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Financial Guaranty Insurance Losses
 12 Months Ended
Dec. 31, 2014
Insurance [Abstract]  
Financial Guaranty Insurance Losses
Financial Guaranty Insurance Losses

Accounting Policies

Loss and LAE Reserve

Loss and LAE reserve reported on the balance sheet relates only to direct and assumed reinsurance contracts that are accounted for as insurance, substantially all of which are financial guaranty insurance contracts. The corresponding reserve ceded to reinsurers is reported as reinsurance recoverable on unpaid losses. As discussed in Note 8, Fair Value Measurement, contracts that meet the definition of a derivative, as well as consolidated FG VIE assets and liabilities, are recorded separately at fair value. Any expected losses related to consolidated FG VIEs are eliminated upon consolidation. Any expected losses on credit derivatives are not recorded as loss and LAE reserve on the consolidated balance sheet.

Under financial guaranty insurance accounting, the sum of unearned premium reserve and loss and LAE reserve represents the Company's stand‑ready obligation. Unearned premium reserve is deferred premium revenue, less claim payments and recoveries received that have not yet been recognized in the statement of operations ("contra-paid"). At contract inception, the entire stand-ready obligation is represented by unearned premium reserve. A loss and LAE reserve for an insurance contract is only recorded when the expected loss to be paid net of contra-paid (“total losses”) exceed the deferred premium revenue, on a contract by contract basis.

When a claim payment is made on a contract, it first reduces any recorded loss and LAE reserve. To the extent there is no loss and LAE reserve on a contract, which occurs when total losses are less than deferred premium revenue, or to the extent loss and LAE reserve is not sufficient to cover a claim payment, then such claim payment is recorded as “contra-paid,” which reduces the unearned premium reserve. The contra-paid is recognized in the line item “loss and LAE” in the consolidated statement of operations when and for the amount that total losses exceed the remaining deferred premium revenue on the insurance contract. Loss and LAE in the consolidated statement of operations is presented net of cessions to reinsurers.

Salvage and Subrogation Recoverable

When the Company becomes entitled to the cash flow from the underlying collateral of an insured credit under salvage and subrogation rights as a result of a claim payment or estimated future claim payment, it reduces the expected loss to be paid on the contract. Such reduction in expected loss to be paid can result in one of the following:

•
a reduction in the corresponding loss and LAE reserve with a benefit to the income statement,

•
no entry recorded, if “total loss” is not in excess of deferred premium revenue, or

•
the recording of a salvage asset with a benefit to the income statement if the transaction is in a net recovery position at the reporting date.

The Company recognizes the expected recovery of claim payments (including recoveries from settlement with R&W providers) made by an acquired subsidiary prior to the date of acquisition, consistent with its policy for recognizing recoveries on all financial guaranty insurance contracts. To the extent that the estimated amount of recoveries increases or decreases, due to changes in facts and circumstances, including the examination of additional loan files and our experience in recovering loans put back to the originator, the Company would recognize a benefit or expense consistent with how changes in the expected recovery of all other claim payments are recorded. The ceded component of salvage and subrogation recoverable is recorded in the line item reinsurance balances payable.

Expected Loss to be Expensed

Expected loss to be expensed represents past or expected future net claim payments that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies. Expected loss to be expensed is the Company's projection of incurred losses that will be recognized in future periods, excluding accretion of discount.

Insurance Contracts' Loss Information

The following table provides balance sheet information on loss and LAE reserves and salvage and subrogation recoverable, net of reinsurance. The Company used weighted average risk-free rates for U.S. dollar denominated financial guaranty insurance obligations that ranged from 0.0% to 2.95% as of December 31, 2014 and 0.0% to 4.44% as of December 31, 2013. Financial guaranty insurance expected LAE reserve was $12 million as of December 31, 2014 and $27 million as of December 31, 2013.

