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Financial Guaranty Insurance Losses (Tables)
 9 Months Ended
Sep. 30, 2013
Financial Guaranty Insurance Losses [Abstract]  
Loss and LAE Reserve, Net of Reinsurance and Salvage and Subrogation Recoverable
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.
Components of Net Reserves (Salvage)
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 R&W benefits, Net of Reinsurance
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.
Reconciliation of Net Expected Loss to be Paid and Net Expected Loss to be Expensed
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.
Net Expected Loss to be Expensed Insurance Contracts
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.
Loss and LAE Reported on the Consolidated Statements of Operations
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
Financial Guaranty Insurance BIG Transaction Loss Summary
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).”