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Expected Loss to be Paid
 3 Months Ended
Mar. 31, 2015
Expected Losses [Abstract]  
Expected Loss to be Paid
Expected Loss to be Paid
 
The following tables present a roll forward of the present value of net expected loss to be paid for all contracts, whether accounted for as insurance, credit derivatives or FG VIEs, by sector, after the benefit for net expected recoveries for contractual breaches of representations and warranties ("R&W"). The Company used weighted average risk-free rates for U.S. dollar denominated obligations that ranged from 0.0% to 2.89% as of March 31, 2015 and 0.0% to 2.95% as of December 31, 2014.
Net Expected Loss to be Paid
After Net Expected Recoveries for Breaches of R&W
Roll Forward by Sector
First Quarter 2015

 
Net Expected
Loss to be
Paid (Recovered)
as of
December 31, 2014 (2)
 
Economic Loss
Development
 
(Paid)
Recovered
Losses (1)
 
Net Expected
Loss to be
Paid (Recovered)
as of
March 31,2015 (2)
 
(in millions)
Public Finance:
 
 
 
 
 
 
 
U.S. public finance
$
303

 
$
9

 
$
(2
)
 
$
310

Non-U.S public finance
45

 
(3
)
 
—

 
42

Public Finance
348

 
6

 
(2
)
 
352

Structured Finance:
 
 
 
 
 
 
 
U.S. RMBS:
 

 
 

 
 

 
 

First lien:
 

 
 

 
 

 
 

Prime first lien
4

 
0

 
(1
)
 
3

Alt-A first lien
304

 
(5
)
 
(10
)
 
289

Option ARM
(16
)
 
4

 
(4
)
 
(16
)
Subprime
303

 
(1
)
 
(9
)
 
293

Total first lien
595

 
(2
)
 
(24
)
 
569

Second lien:
 

 
 

 
 

 
 

Closed-end second lien
8

 
1

 
2

 
11

HELOCs
(19
)
 
5

 
4

 
(10
)
Total second lien
(11
)
 
6

 
6

 
1

Total U.S. RMBS
584

 
4

 
(18
)
 
570

Triple-X life insurance transactions
161

 
5

 
(1
)
 
165

TruPS
23

 
(9
)
 
—

 
14

Other structured finance
57

 
(8
)
 
3

 
52

Structured Finance
825

 
(8
)
 
(16
)
 
801

Subtotal
1,173

 
(2
)
 
(18
)
 
1,153

Other insurance
(4
)
 
(1
)
 
6

 
1

Total
$
1,169

 
$
(3
)
 
$
(12
)
 
$
1,154


Net Expected Loss to be Paid
After Net Expected Recoveries for Breaches of R&W
Roll Forward by Sector
First Quarter 2014

 
Net Expected
Loss to be
Paid (Recovered)
as of
December 31, 2013
 
Economic Loss
Development
 
(Paid)
Recovered
Losses (1)
 
Net Expected
Loss to be
Paid (Recovered)
as of
March 31,2014
 
(in millions)
Public Finance:
 
 
 
 
 
 
 
U.S. public finance
$
264

 
$
23

 
$
(6
)
 
$
281

Non-U.S public finance
57

 
—

 
—

 
57

Public Finance
321

 
23

 
(6
)
 
338

Structured Finance:
 

 
 

 
 

 
 

U.S. RMBS:
 

 
 

 
 

 
 

First lien:
 
 
 
 
 
 
 
Prime first lien
21

 
(3
)
 
—

 
18

Alt-A first lien
304

 
8

 
(4
)
 
308

Option ARM
(9
)
 
(15
)
 
(4
)
 
(28
)
Subprime
304

 
(7
)
 
(2
)
 
295

Total first lien
620

 
(17
)
 
(10
)
 
593

Second lien:
 
 
 
 
 
 
 
Closed-end second lien
(11
)
 
5

 
2

 
(4
)
HELOCs
(116
)
 
2

 
5

 
(109
)
Total second lien
(127
)
 
7

 
7

 
(113
)
Total U.S. RMBS
493

 
(10
)
 
(3
)
 
480

Triple-X life insurance transactions
75

 
13

 
(1
)
 
87

TruPS
51

 
(19
)
 
—

 
32

Other structured finance
45

 
6

 
—

 
51

Structured Finance
664

 
(10
)
 
(4
)
 
650

Subtotal
985

 
13

 
(10
)
 
988

Other insurance
(3
)
 
(1
)
 
—

 
(4
)
Total
$
982

 
$
12

 
$
(10
)
 
$
984

____________________
(1)
Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded in reinsurance recoverable on paid losses included in other assets. The Company paid $4 million and $6 million in loss adjustment expenses ("LAE") for First Quarter 2015 and 2014, respectively.

(2)
Includes expected LAE to be paid of $13 million as of March 31, 2015 and $16 million as of December 31, 2014.


Net Expected Recoveries from
Breaches of R&W Rollforward
First Quarter 2015
 
 
Future Net
R&W Benefit as of
December 31, 2014
 
R&W Development
and Accretion of
Discount
During 2015
 
R&W (Recovered)
During 2015
 
Future Net
R&W Benefit as of
March 31,2015 (1)
 
(in millions)
U.S. RMBS:
 
 
 
 
 
 
 
First lien:
 
 
 
 
 
 
 
Prime first lien
$
2

 
$
(1
)
 
$
—

 
$
1

Alt-A first lien
106

 
(10
)
 
(2
)
 
94

Option ARM
15

 
(20
)
 
(15
)
 
(20
)
Subprime
109

 
(19
)
 
(3
)
 
87

Total first lien
232

 
(50
)
 
(20
)
 
162

Second lien:
 
 
 
 
 
 
 
Closed-end second lien
85

 
(1
)
 
(1
)
 
83

HELOC
—

 
—

 
—

 
—

Total second lien
85

 
(1
)
 
(1
)
 
83

Total
$
317

 
$
(51
)
 
$
(21
)
 
$
245


 
Net Expected Recoveries from
Breaches of R&W Rollforward
First Quarter 2014

 
Future Net
R&W Benefit as of
December 31, 2013
 
R&W Development
and Accretion of
Discount
During 2014
 
R&W (Recovered)
During 2014
 
Future Net
R&W Benefit as of
March 31, 2014
 
(in millions)
U.S. RMBS:
 
 
 
 
 
 
 
First lien:
 
 
 
 
 
 
 
Prime first lien
$
4

 
$
(1
)
 
$
—

 
$
3

Alt-A first lien
274

 
3

 
(8
)
 
269

Option ARM
173

 
9

 
(30
)
 
152

Subprime
118

 
28

 
—

 
146

Total first lien
569

 
39

 
(38
)
 
570

Second lien:
 
 
 
 
 
 
 
Closed-end second lien
98

 
(3
)
 
—

 
95

HELOC
45

 
12

 
(1
)
 
56

Total second lien
143

 
9

 
(1
)
 
151

Total
$
712

 
$
48

 
$
(39
)
 
$
721


___________________
(1)    See the section "Breaches of Representations and Warranties" below for eligible assets held in trust.


