Reinsurance and Other Monoline Exposures

The Company assumes exposure on insured obligations (“Assumed Business”) and cedes portions of its exposure on obligations it has insured (“Ceded Business”) in exchange for premiums, net of ceding commissions. The Company has historically entered into ceded reinsurance contracts in order to obtain greater business diversification and reduce the net potential loss from large risks.

Assumed and Ceded Business

The Company is party to reinsurance agreements as a reinsurer to other monoline financial guaranty companies. Under these relationships, the Company assumes a portion of the ceding company’s insured risk in exchange for a premium. The Company may be exposed to risk in this portfolio in that the Company may be required to pay losses without a corresponding premium in circumstances where the ceding company is experiencing financial distress and is unable to pay premiums. The Company’s facultative and treaty agreements are generally subject to termination at the option of the ceding company:


•	if the Company fails to meet certain financial and regulatory criteria and to maintain a specified minimum financial strength rating, or


•	upon certain changes of control of the Company.

Upon termination under these conditions, the Company may be required (under some of its reinsurance agreements) to return to the ceding company unearned premiums (net of ceding commissions) and loss reserves calculated on a statutory basis of accounting, attributable to reinsurance ceded pursuant to such agreements after which the Company would be released from liability with respect to the Assumed Business.

Upon the occurrence of the conditions set forth in the first bullet above, whether or not an agreement is terminated, the Company may be required to obtain a letter of credit or alternative form of security to collateralize its obligation to perform under such agreement or it may be obligated to increase the level of ceding commission paid.

With respect to a significant portion of the Company’s in-force financial guaranty Assumed Business, based on AG Re's and AGC's current ratings and subject to the terms of each reinsurance agreement, the ceding company may have the right to recapture Assumed Business ceded to AG Re or AGC, respectively, and in most cases, assets representing the statutory unearned premium (net of ceding commissions) and loss reserves (if any), plus in certain cases to receive an additional ceding commission, associated with that business. As of September 30, 2013, AG Re had posted $314 million of collateral in trust accounts for the benefit of third party ceding companies to secure its obligations under its reinsurance agreements, excluding contingency reserves. The equivalent amount for AGC is $130 million; AGC is not required to post collateral. On February 14, 2013, AG Re posted an additional $27 million of collateral due to the January 2013 downgrade by Moody's of its financial strength rating to Baa1. As of September 30, 2013, the amount of additional ceding commission for AG Re was $7 million.

The Company has Ceded Business to non-affiliated companies to limit its exposure to risk. Under these relationships, the Company cedes a portion of its insured risk in exchange for a premium paid to the reinsurer. The Company remains primarily liable for all risks it directly underwrites and is required to pay all gross claims. It then seeks reimbursement from the reinsurer for its proportionate share of claims. The Company may be exposed to risk for this exposure if it were required to pay the gross claims and not be able to collect ceded claims from an assuming company experiencing financial distress. A number of the financial guaranty insurers to which the Company has ceded par have experienced financial distress and been downgraded by the rating agencies as a result. In addition, state insurance regulators have intervened with respect to some of these insurers. The Company’s ceded contracts generally allow the Company to recapture Ceded Business after certain triggering events, such as reinsurer downgrades.

Commutations of Ceded Business resulted in net increase to unearned premium reserves of $108 million, net par outstanding of 19.1 billion and gains of $84 million which were recorded in other income, for Nine Months 2012. There have been no commutations to date in 2013. While certain Ceded Business has been reassumed, the Company still has significant Ceded Business with third parties.

The following table presents the components of premiums and losses reported in the consolidated statement of operations and the contribution of the Company's Assumed and Ceded Businesses.

