Financial Guaranty Insurance Premiums

The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, includes financial guaranty contracts that meet the definition of insurance contracts as well as those that meet the definition of a derivative under GAAP. Amounts presented in this note relate only to financial guaranty insurance contracts, unless otherwise noted. See Note 9, Financial Guaranty Contracts Accounted for as Credit Derivatives for amounts that relate to CDS.

Accounting Policies

Accounting for financial guaranty contracts that meet the scope exception under derivative accounting guidance are subject to industry specific guidance for financial guaranty insurance. The accounting for contracts that fall under the financial guaranty insurance definition are consistent whether the contract was written on a direct basis, assumed from another financial guarantor under a reinsurance treaty, ceded to another insurer under a reinsurance treaty, or acquired in a business combination.

Premium receivables comprise the present value of contractual or expected future premium collections discounted using the risk-free rate. Unearned premium reserve represents deferred premium revenue, less claim payments and recoveries received that have not yet been recognized in the statement of operations (“contra-paid”). The following discussion relates to the deferred premium revenue component of the unearned premium reserve, while the contra-paid is discussed in Note 7, Financial Guaranty Insurance Losses.

The amount of deferred premium revenue at contract inception is determined as follows:


•	For premiums received upfront on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is equal to the amount of cash received. Upfront premiums typically relate to public finance transactions.

•

For premiums received in installments on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is the present value of either (1) contractual premiums due or (2) in cases where the underlying collateral is comprised of homogeneous pools of assets, the expected premiums to be collected over the life of the contract. To be considered a homogeneous pool of assets, prepayments must be contractually prepayable, the amount of prepayments must be probable, and the timing and amount of prepayments must be reasonably estimable. When the Company adjusts prepayment assumptions or expected premium collections, an adjustment is recorded to the deferred premium revenue, with a corresponding adjustment to the premium receivable, and prospective changes are recognized in premium revenues. Premiums receivable are discounted at the risk-free rate at inception and such discount rate is updated only when changes to prepayment assumptions are made that change the expected date of final maturity. Installment premiums typically relate to structured finance transactions, where the insurance premium rate is determined at the inception of the contract but the insured par is subject to prepayment throughout the life of the transaction.

•

For financial guaranty insurance contracts acquired in a business combination, deferred premium revenue is equal to the fair value of the Company's stand-ready obligation portion of the insurance contract at the date of acquisition based on what a hypothetical similarly rated financial guaranty insurer would have charged for the contract at that date and not the actual cash flows under the insurance contract. The amount of deferred premium revenue may differ significantly from cash collections due primarily to fair value adjustments recorded in connection with a business combination.

The Company recognizes deferred premium revenue as earned premium over the contractual period or expected period of the contract in proportion to the amount of insurance protection provided. As premium revenue is recognized, a corresponding decrease to the deferred premium revenue is recorded. The amount of insurance protection provided is a function of the insured principal amount outstanding. Accordingly, the proportionate share of premium revenue recognized in a given reporting period is a constant rate calculated based on the relationship between the insured principal amounts outstanding in the reporting period compared with the sum of each of the insured principal amounts outstanding for all periods. When an insured financial obligation is retired before its maturity, the financial guaranty insurance contract is extinguished. Any nonrefundable deferred premium revenue related to that contract is accelerated and recognized as premium revenue. When a premium receivable balance is deemed uncollectible, it is written off to bad debt expense.

For reinsurance assumed contracts, earned premiums reported in the Company's consolidated statements of operations are calculated based upon data received from ceding companies, however, some ceding companies report premium data between 30 and 90 days after the end of the reporting period. The Company estimates earned premiums for the lag period. Differences between such estimates and actual amounts are recorded in the period in which the actual amounts are determined. When installment premiums are related to reinsurance assumed contracts, the Company assesses the credit quality and liquidity of the ceding companies and the impact of any potential regulatory constraints to determine the collectability of such amounts.

