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Financial Guaranty Insurance Losses
 3 Months Ended
Mar. 31, 2014
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 LAE reserves and salvage and subrogation recoverable, net of reinsurance.

Loss and LAE Reserve and Salvage and Subrogation Recoverable
Net of Reinsurance
Insurance Contracts
 
 
As of March 31, 2014
 
As of December 31, 2013
 
Loss and
LAE
Reserve, net
 
Salvage and
Subrogation
Recoverable, net 
 
Net Reserve (Recoverable)
 
Loss and
LAE
Reserve, net
 
Salvage and
Subrogation
Recoverable, net 
 
Net Reserve (Recoverable)
 
(in millions)
U.S. RMBS:
 

 
 

 
 

 
 

 
 

 
 

First lien:
 

 
 

 
 

 
 

 
 

 
 

Prime first lien
$
3

 
$
—

 
$
3

 
$
3

 
$
—

 
$
3

Alt-A first lien
112

 
—

 
112

 
108

 
—

 
108

Option ARM
19

 
57

 
(38
)
 
22

 
47

 
(25
)
Subprime
135

 
1

 
134

 
143

 
2

 
141

First lien
269

 
58

 
211

 
276

 
49

 
227

Second lien:
 

 
 

 
 

 
 

 
 

 
 

Closed-end second lien
5

 
43

 
(38
)
 
5

 
45

 
(40
)
HELOC
6

 
117

 
(111
)
 
5

 
127

 
(122
)
Second lien
11

 
160

 
(149
)
 
10

 
172

 
(162
)
Total U.S. RMBS
280

 
218

 
62

 
286

 
221

 
65

TruPS
1

 
—

 
1

 
2

 
—

 
2

Other structured finance
159

 
5

 
154

 
145

 
6

 
139

U.S. public finance
212

 
8

 
204

 
189

 
8

 
181

Non-U.S. public finance
36

 
—

 
36

 
35

 
—

 
35

Financial guaranty
688

 
231

 
457

 
657

 
235

 
422

Other
1

 
5

 
(4
)
 
2

 
5

 
(3
)
Subtotal
689

 
236

 
453

 
659

 
240

 
419

Effect of consolidating FG VIEs
(90
)
 
(17
)
 
(73
)
 
(103
)
 
(85
)
 
(18
)
Total (1)
$
599

 
$
219

 
$
380

 
$
556

 
$
155

 
$
401

____________________
(1)
See “Components of Net Reserves (Salvage)” table for loss and LAE reserve and salvage and subrogation recoverable components.
 
The following table reconciles the reported gross and ceded reserve and salvage and subrogation amount 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
March 31, 2014
 
As of
December 31, 2013
 
(in millions)
Loss and LAE reserve
$
636

 
$
592

Reinsurance recoverable on unpaid losses
(37
)
 
(36
)
Loss and LAE reserve, net
599

 
556

Salvage and subrogation recoverable
(241
)
 
(174
)
Salvage and subrogation payable(1)
22

 
19

Salvage and subrogation recoverable, net
(219
)
 
(155
)
Subtotal
380

 
401

Other recoverables(2)
(17
)
 
(15
)
  Net reserves (salvage)
363

 
386

Less: other (non-financial guaranty business)
(4
)
 
(3
)
Net reserves (salvage)
$
367

 
$
389

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

(2)
R&W recoverables 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 March 31, 2014
 
As of December 31, 2013
 
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, net
$
126

 
$
—

 
$
126

 
$
122

 
$
(49
)
 
$
73

Loss and LAE reserve, net
378

 
(14
)
 
364

 
363

 
(24
)
 
339

____________________
(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 total 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) salvage and subrogation recoverable for transactions that are in a net recovery position where the Company has not yet received recoveries on claims previously paid (having the effect of reducing net expected loss to be paid by the amount of the previously paid claim and the expected recovery), but will have no future income effect (because the previously paid claims and the corresponding recovery of those claims will offset in income in future periods), 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
March 31, 2014
 
(in millions)
Net expected loss to be paid
$
816

Less: net expected loss to be paid for FG VIEs
108

Total
708

Contra-paid, net
50

Salvage and subrogation recoverable, net of reinsurance
214

Loss and LAE reserve, net of reinsurance
(598
)
Other recoveries (1)
17

Net expected loss to be expensed (2)
$
391

____________________
(1)
R&W recoverables recorded in other assets on the consolidated balance sheet.
 
(2)
Excludes $84 million as of March 31, 2014, 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. This table excludes amounts related to FG VIEs, which are eliminated in consolidation.
 
