XML 118 R16.htm IDEA: XBRL DOCUMENT v2.4.0.6
Financial Guaranty Insurance Losses
 12 Months Ended
Dec. 31, 2012
Financial Guaranty Insurance Losses [Abstract]  
Financial Guaranty Insurance Losses
Financial Guaranty Insurance Losses

Accounting Policies

Loss and LAE Reserve

Loss and LAE reserve reported on the balance sheet relates only to direct and assumed reinsurance contracts that are accounted for as insurance, substantially all of which are financial guaranty insurance contracts. The corresponding reserve ceded to reinsurers is reported as reinsurance recoverable on unpaid losses. As discussed in Note 8, Fair Value Measurement, contracts that meet the definition of a derivative, as well as consolidated FG VIE assets and liabilities, are recorded separately at fair value.

Under financial guaranty insurance accounting, the sum of unearned premium reserve (deferred premium revenue, less claim payments that have not yet been expensed or "contra-paid"), and loss and LAE reserve represents the Company's stand‑ready obligation. At contract inception, the entire stand-ready obligation is represented by unearned premium reserve. A loss and LAE reserve for an insurance contract is only recorded when the expected loss to be paid plus contra-paid (“total losses”) exceed the deferred premium revenue on a contract by contract basis.

When a claim payment is made on a contract it first reduces any recorded loss and LAE reserve. To the extent a loss and LAE reserve is not recorded on a contract, which occurs when total losses are less than deferred premium revenue, or to the extent loss and LAE reserve is not sufficient to cover a claim payment, then such claim payment is recorded as “contra-paid,” which reduces the unearned premium reserve. The contra-paid is recognized in the line item “loss and LAE” in the consolidated statement of operations when and for the amount that total losses exceed the remaining deferred premium revenue on the insurance contract. Loss and LAE in the consolidated statement of operations is presented net of cessions to reinsurers.

Salvage and Subrogation Recoverable

When the Company becomes entitled to the cash flow from the underlying collateral of an insured credit under salvage and subrogation rights as a result of a claim payment or estimated future claim payment, it reduces the expected loss to be paid on the contract. Such reduction in expected to be paid can result in one of the following:

•
a reduction in the corresponding loss and LAE reserve with a benefit to the income statement,

•
no entry recorded, if “total loss” is not in excess of deferred premium revenue, or

•
the recording of a salvage asset with a benefit to the income statement if the transaction is in a net recovery position at the reporting date.

The Company recognizes the expected recovery of claim payments made by an acquired subsidiary, including recoveries from settlement with R&W providers, prior to the date of acquisition consistent with its policy for recognizing recoveries on all financial guaranty insurance contracts. To the extent that the estimated amount of recoveries increases or decreases, due to changes in facts and circumstances, including the examination of additional loan files and our experience in recovering loans put back to the originator, the Company would recognize a benefit or expense consistent with how changes in the expected recovery of all other claim payments are recorded. The ceded component of salvage and subrogation is recorded in the line item reinsurance balances payable.

Expected Loss to be Expensed

Expected loss to be expensed represents past or future net claim payments that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies. Expected loss to be expensed is important because it presents the Company's projection of incurred losses that will be recognized in future periods, based on current expected losses to be paid.

Insurance Contracts' Loss Information

The following table provides balance sheet information on loss and LAE reserves, net of reinsurance and salvage and subrogation recoverable.

Loss and LAE Reserve (Recovery)
Net of Reinsurance and Salvage and Subrogation Recoverable
Insurance Contracts
 
 
As of December 31, 2012
 
As of December 31, 2011
 
Loss and
LAE
Reserve, net
 
Salvage and
Subrogation
Recoverable, net 
 
Net
 
Loss and
LAE
Reserve, net
 
Salvage and
Subrogation
Recoverable, net 
 
Net
 
(in millions)
U.S. RMBS:
 

 
 

 
 

 
 

 
 

 
 

First lien:
 

 
 

 
 

 
 

 
 

 
 

