Reinsurance and Other Monoline Exposures

12 Months Ended

Dec. 31, 2011

Reinsurance and Other Monoline Exposures

Reinsurance and Other Monoline Exposures

12. 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.

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 and losses, the accounting model described in Note 5 is followed, and for assumed and ceded credit derivative premiums and losses, the accounting model in Note 7 is followed.

Assumed and Ceded 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:

• (a)

  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
  
  

  (b)

  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 December 31, 2011, if this entire amount were recaptured, it would result in a corresponding one-time reduction to net income of approximately $13.9 million. In the case of AGC, some of its in-force financial guaranty reinsurance business is subject to recapture at AGC's current ratings and an additional portion of such business would be subject to recapture if AGC were downgraded by Moody's to below Aa3 or by S&P to below AA. Subject to the terms of each reinsurance agreement, upon recapture the ceding company typically is owed assets representing substantially all of the statutory unearned premium and loss reserves (if any) associated with AGC's assumed business. As of December 31, 2011, if all of AGC's assumed business was recaptured, it would result in a corresponding one-time reduction to net income of approximately $16.8 million.

        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 BIG financial guaranty companies and its other reinsurers. The Company also cancelled assumed reinsurance contracts. These commutations of ceded and cancellations of assumed business resulted in gains of $32.2 million and $49.8 million for 2011 and 2010, respectively and losses of $1.8 million for 2009. Commutations gains/losses were recorded in other income. While certain Ceded Business has been reassumed, the Company still has significant Ceded Business with third parties.

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

Net Effect of Commutations and Cancellations
of Reinsurance Contracts

	As of December 31,
	Commutations of Ceded Reinsurance Contracts						Cancellation of Assumed Reinsurance Contracts
	2011		2010		2009		2011			2010			2009
	(in millions)
Increase (decrease) in net unearned premium reserve	$	2.3	$	104.4	$	65.1	$	(22.4	)	$	(84.5	)		(31.4	)
Increase (decrease) in net par		265		15,470		2,936		(1,045	)		(3,097	)		(894	)

Effect of Reinsurance on Statement of Operations

	Year Ended December 31,
	2011			2010			2009
	(in millions)
Premiums Written:
Direct	$	190.3		$	343.3		$	485.8
Assumed(1)		(63.5	)		(120.9	)		70.6
Ceded(2)		4.3			100.5			37.8
Net	$	131.1		$	322.9		$	594.2
Premiums Earned:
Direct	$	997.1		$	1,242.5		$	870.5
Assumed		46.3			72.9			136.4
Ceded		(123.3	)		(128.7	)		(76.5	)
Net	$	920.1		$	1,186.7		$	930.4
Loss and LAE:
Direct	$	577.8		$	398.5		$	276.2
Assumed		4.2			74.2			135.6
Ceded		(120.1	)		(60.5	)		(18.0	)
Net	$	461.9		$	412.2		$	393.8

(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 December 31, 2011, based on fair value, the Company had $770.3 million of fixed maturity securities in its investment portfolio wrapped by National Public Finance Guarantee Corporation, $568.8 million by Ambac and $49.2 million by other guarantors.

Exposure by Reinsurer

	Ratings at February 22, 2012		Par Outstanding as of December 31, 2011
Reinsurer	Moody's Reinsurer Rating	S&P Reinsurer Rating	Ceded Par Outstanding(3)		Second-to- Pay Insured Par Outstanding		Assumed Par Outstanding
	(dollars in millions)
Radian Asset Assurance Inc.	Ba1	B+	$	19,310	$	50	$	—
Tokio Marine & Nichido Fire Insurance Co., Ltd.	Aa3(1)	AA-(1)		16,345		—		934
American Overseas Reinsurance Company Limited(4)	WR(2)	WR		11,444		—		24
Syncora Guarantee Inc.	Ca	WR		4,222		2,171		217
Mitsui Sumitomo Insurance Co. Ltd.	A1	A+		2,407		—		—
ACA Financial Guaranty Corp	NR	WR		855		12		2
Swiss Reinsurance Co.	A1	AA-		505		—		—
Ambac	WR	WR		87		7,491		22,680
CIFG Assurance North America Inc	WR	WR		69		258		6,561
MBIA Inc.	(5)	(5)		27		11,549		10,422
Financial Guaranty Insurance Co.	WR	WR		—		3,857		2,138
Other	Various	Various		1,023		1,992		96
Total			$	56,294	$	27,380	$	43,074

(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 $5,438 million in ceded par outstanding related to insured credit derivatives.

(4)

Formerly RAM Reinsurance Company Ltd.

(5)

MBIA Inc. includes various subsidiaries which are rated BBB to B by S&P and Baa2, B3, WR and NR by Moody's.

