Reinsurance

6 Months Ended

Jun. 30, 2011

Reinsurance

Reinsurance

11. Reinsurance

        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.

Assumed Business

        The Company is party to reinsurance agreements as a reinsurer to other monoline financial guaranty insurance 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 primary insurer if the Company fails to maintain certain financial, regulatory and rating agency criteria that are equivalent to or more stringent than those the Company is otherwise required to maintain for its own compliance with state mandated insurance laws and to maintain a specified financial strength rating for the particular insurance subsidiary, 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 primary insurer all statutory unearned premiums, less ceding commissions, attributable to reinsurance ceded 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 (a) 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.

        With respect to a significant portion of the Company's in-force financial guaranty Assumed Business, due to the downgrade of AG Re to A1, subject to the terms of each policy, the ceding company may have the right to recapture business ceded to AG Re and assets representing substantially all of the statutory unearned premium reserve net of loss reserves (if any) associated with that business. As of June 30, 2011, if this entire amount were recaptured, it would result in a corresponding one-time reduction to net income of approximately $23.1 million. In the case of AGC, one ceding company can recapture its portfolio at the company's current ratings and, if AGC were downgraded by Moody's to below Aa3 or by S&P below AA-, an additional portion of its in-force financial guaranty reinsurance business could be recaptured. Subject to the terms of each reinsurance agreement, the ceding company has the right to recapture business ceded to AGC and assets representing substantially all of the statutory unearned premium and loss reserves (if any) associated with that business. As of June 30, 2011, if this entire amount were recaptured, it would result in a corresponding one-time reduction to net income of approximately $12.4 million.

Ceded Business

        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 books of business from BIG financial guaranty companies and its other reinsurers. The resulting commutation gains of $8.1 million, $2.2 million, $32.2 million and $16.7 million for Second Quarter 2011 and 2010 and Six Months 2011 and 2010, respectively, were recorded in other income. While certain Ceded Business has been reassumed, the Company still has significant Ceded Business with third parties. It has not entered into any new ceded reinsurance treaties with non-affiliated companies since 2008.

        The effect of the Company's commutations and cancellations of reinsurance contracts is summarized below.

Net Effect of Commutations and Cancellations
of Reinsurance Contracts

	Second Quarter					Six Months
	2011			2010		2011			2010
	(in millions)
Increase (decrease) in net unearned premium reserve	$	(22.4	)	$	6.2	$	(20.1	)	$	60.4
Increase (decrease) in net par		(1,045	)		537		(780	)		8,374

        Direct, assumed, and ceded premium and loss and LAE amounts are presented below.

Direct, Assumed and Ceded Premium and Loss and LAE

		Second Quarter						Six Months
		2011			2010			2011			2010
		(in millions)
Premiums Written:
	Direct	$	26.9		$	101.9		$	57.4		$	195.7
	Assumed(1)		(9.9	)		(10.1	)		(51.9	)		(11.8	)
	Ceded(2)		0.4			6.5			4.4			58.1
	Net	$	17.4		$	98.3		$	9.9		$	242.0
Premiums Earned:
	Direct	$	238.6		$	304.5		$	514.9		$	636.1
	Assumed		21.0			17.9			31.0			36.9
	Ceded		(29.6	)		(30.3	)		(61.9	)		(61.3	)
	Net	$	230.0		$	292.1		$	484.0		$	611.7
Loss and LAE:
	Direct	$	138.4		$	62.8		$	144.0		$	226.1
	Assumed		7.2			12.4			(5.8	)		40.5
	Ceded		(12.7	)		(4.0	)		(32.3	)		(64.9	)
	Net	$	132.9		$	71.2		$	105.9		$	201.7

(1)

Negative assumed premiums written were due to commutations and changes in expected debt service schedules.

(2)

Positive ceded premiums written were due to commutations and changes in expected debt service schedules.

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. At June 30, 2011, the Company had $828.8 million of fixed maturity securities in its investment portfolio wrapped by MBIA Insurance Corporation, $598.5 million by Ambac and $54.4 million by other guarantors at fair value.

Exposure by Reinsurer

		Ratings at August 3, 2011		Par Outstanding as of June 30, 2011
Reinsurer		Moody's Financial Strength Rating	S&P Financial Strength Rating	Ceded Par Outstanding(3)		Second-to- Pay Insured Par Outstanding		Assumed Par Outstanding
		(dollars in millions)
Radian Asset Assurance Inc.		Ba1	BB-	$	20,859	$	56	$	—
Tokio Marine & Nichido Fire Insurance Co., Ltd.		Aa2(1)	AA-(1)		17,966		—		933
RAM Reinsurance Co. Ltd.		WR(2)	WR(2)		12,701		—		24
Syncora Guarantee Inc.		Ca	WR		4,334		2,323		217
Mitsui Sumitomo Insurance Co. Ltd.		Aa3	AA-		2,442		—		—
ACA Financial Guaranty Corp		NR	WR		866		13		2
Swiss Reinsurance Co.		A1	A+		512		—		—
Ambac		WR	WR		87		7,700		23,593
CIFG Assurance North America Inc.		WR	WR		69		258		10,158
MBIA Insurance Corporation		B3	B		45		11,704		10,773
Financial Guaranty Insurance Co.		WR	WR		—		3,854		2,350
Other		Various	Various		1,052		2,061		100
	Total			$	60,933	$	27,969	$	48,150

(1)

The Company has structural collateral agreements satisfying the triple-A credit requirement of S&P and/or Moody's.

(2)

Represents "Withdrawn Rating."

(3)

Includes $6,534 million in ceded par outstanding related to insured credit derivatives.

Amounts Due (To) From Reinsurers

		As of June 30, 2011
		Assumed Premium Receivable, net of Commissions		Assumed Expected Loss and LAE			Ceded Expected Loss and LAE
		(in millions)
Radian Asset Assurance Inc.		$	—	$	—		$	13.7
Tokio Marine & Nichido Fire Insurance Co., Ltd.			—		—			47.3
RAM Reinsurance Co. Ltd.			—		—			9.1
Syncora Guarantee Inc.			—		(0.3	)		0.1
Mitsui Sumitomo Insurance Co. Ltd.			—		—			2.9
Swiss Reinsurance Co.			—		—			1.6
Ambac			111.3		(98.4	)		—
CIFG Assurance North America Inc.			7.1		(1.2	)		1.3
MBIA Insurance Corporation			1.2		(21.0	)		—
Financial Guaranty Insurance Co.			13.4		(31.0	)		—
	Total	$	133.0	$	(151.9	)	$	76.0