Financial Guaranty Insurance Premiums

The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, includes financial guaranty contracts that meet the definition of insurance contracts as well as those that meet the definition of a derivative under GAAP. Amounts presented in this note relate only to financial guaranty insurance contracts. See Note 9, Financial Guaranty Contracts Accounted for as Credit Derivatives, for a discussion of credit derivative revenues.

Accounting Policies

Accounting for financial guaranty contracts that meet the scope exception under derivative accounting guidance are subject to industry specific guidance which prescribes revenue recognition methodologies. Contracts that meet the definition of a derivative are accounted for at fair value and discussed separately in these financial statements. The accounting for contracts that fall under the financial guaranty insurance definition are consistent whether the contract was written on a direct basis, assumed from another financial guarantor under a reinsurance treaty, ceded to another insurer under a reinsurance treaty, or acquired in a business combination.

Unearned premium reserve represents deferred premium revenue, net of paid claims that have not yet been expensed (“contra-paid”). The following discussion relates to the deferred premium revenue component of the unearned premium reserve, while the contra-paid is discussed in Note 7, Financial Guaranty Insurance Losses.

The amount of deferred premium revenue at contract inception is determined as follows:


•	For premiums received upfront on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is equal to the amount of cash received. Upfront premiums typically relate to public finance transactions.

•

For premiums received in installments on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is the present value of either (1) contractual premiums due or (2) premiums expected to be collected over the life of the contract. For financial guaranty insurance contracts where the underlying collateral is comprised of homogeneous pools of assets, the expected premiums to be collected over the life of the contract is used to estimate the present value of future premiums. To be considered a homogeneous pool of assets prepayments must be contractually prepayable, the amount of prepayments must be probable, and the timing and amount of prepayments can be reasonably estimated. When the Company makes a significant adjustment to prepayment assumptions, or expected premium collections, it recognizes a prospective change in premium revenues. When the Company adjusts prepayment assumptions, an adjustment is recorded to the deferred premium revenue, with a corresponding adjustment to the premium receivable. For all other contracts, the present value of contractual premiums due is used. Premiums receivable are discounted at the risk-free rate at inception and such discount rate is updated only when significant changes to prepayment assumptions are made. Installment premiums typically relate to structured finance transactions, where the insurance premium rate is determined at the inception of the contract but the insured par is subject to prepayment throughout the life of the deal.

•

For financial guaranty insurance contracts acquired in a business combination, deferred premium revenue is equal to the fair value of the insurance contract at the date of acquisition based on what a hypothetical similarly rated financial guaranty insurer would have charged for the contract at that date and not the actual cash flows under the insurance contract. The amount of deferred premium revenue differs significantly from cash collections due primarily to fair value adjustments recorded in connection with a business combination.

The Company recognizes deferred premium revenue as earned premium over the contractual period or expected period of the contract in proportion to the amount of insurance protection provided. As premium revenue is recognized, a corresponding decrease to the deferred premium revenue is recorded. The amount of insurance protection provided is a function of the insured principal amount outstanding. Accordingly, the proportionate share of premium revenue recognized in a given reporting period is a constant rate calculated based on the relationship between the insured principal amounts outstanding in the reporting period compared with the sum of each of the insured principal amounts outstanding for all periods. When an insured financial obligation is retired before its maturity, the financial guaranty insurance contract is extinguished. Any nonrefundable deferred premium revenue related to that contract is recognized as premium revenue. When a premium receivable balance is deemed uncollectible, it is written off to bad debt expense.

For reinsurance assumed contracts, earned premium reported in the Company's consolidated statements of operations are calculated based upon data received from ceding companies, however, some ceding companies report premium data between 30 and 90 days after the end of the reporting period. The Company estimates earned premiums for the lag period. Differences between such estimates and actual amounts are recorded in the period in which the actual amounts are determined. When installment premiums are related to reinsurance assumed contracts, the Company assesses the credit quality and liquidity of the ceding companies and the impact of any potential regulatory constraints to determine the collectability of such amounts.

Deferred premium revenue ceded to reinsurers is recorded as an asset in the line item ceded unearned premium reserve. Direct, assumed and ceded premium revenue are presented net in the income statement line item, net earned premiums. Net earned premiums comprise the following:

Net Earned Premiums



	Year Ended December 31,
	2012		2011		2010
	(in millions)
Scheduled net earned premiums	$	581	$	765	$	1,054
Acceleration of premium earnings	249		125		90
Accretion of discount on net premiums receivable	22		28		40
Total financial guaranty insurance	852		918		1,184
Other	1		2		3
Total net earned premiums(1)	$	853	$	920	$	1,187

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(1)	Excludes $153 million, $75 million and $48 million for the year ended December 31, 2012, 2011 and 2010, respectively, related to consolidated FG VIEs.