Financial Guaranty Insurance Premiums

Deferred premium revenue ceded to reinsurers (ceded unearned premium reserve) is recorded as an asset. Direct, assumed and ceded earned premium revenue are presented together as net earned premiums in the statement of operations. Net earned premiums comprise the following:

Net Earned Premiums



	Year Ended December 31,
	2014		2013		2012
	(in millions)
Scheduled net earned premiums	$	415	$	470	$	581
Acceleration of net earned premiums	136		263		249
Accretion of discount on net premiums receivable	16		17		22
Financial guaranty insurance net earned premiums	567		750		852
Other	3		2		1
Net earned premiums (1)	$	570	$	752	$	853

___________________


(1)	Excludes $32 million, $60 million and $153 million for the year ended December 31, 2014, 2013 and 2012, respectively, related to consolidated FG VIEs.

Components of

Unearned Premium Reserve



	As of December 31, 2014							As of December 31, 2013
	Gross		Ceded			Net(1)		Gross			Ceded			Net(1)
	(in millions)
Deferred premium revenue:
Financial guaranty insurance	$	4,167	$	387		$	3,780	$	4,647		$	470		$	4,177
Other	0		—			0		5			—			5
Deferred premium revenue	$	4,167	$	387		$	3,780	$	4,652		$	470		$	4,182
Contra-paid(2)	94		(6		)	100		(57		)	(18		)	(39		)
Unearned premium reserve	$	4,261	$	381		$	3,880	$	4,595		$	452		$	4,143

____________________


(1)	Excludes $125 million and $187 million deferred premium revenue and $42 million and $55 million of contra-paid related to FG VIEs as of December 31, 2014 and December 31, 2013, respectively.


(2)	See Note 7, "Financial Guaranty Insurance Losses– Insurance Contracts' Loss Information" for an explanation of "contra-paid".

Gross Premium Receivable,

Net of Commissions on Assumed Business

Roll Forward



	Year Ended December 31,
	2014			2013			2012
	(in millions)
Beginning of period, December 31	$	876		$	1,005		$	1,003
Gross premium written, net of commissions on assumed business	171			145			211
Gross premiums received, net of commissions on assumed business	(230		)	(259		)	(294		)
Adjustments:
Changes in the expected term	(66		)	(28		)	44
Accretion of discount, net of commissions on assumed business	10			20			36
Foreign exchange translation	(31		)	(1		)	13
Consolidation/deconsolidation of FG VIEs	(1		)	—			(5		)
Other adjustments	—			(6		)	(3		)
End of period, December 31 (1)	$	729		$	876		$	1,005

____________________


(1)	Excludes $19 million, $21 million and $29 million as of December 31, 2014 , 2013 and 2012, respectively, related to consolidated FG VIEs.

Foreign exchange translation relates to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 51% and 48% of installment premiums at December 31, 2014 and 2013, respectively, are denominated in currencies other than the U.S. dollar, primarily the Euro and British Pound Sterling.

The timing and cumulative amount of actual collections may differ from expected collections in the tables below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations and changes in expected lives.

Expected Collections of

Gross Premiums Receivable,

Net of Commissions on Assumed Business

(Undiscounted)



	As of December 31, 2014
	(in millions)
2015 (January 1 – March 31)	$	31
2015 (April 1 – June 30)	26
2015 (July 1 – September 30)	20
2015 (October 1 – December 31)	20
2016	74
2017	69
2018	62
2019	58
2020-2024	242
2025-2029	154
2030-2034	106
After 2034	102
Total(1)	$	964

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(1)	Excludes expected cash collections on FG VIEs of $25 million.

Scheduled Net Earned Premiums



	As of December 31, 2014
	(in millions)
2015 (January 1 – March 31)	$	93
2015 (April 1 – June 30)	91
2015 (July 1 – September 30)	89
2015 (October 1 – December 31)	86
Subtotal 2015	359
2016	332
2017	295
2018	269
2019	246
2020-2024	968
2025-2029	615
2030-2034	370
After 2034	326
Total present value basis(1)	3,780
Discount	208
Total future value	$	3,988

____________________


(1)	Excludes scheduled net earned premiums on consolidated FG VIEs of $125 million.

Selected Information for Policies Paid in Installments



	As of December 31, 2014			As of December 31, 2013
	(dollars in millions)
Premiums receivable, net of commission payable	$	729		$	876
Gross deferred premium revenue	1,370			1,576
Weighted-average risk-free rate used to discount premiums	3.5		%	3.4		%
Weighted-average period of premiums receivable (in years)	9.4			9.4