Financial Guaranty Insurance Contracts

The following table includes information as of September 30, 2011, regarding our financial guaranty claim liabilities, segregated by the surveillance categories that we use in monitoring the risks related to these contracts:



	Surveillance Categories
($ in millions)	Performing		Special Mention		Intensified Surveillance		Case Reserve		Total
Number of policies	15		133		60		101		309
Remaining weighted-average contract period (in years)	23		18		22		27		21
Insured contractual payments outstanding:
Principal	$	60.5	$	995.6	$	383.3	$	364.8	$	1,804.2
Interest	13.2		521.9		212.4		180.8		928.3
Total	$	73.7	$	1,517.5	$	595.7	$	545.6	$	2,732.5
Gross claim liability	$	0.4	$	15.3	$	122.9	$	91.5	$	230.1
Less:
Gross potential recoveries	—		0.5		69.2		83.5		153.2
Discount, net	0.1		3.7		15.6		2.1		21.5
Net claim liability	$	0.3	$	11.1	$	38.1	$	5.9	$	55.4
Unearned premium revenue	$	0.2	$	24.9	$	7.9	$	—	$	33.0
Claim liability reported in the balance sheet	$	0.2	$	3.3	$	32.1	$	5.9	$	41.5
Reinsurance recoverables	$	—	$	—	$	—	$	—	$	—

A claim liability is established for a performing credit if the expected loss on the credit exceeds the unearned premium revenue for the contract based on the present value of the expected net cash outflows. Included in accounts and notes receivable and unearned premiums on our condensed consolidated balance sheets are the present value of premiums receivable and unearned premiums that are received on an installment basis. The premiums receivable is net of commissions on assumed reinsurance business. The present values of premiums receivable and unearned premiums that are received on an installment basis are $35.7 million and $41.2 million, respectively, as of September 30, 2011, and $44.0 million and $60.5 million, respectively, as of December 31, 2010.

The accretion of these balances is included either in premiums written and premiums earned (for premiums receivable) or policy acquisition costs (for commissions) on our condensed consolidated statements of operations. The accretion included in premiums earned for the three and nine months ended September 30, 2011, was $0.3 million and $0.9 million, respectively, compared to $0.4 million and $1.2 million, respectively, for the comparable periods of 2010. There was an immaterial amount of accretion recorded in policy acquisition costs for the three and nine months ended September 30, 2011 and 2010.

The nominal (non-discounted) premiums, net of commissions that are expected to be collected on financial guaranty contracts with installment premiums, included in premiums receivable as of September 30, 2011, was $45.1 million and is expected to be collected on a declining basis due to no new business being written. The activity related to the net present value of premiums receivable during the three and nine months ended September 30, 2011 and 2010, was not material. The weighted-average risk-free rate used to discount the premiums receivable and premiums to be collected was 2.6% at September 30, 2011.

Premiums earned have been accelerated as a result of refundings, which were $4.6 million and $18.7 million, respectively, for the three and nine month periods ending September 30, 2011, compared to $8.6 million and $28.3 million, respectively, for the corresponding periods of 2010. The following table shows the expected contractual premium revenue from our existing financial guaranty portfolio, assuming no prepayments or refundings of any financial guaranty obligations, as of September 30, 2011:



(In millions)	Ending Net Unearned Premiums		Unearned Premium Amortization		Accretion		Total Premium Revenue
Fourth Quarter 2011	$	411.5	$	10.4	$	0.3	$	10.7
2011	411.5		10.4		0.3		10.7
2012	375.9		35.6		1.1		36.7
2013	341.1		34.8		1.0		35.8
2014	307.9		33.2		0.9		34.1
2015	278.2		29.7		0.8		30.5
2011 – 2015	278.2		143.7		4.1		147.8
2016 – 2020	159.7		118.5		3.3		121.8
2021 – 2025	79.3		80.4		2.1		82.5
2026 – 2030	33.1		46.2		1.3		47.5
After 2030	—		33.1		1.6		34.7
Total	$	—	$	421.9	$	12.4	$	434.3

The following table shows the significant components of the change in our financial guaranty claim liability for the periods indicated:



	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2011			2010			2011			2010
Claim liability at beginning of period	$	70.8		$	119.3		$	67.4		$	121.8
Incurred losses and LAE:
Increase in gross claim liability	15.0			1.7			56.7			75.6
Increase in gross potential recoveries	(50.7		)	(7.3		)	(83.9		)	(53.2		)
Decrease/(increase) in discount	8.4			4.8			2.6			(2.3		)
Decrease/(increase) in unearned premiums	0.3			(2.7		)	4.3			(0.7		)
Incurred losses and LAE	(27.0		)	(3.5		)	(20.3		)	19.4
Paid losses and LAE	(2.3		)	(31.5		)	(5.6		)	(56.9		)
Claim liability at end of period	$	41.5		$	84.3		$	41.5		$	84.3
Components of incurred losses and LAE:
Claim liability established in current period	$	1.0		$	1.1		$	1.0		$	2.3
Changes in existing claim liabilities	(28.0		)	(4.6		)	(21.3		)	17.1
Total incurred losses and LAE	$	(27.0	)	$	(3.5	)	$	(20.3	)	$	19.4
Components of decrease/(increase) in discount:
Decrease/(increase) in discount related to claim liabilities established in current period	$	1.2		$	(2.1	)	$	1.1		$	(4.4	)
Decrease in discount related to existing claim liabilities	7.2			6.9			1.5			2.1
Total decrease/(increase) in discount	$	8.4		$	4.8		$	2.6		$	(2.3	)

Our financial guaranty loss reserve estimate involves significant judgment surrounding the estimated probability of the likelihood, magnitude and timing of each potential loss based upon different loss scenarios. The probabilities, assumptions and estimates we use to establish our financial guaranty loss reserves are subject to uncertainties, particularly given the current economic and credit environments, including uncertainties regarding our public finance municipal exposures and international sovereign risk exposures. We continue to monitor the uncertainties surrounding our portfolio, and it is possible that the actual losses paid could differ materially from our present estimates.

The weighted-average risk-free rates used to discount the gross claim liability and gross potential recoveries were as follows as of the dates indicated:



December 31, 2009	4.34	%
June 30, 2010	3.88	%
September 30, 2010	3.16	%
December 31, 2010	3.69	%
June 30, 2011	3.97	%
September 30, 2011	3.28	%