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. The Company has historically entered into ceded reinsurance contracts in order to obtain greater business diversification and reduce the net potential loss from large risks.

Assumed and Ceded Business

The Company assumes business from other monoline financial guaranty 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 at the option of the ceding company:


•	if the Company fails to meet certain financial and regulatory criteria and to maintain a specified minimum financial strength rating, or


•	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 ceding company unearned premiums (net of ceding commissions) and loss reserves calculated on a statutory basis of accounting, attributable to reinsurance assumed 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 the first bullet 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 downgrade of the financial strength ratings of AG Re or of AGC gives certain reinsurance counterparties the right to recapture ceded business, which would lead to a reduction in the Company's unearned premium reserve and related earnings on such reserve. With respect to a significant portion of the Company's in-force financial guaranty assumed business, based on AG Re's and AGC's current ratings and subject to the terms of each reinsurance agreement, the third party ceding company may have the right to recapture assumed business ceded to AG Re and/or AGC, and in connection therewith, to receive payment from the assuming reinsurer of an amount equal to the reinsurer’s statutory unearned premium (net of ceding commissions) and statutory loss reserves (if any) associated with that business, plus, in certain cases, an additional ceding commission. As of March 31, 2014, if each third party company ceding business to AG Re and/or AGC had a right to recapture such business, and chose to exercise such right, the aggregate amounts that AG Re and AGC could be required to pay to all such companies would be approximately $283 million and $57 million, respectively.

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.

In First Quarter 2014, the Company entered into commutation agreements to reassume previously ceded business consisting of approximately $856 million par of almost exclusively U.S. public finance and European (predominantly UK) utility and infrastructure exposures outstanding as of February 28, 2014. For such reassumptions, the Company received the statutory unearned premium outstanding as of the commutation dates plus, in one case, a commutation premium. There were no commutations in First Quarter 2013.

The following table presents the components of premiums and losses reported in the consolidated statement of operations and the contribution of the Company's Assumed and Ceded Businesses.

Effect of Reinsurance on Statement of Operations



	First Quarter
	2014			2013
	(in millions)
Premiums Written:
Direct	$	31		$	19
Assumed(1)	(1		)	(2		)
Ceded	(24		)	(2		)
Net	$	6		$	15
Premiums Earned:
Direct	$	140		$	267
Assumed	11			13
Ceded	(19		)	(32		)
Net	$	132		$	248
Loss and LAE:
Direct	$	34		$	(27	)
Assumed	6			(14		)
Ceded	1			(7		)
Net	$	41		$	(48	)

____________________


(1)	Negative assumed premiums written were due to 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 March 31, 2014, based on fair value, the Company had fixed-maturity securities in its investment portfolio consisting of $435 million insured by National Public Finance Guarantee Corporation, $455 million insured by Ambac Assurance Corporation ("Ambac") and $29 million insured by other guarantors.

Exposure by Reinsurer



	Ratings at		Par Outstanding
	May 5, 2014		As of March 31, 2014
Reinsurer	Moody’s Reinsurer Rating	S&P Reinsurer Rating	Ceded Par Outstanding(1)		Second-to- Pay Insured Par Outstanding		Assumed Par Outstanding
	(dollars in millions)
American Overseas Reinsurance Company Limited (f/k/a Ram Re)	WR (2)	WR	$	8,113	$	—	$	30
Tokio Marine & Nichido Fire Insurance Co., Ltd.	Aa3 (3)	AA- (3)	6,273		—		—
Radian Asset Assurance Inc.	Ba1	B+	4,696		24		987
Syncora Guarantee Inc.	WR	WR	4,192		1,769		161
Mitsui Sumitomo Insurance Co. Ltd.	A1	A+ (3)	2,139		—		—
ACA Financial Guaranty Corp.	NR (5)	WR	809		3		8
Federal Insurance Company	Aa2	AA	382		—		—
Swiss Reinsurance Co.	Aa3	AA-	347		—		—
Security Life of Denver Insurance Company	A3	A-	239		—		—
Ambac (4)	WR	WR	85		6,013		17,578
CIFG Assurance North America Inc.	WR	WR	—		114		4,883
MBIA Inc.	(4)	(4)	—		10,208		7,221
Financial Guaranty Insurance Co.	WR	WR	—		2,273		1,237
Other	Various	Various	251		2,114		45
Total			$	27,526	$	22,518	$	32,150

____________________


(1)	Includes $3,038 million in ceded par outstanding related to insured credit derivatives.

