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.

Accounting Policy

For business assumed and ceded, the accounting model of the underlying direct financial guaranty contract dictates the accounting model used for the reinsurance contract (except for those eliminated as FG VIEs). For any assumed or ceded financial guaranty insurance premiums, the accounting model described in Note 4 is followed, for assumed and ceded financial guaranty insurance losses, the accounting model in Note 7 is followed. For any assumed or ceded credit derivative contracts, the accounting model in Note 9 is followed.

Assumed and Ceded Business

The Company assumes business from 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 assumed 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.

The downgrade of the financial strength ratings of AG Re or of AGC gives certain reinsurance counterparties the right to recapture ceded business, which would lead to a reduction in the Company's unearned premium reserve and related earnings on such reserve. 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 third party ceding company may have the right to recapture assumed business ceded to AG Re and/or AGC, and in connection therewith, to receive payment from the assuming reinsurer of an amount equal to the reinsurer’s statutory unearned premium (net of ceding commissions) and statutory loss reserves (if any) associated with that business, plus, in certain cases, an additional ceding commission. As of December 31, 2014, if each third party company ceding business to AG Re and/or AGC had a right to recapture such business, and chose to exercise such right, the aggregate amounts that AG Re and AGC could be required to pay to all such companies would be approximately $85 million and $45 million, respectively.

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.

Over the past several years, the Company has entered into several commutations in order to reassume previously ceded books of business from its reinsurers. The Company has also canceled assumed reinsurance contracts.

Net Effect of Commutations of Ceded and

Cancellations of Assumed Reinsurance Contracts



	Year Ended December 31,
	2014		2013		2012
	(in millions)
Increase (decrease) in net unearned premium reserve	$	20	$	11	$	109
Increase (decrease) in net par outstanding	1,167		151		19,173
Commutation gains recorded in other income	23		2		82

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



	Year Ended December 31,
	2014			2013			2012
	(in millions)
Premiums Written:
Direct	$	116		$	106		244
Assumed(1)	(12		)	17			9
Ceded(2)	15			2			51
Net	$	119		$	125		304
Premiums Earned:
Direct	$	581		$	819		936
Assumed	47			40			50
Ceded	(58		)	(107		)	(133	)
Net	$	570		$	752		853
Loss and LAE:
Direct	$	132		$	110		636
Assumed	37			73			(4	)
Ceded	(43		)	(29		)	(128	)
Net	$	126		$	154		504

____________________


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


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

On January 24, 2012, AGC reinsured approximately $1.8 billion of U.S. public finance par from Radian Asset. In connection with the reinsurance assumption, the Company received a payment of $22 million.

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. As of December 31, 2014, based on fair value, the Company had fixed-maturity securities in its investment portfolio consisting of $330 million insured by National Public Finance Guarantee Corporation, $266 million insured by Ambac Assurance Corporation ("Ambac") and $29 million insured by other guarantors.

Exposure by Reinsurer



	Ratings at		Par Outstanding (1)
	February 24, 2015		As of December 31, 2014
Reinsurer	Moody’s Reinsurer Rating	S&P Reinsurer Rating	Ceded Par Outstanding		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	$	6,727	$	—	$	30
Tokio Marine & Nichido Fire Insurance Co., Ltd. (“Tokio”)	Aa3 (3)	AA- (3)	5,276		—		—
Radian Asset	Ba1	B+	4,104		21		671
Syncora Guarantee Inc.	WR	WR	3,715		1,514		161
Mitsui Sumitomo Insurance Co. Ltd.	A1	A+ (3)	2,033		—		—
ACA Financial Guaranty Corp.	NR (5)	WR	746		2		—
Swiss Reinsurance Co.	Aa3	AA-	93		—		—
Ambac	WR	WR	82		4,930		14,342
National Public Finance Guarantee Corporation	A3	AA-	—		6,210		5,894
MBIA	(4)	(4)	—		2,613		587
FGIC	WR	WR	—		2,074		834
Ambac Assurance Corp. Segregated Account	NR	NR	—		109		956
CIFG Assurance North America Inc. ("CIFG")	WR	WR	—		102		4,365
Other	Various	Various	199		894		46
Total			$	22,975	$	18,469	$	27,886

____________________


(1)	Includes par 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 includes subsidiaries MBIA Insurance Corp. rated B by S&P and B2 by Moody's and MBIA U.K. Insurance Ltd. rated B by S&P and Ba2 by Moody’s.


(5)	Represents “Not Rated.”