The following tables present the present value of net expected loss to be paid for all contracts by accounting model, by sector and after the benefit for estimated and contractual recoveries for breaches of R&W.  

Net Expected Loss to be Paid (Recovered)
By Accounting Model
As of March 31, 2015
 
Financial
Guaranty
Insurance
 
FG VIEs(1)
 
Credit
Derivatives(2)
 
Total
 
(in millions)
Public Finance:
 
 
 
 
 
 
 
U.S. public finance
$
310

 
$
—

 
$
—

 
$
310

Non-U.S. public finance
42

 
—

 
—

 
42

Public Finance
352

 
—

 
—

 
352

Structured Finance:
 
 
 
 
 
 
 
U.S. RMBS:
 

 
 

 
 

 
 

First lien:
 

 
 

 
 

 
 

Prime first lien
3

 
—

 
—

 
3

Alt-A first lien
278

 
17

 
(6
)
 
289

Option ARM
(17
)
 
—

 
1

 
(16
)
Subprime
157

 
69

 
67

 
293

Total first lien
421

 
86

 
62

 
569

Second lien:
 

 
 

 
 

 
 

Closed-end second lien
(24
)
 
31

 
4

 
11

HELOCs
(15
)
 
5

 
—

 
(10
)
Total second lien
(39
)
 
36

 
4

 
1

Total U.S. RMBS
382

 
122

 
66

 
570

Triple-X life insurance transactions
157

 
—

 
8

 
165

TruPS
0

 
—

 
14

 
14

Other structured finance
98

 
—

 
(46
)
 
52

Structured Finance
637

 
122

 
42

 
801

Subtotal
$
989

 
$
122

 
$
42

 
$
1,153

Other
 
 
 
 
 
 
1

Total
 
 
 
 
 
 
$
1,154


Net Expected Loss to be Paid (Recovered)
By Accounting Model
As of December 31, 2014

 
Financial
Guaranty
Insurance
 
FG VIEs(1)
 
Credit
Derivatives(2)
 
Total
 
(in millions)
Public Finance:
 
 
 
 
 
 
 
U.S. public finance
$
303

 
$
—

 
$
—

 
$
303

Non-U.S. public finance
45

 
—

 
—

 
45

Public Finance
348

 
—

 
—

 
348

Structured Finance:
 
 
 
 
 
 
 
U.S. RMBS:
 
 
 
 
 
 
 
First lien:
 
 
 
 
 
 
 
Prime first lien
2

 
—

 
2

 
4

Alt-A first lien
288

 
17

 
(1
)
 
304

Option ARM
(15
)
 
—

 
(1
)
 
(16
)
Subprime
163

 
71

 
69

 
303

Total first lien
438

 
88

 
69

 
595

Second lien:
 

 
 

 
 

 
 

Closed-end second lien
(27
)
 
31

 
4

 
8

HELOCs
(26
)
 
7

 
—

 
(19
)
Total second lien
(53
)
 
38

 
4

 
(11
)
Total U.S. RMBS
385

 
126

 
73

 
584

Triple-X life insurance transactions
153

 
—

 
8

 
161

TruPS
1

 
—

 
22

 
23

Other structured finance
102

 
—

 
(45
)
 
57

Structured Finance
641

 
126

 
58

 
825

Subtotal
$
989

 
$
126

 
$
58

 
1,173

Other
 
 
 
 
 
 
(4
)
Total
 
 
 
 
 
 
$
1,169

___________________
(1)    Refer to Note 9, Consolidated Variable Interest Entities.

(2)    Refer to Note 8, Financial Guaranty Contracts Accounted for as Credit Derivatives.



    
The following tables present the net economic loss development for all contracts by accounting model, by sector and after the benefit for estimated and contractual recoveries for breaches of R&W.

Net Economic Loss Development (Benefit)
By Accounting Model
First Quarter 2015
 
 
Financial
Guaranty
Insurance
 
FG VIEs(1)
 
Credit
Derivatives(2)
 
Total
 
(in millions)
Public Finance:
 
 
 
 
 
 
 
U.S. public finance
$
9

 
$
—

 
$
—

 
$
9

Non-U.S. public finance
(3
)
 
—

 
—

 
(3
)
Public Finance
6

 
—

 
—

 
6

Structured Finance:
 
 
 
 
 
 
 
U.S. RMBS:
 
 
 
 
 
 
 
First lien:
 
 
 
 
 
 
 
Prime first lien
1

 
—

 
(1
)
 
0

Alt-A first lien
2

 
—

 
(7
)
 
(5
)
Option ARM
1

 
—

 
3

 
4

Subprime
(4
)
 
4

 
(1
)
 
(1
)
Total first lien
0

 
4

 
(6
)
 
(2
)
Second lien:
 

 
 

 
 

 
 

Closed-end second lien
1

 
1

 
(1
)
 
1

HELOCs
7

 
(2
)
 
—

 
5

Total second lien
8

 
(1
)
 
(1
)
 
6

Total U.S. RMBS
8

 
3

 
(7
)
 
4

Triple-X life insurance transactions
4

 
—

 
1

 
5

TruPS
(1
)
 
—

 
(8
)
 
(9
)
Other structured finance
(5
)
 
—

 
(3
)
 
(8
)
Structured Finance
6

 
3

 
(17
)
 
(8
)
Subtotal
$
12

 
$
3

 
$
(17
)
 
$
(2
)
Other
 
 
 
 
 
 
(1
)
Total
 
 
 
 
 
 
$
(3
)

Net Economic Loss Development (Benefit)
By Accounting Model
First Quarter 2014

 
Financial
Guaranty
Insurance
 
FG VIEs(1)
 
Credit
Derivatives(2)
 
Total
 
(in millions)
Public Finance:
 
 
 
 
 
 
 
U.S. public finance
$
23

 
$
—

 
$
—

 
$
23

Non-U.S. public finance
—

 
—

 
—

 
—

Public Finance
23

 
—

 
—

 
23

Structured Finance:
 
 
 
 
 
 
 
U.S. RMBS:
 
 
 
 
 
 
 
First lien:
 
 
 
 
 
 
 
Prime first lien
—

 
—

 
(3
)
 
