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.

Accounting Policies

Accounting for financial guaranty contracts that meet the scope exception under derivative accounting guidance are subject to industry specific guidance for financial guaranty insurance. 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) in cases where the underlying collateral is comprised of homogeneous pools of assets, the expected premiums to be collected over the life of the contract. 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 must be reasonably estimable. When the Company adjusts prepayment assumptions or expected premium collections, an adjustment is recorded to the deferred premium revenue, with a corresponding adjustment to the premium receivable, and prospective changes are recognized in premium revenues. Premiums receivable are discounted at the risk-free rate at inception and such discount rate is updated only when changes to prepayment assumptions are made that change the expected date of final maturity. 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 transaction.

•

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 may differ 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 accelerated and 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 premiums 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 (ceded unearned premium reserve) is recorded as an asset. Direct, assumed and ceded earned premium revenue are presented together as net earned premiums in the statement of operations. Net earned premiums comprise the following:

Net Earned Premiums



	Year Ended December 31,
	2013		2012		2011
	(in millions)
Scheduled net earned premiums	$	470	$	581	$	765
Acceleration of net earned premiums	263		249		125
Accretion of discount on net premiums receivable	17		22		28
Financial guaranty insurance net earned premiums	750		852		918
Other	2		1		2
Net earned premiums(1)	$	752	$	853	$	920

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(1)	Excludes $60 million, $153 million and $75 million for the year ended December 31, 2013, 2012 and 2011, respectively, related to consolidated FG VIEs.

Components of

Unearned Premium Reserve



	As of December 31, 2013									As of December 31, 2012
	Gross			Ceded			Net(1)			Gross			Ceded			Net(1)
	(in millions)
Deferred premium revenue:
Financial guaranty insurance	$	4,647		$	470		$	4,177		$	5,349		$	586		$	4,763
Other	5			—			5			7			—			7
Deferred premium revenue	$	4,652		$	470		$	4,182		$	5,356		$	586		$	4,770
Contra-paid	(57		)	(18		)	(39		)	(149		)	(25		)	(124		)
Unearned premium reserve	$	4,595		$	452		$	4,143		$	5,207		$	561		$	4,646

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(1)	Excludes $187 million and $262 million deferred premium revenue and $55 million and $98 million contra-paid related to FG VIEs as of December 31, 2013 and December 31, 2012, respectively.

Gross Premium Receivable,

Net of Commissions on Assumed Business

Roll Forward



	Year Ended December 31,
	2013			2012			2011
	(in millions)
Beginning of period, December 31	$	1,005		$	1,003		$	1,168
Gross premium written, net of commissions on assumed business	145			211			245
Gross premiums received, net of commissions on assumed business	(259		)	(294		)	(318		)
Adjustments:
Changes in the expected term	(28		)	44			(104		)
Accretion of discount, net of commissions on assumed business	20			36			32
Foreign exchange translation	(1		)	13			(5		)
Consolidation of FG VIEs	—			(5		)	(10		)
Other adjustments	(6		)	(3		)	(5		)
End of period, December 31 (1)	$	876		$	1,005		$	1,003

____________________


(1)	Excludes $21 million, $29 million and $28 million as of December 31, 2013 , 2012 and 2011, 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 48% and 47% of installment premiums at December 31, 2013 and 2012, respectively, are denominated in currencies other than the U.S. dollar, primarily the 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 Commissions on Assumed Business

(Undiscounted)



	As of December 31, 2013
	(in millions)
2014 (January 1 – March 31)	$	47
2014 (April 1 – June 30)	33
2014 (July 1 – September 30)	23
2014 (October 1 – December 31)	25
2015	91
2016	85
2017	78
2018	70
2019-2023	279
2024-2028	173
2029-2033	121
After 2033	129
Total(1)	$	1,154

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(1)	Excludes expected cash collections on FG VIEs of $27 million.

Scheduled Net Earned Premiums



	As of December 31, 2013
	(in millions)
2014 (January 1 – March 31)	$	108
2014 (April 1 – June 30)	107
2014 (July 1 – September 30)	105
2014 (October 1 – December 31)	102
Subtotal 2014	422
2015	372
2016	328
2017	294
2018	269
2019-2023	1,049
2024-2028	668
2029-2033	405
After 2033	370
Total present value basis(1)	4,177
Discount	240
Total future value	$	4,417

____________________


(1)	Excludes scheduled net earned premiums on consolidated FG VIEs of $187 million.

Selected Information for

Policies Paid in Installments



	As of December 31, 2013			As of December 31, 2012
	(dollars in millions)
Premiums receivable, net of ceding commission payable	$	876		$	1,005
Gross deferred premium revenue	1,576			1,908
Weighted-average risk-free rate used to discount premiums	3.4		%	3.5		%
Weighted-average period of premiums receivable (in years)	9.4			9.6