Effect of Reinsurance on Statement of Operations



	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions)
Premiums Written:
Direct	$	28		$	24		$	48		$	131
Assumed(1)	(2		)	0			17			13
Ceded(2)	4			1			3			88
Net	$	30		$	25		$	68		$	232
Premiums Earned:
Direct	$	173		$	242		$	627		$	694
Assumed	12			13			26			39
Ceded	(26		)	(33		)	(83		)	(98		)
Net	$	159		$	222		$	570		$	635
Loss and LAE:
Direct	$	25		$	108		$	18		$	545
Assumed	35			(4		)	70			13
Ceded	(5		)	(18		)	(19		)	(112		)
Net	$	55		$	86		$	69		$	446

____________________


(1)	Negative assumed premiums written were due to changes in expected Debt Service schedules.


(2)	Positive ceded premiums written were due to commutations and changes in expected Debt Service schedules.

Reinsurer Exposure

In addition to assumed and ceded reinsurance arrangements, the Company may also have exposure to some financial guaranty reinsurers (i.e., monolines) in other areas. Second-to-pay insured par outstanding represents transactions the Company has insured that were previously insured by other monolines. The Company underwrites such transactions based on the underlying insured obligation without regard to the primary insurer. Another area of exposure is in the investment portfolio where the Company holds fixed maturity securities that are wrapped by monolines and whose value may decline based on the rating of the monoline. At September 30, 2013, based on fair value, the Company had $524 million of fixed maturity securities in its investment portfolio wrapped by National Public Finance Guarantee Corporation, $474 million by Ambac Assurance Corporation ("Ambac") and $28 million by other guarantors.

Exposure by Reinsurer



	Ratings at		Par Outstanding
	November 7, 2013		As of September 30, 2013
Reinsurer	Moody’s Reinsurer Rating	S&P Reinsurer Rating	Ceded Par Outstanding(1)		Second-to- Pay Insured Par Outstanding		Assumed Par Outstanding
	(dollars in millions)
American Overseas Reinsurance Company Limited (f/k/a Ram Re)	WR (2)	WR	$	8,695	$	—	$	30
Tokio Marine & Nichido Fire Insurance Co., Ltd.	Aa3 (3)	AA- (3)	7,420		—		—
Radian Asset Assurance Inc.	Ba1	B+	4,781		38		1,194
Syncora Guarantee Inc.	WR	WR	4,119		1,790		162
Mitsui Sumitomo Insurance Co. Ltd.	A1	A+ (3)	2,160		—		—
ACA Financial Guaranty Corp.	NR	WR	810		5		10
Swiss Reinsurance Co.	A1	AA-	401		—		—
Ambac	WR	WR	85		6,451		18,307
CIFG Assurance North America Inc.	WR	WR	61		237		5,201
MBIA Inc.	(4)	(4)	—		10,549		7,497
Financial Guaranty Insurance Co.	WR	WR	—		2,535		1,721
Other	Various	Various	946		2,056		46
Total			$	29,478	$	23,661	$	34,168

____________________


(1)	Includes $3,364 million in ceded par outstanding related to insured credit derivatives.

(2) Represents “Withdrawn Rating.”

(3) The Company has structural collateral agreements satisfying the triple-A credit requirement of S&P and/or Moody’s.


(4)	MBIA Inc. includes various subsidiaries which are rated A and B by S&P and Baa1, B1 and B3 by Moody’s.

Amounts Due (To) From Reinsurers

As of September 30, 2013



	Assumed Premium, net of Commissions		Ceded Premium, net of Commissions			Assumed Expected Loss and LAE			Ceded Expected Loss and LAE
	(in millions)
American Overseas Reinsurance Company Limited	$	—	$	(9	)	$	—		$	5
Tokio Marine & Nichido Fire Insurance Co., Ltd.	—		(22		)	—			33
Radian Asset Assurance Inc.	—		(17		)	—			12
Syncora Guarantee Inc.	—		(39		)	22			—
Mitsui Sumitomo Insurance Co. Ltd.	—		(4		)	—			7
Swiss Reinsurance Co.	—		(3		)	—			—
Ambac	69		—			(80		)	—
CIFG Assurance North America Inc.	—		—			—			4
MBIA Inc.	14		—			(11		)	—
Financial Guaranty Insurance Co.	7		—			(118		)	—
Other	—		(39		)	—			—
Total	$	90	$	(133	)	$	(187	)	$	61