(3
)
Alt-A first lien
19

 
(12
)
 
1

 
8

Option ARM
(16
)
 
1

 
—

 
(15
)
Subprime
(8
)
 
(2
)
 
3

 
(7
)
Total first lien
(5
)
 
(13
)
 
1

 
(17
)
Second lien:
 

 
 

 
 

 
 

Closed-end second lien
(1
)
 
2

 
4

 
5

HELOCs
(56
)
 
58

 
—

 
2

Total second lien
(57
)
 
60

 
4

 
7

Total U.S. RMBS
(62
)
 
47

 
5

 
(10
)
Triple-X life insurance transactions
13

 
—

 
—

 
13

TruPS
(1
)
 
—

 
(18
)
 
(19
)
Other structured finance
4

 
—

 
2

 
6

Structured Finance
(46
)
 
47

 
(11
)
 
(10
)
Subtotal
$
(23
)
 
$
47

 
$
(11
)
 
13

Other
 
 
 
 
 
 
(1
)
Total
 
 
 
 
 
 
$
12

_________________
(1)    Refer to Note 9, Consolidated Variable Interest Entities.

(2)    Refer to Note 8, Financial Guaranty Contracts Accounted for as Credit Derivatives.

Selected U.S. Public Finance Transactions
 
The Company insures general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $4.9 billion net par as of March 31, 2015. The Company rates $4.7 billion net par of that amount BIG. For additional information regarding the Company's exposure to general obligations of Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations, please refer to "Exposure to Puerto Rico" in Note 3, Outstanding Exposure.
On February 25, 2015, a plan of adjustment resolving the bankruptcy filing of the City of Stockton, California under chapter 9 of the U.S. Bankruptcy Code became effective. As of March 31, 2015, the Company’s net exposure subject to the plan consists of $117 million of pension obligation bonds. As part of the plan settlement, the City will repay the pension obligation bonds from certain fixed payments and certain variable payments contingent on the City's revenue growth. The Company agreed as part of the plan to cancel its $40 million of the City’s lease revenue bonds in exchange for the irrevocable option to take title to the office building that served as collateral for the lease revenue bonds. The Company also receives net rental payments from the office building. The Company no longer reflects the canceled lease revenue bonds as outstanding insured net par, but instead the financial statements reflect an investment in the office building and related lease revenue and expenses. As of March 31, 2015, the office building is carried at approximately $30 million and is reported as part of Other Assets.
The Company has $336 million of net par exposure to the Louisville Arena Authority. The bond proceeds were used to construct the KFC Yum Center, home to the University of Louisville men's and women's basketball teams. Actual revenues available for Debt Service are well below original projections, and under the Company's internal rating scale, the transaction is BIG.
    
In December 2014, the City of Detroit emerged from bankruptcy under chapter 9 of the U.S. Bankruptcy Code. The Company still expects to make debt service payments on the 15.5% of the City’s unlimited tax general obligation (“UTGO”) that were not exchanged as part of the related settlement. As of March 31, 2015, these bonds had a net par outstanding of $20 million.
    
The Company projects that its total net expected loss across its troubled U.S. public finance credits as of March 31, 2015, which incorporated the likelihood of the outcomes mentioned above, will be $310 million, compared with a net expected loss of $303 million as of December 31, 2014. Economic loss development in First Quarter 2015 was $9 million which was primarily attributable to certain Puerto Rico exposures.

Certain Selected European Country Transactions

The Company insures and reinsures credits with sub-sovereign exposure to various Spanish and Portuguese issuers where a Spanish and Portuguese sovereign default may cause the regions also to default. The Company's gross exposure to these Spanish and Portuguese credits is $461 million and $114 million, respectively and exposure net of reinsurance for Spanish and Portuguese credits is $331 million and $102 million, respectively. The Company rates most of these issuers in the BB category due to the financial condition of Spain and Portugal and their dependence on the sovereign. The Company's Hungary exposure is to infrastructure bonds dependent on payments from Hungarian governmental entities and covered mortgage bonds issued by Hungarian banks. The Company's gross exposure to these Hungarian credits is $465 million and its exposure net of reinsurance is $439 million, most of which is rated BIG. The Company estimated net expected losses of $42 million related to these Spanish, Portuguese and Hungarian credits. The positive economic loss development of approximately $3 million during First Quarter 2015 was primarily related to changes in the exchange rate between the Euro and US Dollar.
 
Infrastructure Finance

The Company has insured exposure of approximately $3.0 billion to infrastructure transactions with refinancing risk as to which the Company may need to make claim payments that it did not anticipate paying when the policies were issued. Although the Company may not experience ultimate loss on a particular transaction, the aggregate amount of the claim payments may be substantial and reimbursement may not occur for an extended time. These transactions generally involve long-term infrastructure projects that were financed by bonds that mature prior to the expiration of the project concession. The Company expects the cash flows from these projects to be sufficient to repay all of the debt over the life of the project concession, but also expects the debt to be refinanced in the market at or prior to its maturity. If the issuer is unable to refinance the debt due to market conditions, the Company may have to pay a claim when the debt matures, and then recover its payment from cash flows produced by the project in the future. The Company generally projects that in most scenarios it will be fully reimbursed for such payments. However, the recovery of the payments is uncertain and may take from 10 to 35 years, depending on the transaction and the performance of the underlying collateral. The Company estimates total claims for the two largest transactions with significant refinancing risk, assuming no refinancing, and based on certain performance assumptions could be $1.7 billion on a gross basis; such claims would be payable from 2017 through 2022.
    
Approach to Projecting Losses in U.S. RMBS
 
The Company projects losses on its insured U.S. RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (i.e., payment priorities and tranching) of the RMBS to the projected performance of the collateral over time. The resulting projected claim payments or reimbursements are then discounted using risk-free rates. For transactions where the Company projects it will receive recoveries from providers of R&W, it projects the amount of recoveries and either establishes a recovery for claims already paid or reduces its projected claim payments accordingly.
 
The further behind a mortgage borrower falls in making payments, the more likely it is that he or she will default. The rate at which borrowers from a particular delinquency category (number of monthly payments behind) eventually default is referred to as the “liquidation rate.” The Company derives its liquidation rate assumptions from observed roll rates, which are the rates at which loans progress from one delinquency category to the next and eventually to default and liquidation. The Company applies liquidation rates to the mortgage loan collateral in each delinquency category and makes certain timing assumptions to project near-term mortgage collateral defaults from loans that are currently delinquent.
 