Ceded Par Outstanding by Reinsurer and Credit Rating
As of December 31, 2011(1)

	Internal Credit Rating
Reinsurer	Super Senior		AAA		AA		A		BBB		BIG		Total
	(in millions)
Radian Asset Assurance Inc.	$	93	$	892	$	7,490	$	7,805	$	2,627	$	403	$	19,310
Tokio Marine & Nichido Fire Insurance Co., Ltd.		361		1,540		4,673		6,037		2,941		793		16,345
American Overseas Reinsurance Company Limited		265		1,657		4,049		3,262		1,642		569		11,444
Syncora Guarantee Inc.		—		—		287		962		2,330		643		4,222
Mitsui Sumitomo Insurance Co. Ltd.		8		171		825		917		404		82		2,407
ACA Financial Guaranty Corp		—		—		483		329		43		—		855
Swiss Reinsurance Co.		—		9		3		320		98		75		505
Ambac		—		—		—		87		—		—		87
CIFG Assurance North America Inc		—		—		—		—		—		69		69
MBIA Inc.		—		—		27		—		—		—		27
Other		—		—		119		819		85		—		1,023
Total	$	727	$	4,269	$	17,956	$	20,538	$	10,170	$	2,634	$	56,294

        In accordance with 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 post collateral for the benefit of the Company in an amount at least equal to the sum of their ceded unearned premium reserve, loss and LAE reserves and contingency reserves all calculated on a statutory basis of accounting. CIFG Assurance North America Inc. and Radian Asset Assurance Inc. ("Radian") are authorized reinsurers. Their collateral equals or exceeds their ceded statutory loss reserves. 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, 2011 exceeds $1 billion.

Second-to-Pay
Insured Par Outstanding by Rating
As of December 31, 2011(1)

	Public Finance										Structured Finance
	AAA		AA		A		BBB		BIG		Super Senior		AAA		AA		A		BBB		BIG		Total
	(in millions)
Radian	$	—	$	—	$	13	$	22	$	14	$	—	$	1	$	—	$	—	$	—	$	—	$	50
Syncora Guarantee Inc.		—		25		384		749		328		—		205		134		12		93		241		2,171
ACA Financial Guaranty Corp		—		8		—		4		—		—		—		—		—		—		—		12
Ambac		—		1,741		3,453		1,123		335		—		99		69		256		83		332		7,491
CIFG Assurance North America Inc.		—		11		69		133		45		—		—		—		—		—		—		258
MBIA Inc.		66		3,053		4,603		1,893		8		—		—		1,389		54		460		23		11,549
Financial Guaranty Insurance Co		—		154		1,251		570		355		476		728		—		254		8		61		3,857
Other		—		—		1,992		—		—		—		—		—		—		—		—		1,992
Total	$	66	$	4,992	$	11,765	$	4,494	$	1,085	$	476	$	1,033	$	1,592	$	576	$	644	$	657	$	27,380

(1)

Assured Guaranty's internal rating.

Amounts Due (To) From Reinsurers

	As of December 31, 2011
	Assumed Premium Receivable, net of Commissions		Assumed Expected Loss and LAE			Ceded Expected Loss and LAE
	(in millions)
Radian	$	—	$	—		$	12.9
Tokio Marine & Nichido Fire Insurance Co., Ltd.		—		—			75.1
American Overseas Reinsurance Company Limited		—		—			19.7
Syncora Guarantee Inc.		—		(2.6	)		0.2
Mitsui Sumitomo Insurance Co. Ltd.		—		—			9.9
Swiss Reinsurance Co.		—		—			3.8
Ambac		97.9		(99.9	)		—
CIFG Assurance North America Inc.		6.8		(0.1	)		1.4
MBIA Inc.		0.8		(13.1	)		—
Financial Guaranty Insurance Co.		11.5		(22.3	)		—
Total	$	117.0	$	(138.0	)	$	123.0

        On January 22, 2012, AGC and AGM entered into an aggregate excess of loss reinsurance facility, effective as of January 1, 2012. At AGC's and AGM's option, the facility will cover losses occurring from January 1, 2012 through December 31, 2019 or from January 1, 2013 through December 31, 2020. The contract terminates, unless AGC and AGM choose to extend it, on January 1, 2014. The facility covers U.S. public finance credits insured or reinsured by AGC and AGM as of September 30, 2011, excluding credits that were rated non-investment grade as of December 31, 2011 by Moody's or S&P or internally by AGC or AGM and subject to certain per credit limits. The facility attaches when AGC's or AGM's net losses (net of AGC's and AGM other reinsurance, other than pooling reinsurance provided to AGM by AGM's subsidiaries and net of recoveries) exceed in the aggregate $2 billion and covers a portion of the next $600 million of losses, with the reinsurers assuming pro rata in the aggregate $435 million of the $600 million of losses and AGC and AGM jointly retaining the remaining $165 million of losses. The reinsurers are required to be rated at least AA-(Stable Outlook) through December 31, 2014 or to post collateral sufficient to provide AGM and AGC with the same reinsurance credit as reinsurers rated AA-. AGM and AGC are obligated to pay the reinsurers their share of recoveries relating to losses during the coverage period in the covered portfolio. This obligation is secured by a pledge of the recoveries, which will be deposited into a trust for the benefit of the reinsurers.

Re-Assumption and Reinsurance Agreements with Radian Asset Assurance Inc.

        On January 24, 2012, AGM entered into an agreement under which it has reassumed $12.9 billion of par it had previously ceded to Radian. Also, through AGC, the Company has reinsured approximately $1.8 billion of Radian public finance par. The Company has received a payment of $86 million from Radian for the re-assumption, which consists 96% of public finance exposure and 4% of structured finance credits; additionally, the Company projects it will receive an incremental $1.9 million present value from future installment premiums. In connection with assuming $1.8 billion of public finance par, the Company has received a payment of $22 million. Both the reassumed and reinsured portfolios are composed entirely of selected credits that meet the Company's underwriting standards. In addition, the Company entered into an agreement to acquire MIAC from a subsidiary of Radian.