Prime first lien
$
3

 
$
—

 
$
3

 
$
1

 
$
—

 
$
1

Alt-A first lien
93

 
—

 
93

 
70

 
55

 
15

Option ARM
52

 
216

 
(164
)
 
142

 
141

 
1

Subprime
82

 
0

 
82

 
51

 
0

 
51

Total first lien
230

 
216

 
14

 
264

 
196

 
68

Second lien:
 

 
 

 
 

 
 

 
 

 
 

Closed-end second lien
5

 
72

 
(67
)
 
11

 
136

 
(125
)
HELOC
37

 
196

 
(159
)
 
61

 
177

 
(116
)
Total second lien
42

 
268

 
(226
)
 
72

 
313

 
(241
)
Total U.S. RMBS
272

 
484

 
(212
)
 
336

 
509

 
(173
)
TruPS
1

 
—

 
1

 
11

 
—

 
11

Other structured finance
197

 
4

 
193

 
223

 
6

 
217

U.S. public finance
104

 
134

 
(30
)
 
62

 
70

 
(8
)
Non-U.S. public finance
31

 
—

 
31

 
38

 
—

 
38

Total financial guaranty
605

 
622

 
(17
)
 
670

 
585

 
85

Other
2

 
5

 
(3
)
 
2

 
—

 
2

Subtotal
607

 
627

 
(20
)
 
672

 
585

 
87

Effect of consolidating FG VIEs
(64
)
 
(217
)
 
153

 
(62
)
 
(258
)
 
196

Total (1)
$
543

 
$
410

 
$
133

 
$
610

 
$
327

 
$
283

____________________
(1)                                 See “Components of Net Reserves (Salvage)” table for loss and LAE reserve and salvage and subrogation recoverable components.
 
The following table reconciles the loss and LAE reserve and salvage and subrogation components on the consolidated balance sheet to the financial guaranty net reserves (salvage) in the financial guaranty BIG transaction loss summary tables.
 
Components of Net Reserves (Salvage)
Insurance Contracts
 
 
As of
December 31, 2012
 
As of
December 31, 2011
 
(in millions)
Loss and LAE reserve
$
601

 
$
679

Reinsurance recoverable on unpaid losses
(58
)
 
(69
)
Subtotal
543

 
610

Salvage and subrogation recoverable
(456
)
 
(368
)
Salvage and subrogation payable(1)
46

 
41

Subtotal
(410
)
 
(327
)
Other recoveries(2)
(30
)
 
—

Subtotal
(440
)
 
(327
)
  Total
103

 
283

Less: other
(3
)
 
2

Financial guaranty net reserves (salvage)
$
106

 
$
281

____________________
(1)          Recorded as a component of reinsurance balances payable.

(2)     R&W recoveries recorded in other assets on the consolidated balance sheet.
 
Balance Sheet Classification of
Net Expected Recoveries for Breaches of R&W
 
 
As of December 31, 2012
 
As of December 31, 2011
 
For all
Financial
Guaranty
Insurance
Contracts
 
Effect of
Consolidating
FG VIEs
 
Reported on
Balance Sheet(1)
 
For all
Financial
Guaranty
Insurance
Contracts
 
Effect of
Consolidating
FG VIEs
 
Reported on
Balance Sheet(1)
 
(in millions)
Salvage and subrogation recoverable
$
449

 
$
(169
)
 
$
280

 
$
402

 
$
(197
)
 
$
205

Loss and LAE reserve
571

 
(33
)
 
538

 
858

 
(75
)
 
783

____________________
(1)
The remaining benefit for R&W is not recorded on the balance sheet until the expected loss, net of R&W, exceeds unearned premium reserve.

The table below provides a reconciliation of net expected loss to be paid to net expected loss to be expensed. Expected loss to be paid differs from expected loss to be expensed due to: (1) the contra-paid which represent the payments that have been made but have not yet been expensed, (2) for transactions with a net expected recovery, the addition of claim payments that have been made (and therefore are not included in expected loss to be paid) that are expected to be recovered in the future (and therefore have reduced expected loss to be paid), and (3) loss reserves that have already been established (and therefore expensed but not yet paid).
 