Loss and LAE Reserve and Salvage and Subrogation Recoverable
Net of Reinsurance
Insurance Contracts
 
 
As of December 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
$
2

 
$
—

 
$
2

 
$
3

 
$
—

 
$
3

Alt-A first lien
87

 
—

 
87

 
108

 
—

 
108

Option ARM
28

 
40

 
(12
)
 
22

 
47

 
(25
)
Subprime
166

 
8

 
158

 
143

 
2

 
141

First lien
283

 
48

 
235

 
276

 
49

 
227

Second lien:
 

 
 

 
 

 
 

 
 

 
 

Closed-end second lien
4

 
39

 
(35
)
 
5

 
45

 
(40
)
HELOC
3

 
39

 
(36
)
 
5

 
127

 
(122
)
Second lien
7

 
78

 
(71
)
 
10

 
172

 
(162
)
Total U.S. RMBS
290

 
126

 
164

 
286

 
221

 
65

TruPS
0

 
—

 
0

 
2

 
—

 
2

Other structured finance
236

 
2

 
234

 
145

 
6

 
139

U.S. public finance
243

 
8

 
235

 
189

 
8

 
181

Non-U.S. public finance
30

 
—

 
30

 
35

 
—

 
35

Financial guaranty
799

 
136

 
663

 
657

 
235

 
422

Other recoverables
—

 
13

 
(13
)
 
—

 
15

 
(15
)
Subtotal
799

 
149

 
650

 
657

 
250

 
407

Effect of consolidating FG VIEs
(80
)
 
(1
)
 
(79
)
 
(103
)
 
(85
)
 
(18
)
Subtotal
719

 
148

 
571

 
554

 
165

 
389

Other
2

 
6

 
(4
)
 
2

 
5

 
(3
)
Total (1)
$
721

 
$
154

 
$
567

 
$
556

 
$
170

 
$
386

____________________
(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
December 31, 2014
 
As of
December 31, 2013
 
(in millions)
Loss and LAE reserve
$
799

 
$
592

Reinsurance recoverable on unpaid losses
(78
)
 
(36
)
Loss and LAE reserve, net
721

 
556

Salvage and subrogation recoverable
(151
)
 
(174
)
Salvage and subrogation payable(1)
10

 
19

Other recoverables(2)
(13
)
 
(15
)
Salvage and subrogation recoverable, net and other recoverable
(154
)
 
(170
)
Subtotal
567

 
386

Less: other (non-financial guaranty business)
(4
)
 
(3
)
Net reserves (salvage) - financial guaranty
$
571

 
$
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 December 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
$
20

 
$
—

 
$
20

 
$
122

 
$
(49
)
 
$
73

Loss and LAE reserve, net
185

 
(8
)
 
177

 
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 claim payments made and recoveries received that have not yet been recognized in the statement of operations, (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 December 31, 2014
 
(in millions)
Net expected loss to be paid
$
1,115

Less: net expected loss to be paid for FG VIEs
126

Total
989

Contra-paid, net
(100
)
Salvage and subrogation recoverable, net of reinsurance
135

Loss and LAE reserve, net of reinsurance
(719
)
Other recoveries (1)
13

Net expected loss to be expensed (present value)(2)
$
318

____________________
(1)
R&W recoverables recorded in other assets on the consolidated balance sheet.
 
(2)
Excludes $89 million as of December 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
Financial Guaranty Insurance Contracts
 
 
As of December 31, 2014
 
(in millions)
2015 (January 1 – March 31)
$
8

2015 (April 1 – June 30)
8

2015 (July 1 – September 30)
8

2015 (October 1 – December 31)
9

Subtotal 2015
33

2016
34

2017
27

2018
24

2019
22

2020-2024
79

2025-2029
46

2030-2034
32

After 2034
21

Net expected loss to be expensed
318

Discount
413

Total future value
$
731

 



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
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
 
(in millions)
Structured Finance:
 
 
 
 
 
U.S. RMBS:
 
 
 
 
 
First lien:
 
 
 
 
 
Prime first lien
$
(1
)
 
$
1

 
$
2

Alt-A first lien
(66
)
 
(2
)
 
51

Option ARM
(37
)
 
(48
)
 