Ceded Par Outstanding by Reinsurer and Credit Rating

As of December 31, 2014



	Internal Credit Rating
Reinsurer	AAA		AA		A		BBB		BIG		Total
	(in millions)
American Overseas Reinsurance Company Limited (f/k/a Ram Re)	$	633	$	2,452	$	1,992	$	1,158	$	492	$	6,727
Tokio	763		968		1,485		1,281		779		5,276
Radian Asset	206		287		2,037		1,085		489		4,104
Syncora Guarantee Inc.	—		291		498		2,193		733		3,715
Mitsui Sumitomo Insurance Co. Ltd.	134		669		742		299		189		2,033
ACA Financial Guaranty Corp	—		458		277		11		—		746
Swiss Reinsurance Co.	—		—		0		26		67		93
Ambac	—		—		82		—		—		82
Other	62		82		55		—		—		199
Total	$	1,798	$	5,207	$	7,168	$	6,053	$	2,749	$	22,975

In accordance with U.S. statutory accounting requirements and U.S. insurance laws and regulations, in order for the Company to receive credit for liabilities ceded to reinsurers domiciled outside of the U.S., such reinsurers must secure their liabilities to the Company. All of the unauthorized reinsurers in the table above are required to post collateral for the benefit of the Company in an amount at least equal to the sum of their ceded unearned premium reserve, loss reserves and contingency reserves all calculated on a statutory basis of accounting. In addition, certain authorized reinsurers in the table above post collateral on terms negotiated with the Company. Collateral may be in the form of letters of credit or trust accounts. The total collateral posted by all non-affiliated reinsurers as of December 31, 2014 is approximately $610 million.

Second-to-Pay

Insured Par Outstanding by Internal Rating

As of December 31, 2014(1)



	Public Finance										Structured Finance
	AAA		AA		A		BBB		BIG		AAA		AA		A		BBB		BIG		Total
	(in millions)
Radian Asset	$	—	$	—	$	3	$	12	$	6	$	—	$	—	$	—	$	—	$	—	$	21
Syncora Guarantee Inc.	—		45		326		727		276		96		—		—		—		44		1,514
ACA Financial Guaranty Corp.	—		1		—		1		—		—		—		—		—		—		2
Ambac	30		1,301		2,597		637		63		—		1		64		231		6		4,930
National Public Finance Guarantee Corporation	160		2,193		3,833		—		—		—		—		24		—		—		6,210
MBIA	—		65		254		424		—		—		1,508		—		243		119		2,613
FGIC	—		77		975		281		302		371		—		25		—		43		2,074
Ambac Assurance Corp. Segregated Account	—		—		—		—		—		—		33		—		—		76		109
CIFG	—		4		51		22		25		—		—		—		—		—		102
Other	—		894		—		—		—		—		—		—		—		—		894
Total	$	190	$	4,580	$	8,039	$	2,104	$	672	$	467	$	1,542	$	113	$	474	$	288	$	18,469

____________________


(1)	Assured Guaranty’s internal rating.

Amounts Due (To) From Reinsurers

As of December 31, 2014



	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 (f/k/a Ram Re)	$	—		$	(8	)	$	—		$	11
Tokio	—			(13		)	—			46
Radian Asset	—			(13		)	—			19
Syncora Guarantee Inc.	—			(29		)	—			4
Mitsui Sumitomo Insurance Co. Ltd.	—			(3		)	—			15
Swiss Reinsurance Co.	—			(3		)	—			6
Ambac	43			—			(19		)	—
National Public Finance Guarantee Corporation	7			—			(7		)	—
MBIA	5			—			(9		)	—
FGIC	5			—			(3		)	—
Ambac Assurance Corp. Segregated Account	13			—			(83		)	—
CIFG	—			—			(6		)	—
Other	(2		)	(23		)	—			—
Total	$	71		$	(92	)	$	(127	)	$	101

Excess of Loss Reinsurance Facility

AGC, AGM and MAC entered into an aggregate excess of loss reinsurance facility with a number of reinsurers, effective as of January 1, 2014. The facility covers losses occurring either from January 1, 2014 through December 31, 2021, or January 1, 2015 through December 31, 2022, at the option of AGC, AGM and MAC. It terminates on January 1, 2016, unless AGC, AGM and MAC choose to extend it. The facility covers certain U.S. public finance credits insured or reinsured by AGC, AGM and MAC as of September 30, 2013, excluding credits that were rated non-investment grade as of December 31, 2013 by Moody’s or S&P or internally by AGC, AGM or MAC and is subject to certain per credit limits. Among the credits excluded are those associated with the Commonwealth of Puerto Rico and its related authorities and public corporations. The facility attaches when AGC’s, AGM’s and MAC’s net losses (net of AGC’s and AGM's reinsurance (including from affiliates) and net of recoveries) exceed $1.5 billion in the aggregate. The facility covers a portion of the next $500 million of losses, with the reinsurers assuming pro rata in the aggregate $450 million of the $500 million of losses and AGC, AGM and MAC jointly retaining the remaining $50 million of losses. The reinsurers are required to be rated at least AA- or to post collateral sufficient to provide AGM, AGC and MAC with the same reinsurance credit as reinsurers rated AA-. AGM, AGC and MAC are obligated to pay the reinsurers their share of recoveries relating to losses during the coverage period in the covered portfolio. AGC, AGM and MAC have paid approximately $19 million of premiums during 2014 for the term January 1, 2014 through December 31, 2014 and deposited approximately $19 million of securities into trust accounts for the benefit of the reinsurers to be used to pay the premium for January 1, 2015 through December 31, 2015.