Reinsurance

3 Months Ended

Mar. 31, 2011

Reinsurance

Reinsurance

12. 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. 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 March 31, 2011, if this entire amount were recaptured, it would result in a corresponding one-time reduction to net income of approximately $10.5 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 March 31, 2011, if this entire amount were recaptured, it would result in a corresponding one-time reduction to net income of approximately $12.5 million.

The Company is party to reinsurance agreements as a reinsurer to other monoline financial guaranty insurance companies. 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 which 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.

The Company ceded business to non-affiliated companies to limit its exposure to risk. In the event that any of the reinsurers are unable to meet their obligations, the Company would be liable for such defaulted amounts. 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 $24.1 million and $14.5 million for First Quarter 2011 and 2010, respectively, were recorded in other income. While certain Ceded Business has been re-assumed, 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

	First Quarter
	2011		2010
	(in millions)
Increase (decrease) in net unearned premium reserve	$	2.3	$	54.2
Increase (decrease) in net par	265		7,837

Direct, assumed, and ceded premium and loss and LAE amounts for First Quarter 2011 and 2010 were as follows:

	First Quarter
	2011			2010
	(restated)
	(in millions)
Premiums Written:
Direct	$	30.5		$	93.7
Assumed(1)	(42.0		)	(1.7		)
Ceded(2)	4.0			51.6
Net	$	(7.5	)	$	143.6
Premiums Earned:
Direct	$	276.3		$	326.7
Assumed	10.0			19.0
Ceded	(32.3		)	(31.0		)
Net	$	254.0		$	314.7
Loss and LAE:
Direct	$	7.1		$	142.9
Assumed	(13.0		)	28.1
Ceded	(19.6		)	(60.1		)
Net	$	(25.5	)	$	110.9

(1) Negative assumed premiums written were due to changes in expected debt service schedules.

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

Ceded par outstanding represents the portion of insured risk ceded to other reinsurers. 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.

Assumed par outstanding represents the amount of par assumed by the Company from other monolines. 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.

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 March 31, 2011, The Company had $860.7 million of fixed maturity securities in its investment portfolio wrapped by MBIA Insurance Corporation, $647.7 million by Ambac and $65.9 million by other guarantors at fair value.

Exposure by Reinsurer

	Ratings at May 3, 2011		Par Outstanding as of March 31, 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–	$	21,197	$	57	$	—
Tokio Marine & Nichido Fire Insurance Co., Ltd.	Aa2(1)	AA–(1)	18,458		—		934
RAM Reinsurance Co. Ltd.	WR(2)	WR(2)	12,936		—		24
Syncora Guarantee Inc.	Ca	WR	4,303		2,395		879
Mitsui Sumitomo Insurance Co. Ltd.	Aa3	AA–	2,449		—		—
ACA Financial Guaranty Corp.	NR	WR	866		13		2
Swiss Reinsurance Co.	A1	A+	516		—		—
MBIA Insurance Corporation	B3	B	100		11,659		11,304
Ambac	WR	WR	93		7,557		24,116
CIFG Assurance North America Inc.	WR	WR	68		258		10,991
Financial Guaranty Insurance Co.	WR	WR	—		3,835		3,442
Other	Various	Various	1,057		2,066		115
Total			$	62,043	$	27,840	$	51,807

(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 $6,752 million in ceded par outstanding related to insured credit derivatives.

Amounts Due (To) From Reinsurers

	As of March 31, 2011
	Assumed Premium Receivable, net of Commissions		Assumed Expected Loss and LAE			Ceded Expected Loss
	(in millions)
Radian Asset Assurance Inc.	$	—	$	—		$	16.8
Tokio Marine & Nichido Fire Insurance Co., Ltd.	—		—			(20.5		)
RAM Reinsurance Co. Ltd.	—		—			(11.6		)
Syncora Guarantee Inc.	—		(0.3		)	0.2
Mitsui Sumitomo Insurance Co. Ltd.	—		—			(5.3		)
Swiss Reinsurance Co.	—		—			(4.2		)
MBIA Insurance Corporation	0.5		(19.3		)	—
Ambac Assurance Corporation	110.7		(90.0		)	—
Financial Guaranty Insurance Co.	26.8		(29.6		)	—
CIFG Assurance North America Inc.	7.2		—			0.4
Total	$	145.2	$	(139.2	)	$	(24.2	)