137

Subprime
8

 
80

 
38

First lien
(96
)
 
31

 
228

Second lien:
 
 
 
 
 
Closed-end second lien
(2
)
 
18

 
31

HELOC
(31
)
 
(53
)
 
49

Second lien
(33
)
 
(35
)
 
80

Total U.S. RMBS
(129
)
 
(4
)
 
308

TruPS
(1
)
 
(1
)
 
(10
)
Other structured finance
96

 
(34
)
 
3

Structured finance
(34
)
 
(39
)
 
301

Public Finance:
 
 
 
 
 
U.S. public finance
192

 
198

 
51

Non-U.S. public finance
(1
)
 
16

 
234

Public finance
191

 
214

 
285

Subtotal
157

 
175

 
586

Other
(1
)
 
—

 
(17
)
Loss and LAE on insurance contracts before FG VIE consolidation
156

 
175

 
569

Effect of consolidating FG VIEs
(30
)
 
(21
)
 
(65
)
Loss and LAE
$
126

 
$
154

 
$
504




















 The following table provides information on financial guaranty insurance contracts categorized as BIG.

 Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 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)
164

 
(59
)
 
75

 
(15
)
 
119

 
(38
)
 
358

 
—

 
358

Remaining weighted-average contract period (in years)
9.9

 
7.4

 
10.1

 
8.9

 
9.6

 
6.9

 
10.3

 
—

 
10.3

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Principal
$
12,358

 
$
(2,163
)
 
$
2,421

 
$
(286
)
 
$
3,067

 
$
(175
)
 
$
15,222

 
$
—

 
$
15,222

Interest
6,350

 
(838
)
 
1,274

 
(121
)
 
1,034

 
(48
)
 
7,651

 
—

 
7,651

Total(2)
$
18,708

 
$
(3,001
)
 
$
3,695

 
$
(407
)
 
$
4,101

 
$
(223
)
 
$
22,873

 
$
—

 
$
22,873

Expected cash outflows (inflows)
$
1,762

 
$
(626
)
 
$
763

 
$
(77
)
 
$
1,716

 
$
(75
)
 
$
3,463

 
$
(345
)
 
$
3,118

Potential recoveries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Undiscounted R&W
(39
)
 
0

 
(48
)
 
2

 
(171
)
 
9

 
(247
)
 
8

 
(239
)
Other(3)
(1,687
)
 
608

 
(206
)
 
5

 
(404
)
 
30

 
(1,654
)
 
177

 
(1,477
)
Total potential recoveries
(1,726
)
 
608

 
(254
)
 
7

 
(575
)
 
39

 
(1,901
)
 
185

 
(1,716
)
Subtotal
36

 
(18
)
 
509

 
(70
)
 
1,141

 
(36
)
 
1,562

 
(160
)
 
1,402

Discount
3

 
0

 
(117
)
 
11

 
(353
)
 
9

 
(447
)
 
34

 
(413
)
Present value of expected cash flows
$
39

 
$
(18
)
 
$
392

 
$
(59
)
 
$
788

 
$
(27
)
 
$
1,115

 
$
(126
)
 
$
989

Deferred premium revenue
$
378

 
$
(70
)
 
$
119

 
$
(6
)
 
$
312

 
$
(33
)
 
$
700

 
$
(116
)
 
$
584

Reserves (salvage)(4)
$
(42
)
 
$
(5
)
 
$
278

 
$
(53
)
 
$
482

 
$
(10
)
 
$
650

 
$
(79
)
 
$
571

 
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)
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.

(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 $146 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 $393 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 December 31, 2014, AGM and AGC had insured approximately $6.0 billion net par of VRDOs, of which approximately $0.3 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 the GIC holder to terminate the GIC and withdraw the funds in the event of a downgrade of AGM below A3 or A-, 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 $2.3 billion as of December 31, 2014 were terminated, the assets of the GIC issuers (which had an aggregate accreted principal of approximately $3.4 billion and an aggregate market value of approximately $3.1 billion) would be sufficient to fund the withdrawal of the GIC funds.