Reconciliation of Net Expected Loss to be Paid and
Net Expected Loss to be Expensed
Insurance Contracts
 
 
As of December 31, 2012
 
(in millions)
Net expected loss to be paid
$
355

Less: net expected loss to be paid for FG VIEs
(96
)
Total
451

Contra-paid, net
124

Salvage and subrogation recoverable, net of reinsurance
405

Loss and LAE reserve, net of reinsurance
(541
)
Other recoveries (1)
30

Net expected loss to be expensed (2)
$
469

____________________
(1)
R&W recoveries recorded in other assets on the consolidated balance sheet.
 
(2)
Excludes $156 million and $223 million as of December 31, 2012 and 2011, respectively, related to consolidated FG VIEs.

The following table provides a schedule of the expected timing of net expected losses to be expensed. The amount and timing of actual loss and LAE may differ from the estimates shown below due to factors such as refundings, accelerations, commutations, changes in expected lives and updates to loss estimates. A loss and LAE reserve is only recorded for the amount by which expected loss to be expensed exceeds deferred premium revenue determined on a contract-by-contract basis. This table excludes amounts related to consolidated FG VIEs, which are eliminated in consolidation.
 

Net Expected Loss to be Expensed
Insurance Contracts
 
 
As of December 31, 2012
 
(in millions)
2013 (January 1 - March 31)
$
19

2013 (April 1 - June 30)
19

2013 (July 1 - September 30)
18

2013 (October 1–December 31)
16

Subtotal 2013
72

2014
48

2015
42

2016
37

2017
36

2018 - 2022
127

2023 - 2027
59

2028 - 2032
29

After 2032
19

Total present value basis(1)
469

Discount
251

Total future value
$
720

 
____________________
(1)
Consolidation of FG VIEs resulted in reductions of $156 million in net expected loss to be expensed.


The following table presents the loss and LAE recorded in the consolidated statements of operations by sector for non-derivative contracts. Amounts presented are net of reinsurance.

Loss and LAE
Reported on the
Consolidated Statements of Operations
 
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
 
U.S. RMBS:
 
 
 
 
 
First lien:
 
 
 
 
 
Prime first lien
$
2

 
$
—

 
$
1

Alt-A first lien
51

 
53

 
37

Option ARM
137

 
203

 
272

Subprime
38

 
(39
)
 
86

Total first lien
228

 
217

 
396

Second lien:
 
 
 
 
 
Closed end second lien
31

 
1

 
5

HELOC
49

 
171

 
(20
)
Total second lien
80

 
172

 
(15
)
Total U.S. RMBS
308

 
389

 
381

TruPS
(10
)
 
11

 
(5
)
Other structured finance
3

 
107

 
69

U.S. public finance
51

 
15

 
28

Non-U.S. public finance
234

 
33

 
5

Subtotal
586

 
555

 
478

Other
(17
)
 
—

 
—

Total insurance contracts before FG VIE consolidation
569

 
555

 
478

Effect of consolidating FG VIEs
(46
)
 
(93
)
 
(66
)
Total loss and LAE
$
523

 
$
462

 
$
412



 
The following table provides information on non-derivative financial guaranty insurance contracts categorized as BIG.
 
Financial Guaranty Insurance BIG Transaction Loss Summary
December 31, 2012
 
 
BIG Categories
 
BIG 1
 
BIG 2
 
BIG 3
 
Total
BIG, Net
 
Effect of
Consolidating
FG VIEs
 
Total
 
Gross
 
Ceded
 
Gross
 
Ceded
 
Gross
 
Ceded
 
 
 

(dollars in millions)
Number of risks(1)
153

 
(57
)
 
76

 
(22
)
 
142

 
(51
)
 
371

 
—

 
371

Remaining weighted-average contract period (in years)
11.0

 
9.3

 
11.5

 
15.3

 
8.5

 
5.8

 
10.2

 
—

 
10.2

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Principal
$
8,533

 
$
(1,484
)
 