Mortgage borrowers that are not more than one payment behind (generally considered performing borrowers) have demonstrated an ability and willingness to pay throughout the recession and mortgage crisis, and as a result are viewed as less likely to default than delinquent borrowers. Performing borrowers that eventually default will also need to progress through delinquency categories before any defaults occur. The Company projects how many of the currently performing loans will default and when they will default, by first converting the projected near term defaults of delinquent borrowers derived from liquidation rates into a vector of conditional default rates ("CDR"), then projecting how the conditional default rates will develop over time. Loans that are defaulted pursuant to the conditional default rate after the near-term liquidation of currently delinquent loans represent defaults of currently performing loans and projected re-performing loans. A conditional default rate is the outstanding principal amount of defaulted loans liquidated in the current month divided by the remaining outstanding amount of the whole pool of loans (or “collateral pool balance”). The collateral pool balance decreases over time as a result of scheduled principal payments, partial and whole principal prepayments, and defaults.
 
In order to derive collateral pool losses from the collateral pool defaults it has projected, the Company applies a loss severity. The loss severity is the amount of loss the transaction experiences on a defaulted loan after the application of net proceeds from the disposal of the underlying property. The Company projects loss severities by sector based on its experience to date. The Company continues to update its evaluation of these exposures as new information becomes available.
 
The Company has been enforcing claims for breaches of R&W regarding the characteristics of the loans included in the collateral pools. The Company calculates a credit for R&W recoveries to include in its cash flow projections. Where the Company has an agreement with an R&W provider (such as its agreements with Bank of America, Deutsche Bank and UBS, which are described in more detail under "Breaches of Representations and Warranties" below), that credit is based on the agreement or potential agreement. Where the Company does not have an agreement with the R&W provider but the Company believes the R&W provider to be economically viable, the Company estimates what portion of its past and projected future claims it believes will be reimbursed by that provider.

The Company projects the overall future cash flow from a collateral pool by adjusting the payment stream from the principal and interest contractually due on the underlying mortgages for the collateral losses it projects as described above; assumed voluntary prepayments; and servicer advances. The Company then applies an individual model of the structure of the transaction to the projected future cash flow from that transaction’s collateral pool to project the Company’s future claims and claim reimbursements for that individual transaction. Finally, the projected claims and reimbursements are discounted using risk-free rates. The Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, and probability weights them.

The ultimate performance of the Company’s RMBS transactions remains highly uncertain, may differ from the Company's projections and may be subject to considerable volatility due to the influence of many interrelated factors that are difficult to predict, including the level and timing of loan defaults, changes in housing prices, results from the Company’s loss mitigation activities and other variables. The Company will continue to monitor the performance of its RMBS exposures and will adjust its RMBS loss projection assumptions and scenarios based on actual performance and management’s view of future performance. If actual experience differs from the Company’s assumptions, the losses incurred could be materially different from the estimate.

The Company's RMBS loss projection methodology assumes that the housing and mortgage markets will continue improving. Each period the Company makes a judgment as to whether to change the assumptions it uses to make RMBS loss projections based on its observation during the period of the performance of its insured transactions (including early stage delinquencies, late stage delinquencies and loss severity) as well as the residential property market and economy in general, and, to the extent it observes changes, it makes a judgment as whether those changes are normal fluctuations or part of a trend.

First Quarter 2015 U.S. RMBS Loss Projections
 
Based on its observation during the period of the performance of its insured transactions (including early stage delinquencies, late stage delinquencies and loss severity) as well as the residential property market and economy in general, the Company chose to use the same general assumptions to project RMBS losses as of March 31, 2015 as it used as of December 31, 2014, except that, for its first lien RMBS loss projections it again this quarter shortened by three months the period it is projecting it will take in the base case to reach the final CDR.

U.S. First Lien RMBS Loss Projections: Alt-A First Lien, Option ARM, Subprime and Prime

     The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that have been modified or have been delinquent in the previous 12 months, are two or more payments behind, are in foreclosure or that have been foreclosed and so the RMBS issuer owns the underlying real estate). Changes in the amount of non-performing loans from the amount projected in the previous period are one of the primary drivers of loss development in this portfolio. In order to determine the number of defaults resulting from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of various non-performing categories. The Company arrived at its liquidation rates based on data purchased from a third party provider and assumptions about how delays in the foreclosure process and loan modifications may ultimately affect the rate at which loans are liquidated. Each year the Company reviews the most recent twenty-four months of this data and adjusts its liquidation rates based on its observations. The following table shows liquidation assumptions for various non-performing categories.

First Lien Liquidation Rates

 
March 31, 2015
 
December 31, 2014
Current Loans Modified in the Previous 12 Months
 
 
 
Alt A and Prime
25%
 
25%
Option ARM
25
 
25
Subprime
25
 
25
Current Loans Delinquent in the Previous 12 Months
 
 
 
Alt A and Prime
25
 
25
Option ARM
25
 
25
Subprime
25
 
25
30 – 59 Days Delinquent
 
 
 
Alt A and Prime
35
 
35
Option ARM
40
 
40
Subprime
35
 
35
60 – 89 Days Delinquent
 
 
 
Alt A and Prime
50
 
50
Option ARM
55
 
55
Subprime
40
 
40
90+ Days Delinquent
 
 
 
Alt A and Prime
60
 
60
Option ARM
65
 
65
Subprime
55
 
55
Bankruptcy
 
 
 
Alt A and Prime
45
 
45
Option ARM
50
 
50
Subprime
40
 
40
Foreclosure
 
 
 
Alt A and Prime
75
 
75
Option ARM
80
 
80
Subprime
70
 
70
Real Estate Owned
 
 
 
All
100
 
100


While the Company uses liquidation rates as described above to project defaults of non-performing loans (including current loans modified or delinquent within the last 12 months), it projects defaults on presently current loans by applying a CDR trend. The start of that CDR trend is based on the defaults the Company projects will emerge from currently nonperforming, recently nonperforming and modified loans. The total amount of expected defaults from the non-performing loans is translated into a constant CDR (i.e., the CDR plateau), which, if applied for each of the next 36 months, would be sufficient to produce approximately the amount of defaults that were calculated to emerge from the various delinquency categories. The CDR thus calculated individually on the delinquent collateral pool for each RMBS is then used as the starting point for the CDR curve used to project defaults of the presently performing loans.
 
In the base case, after the initial 36-month CDR plateau period, each transaction’s CDR is projected to improve over 12 months to an intermediate CDR (calculated as 20% of its CDR plateau); that intermediate CDR is held constant for 36 months and then trails off in steps to a final CDR of 5% of the CDR plateau. In the base case, the Company assumes the final CDR will be reached eight years and three months after the initial 36-month CDR plateau period, which is three months shorter than assumed as of December 31, 2014 but the same calendar date as it assumed as of June 30, 2014. Under the Company’s methodology, defaults projected to occur in the first 36 months represent defaults that can be attributed to loans that were modified or delinquent in the last 12 months or that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected CDR trend after the first 36 month period represent defaults attributable to borrowers that are currently performing or are projected to reperform.

     Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. Loss severities experienced in first lien transactions have reached historic high levels, and the Company is assuming in the base case that these high levels generally will continue for another 18 months. The Company determines its initial loss severity based on actual recent experience. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning after the initial 18 month period, declining to 40% in the base case over 2.5 years. Beginning for December 31, 2014, the Company differentiated the loss severity assumptions depending on the vintage of the transaction, as shown in the table below.
 
The following table shows the range as well as the average, weighted by outstanding net insured par, for key assumptions used in the calculation of expected loss to be paid for individual transactions for direct vintage 2004 - 2008 first lien U.S. RMBS.
 
Key Assumptions in Base Case Expected Loss Estimates
First Lien RMBS(1)
 
 
As of
March 31, 2015
 
As of
December 31, 2014
 
Range
 
Weighted Average
 
Range
 
Weighted Average
Alt-A First Lien
 
 
 
 
 
 
 
 
 
 
 
Plateau CDR
2.6
%
–
13.1%
 
7.4%
 
2.0
%
–
13.4%
 
7.3%
Intermediate CDR
0.5
%
–
2.6%
 
1.5%
 
0.4
%
–
2.7%
 
1.5%
Period until intermediate CDR
48 months
 
 
 
48 months
 
 
Final CDR
0.1
%
–
0.7%
 
0.3%
 
0.1
%
–
0.7%
 
0.3%
Initial loss severity:
 
 
 
 
 
 
 
2005 and prior
60.0%
 
 
 
60.0%
 
 
2006
70.0%
 
 
 
70.0%
 
 
2007
65.0%
 
 
 
65.0%
 
 
Initial conditional prepayment rate ("CPR")
2.7
%
–
22.4%
 
8.1%
 
1.7
%
–
21.0%
 
7.7%
Final CPR(2)
15.0
%
–
22.4%
 
15.2%
 
15%
 
 
Option ARM
 
 
 
 
 
 
 
 
 
 
 
Plateau CDR
4.5
%
–
12.9%
 
9.9%
 
4.3
%
–
14.2%
 
10.6%
Intermediate CDR
0.9
%
–
2.6%
 
2.0%
 
0.9
%
–
2.8%
 
2.1%
Period until intermediate CDR
48 months
 
 
 
48 months
 
 
Final CDR
0.2
%
–
0.6%
 
0.5%
 
0.2
%
–
0.7%
 
0.5%
Initial loss severity:
 
 
 
 
 
 
 
2005 and prior
60.0%
 
 
 
60.0%
 
 
2006
70.0%
 
 
 
70.0%
 
 
2007
65.0%
 
 
 
65.0%
 
 
Initial CPR
1.8
%
–
12.7%
 
4.9%
 
1.1
%
–
11.8%
 
4.9%
Final CPR(2)
15%
 
 
 
15%
 
 
Subprime
 
 
 
 
 
 
 
 
 
 
 
Plateau CDR
4.8
%
–
14.4%
 
10.2%
 
4.9
%
–
15.0%
 
10.6%
Intermediate CDR
1.0
%
–
2.9%
 
2.0%
 
1.0
%
–
3.0%
 
2.1%
Period until intermediate CDR
48 months
 
 
 
48 months
 
 
Final CDR
0.2
%
–
0.7%
 
0.4%
 
0.2
%
–
0.7%
 
0.4%
Initial loss severity:
 
 
 
 
 
 
 
2005 and prior
75.0%
 
 
 
75.0%
 
 
2006
90.0%
 
 
 
90.0%
 
 
2007
90.0%
 
 
 
90.0%
 
 
Initial CPR
0.0
%
–
9.7%
 
4.7%
 
0.0
%
–
10.5%
 
6.1%
Final CPR(2)
15%
 
 
 
15%
 
 
____________________
(1)                                Represents variables for most heavily weighted scenario (the “base case”).

(2) 
For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used.
 
 The rate at which the principal amount of loans is voluntarily prepaid may impact both the amount of losses projected (since that amount is a function of the conditional default rate, the loss severity and the loan balance over time) as well as the amount of excess spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on the insured obligations). The assumption for the voluntary CPR follows a similar pattern to that of the conditional default rate. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final CPR, which is assumed to be 15% in the base case. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. These assumptions are the same as those the Company used for December 31, 2014.
 
In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien transactions by varying its assumptions of how fast a recovery is expected to occur. One of the variables used to model sensitivities was how quickly the conditional default rate returned to its modeled equilibrium, which was defined as 5% of the initial conditional default rate. The Company also stressed CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios (including its base case) as of March 31, 2015. The Company used a similar approach to establish its pessimistic and optimistic scenarios as of March 31, 2015 as it used as of December 31, 2014, increasing and decreasing the periods of stress from those used in the base case.
 
In a somewhat more stressful environment than that of the base case, where the conditional default rate plateau was extended six months (to be 42 months long) before the same more gradual conditional default rate recovery and loss severities were assumed to recover over 4.5 rather than 2.5 years (and subprime loss severities were assumed to recover only to 60% and Option ARM and Alt A loss severities to only 45%), expected loss to be paid would increase from current projections by approximately $38 million for Alt-A first liens, $2 million for Option ARM, $72 million for subprime and $1 million for prime transactions.

In an even more stressful scenario where loss severities were assumed to rise and then recover over nine years and the initial ramp-down of the conditional default rate was assumed to occur over 15 months and other assumptions were the same as the other stress scenario, expected loss to be paid would increase from current projections by approximately $84 million for Alt-A first liens, $12 million for Option ARM, $99 million for subprime and $4 million for prime transactions.

In a scenario with a somewhat less stressful environment than the base case, where conditional default rate recovery was somewhat less gradual, expected loss to be paid would decrease from current projections by approximately $0.4 million for Alt-A first lien, $14 million for Option ARM, $11 million for subprime and $0.1 million for prime transactions.

In an even less stressful scenario where the conditional default rate plateau was six months shorter (30 months, effectively assuming that liquidation rates would improve) and the conditional default rate recovery was more pronounced, (including an initial ramp-down of the conditional default rate over nine months), expected loss to be paid would decrease from current projections by approximately $26 million for Alt-A first lien, $26 million for Option ARM, $47 million for subprime and $0.5 million for prime transactions.

