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Financial Guaranty Insurance
 6 Months Ended
Jun. 30, 2016
Insurance [Abstract]  
Financial Guaranty Insurance
Financial Guaranty Insurance

Financial Guaranty Insurance Premiums

The portfolio of outstanding exposures discussed in Note 4, 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 to financial guaranty insurance contracts, unless otherwise noted. See Note 8, Financial Guaranty Contracts Accounted for as Credit Derivatives for amounts that relate to CDS and Note 9, Consolidated Variable Interest Entities for amounts that relate to FG VIEs.

Net Earned Premiums
 
 
Second Quarter
 
Six Months
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Scheduled net earned premiums
$
93

 
$
118

 
$
184

 
$
214

Acceleration of net earned premiums (1)
117

 
96

 
206

 
137

Accretion of discount on net premiums receivable
4

 
5

 
7

 
9

Financial guaranty insurance net earned premiums
214

 
219

 
397

 
360

Other
—

 
0

 
0

 
1

 Net earned premiums (2)
$
214

 
$
219

 
$
397

 
$
361

 ___________________
(1)
Reflects the unscheduled refunding or termination of the insurance on an insured obligation as well as changes in scheduled earnings due to changes in the expected lives of the insured obligations. 

(2)
Excludes $3 million and $5 million for Second Quarter 2016 and 2015, respectively, and $8 million and $10 million for Six Months 2016 and 2015, respectively, related to consolidated FG VIEs.


Components of Unearned Premium Reserve
 
 
As of June 30, 2016
 
As of December 31, 2015
 
Gross
 
Ceded
 
Net(1)
 
Gross
 
Ceded
 
Net(1)
 
(in millions)
Deferred premium revenue
3,641

 
230

 
3,411

 
4,008

 
238

 
3,770

Contra-paid (2)
(24
)
 
(2
)
 
(22
)
 
(12
)
 
(6
)
 
(6
)
Unearned premium reserve
$
3,617

 
$
228

 
$
3,389

 
$
3,996

 
$
232

 
$
3,764

 ____________________
(1)
Excludes $98 million and $110 million of deferred premium revenue, and $30 million and $30 million of contra-paid related to FG VIEs as of June 30, 2016 and December 31, 2015, respectively.

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

Gross Premium Receivable,
Net of Commissions on Assumed Business
Roll Forward
 
 
Six Months
 
2016
 
2015
 
(in millions)
Beginning of period, December 31
$
693

 
$
729

Premiums receivable acquired in Radian Asset Acquisition on April 1, 2015
—

 
2

Gross written premiums, net of commissions on assumed business
83

 
61

Gross premiums received, net of commissions on assumed business
(107
)
 
(79
)
Adjustments:
 
 
 
Changes in the expected term
(27
)
 
(9
)
Accretion of discount, net of commissions on assumed business
3

 
10

Foreign exchange translation
(22
)
 
(8
)
Consolidation/deconsolidation of FG VIEs
0

 
(4
)
End of period, June 30 (1)
$
623

 
$
702

____________________
(1)
Excludes $11 million and $23 million as of June 30, 2016 and June 30, 2015, respectively, related to consolidated FG VIEs. Excludes $1 million related to non-financial guaranty line of business as of June 30, 2015.

Foreign exchange translation relates to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 55%, 52% and 50% of installment premiums at June 30, 2016, December 31, 2015 and June 30, 2015, 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
Financial Guaranty Insurance Gross Premiums Receivable,
Net of Commissions on Assumed Business
(Undiscounted)
 