$
2,741

 
$
(135
)
 
$
7,568

 
$
(540
)
 
$
16,683

 
$
—

 
$
16,683

Interest
4,357

 
(585
)
 
1,813

 
(131
)
 
2,269

 
(137
)
 
7,586

 
—

 
7,586

Total(2)
$
12,890

 
$
(2,069
)
 
$
4,554

 
$
(266
)
 
$
9,837

 
$
(677
)
 
$
24,269

 
$
—

 
$
24,269

Expected cash outflows (inflows)
$
1,582

 
$
(677
)
 
$
863

 
$
(58
)
 
$
3,052

 
$
(156
)
 
$
4,606

 
$
(738
)
 
$
3,868

Potential recoveries(3)
(1,629
)
 
653

 
(509
)
 
18

 
(2,639
)
 
142

 
(3,964
)
 
798

 
(3,166
)
Subtotal
(47
)
 
(24
)
 
354

 
(40
)
 
413

 
(14
)
 
642

 
60

 
702

Discount
(1
)
 
9

 
(107
)
 
14

 
(202
)
 
0

 
(287
)
 
36

 
(251
)
Present value of expected cash flows
$
(48
)
 
$
(15
)
 
$
247

 
$
(26
)
 
$
211

 
$
(14
)
 
$
355

 
$
96

 
$
451

Deferred premium revenue
$
111

 
$
(24
)
 
$
227

 
$
(15
)
 
$
757

 
$
(90
)
 
$
966

 
$
(251
)
 
$
715

Reserves (salvage)(4)
$
(103
)
 
$
(4
)
 
$
102

 
$
(18
)
 
$
(35
)
 
$
11

 
$
(47
)
 
$
153

 
$
106

 
Financial Guaranty Insurance BIG Transaction Loss Summary
December 31, 2011
 
 
BIG Categories
 
BIG 1
 
BIG 2
 
BIG 3
 
Total
BIG, Net
 
Effect of
Consolidating
FG VIEs
 
Total
 
Gross
 
Ceded
 
Gross
 
Ceded
 
Gross
 
Ceded
 
 
(dollars in millions)
Number of risks(1)
171

 
(68
)
 
71

 
(26
)
 
126

 
(48
)
 
368

 
—

 
368

Remaining weighted-average contract period (in years)
10.0

 
9.2

 
13.7

 
20.5

 
9.2

 
6.4

 
10.4

 
—

 
10.4

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Principal
$
9,675

 
$
(1,378
)
 
$
3,732

 
$
(274
)
 
$
7,831

 
$
(627
)
 
$
18,959

 
$
—

 
$
18,959

Interest
4,309

 
(486
)
 
2,889

 
(405
)
 
2,486

 
(170
)
 
8,623

 
—

 
8,623

Total(2)
$
13,984

 
$
(1,864
)
 
$
6,621

 
$
(679
)
 
$
10,317

 
$
(797
)
 
$
27,582

 
$
—

 
$
27,582

Expected cash outflows (inflows)
$
1,731

 
$
(659
)
 
$
1,833

 
$
(121
)
 
$
2,423

 
$
(133
)
 
$
5,074

 
$
(998
)
 
$
4,076

Potential recoveries(3)
(1,798
)
 
664

 
(1,079
)
 
39

 
(2,041
)
 
100

 
(4,115
)
 
1,060

 
(3,055
)
Subtotal
(67
)
 
5

 
754

 
(82
)
 
382

 
(33
)
 
959

 
62

 
1,021

Discount
16

 
(5
)
 
(241
)
 
32

 
(125
)
 
2

 
(321
)
 
45

 
(276
)
Present value of expected cash flows
$
(51
)
 
$
0

 
$
513

 
$
(50
)
 
$
257

 
$
(31
)
 
$
638

 
$
107

 
$
745

Deferred premium revenue
$
261

 
$
(69
)
 
$
281

 
$
(12
)
 
$
992

 
$
(127
)
 
$
1,326

 
$
(391
)
 
$
935

Reserves (salvage)(4)
$
(97
)
 
$
7

 
$
320

 
$
(42
)
 
$
(110
)
 
$
7

 
$
85

 
$
196

 
$
281

 ____________________
(1)
A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making Debt Service payments. The ceded number of risks represents the number of risks for which the Company ceded a portion of its exposure.