U.S. Second Lien RMBS Loss Projections: HELOCs and Closed-End Second Lien
 
The Company believes the primary variable affecting its expected losses in second lien RMBS transactions is the amount and timing of future losses in the collateral pool supporting the transactions. Expected losses are also a function of the structure of the transaction; the voluntary prepayment rate (typically also referred to as CPR of the collateral); the interest rate environment; and assumptions about the draw rate and loss severity.
 
The following table shows the range as well as the average, weighted by outstanding net insured par, for key assumptions for the calculation of expected loss to be paid for individual transactions for direct vintage 2004 - 2008 second lien U.S. RMBS.
 
Key Assumptions in Base Case Expected Loss Estimates
Second Lien RMBS(1)

HELOC key assumptions
As of
March 31, 2015
 
As of
December 31, 2014
 
Range
 
Weighted Average
 
Range
 
Weighted Average
Plateau CDR
2.3
%
–
7.5%
 
4.4%
 
2.8
%
–
6.8%
 
4.1%
Final CDR trended down to
0.5
%
–
3.2%
 
1.2%
 
0.5
%
–
3.2%
 
1.2%
Period until final CDR
34 months
 
 
 
34 months
 
 
Initial CPR
6.9
%
–
23.2%
 
10.2%
 
6.9
%
–
21.8%
 
11.0%
Final CPR(2)
10.0
%
–
23.2%
 
15.2%
 
15.0
%
–
21.8%
 
15.5%
Loss severity
90.0
%
–
98.0%
 
90.4%
 
90.0
%
–
98.0%
 
90.4%
 
Closed-end second lien key assumptions
As of
March 31, 2015
 
As of
December 31, 2014
 
Range
 
Weighted Average
 
Range
 
Weighted Average
Plateau CDR
4.7
%
–
12.4%
 
6.9%
 
5.5
%
–
12.5%
 
7.2%
Final CDR trended down to
3.5
%
–
9.1%
 
4.9%
 
3.5
%
–
9.1%
 
4.9%
Period until final CDR
34 months
 
 
 
34 months
 
 
Initial CPR
3.4
%
–
11.8%
 
7.6%
 
2.8
%
–
13.9%
 
9.9%
Final CPR(2)
15%
 
 
 
15%
 
 
Loss severity
98%
 
 
 
98%
 
 
____________________
(1)
Represents variables for most heavily weighted scenario (the “base case”).

(2) 
For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used.
 
In second lien transactions the projection of near-term defaults from currently delinquent loans is relatively straightforward because loans in second lien transactions are generally “charged off” (treated as defaulted) by the securitization’s servicer once the loan is 180 days past due. Most second lien transactions report the amount of loans in five monthly delinquency categories (i.e., 30-59 days past due, 60-89 days past due, 90-119 days past due, 120-149 days past due and 150-179 days past due). The Company estimates the amount of loans that will default over the next five months by calculating current representative liquidation rates (the percent of loans in a given delinquency status that are assumed to ultimately default) from selected representative transactions and then applying an average of the preceding twelve months’ liquidation rates to the amount of loans in the delinquency categories. The amount of loans projected to default in the first through fifth months is expressed as a CDR. The first four months’ CDR is calculated by applying the liquidation rates to the current period past due balances (i.e., the 150-179 day balance is liquidated in the first projected month, the 120-149 day balance is liquidated in the second projected month, the 90-119 day balance is liquidated in the third projected month and the 60-89 day balance is liquidated in the fourth projected month). For the fifth month the CDR is calculated using the average 30-59 day past due balances for the prior three months, adjusted as necessary to reflect one-time service events. The fifth month CDR is then used as the basis for the plateau period that follows the embedded five months of losses.
 
For the base case scenario, the CDR (the “plateau CDR”) was held constant for one month. Once the plateau period has ended, the CDR is assumed to gradually trend down in uniform increments to its final long-term steady state CDR. (The long-term steady state CDR is calculated as the constant CDR that would have yielded the amount of losses originally expected at underwriting.) In the base case scenario, the time over which the CDR trends down to its final CDR is 28 months. Therefore, the total stress period for second lien transactions is 34 months, comprising five months of delinquent data, a one month plateau period and 28 months of decrease to the steady state CDR, the same as of December 31, 2014.

HELOC loans generally permit the borrower to pay only interest for an initial period (often ten years) and, after that period, require the borrower to make both the monthly interest payment and a monthly principal payment, and so increase the borrower's aggregate monthly payment. Some of the HELOC loans underlying the Company's insured HELOC transactions have reached their principal amortization period. The Company has observed that for loans reaching their principal amortization period planned servicer intervention is not completely effective. Thus, most of the HELOC projections incorporate an assumption that 7.5% of loans reaching their amortization periods will default around the time of the payment increase. These projected defaults are in addition to those generated using the CDR curve as described above. This assumption is the same as December 31, 2014.

When a second lien loan defaults, there is generally a very low recovery. The Company had assumed as of December 31, 2014 that it will recover only 10% of the collateral defaulting in the future and declining additional amounts on post-default receipts on previously defaulted collateral. This is the same as at December 31, 2014.

The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected as well as the amount of excess spread. In the base case, the current CPR (based on experience of the most recent three quarters) is assumed to continue until the end of the plateau before gradually increasing to the final CPR over the same period the CDR decreases. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. The final CPR is assumed to be 15% for both HELOC and closed-end second lien transactions, which is lower than the historical average but reflects the Company’s continued uncertainty about the projected performance of the borrowers in these transactions. This pattern is consistent with how the Company modeled the CPR at December 31, 2014. To the extent that prepayments differ from projected levels it could materially change the Company’s projected excess spread and losses.
 
The Company uses a number of other variables in its second lien loss projections, including the spread between relevant interest rate indices and HELOC draw rates (the amount of new advances provided on existing HELOCs expressed as a percentage of the current pool balance). These variables have been relatively stable and in the relevant ranges have less impact on the projection results than the variables discussed above. However, in a number of HELOC transactions the servicers have been modifying poorly performing loans from floating to fixed rates, and, as a result, rising interest rates would negatively impact the excess spread available from these modified loans to support the transactions.  The Company incorporated these modifications in its assumptions.

In estimating expected losses, the Company modeled and probability weighted three possible CDR curves applicable to the period preceding the return to the long-term steady state CDR using the same approaches and weightings as it did as of December 31, 2014. The Company believes that the level of the elevated CDR and the length of time it will persist is the primary driver behind the likely amount of losses the collateral will suffer. The Company continues to evaluate the assumptions affecting its modeling results.
 