Net Expected Loss to be Expensed
Insurance Contracts
 
 
As of March 31, 2014
 
(in millions)
2014 (April 1– June 30)
$
12

2014 (July 1– September 30)
11

2014 (October 1–December 31)
10

2015
42

2016
38

2017
31

2018
28

2019 - 2023
98

2024 - 2028
57

2029 - 2033
37

After 2033
27

Net expected loss to be expensed(1)
391

Discount
419

Total future value
$
810

 
____________________
(1)
Consolidation of FG VIEs resulted in reductions of $84 million in net expected loss to be expensed which is on a present value basis.


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

Loss and LAE
Reported on the
Consolidated Statements of Operations
 
 
First Quarter
 
2014
 
2013
Structured Finance:
(in millions)
U.S. RMBS:
 
 
 
First lien:
 
 
 
Prime first lien
$
0

 
$
—

Alt-A first lien
7

 
9

Option ARM
(8
)
 
(83
)
Subprime
(8
)
 
11

First lien
(9
)
 
(63
)
Second lien:
 
 
 
Closed-end second lien
—

 
20

HELOC
8

 
3

Second lien
8

 
23

Total U.S. RMBS
(1
)
 
(40
)
TruPS
(1
)
 
—

Other structured finance
16

 
(12
)
      Structured finance
14

 
(52
)
Public Finance:
 
 
 
U.S. public finance
26

 
(4
)
Non-U.S. public finance
1

 
1

Public finance
27

 
(3
)
Subtotal
41

 
(55
)
Other
(1
)
 
—

Loss and LAE insurance contracts before FG VIE consolidation
40

 
(55
)
Effect of consolidating FG VIEs
1

 
7

Loss and LAE
$
41

 
$
(48
)


 
The following table provides information on financial guaranty insurance contracts categorized as BIG.
 
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of March 31, 2014
 
 
BIG  Categories
 
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(1)
193

 
(74
)
 
80

 
(23
)
 
109

 
(32
)
 
382

 
—

 
382

Remaining weighted-average contract period (in years)
10.2

 
7.9

 
8.3

 
5.6

 
10.0

 
8.5

 
10.4

 
—

 
10.4

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Principal
$
14,981

 
$
(2,739
)
 
$
2,412

 
$
(159
)
 
$
2,980

 
$
(108
)
 
$
17,367

 
$
—

 
$
17,367

Interest
7,836

 
(1,107
)
 
1,139

 
(52
)
 
1,197

 
(40
)
 
8,973

 
—

 
8,973

Total(2)
$
22,817

 
$
(3,846
)
 
$
3,551

 
$
(211
)
 
$
4,177

 
$
(148
)
 
$
26,340

 
$
—

 
$
26,340

Expected cash outflows (inflows)
$
1,901

 
$
(528
)
 
$
727

 
$
(33
)
 
$
1,695

 
$
(59
)
 
$
3,703

 
$
(358
)
 
$
3,345

Potential recoveries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Undiscounted R&W
(174
)
 
10

 
(108
)
 
4

 
(374
)
 
14

 
(628
)
 
15

 
(613
)
Other(3)
(1,780
)
 
506

 
(255
)
 
17

 
(302
)
 
18

 
(1,796
)
 
191

 
(1,605
)
Total potential recoveries
(1,954
)
 
516

 
(363
)
 
21

 
(676
)
 
32

 
(2,424
)
 
206

 
(2,218
)
Subtotal
(53
)
 