(2) Represents “Withdrawn Rating.”

(3) The Company has structural collateral agreements satisfying the triple-A credit requirement of S&P and/or Moody’s.


(4)	MBIA Inc. includes various subsidiaries which are rated AA- and B by S&P and Baa1, B1 and B3 by Moody’s. Ambac includes policies in their general and segregated account.


(5)	Represents “Not Rated.”

Amounts Due (To) From Reinsurers

As of March 31, 2014



	Assumed Premium, net of Commissions		Ceded Premium, net of Commissions			Assumed Expected Loss and LAE			Ceded Expected Loss and LAE
	(in millions)
American Overseas Reinsurance Company Limited	$	—	$	(9	)	$	—		$	7
Tokio Marine & Nichido Fire Insurance Co., Ltd.	—		(18		)	—			18
Radian Asset Assurance Inc.	—		(17		)	—			14
Syncora Guarantee Inc.	—		(39		)	—			1
Mitsui Sumitomo Insurance Co. Ltd.	—		(3		)	—			3
Federal Insurance Company	—		(17		)	—			—
Swiss Reinsurance Co.	—		(3		)	—			1
Security Life of Denver Insurance Company	—		(10		)	—			—
Ambac	66		—			(82		)	—
CIFG Assurance North America Inc.	—		—			(6		)	—
MBIA Inc.	13		—			(10		)	—
Financial Guaranty Insurance Co.	6		—			(104		)	—
Other	0		(25		)	—			—
Total	$	85	$	(141	)	$	(202	)	$	44

Excess of Loss Reinsurance Facility

AGC, AGM and MAC entered into an aggregate excess of loss reinsurance facility with a number of reinsurers, effective as of January 1, 2014. The facility covers losses occurring either from January 1, 2014 through December 31, 2021, or January 1, 2015 through December 31, 2022, at the option of AGC, AGM and MAC. It terminates on January 1, 2016, unless AGC, AGM and MAC choose to extend it. The facility covers certain U.S. public finance credits insured or reinsured by AGC, AGM and MAC as of September 30, 2013, excluding credits that were rated non-investment grade as of December 31, 2013 by Moody’s or S&P or internally by AGC, AGM or MAC and is subject to certain per credit limits. Among the credits excluded are those associated with the Commonwealth of Puerto Rico and its related authorities and public corporations. The facility attaches when AGC’s, AGM’s and MAC’s net losses (net of AGC’s and AGM's reinsurance (including from affiliates) and net of recoveries) exceed $1.5 billion in the aggregate. The facility covers a portion of the next $500 million of losses, with the reinsurers assuming pro rata in the aggregate $450 million of the $500 million of losses and AGC, AGM and MAC jointly retaining the remaining $50 million of losses. The reinsurers are required to be rated at least AA- or to post collateral sufficient to provide AGM, AGC and MAC with the same reinsurance credit as reinsurers rated AA-. AGM, AGC and MAC are obligated to pay the reinsurers their share of recoveries relating to losses during the coverage period in the covered portfolio. AGC, AGM and MAC have paid approximately $19 million of premiums during 2014 for the term January 1, 2014 through December 31, 2014 and deposited approximately $19 million of securities into trust accounts for the benefit of the reinsurers to be used to pay the premium for January 1, 2015 through December 31, 2015. This facility replaces the $435 million aggregate excess of loss reinsurance facility that AGC and AGM had entered into on January 22, 2012.