(2)
Includes BIG amounts related to FG VIEs.

(3)
Includes estimated future recoveries for breaches of R&W as well as excess spread, and draws on HELOCs.
 
(4)
See table “Components of net reserves (salvage).”

Ratings Impact on Financial Guaranty Business
 
A downgrade of one of the Company’s insurance subsidiaries may result in increased claims under financial guaranties issued by the Company, if the insured obligors were unable to pay.
 
For example, AGM has issued financial guaranty insurance policies in respect of the obligations of municipal obligors under interest rate swaps. Under the swaps, AGM insures periodic payments owed by the municipal obligors to the bank counterparties. Under certain of the swaps, AGM also insures termination payments that may be owed by the municipal obligors to the bank counterparties. If (i) AGM has been downgraded below the rating trigger set forth in a swap under which it has insured the termination payment, which rating trigger varies on a transaction by transaction basis; (ii) the municipal obligor has the right to cure by, but has failed in, posting collateral, replacing AGM or otherwise curing the downgrade of AGM; (iii) the transaction documents include as a condition that an event of default or termination event with respect to the municipal obligor has occurred, such as the rating of the municipal obligor being downgraded past a specified level, and such condition has been met; (iv) the bank counterparty has elected to terminate the swap; (v) a termination payment is payable by the municipal obligor; and (vi) the municipal obligor has failed to make the termination payment payable by it, then AGM would be required to pay the termination payment due by the municipal obligor, in an amount not to exceed the policy limit set forth in the financial guaranty insurance policy. The claim payments would be subject to recovery from the municipal obligor. As a result of the January 2013 Moody's downgrade of the financial strength rating of AGM, if the conditions giving rise to the obligation of AGM to make a payment under the swap policies were all satisfied, then AGM could pay claims in an amount not exceeding $109 million in respect of such termination payments. Taking into consideration whether the rating of the municipal obligor is below any applicable specified trigger, if the financial strength ratings of AGM were further downgraded below "A" by S&P or below "A2" by Moody's, and the conditions giving rise to the obligation of AGM to make a payment under the swap policies were all satisfied, then AGM could pay claims in an additional amount not exceeding $258 million in respect of such termination payments.
     
As another example, with respect to variable rate demand obligations ("VRDOs") for which a bank has agreed to provide a liquidity facility, a downgrade of AGM or AGC may provide the bank with the right to give notice to bondholders that the bank will terminate the liquidity facility, causing the bondholders to tender their bonds to the bank. Bonds held by the bank accrue interest at a “bank bond rate” that is higher than the rate otherwise borne by the bond (typically the prime rate plus 2.00% — 3.00%, and capped at the lesser of 25% and the maximum legal limit). In the event the bank holds such bonds for longer than a specified period of time, usually 90-180 days, the bank has the right to demand accelerated repayment of bond principal, usually through payment of equal installments over a period of not less than five years. In the event that a municipal obligor is unable to pay interest accruing at the bank bond rate or to pay principal during the shortened amortization period, a claim could be submitted to AGM or AGC under its financial guaranty policy. As of December 31, 2012, AGM and AGC had insured approximately $12.3 billion net par of VRDOs, of which approximately $0.6 billion of net par constituted VRDOs issued by municipal obligors rated BBB- or lower pursuant to the Company’s internal rating. As of the date of this filing, the Company has not been notified that a bank has terminated a liquidity facility as a result of the January 2013 Moody's downgrade, nor has there been a failed remarketing of the AGM or AGC VRDOs, although in some cases, VRDOs insured by AGM or AGC have remarketed at higher interest rates. The specific terms relating to the rating levels that trigger the bank’s termination right, and whether it is triggered by a downgrade by one rating agency or a downgrade by all rating agencies then rating the insurer, vary depending on the transaction.