The Company’s base case assumed a one month CDR plateau and a 28 month ramp-down (for a total stress period of 34 months). The Company also modeled a scenario with a longer period of elevated defaults and another with a shorter period of elevated defaults. Increasing the CDR plateau to four months and increasing the ramp-down by five months to 33 months (for a total stress period of 42 months) would increase the expected loss by approximately $14 million for HELOC transactions and $1 million for closed-end second lien transactions. On the other hand, keeping the CDR plateau at one month but decreasing the length of the CDR ramp-down to 18 months (for a total stress period of 24 months) would decrease the expected loss by approximately $14 million for HELOC transactions and $1 million for closed-end second lien transactions.

Breaches of Representations and Warranties

Generally, when mortgage loans are transferred into a securitization, the loan originator(s) and/or sponsor(s) provide R&W that the loans meet certain characteristics, and a breach of such R&W often requires that the loan be repurchased from the securitization. In many of the transactions the Company insures, it is in a position to enforce these R&W provisions. The Company has pursued breaches of R&W on a loan-by-loan basis or in cases where a provider of R&W refused to honor its repurchase obligations, the Company sometimes chose to initiate litigation. The Company's success in pursuing these strategies permitted the Company to enter into agreements with R&W providers under which those providers made payments to the Company, agreed to make payments to the Company in the future, and / or repurchased loans from the transactions, all in return for releases of related liability by the Company. In some instances, the entity providing the R&W (or an affiliate of that entity) also benefited from credit protection sold by the Company through a CDS, and the Company entered into an agreement terminating the CDS protection it provided (and so avoiding future losses on that transaction), again in return for releases of related liability by the Company and in certain instances other consideration. Such agreements with R&W providers provide the Company with many of the benefits of pursuing the R&W claims on a loan by loan basis or through litigation, but without the related expense and uncertainty. The Company continues to pursue these strategies against R&W providers with which it does not yet have agreements.

Through March 31, 2015, the Company has caused entities providing R&Ws to pay, or agree to pay, or to terminate insurance protection on future projected losses of, approximately $4.2 billion (gross of reinsurance) in respect of their R&W liabilities for transactions in which the Company has provided insurance and included in its net expected loss estimates as of March 31, 2015 an estimated net benefit of $245 million, (net of reinsurance). Most of this net benefit is projected to be received pursuant to existing agreements with R&W providers, although some is projected to be received in connection with transactions where the company does not yet have such an agreement. Most of the amount projected to be received pursuant to existing agreements with R&W providers benefits from eligible assets placed in trusts to collateralize the R&W provider’s future reimbursement obligation, with the amount of such collateral subject to increase or decrease from time to time as determined by rating agency requirements. Currently the Company has agreements with three counterparties where a future reimbursement obligation is collateralized by eligible assets held in trust:

•
Bank of America. Under the Company's agreement with Bank of America Corporation and certain of its subsidiaries (“Bank of America”), Bank of America agreed to reimburse the Company for 80% of claims on the first lien transactions covered by the agreement that the Company pays in the future, until the aggregate lifetime collateral losses (not insurance losses or claims) on those transactions reach $6.6 billion. As of March 31, 2015 aggregate lifetime collateral losses on those transactions was $4.2 billion, and the Company was projecting in its base case that such collateral losses would eventually reach $5.2 billion. Bank of America's reimbursement obligation is secured by $569 million of collateral held in trust for the Company's benefit.

•
Deutsche Bank. Under the Company's May 2012 agreement with Deutsche Bank AG and certain of its affiliates (collectively, “Deutsche Bank”), Deutsche Bank agreed to reimburse the Company for certain claims it pays in the future on eight first and second lien transactions, including 80% of claims it pays on those transactions until the aggregate lifetime claims (before reimbursement) reach $319 million. As of March 31, 2015, the Company was projecting in its base case that such aggregate lifetime claims would remain below $319 million. In the event aggregate lifetime claims paid exceed $389 million, Deutsche Bank must reimburse the Company for 85% of such claims paid (in excess of $389 million) until such claims paid reach $600 million.

When the agreement was first signed, Deutsche Bank was also required to reimburse AGC for future claims it pays on certain RMBS resecuritizations. AGC and Deutsche Bank terminated one of the resecuritization transactions on October 10, 2013, another on September 12, 2014 and two more in the fourth quarter of 2014. In the fourth quarter of 2014, AGC and Deutsche Bank also terminated one other BIG transaction under which AGC had provided credit protection to Deutsche Bank through a CDS. In connection with the 2014 terminations, AGC and Deutsche Bank agreed to terminate Deutsche Bank’s reimbursement obligation on all of the RMBS resecuritizations, and AGC made a termination payment to Deutsche Bank and released some of the collateral that had been held in trust. Deutsche Bank remains liable to reimburse the Company for certain claims it pays on eight first and second lien transactions, as described above, and such reimbursement obligation remains secured by $78 million of collateral held in trust for the Company’s benefit.

•
UBS. On May 6, 2013, the Company entered into an agreement with UBS Real Estate Securities Inc. and affiliates ("UBS") and a third party resolving the Company’s claims and liabilities related to specified RMBS transactions that were issued, underwritten or sponsored by UBS and insured by AGM or AGC under financial guaranty insurance policies. Under the agreement, UBS agreed to reimburse the Company for 85% of future losses on three first lien RMBS transactions, and such reimbursement obligation is secured by $95 million of collateral held in trust for the Company's benefit.
    
For the expected recovery from breaches of R&W in transactions not covered by agreements as of March 31, 2015, the Company did not incorporate any gain contingencies from potential litigation in its estimated repurchases. The amount the Company will ultimately recover related to such contractual R&W is uncertain and subject to a number of factors including the counterparty's ability to pay, the number and loss amount of loans determined to have breached R&W and, potentially, negotiated settlements or litigation recoveries. As such, the Company's estimate of recoveries is uncertain and actual amounts realized may differ significantly from these estimates. In arriving at the expected recovery from breaches of R&W not already covered by agreements, the Company considered the creditworthiness of the provider of the R&W, the number of breaches found on defaulted loans, the success rate in resolving these breaches across those transactions where material repurchases have been made and the potential amount of time until the recovery is realized. The calculation of expected recovery from breaches of such contractual R&W involved a variety of scenarios which ranged from the Company recovering substantially all of the losses it incurred due to violations of R&W to the Company realizing limited recoveries. These scenarios were probability weighted in order to determine the recovery incorporated into the Company's estimate of expected losses. This approach was used for both loans that had already defaulted and those assumed to default in the future. The Company adjusts the calculation of its expected recovery from breaches of R&W based on changing facts and circumstances with respect to each counterparty and transaction.