 
As of June 30, 2016
 
(in millions)
2016 (July 1 – September 30)
$
21

2016 (October 1 – December 31)
21

2017
66

2018
59

2019
54

2020
53

2021-2025
212

2026-2030
139

2031-2035
97

After 2035
79

Total(1)
$
801

 ____________________
(1)
Excludes expected cash collections on FG VIEs of $14 million.


Scheduled Financial Guaranty Insurance Net Earned Premiums

 
As of June 30, 2016
 
(in millions)
2016 (July 1 – September 30)
$
89

2016 (October 1 – December 31)
85

2017
313

2018
287

2019
258

2020
236

2021-2025
922

2026-2030
588

2031-2035
350

After 2035
283

Net deferred premium revenue(1)
3,411

Future accretion
166

Total future net earned premiums
$
3,577

 ____________________
(1)
Excludes scheduled net earned premiums on consolidated FG VIEs of $98 million.


Selected Information for Financial Guaranty Insurance
Policies Paid in Installments

 
As of
June 30, 2016
 
As of
December 31, 2015
 
(dollars in millions)
Premiums receivable, net of commission payable
$
623

 
$
693

Gross deferred premium revenue
1,086

 
1,240

Weighted-average risk-free rate used to discount premiums
3.1
%
 
3.1
%
Weighted-average period of premiums receivable (in years)
9.2

 
9.4



Financial Guaranty Insurance Losses

Insurance Contracts' Loss Information

The following table provides 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 2.46% as of June 30, 2016 and 0.0% to 3.25% as of December 31, 2015.

Loss and LAE Reserve and Salvage and Subrogation Recoverable
Net of Reinsurance
Insurance Contracts 

 
As of June 30, 2016
 
As of December 31, 2015
 
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)
Public Finance:
 
 
 
 
 
 
 
 
 
 
 
U.S. public finance
$
807

 
$
14

 
$
793

 
$
604

 
$
7

 
$
597

Non-U.S. public finance
24

 
—

 
24

 
25

 
—

 
25

Public Finance
831

 
14

 
817

 
629

 
7

 
622

Structured Finance:
 
 
 
 
 
 
 
 
 
 
 
U.S. RMBS:
 

 
 

 
 

 
 

 
 

 
 

First lien:
 

 
 

 
 

 
 

 
 

 
 

Prime first lien
3

 
—

 
3

 
2

 
—

 
2

Alt-A first lien
40

 
184

 
(144
)
 
46

 
—

 
46

Option ARM
9

 
58

 
(49
)
 
13

 
42

 
(29
)
Subprime
147

 
14

 
133

 
169

 
21

 
148

First lien
199

 
256

 
(57
)
 
230

 
63

 
167

Second lien
84

 
45

 
39

 
32

 
53

 
(21
)
Total U.S. RMBS
283

 
301

 
(18
)
 
262

 
116

 
146

Triple-X life insurance transactions
83

 
—

 
83

 
82

 
—

 
82

Student loans
30

 
—

 
30

 
51

 
—

 
51

Other structured finance
30

 
1

 
29

 
48

 
—

 
48

Structured Finance
426

 
302

 
124

 
443

 
116

 
327

Subtotal
1,257

 
316

 
941

 
1,072

 
123

 
949

Other recoverables
—

 
3

 
(3
)
 
—

 
3

 
(3
)
Subtotal
1,257

 
319

 
938

 
1,072

 
126

 
946

Effect of consolidating FG VIEs
(71
)
 
—

 
(71
)
 
(74
)
 
0

 
(74
)
Total (1)
$
1,186

 
$
319

 
$
867

 
$
998

 
$
126

 
$
872

____________________
(1)
See “Components of Net Reserves (Salvage)” table for loss and LAE reserve and salvage and subrogation recoverable components.


Components of Net Reserves (Salvage)
 
 
As of
June 30, 2016
 
As of
December 31, 2015
 
(in millions)
Loss and LAE reserve
$
1,268

 
$
1,067

Reinsurance recoverable on unpaid losses
(82
)
 
(69
)
Loss and LAE reserve, net
1,186

 
998

Salvage and subrogation recoverable
(323
)
 
(126
)
Salvage and subrogation payable(1)
7

 
3

Other recoverables
(3
)
 
(3
)
Salvage and subrogation recoverable, net and other recoverable
(319
)
 
(126
)
Net reserves (salvage)
$
867

 
$
872

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

    
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: (i) the contra-paid which represent the claim payments made and recoveries received that have not yet been recognized in the statement of operations, (ii) 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 (iii) 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
June 30, 2016
 
(in millions)
Net expected loss to be paid - financial guaranty insurance (1)
$
1,208

Contra-paid, net
22

Salvage and subrogation recoverable, net of reinsurance
316

Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance
(1,185
)
Other recoveries
3

Net expected loss to be expensed (present value) (2)
$
364

____________________
(1)
See "Net Expected Loss to be Paid (Recovered) by Accounting Model" table in Note 5, Expected Loss to be Paid.

