VRDOs issued by municipal obligors rated BBB- or lower pursuant to the Company’s internal rating. The specific terms relating to the rating levels that trigger the bank’s termination right, and whether it is triggered by a downgrade by one rating agency or a downgrade by all rating agencies then rating the insurer, vary depending on the transaction.

In addition, AGM may be required to pay claims in respect of AGMH’s former financial products business if Dexia SA and its affiliates do not comply with their obligations following a downgrade of the financial strength rating of AGM. Most of the guaranteed investment contracts ("GICs") insured by AGM allow for the withdrawal of GIC funds in the event of a downgrade of AGM, unless the relevant GIC issuer posts collateral or otherwise enhances its credit. Most GICs insured by AGM allow for the termination of the GIC contract and a withdrawal of GIC funds at the option of the GIC holder in the event of a downgrade of AGM below a specified threshold, generally below A- by S&P or A3 by Moody’s, with no right of the GIC issuer to avoid such withdrawal by posting collateral or otherwise enhancing its credit. Each GIC contract stipulates the thresholds below which the GIC issuer must post eligible collateral, along with the types of securities eligible for posting and the collateralization percentage applicable to each security type. These collateralization percentages range from 100% of the GIC balance for cash posted as collateral to, typically, 108% for asset-backed securities.