(12
)
 
364

 
(12
)
 
1,019

 
(27
)
 
1,279

 
(152
)
 
1,127

Discount
13

 
1

 
(120
)
 
3

 
(366
)
 
6

 
(463
)
 
44

 
(419
)
Present value of expected cash flows
$
(40
)
 
$
(11
)
 
$
244

 
$
(9
)
 
$
653

 
$
(21
)
 
$
816

 
$
(108
)
 
$
708

Deferred premium revenue
$
521

 
$
(93
)
 
$
148

 
$
(7
)
 
$
262

 
$
(17
)
 
$
814

 
$
(128
)
 
$
686

Reserves (salvage)(4)
$
(137
)
 
$
5

 
$
133

 
$
(5
)
 
$
458

 
$
(14
)
 
$
440

 
$
(73
)
 
$
367

 
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 2013
 
 
BIG Categories
 
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(1)
185

 
(72
)
 
80

 
(24
)
 
119

 
(34
)
 
384

 
—

 
384

Remaining weighted-average contract period (in years)
10.5

 
8.1

 
8.3

 
5.9

 
9.8

 
7.2

 
10.5

 
—

 
10.5

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Principal
$
15,132

 
$
(2,741
)
 
$
2,483

 
$
(160
)
 
$
3,189

 
$
(158
)
 
$
17,745

 
$
—

 
$
17,745

Interest
8,114

 
(1,144
)
 
1,181

 
(53
)
 
1,244

 
(52
)
 
9,290

 
—

 
9,290

Total(2)
$
23,246

 
$
(3,885
)
 
$
3,664

 
$
(213
)
 
$
4,433

 
$
(210
)
 
$
27,035

 
$
—

 
$
27,035

Expected cash outflows (inflows)
$
1,853

 
$
(528
)
 
$
1,038

 
$
(40
)
 
$
1,681

 
$
(62
)
 
$
3,942

 
$
(690
)
 
$
3,252

Potential recoveries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Undiscounted R&W
(105
)
 
1

 
(201
)
 
8

 
(356
)
 
13

 
(640
)
 
72

 
(568
)
Other(3)
(1,774
)
 
513

 
(470
)
 
19

 
(351
)
 
19

 
(2,044
)
 
507

 
(1,537
)
Total potential recoveries
(1,879
)
 
514

 
(671
)
 
27

 
(707
)
 
32

 
(2,684
)
 
579

 
(2,105
)
Subtotal
(26
)
 
(14
)
 
367

 
(13
)
 
974

 
(30
)
 
1,258

 
(111
)
 
1,147

Discount
13

 
—

 
(126
)
 
3

 
(352
)
 
5

 
(457
)
 
51

 
(406
)
Present value of expected cash flows
$
(13
)
 
$
(14
)
 
$
241

 
$
(10
)
 
$
622

 
$
(25
)
 
$
801

 
$
(60
)
 
$
741

Deferred premium revenue
$
517

 
$
(90
)
 
$
163

 
$
(7
)
 
$
303

 
$
(27
)
 
$
859

 
$
(178
)
 
$
681

Reserves (salvage)(4)
$
(114
)
 
$
1

 
$
117

 
$
(4
)
 
$
420

 
$
(13
)
 
$
407

 
$
(18
)
 
$
389

 ____________________
(1)
The ceded number of risks represents the number of risks for which the Company ceded a portion of its exposure.

(2)
Includes BIG amounts related to FG VIEs.

(3)
Includes excess spread and draws on HELOCs.

(4)
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 $104 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 $290 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 March 31, 2014, AGM and AGC had insured approximately $7.0 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, from which the Company had purchased AGMH and its subsidiaries, 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. If the entire aggregate accreted GIC balance of approximately $2.6 billion as of March 31, 2014 were terminated, the assets of the GIC issuers (which had an aggregate accreted principal of approximately $3.9 billion and an aggregate market value of approximately $3.7 billion) would be sufficient to fund the withdrawal of the GIC funds.