(2)
Excludes $72 million as of June 30, 2016, 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 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
June 30, 2016
 
(in millions)
2016 (July 1 – September 30)
$
9

2016 (October 1 – December 31)
8

Subtotal 2016
17

2017
30

2018
28

2019
29

2020
27

2021-2025
103

2026-2030
71

2031-2035
40

After 2035
19

Net expected loss to be expensed
364

Future accretion
199

Total expected future loss and LAE
$
563

 


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
  
 
Second Quarter
 
Six Months
 
2016
 
2015
 
2016

2015
 
(in millions)
Public Finance:
 
 
 
 
 
 
 
U.S. public finance
$
116

 
$
196

 
$
213

 
$
209

Non-U.S. public finance
(1
)
 
1

 
(1
)
 
6

Public finance
115

 
197

 
212

 
215

Structured Finance:
 
 
 
 
 
 
 
U.S. RMBS:
 
 
 
 
 
 
 
First lien:
 
 
 
 
 
 
 
Prime first lien
(1
)
 
(1
)
 
(1
)
 
(1
)
Alt-A first lien
3

 
(9
)
 
11

 
(11
)
Option ARM
(7
)
 
0

 
(21
)
 
(1
)
Subprime
(11
)
 
1

 
(7
)
 
1

First lien
(16
)
 
(9
)
 
(18
)
 
(12
)
Second lien
4

 
0

 
17

 
10

Total U.S. RMBS
(12
)
 
(9
)
 
(1
)
 
(2
)
Triple-X life insurance transactions
(1
)
 
1

 
2

 
7

Student loans
0

 
1

 
(14
)
 
(5
)
Other structured finance
(3
)
 
0

 
(3
)
 
(2
)
Structured finance
(16
)
 
(7
)
 
(16
)
 
(2
)
Loss and LAE on insurance contracts before FG VIE consolidation
99

 
190

 
196

 
213

Effect of consolidating FG VIEs
3

 
(2
)
 
(4
)
 
(7
)
Loss and LAE
$
102

 
$
188

 
$
192

 
$
206



 
The following table provides information on financial guaranty insurance contracts categorized as BIG.
 
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of June 30, 2016
 
 
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)
198

 
(42
)
 
76

 
(12
)
 
131

 
(46
)
 
405

 
—

 
405

Remaining weighted-average contract period (in years)
9.8

 
7.4

 
12.7

 
10.0

 
6.6

 
5.1

 
10.1

 
—

 
10.1

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Principal
$
7,012

 
$
(466
)
 
$
4,571

 
$
(452
)
 
$
3,276

 
$
(237
)
 
$
13,704

 
$
—

 
$
13,704

Interest
3,618

 
(200
)
 
2,991

 
(228
)
 
937

 
(50
)
 
7,068

 
—

 
7,068

Total(2)
$
10,630

 
$
(666
)
 
$
7,562

 
$
(680
)
 
$
4,213

 
$
(287
)
 
$
20,772

 
$
—

 
$
20,772

Expected cash outflows (inflows)
$
331

 
$
(27
)
 
$
1,466

 
$
(82
)
 
$
1,228

 
$
(57
)
 
$
2,859

 
$
(330
)
 
$
2,529

Potential recoveries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Undiscounted R&W
122

 
(3
)
 
(2
)
 
—

 
(33
)
 
1

 
85

 
—

 
85

Other(3)
(667
)
 
16

 
(298
)
 
11

 
(499
)
 