The Company uses the same RMBS projection scenarios and weightings to project its future R&W benefit as it uses to project RMBS losses on its portfolio. To the extent the Company increases its loss projections, the R&W benefit (whether pursuant to an R&W agreement or not) generally will also increase, subject to the agreement limits and thresholds described above. Similarly, to the extent the Company decreases its loss projections, the R&W benefit (whether pursuant to an R&W agreement or not) generally will also decrease, subject to the agreement limits and thresholds described above.

The number of risks subject to R&W recovery is 30, with related net debt service of 2.1 billion as of March 31, 2015 compared to 29 with related net debt service of $2.1 billion as of December 31, 2014. Included in these amounts is net debt service related to transactions not yet subject to an agreement. A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making Debt Service payments.

The following table provides a breakdown of the development and accretion amount in the roll forward of estimated recoveries associated with claims for breaches of R&W.

Components of R&W Development

 
First Quarter
 
2015

2014
 
(in millions)
Estimated increase (decrease) in defaults that will result in additional (lower) breaches(1)
$
(52
)
 
$
0

Inclusion or removal of deals with breaches of R&W during period
0

 
—

Change in recovery assumptions
—

 
10

Settlements and anticipated settlements
—

 
35

Accretion of discount on balance
1

 
3

Total
$
(51
)
 
$
48

 
____________________
(1)
The negative R&W development is offset by higher anticipated cash flows in the covered transactions that were related to a third party settlement.
 
Triple-X Life Insurance Transactions
 
The Company’s $3.1 billion net par of Triple-X life insurance transactions as of March 31, 2015 include $598 million rated BIG in two transactions. The Triple-X life insurance transactions are based on discrete blocks of individual life insurance business.

In older vintage Triple-X transactions, which include the Company's two BIG Triple-X transactions, the monies raised by the sale of the notes insured by the Company were used to capitalize a special purpose vehicle that provides reinsurance to a life insurer or reinsurer. The monies are invested at inception in accounts managed by third-party investment managers. In the case of the two BIG Triple-X life insurance transactions, material amounts of their assets were invested in U.S. RMBS. Based on its analysis of the information currently available, including estimates of future investment performance, and projected credit impairments on the invested assets and performance of the blocks of life insurance business at March 31, 2015, the Company’s projected net expected loss to be paid is $165 million. The economic loss development during First Quarter 2015 was approximately $5 million, which was due primarily to changes in the risk free rates used to discount the losses and life insurance projections.

Trust Preferred Securities Collateralized Debt Obligations
 
The Company has insured or reinsured $4.1 billion of net par (72% of which is in CDS form) of collateralized debt obligations (“CDOs”) backed by TruPS and similar debt instruments, or “TruPS CDOs.” Of the $4.1 billion, $1.2 billion is rated BIG. The underlying collateral in the TruPS CDOs consists of subordinated debt instruments such as TruPS issued by bank holding companies and similar instruments issued by insurance companies, real estate investment trusts (“REITs”) and other real estate related issuers.
 
The Company projects losses for TruPS CDOs by projecting the performance of the asset pools across several scenarios (which it weights) and applying the CDO structures to the resulting cash flows. At March 31, 2015, the Company has projected expected losses to be paid for TruPS CDOs of $14 million. During First Quarter 2015, there was positive economic development of approximately $9 million, which was due primarily to improving collateral performance during the quarter.

Manufactured Housing

The Company insures or reinsures a total of $215 million net par of securities backed by manufactured housing loans, of which $155 million is rated BIG. The Company has expected loss to be paid of $25 million as of March 31, 2015. The economic loss development during First Quarter 2015 was immaterial.

Student Loan Transactions
 
The Company has insured or reinsured $2.5 billion net par of student loan securitizations, of which $1.8 billion was issued by private issuers and classified as asset-backed and $0.7 billion was issued by public authorities and classified as public finance. Of these amounts, $193 million and $90 million, respectively, are rated BIG. The Company is projecting approximately $75 million of net expected loss to be paid in these portfolios. In general, the losses are due to: (i) the poor credit performance of private student loan collateral and high loss severities, or (ii) high interest rates on auction rate securities with respect to which the auctions have failed. The positive economic development during First Quarter 2015 was approximately $8 million, which was due to a partial commutation by the underlying insurer.
    
Recovery Litigation
 
RMBS Transactions
 
In November 2014, AGM and its affiliate AGC reached a confidential settlement with DLJ Mortgage Capital, Inc., Credit Suisse First Boston Mortgage Securities Corp. and Credit Suisse Securities (USA) LLC to resolve a lawsuit relating to six first lien U.S. RMBS transactions. AGM and AGC sought damages for alleged breaches of representations and warranties in respect of the underlying loans in these transactions, and failure to cure or repurchase defective loans identified by AGM and AGC.  On November 25, 2014, the parties filed a joint stipulation discontinuing the lawsuit with prejudice.  However, on November 20, 2014, U.S. Bank National Association, as trustee for the transactions, had filed a motion to intervene as a plaintiff in the lawsuit.  On November 26, 2014, the trustee submitted a letter stating that the joint stipulation is ineffective and that the lawsuit may be discontinued only by court order, and requesting an opportunity to review and potentially oppose the settlement.  On March 5, 2015 the Court denied the motion to intervene.

Triple-X Life Insurance Transactions
 
In December 2008, AGUK filed an action against J.P. Morgan Investment Management Inc. (“JPMIM”), the investment manager in the Orkney Re II transaction, in the Supreme Court of the State of New York alleging that JPMIM engaged in breaches of fiduciary duty, gross negligence and breaches of contract based upon its handling of the investments of Orkney Re II. After AGUK’s claims were dismissed with prejudice in January 2010, AGUK was successful in its subsequent motions and appeals and, as of December 2011, all of AGUK’s claims for breaches of fiduciary duty, gross negligence and contract were reinstated in full. Separately, at the trial court level, discovery is ongoing.

Public Finance Transactions

On November 1, 2013, Radian Asset commenced a declaratory judgment action in the U.S. District Court for the Southern District of Mississippi against Madison County, Mississippi (the "County") and the Parkway East Public Improvement District (the "District") to establish its rights under a contribution agreement from the County supporting the District’s Special Assessment Bonds, Series 2005, insured by Radian Asset, with $21.8 million outstanding on March 31, 2015. The County maintains that its payment obligation is limited to two years of annual debt service, while Radian Asset contends no such limitation applies. On April 20, 2015, the Court issued an order addressing cross-motions for partial summary judgment filed by Radian Asset and the County, and denied the County's motion for summary judgment that its payment obligation lasts only two years. On May 1, 2015, AGC paid its first claim on the District's bonds.