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Note 10 - Financial Guaranty Insurance Contracts (Notes)
 9 Months Ended
Sep. 30, 2014
Financial Guaranty Insurance Contracts [Abstract]  
Financial Guarantee Insurance Contracts
Financial Guaranty Insurance Contracts
The following table includes information as of September 30, 2014 regarding our financial guaranty claim liabilities on non-derivative transactions, segregated by the surveillance categories that we use in monitoring the risks related to these contracts:
 
Surveillance Categories
($ in thousands)
Performing
 
Special
Mention
 
Intensified
Surveillance
 
Case
Reserve
 
Total
Number of policies
5

 
168

 
90

 
81

 
344

Remaining weighted-average contract period (in years)
21

 
15

 
18

 
18

 
17

Insured contractual payments outstanding:
 
 
 
 
 
 
 
 
 
Principal
$
1,338

 
$
943,438

 
$
658,561

 
$
94,091

 
$
1,697,428

Interest
151

 
486,985

 
386,906

 
25,267

 
899,309

Total
$
1,489

 
$
1,430,423

 
$
1,045,467

 
$
119,358

 
$
2,596,737

 
 
 
 
 
 
 
 
 
 
Gross claim liability
$
1

 
$
15,352

 
$
227,546

 
$
32,230

 
$
275,129

Less:
 
 
 
 
 
 
 
 
 
Gross potential recoveries
—

 
1,830

 
291,209

 
48,922

 
341,961

Discount, net
—

 
1,966

 
(110,678
)
 
(1,252
)
 
(109,964
)
Net claim liability (asset) (prior to reduction for unearned premium)
$
1

 
$
11,556

 
$
47,015

 
$
(15,440
)
 
$
43,132

Unearned premium revenue
$
5

 
$
14,101

 
$
9,471

 
$
—

 
$
23,577

Net claim liability (asset) reported in the balance sheet
$
—

 
$
4,736

 
$
40,608

 
$
(15,439
)
 
$
29,905

Reinsurance recoverables
$
—

 
$
—

 
$
—

 
$
—

 
$
—


A net claim liability is established for a performing credit if there is evidence that credit deterioration has occurred and the expected loss on the credit exceeds the unearned premium revenue for the contract based on the present value of the expected net cash inflows and outflows. Included in accounts and notes receivable and unearned premiums on our condensed consolidated balance sheets are the present values 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 were $21.7 million and $24.9 million, respectively, as of September 30, 2014, and $25.2 million and $27.0 million, respectively, as of December 31, 2013.
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. There was an immaterial amount of accretion recorded in policy acquisition costs and premiums earned for the three and nine months ended September 30, 2014 and 2013.
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, 2014, was $27.4 million and is expected to decrease over time as the portfolio runs off. The activity related to the net present value of premiums receivable during the three and nine months ended September 30, 2014 and 2013 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, 2014.
Premiums earned were affected by the following for the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2014
 
2013
 
2014

2013
Refundings
$
6,253

 
$
6,979

 
$
14,443

 
$
22,020

Recaptures/Commutations
—

 
—

 
—

 
(2,447
)
Adjustments to installment premiums, gross of commissions
(1,586
)
 
(155
)
 
(1,425
)
 
2,527

Unearned premium acceleration upon establishment of case reserves
905

 
—

 
967

 
69

Foreign exchange revaluation, gross of commissions
(299
)
 
112

 
21

 
(975
)
Total adjustment to premiums earned
$
5,273

 
$
6,936

 
$
14,006

 
$
21,194


The following table shows the expected contractual premium revenue from our existing financial guaranty portfolio, assuming no Refundings of any financial guaranty obligations, as of September 30, 2014:
(In thousands)
Ending Net
Unearned
Premiums
 
Unearned
Premium
Amortization
 
Accretion
 
Total
Premium
Revenue
4th quarter 2014
$
154,439

 
$
6,080

 
$
179

 
$
6,259

2014
154,439

 
6,080

 
179

 
6,259

2015
139,127

 
15,312

 
674

 
15,986

2016
126,046

 
13,081

 
617

 
13,698

2017
114,629

 
11,417

 
581

 
11,998

2018
103,819

 
10,811

 
530

 
11,341

2014 - 2018
103,819

 
56,701

 
2,581

 
59,282

2019 - 2023
59,338

 
44,480

 
2,049

 
46,529

2024 - 2028
29,650

 
29,689

 
1,334

 
31,023

2029 - 2033
12,697

 
16,962

 
858

 
17,820

After 2033
—

 
12,697

 
993

 
13,690

Total
$
—

 
$
160,529

 
$
7,815

 
$
168,344


The following table shows the significant components of changes in our financial guaranty claim liability for the three and nine months ended September 30, 2014 and 2013, excluding reserves related to our trade credit reinsurance and surety business of $2.3 million and $1.6 million, respectively, which are excluded from the accounting standard regarding accounting for financial guaranty insurance contracts by insurance enterprises.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2014
 
2013
 
2014

2013
Claim liability at beginning of period
$
32,859

 
$
23,611

 
$
19,458

 
$
64,291

Incurred losses and LAE:
 
 
 
 
 
 
 
(Decrease) increase in gross claim liability
(18,154
)
 
(28,486
)
 
8,965

 
(56,477
)
Decrease in gross potential recoveries
18,308

 
8,896

 
64,454

 
35,339

(Increase) decrease in discount
(8,438
)
 
24,075

 
(68,197
)
 
30,208

Decrease (increase) in unearned premiums
1,384

 
926

 
(1,887
)
 
213

Incurred losses and LAE
(6,900
)
 
5,411

 
3,335

 
9,283

Recovered (paid) losses and LAE:
 
 
 
 
 
 
 
Current year
(669
)
 
(70
)
 
(692
)
 
(103
)
Prior years
4,615

 
1,586

 
7,804

 
(42,933
)
Recoveries (payments) of losses and LAE
3,946

 
1,516

 
7,112

 
(43,036
)
Claim liability at end of period
$
29,905

 
$
30,538

 
$
29,905

 
$
30,538

 
 
 
 
 
 
 
 
Components of incurred losses and LAE:
 
 
 
 
 
 
 
Claim liability established in current period
$
922

 
$
866

 
$
13,065

 
$
1,249

Changes in existing claim liabilities
(7,822
)
 
4,545

 
(9,730
)
 
8,034

Total incurred losses and LAE
$
(6,900
)
 
$
5,411

 
$
3,335

 
$
9,283

 
 
 
 
 
 
 
 
Components of (increase) decrease in discount:
 
 
 
 
 
 
 
Decrease (increase) in discount related to claim liabilities established in current period
$
322

 
$
268

 
$
(3,735
)
 
$
103

(Increase) decrease in discount related to existing claim liabilities
(8,760
)
 
23,807

 
(64,462
)
 
30,105

Total (increase) decrease in discount
$
(8,438
)
 
$
24,075

 
$
(68,197
)
 
$
30,208


Paid losses during the first nine months of 2013 include $41.6 million related to a January 2013 commutation with a primary insurer.
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 on our financial guaranty contracts were as follows, as of the dates indicated:
September 30, 2014
2.52
%
December 31, 2013
2.95
%
September 30, 2013
3.00
%
December 31, 2012
2.00
%