30

 
(1,407
)
 
200

 
(1,207
)
Total potential recoveries
(545
)
 
13

 
(300
)
 
11

 
(532
)
 
31

 
(1,322
)
 
200

 
(1,122
)
Subtotal
(214
)
 
(14
)
 
1,166

 
(71
)
 
696

 
(26
)
 
1,537

 
(130
)
 
1,407

Discount
133

 
(3
)
 
(232
)
 
12

 
(29
)
 
(97
)
 
(216
)
 
17

 
(199
)
Present value of expected cash flows
$
(81
)
 
$
(17
)
 
$
934

 
$
(59
)
 
$
667

 
$
(123
)
 
$
1,321

 
$
(113
)
 
$
1,208

Deferred premium revenue
$
256

 
$
(8
)
 
$
152

 
$
(7
)
 
$
347

 
$
(32
)
 
$
708

 
$
(94
)
 
$
614

Reserves (salvage)
$
(177
)
 
$
(11
)
 
$
811

 
$
(53
)
 
$
378

 
$
(11
)
 
$
937

 
$
(71
)
 
$
866


 
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 2015
 
 
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)
202

 
(46
)
 
85

 
(13
)
 
132

 
(44
)
 
419

 
—

 
419

Remaining weighted-average contract period (in years)
10.0

 
8.7

 
13.8

 
9.5

 
7.7

 
5.9

 
10.7

 
—

 
10.7

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Principal
$
7,751

 
$
(732
)
 
$
3,895

 
$
(240
)
 
$
3,087

 
$
(187
)
 
$
13,574

 
$
—

 
$
13,574

Interest
4,109

 
(354
)
 
2,805

 
(110
)
 
1,011

 
(42
)
 
7,419

 
—

 
7,419

Total(2)
$
11,860

 
$
(1,086
)
 
$
6,700

 
$
(350
)
 
$
4,098

 
$
(229
)
 
$
20,993

 
$
—

 
$
20,993

Expected cash outflows (inflows)
$
386

 
$
(42
)
 
$
1,158

 
$
(60
)
 
$
1,464

 
$
(53
)
 
$
2,853

 
$
(343
)
 
$
2,510

Potential recoveries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Undiscounted R&W
69

 
(2
)
 
(49
)
 
1

 
(85
)
 
5

 
(61
)
 
7

 
(54
)
Other(3)
(441
)
 
14

 
(118
)
 
7

 
(587
)
 
19

 
(1,106
)
 
175

 
(931
)
Total potential recoveries
(372
)
 
12

 
(167
)
 
8

 
(672
)
 
24

 
(1,167
)
 
182

 
(985
)
Subtotal
14

 
(30
)
 
991

 
(52
)
 
792

 
(29
)
 
1,686

 
(161
)
 
1,525

Discount
91

 
3

 
(286
)
 
12

 
(58
)
 
(89
)
 
(327
)
 
41

 
(286
)
Present value of expected cash flows
$
105

 
$
(27
)
 
$
705

 
$
(40
)
 
$
734

 
$
(118
)
 
$
1,359

 
$
(120
)
 
$
1,239

Deferred premium revenue
$
371

 
$
(37
)
 
$
150

 
$
(4
)
 
$
386

 
$
(32
)
 
$
834

 
$
(100
)
 
$
734

Reserves (salvage)
$
2

 
$
(19
)
 
$
591

 
$
(38
)
 
$
404

 
$
(9
)
 
$
931

 
$
(74
)
 
$
857

____________________
(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.

Ratings Impact on Financial Guaranty Business
 
A downgrade of one of AGL’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. AGM insures periodic payments owed by the municipal obligors to the bank counterparties. In certain cases, 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 $193 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 $455 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 June 30, 2016, AGM and AGC had insured approximately $5.4 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 $1.7 billion as of June 30, 2016 were terminated, the assets of the GIC issuers (which had an aggregate market value which exceed the liabilities by $0.8 billion) would be sufficient to fund the withdrawal of the GIC funds.