Components of Unearned Premium Reserve



	As of December 31, 2012									As of December 31, 2011
	Gross			Ceded			Net(1)			Gross			Ceded			Net(1)
	(in millions)
Deferred premium revenue:
Financial guaranty	$	5,349		$	586		$	4,763		$	6,046		$	728		$	5,318
Other	7			—			7			9			0			9
Total deferred premium revenue	$	5,356		$	586		$	4,770		$	6,055		$	728		$	5,327
Contra-paid	(149		)	(25		)	(124		)	(92		)	(19		)	(73		)
Total	$	5,207		$	561		$	4,646		$	5,963		$	709		$	5,254

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(1)	Excludes $262 million and $274 million deferred premium revenue and $98 million and $133 million contra-paid related to FG VIEs as of December 31, 2012 and December 31, 2011, respectively.

Net Deferred Premium Revenue Roll Forward



	Year Ended December 31,
	2012			2011			2010
	(in millions)
Balance beginning of period, December 31	$	5,327		$	6,272		$	7,454
Change in accounting (1)	—			—			(169		)
Balance beginning of the period, adjusted	5,327			6,272			7,285
Premium written, net	167			251			570
Net premium earned, excluding accretion	(831		)	(892		)	(1,147		)
Commutations of reinsurance contracts	(28		)	(19		)	—
Foreign exchange translation	3			—			(1		)
Changes in expected premium	137			(120		)	(247		)
Consolidation of FG VIEs	(5		)	(165		)	(188		)
Balance, end of period, December 31	$	4,770		$	5,327		$	6,272

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(1)	Represents elimination of deferred premium revenue related to the consolidation of FG VIEs.

Gross Premium Receivable, Net of Ceding Commissions Roll Forward



	Year Ended December 31,
	2012			2011			2010
	(in millions)
Balance beginning of period, December 31	$	1,003		$	1,168		$	1,418
Change in accounting (1)	—			—			(19		)
Balance beginning of the period, adjusted	1,003			1,168			1,399
Premium written, net of ceding commissions	211			245			347
Premium payments received, net of ceding commissions	(294		)	(318		)	(487		)
Adjustments:
Changes in the expected term of financial guaranty insurance contracts	44			(104		)	(102		)
Accretion of discount, net of ceding commissions	36			32			43
Foreign exchange translation	13			(5		)	(31		)
Consolidation of FG VIEs	(5		)	(10		)	(6		)
Other adjustments	(3		)	(5		)	5
Balance, end of period, December 31 (2)	$	1,005		$	1,003		$	1,168

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(1)	Represents elimination of premium receivable related to the consolidation of FG VIEs.


(2)	Excludes $29 million, $28 million and $23 million as of December 31, 2012 , 2011 and 2010, respectively, related to consolidated FG VIEs.

Gains or losses due to foreign exchange rate changes relate to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 47%, and 47% of installment premiums at December 31, 2012 and 2011, respectively, are denominated in currencies other than the U.S. dollar, primarily Euro and British Pound Sterling.

The timing and cumulative amount of actual collections may differ from expected collections in the tables below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations and changes in expected lives.

Expected Collections of Gross Premiums Receivable,

Net of Ceding Commissions (Undiscounted)



	December 31, 2012
	(in millions)
2013 (January 1 - March 31)	$	50
2013 (April 1 – June 30)	38
2013 (July 1 – September 30)	27
2013 (October 1 – December 31)	30
2014	105
2015	95
2016	89
2017	82
2018-2022	319
2023-2027	204
2028-2032	141
After 2032	160
Total(1)	$	1,340

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(1)	Excludes expected cash collections on FG VIEs of $36 million.

Scheduled Net Earned Premiums

Financial Guaranty Insurance Contracts



	As of December 31, 2012
	(in millions)
2013 (January 1 - March 31)	$	131
2013 (April 1 - June 30)	126
2013 (July 1 - September 30)	121
2013 (October 1–December 31)	117
Subtotal 2013	495
2014	433
2015	382
2016	347
2017	311
2018 - 2022	1,188
2023 - 2027	741
2028 - 2032	443
After 2032	423
Total present value basis(1)	4,763
Discount	264
Total future value	$	5,027

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(1)	Excludes scheduled net earned premiums on consolidated FG VIEs of $262 million.