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Financial Guaranty Insurance Losses
 3 Months Ended
Mar. 31, 2015
Insurance [Abstract]  
Financial Guaranty Insurance Losses
Financial Guaranty Insurance Losses

Insurance Contracts' Loss Information

The following table provides balance sheet information on loss and LAE reserves and salvage and subrogation recoverable, net of reinsurance. The Company used weighted average risk-free rates for U.S. dollar denominated financial guaranty insurance 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. Financial guaranty insurance expected LAE reserve was $10 million as of March 31, 2015 and $12 million as of December 31, 2014.

Loss and LAE Reserve and Salvage and Subrogation Recoverable
Net of Reinsurance
Insurance Contracts 
 
As of March 31, 2015
 
As of December 31, 2014
 
Loss and
LAE
Reserve, net
 
Salvage and
Subrogation
Recoverable, net 
 
Net Reserve (Recoverable)
 
Loss and
LAE
Reserve, net
 
Salvage and
Subrogation
Recoverable, net 
 
Net Reserve (Recoverable)
 
(in millions)
Public Finance:
 
 
 
 
 
 
 
 
 
 
 
U.S. public finance
$
253

 
$
8

 
$
245

 
$
243

 
$
8

 
$
235

Non-U.S. public finance
28

 
—

 
28

 
30

 
—

 
30

Public Finance
281

 
8

 
273

 
273

 
8

 
265

Structured Finance:
 
 
 
 
 
 
 
 
 
 
 
U.S. RMBS:
 

 
 

 
 

 
 

 
 

 
 

First lien:
 

 
 

 
 

 
 

 
 

 
 

Prime first lien
2

 
—

 
2

 
2

 
—

 
2

Alt-A first lien
80

 
—

 
80

 
87

 
—

 
87

Option ARM
24

 
42

 
(18
)
 
28

 
40

 
(12
)
Subprime
159

 
6

 
153

 
166

 
8

 
158

First lien
265

 
48

 
217

 
283

 
48

 
235

Second lien:
 

 
 

 
 

 
 

 
 

 
 

Closed-end second lien
5

 
37

 
(32
)
 
4

 
39

 
(35
)
HELOCs
2

 
29

 
(27
)
 
3

 
39

 
(36
)
Second lien
7

 
66

 
(59
)
 
7

 
78

 
(71
)
Total U.S. RMBS
272

 
114

 
158

 
290

 
126

 
164

Triple-X life insurance transactions
144

 
—

 
144

 
140

 
—

 
140

TruPS
—

 
—

 
—

 
0

 
—

 
0

Other structured finance
90

 
—

 
90

 
96

 
2

 
94

Structured Finance
506

 
114

 
392

 
526

 
128

 
398

Financial guaranty
787

 
122

 
665

 
799

 
136

 
663

Other recoverables
—

 
7

 
(7
)
 
—

 
13

 
(13
)
Subtotal
787

 
129

 
658

 
799

 
149

 
650

Effect of consolidating FG VIEs
(78
)
 
(1
)
 
(77
)
 
(80
)
 
(1
)
 
(79
)
Subtotal
709

 
128

 
581

 
719

 
148

 
571

Other
1

 
—

 
1

 
2

 
6

 
(4
)
Total (1)
$
710

 
$
128

 
$
582

 
$
721

 
$
154

 
$
567

____________________
(1)
See “Components of Net Reserves (Salvage)” table for loss and LAE reserve and salvage and subrogation recoverable components.
 The following table reconciles the reported gross and ceded reserve and salvage and subrogation amount 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
March 31, 2015
 
As of
December 31, 2014
 
(in millions)
Loss and LAE reserve
$
787

 
$
799

Reinsurance recoverable on unpaid losses
(77
)
 
(78
)
Loss and LAE reserve, net
710

 
721

Salvage and subrogation recoverable
(128
)
 
(151
)
Salvage and subrogation payable(1)
7

 
10

Other recoverables
(7
)
 
(13
)
Salvage and subrogation recoverable, net and other recoverable
(128
)
 
(154
)
Subtotal
582

 
567

Less: other (non-financial guaranty business)
1

 
(4
)
Net reserves (salvage) - financial guaranty
$
581

 
$
571

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


Balance Sheet Classification of
Net Expected Recoveries for Breaches of R&W
Insurance Contracts
 
 
As of March 31, 2015
 
As of December 31, 2014
 
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, net
$
2

 
$
—

 
$
2

 
$
20

 
$
—

 
$
20

Loss and LAE reserve, net
146

 
(8
)
 
138

 
185

 
(8
)
 
177

____________________
(1)
The remaining benefit for R&W is either recorded at fair value in FG VIE assets, or not recorded on the balance sheet until the total 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 claim payments made and recoveries received that have not yet been recognized in the statement of operations, (2) salvage and subrogation recoverable for transactions that are in a net recovery position where the Company has not yet received recoveries on claims previously paid (having the effect of reducing net expected loss to be paid by the amount of the previously paid claim and the expected recovery), but will have no future income effect (because the previously paid claims and the corresponding recovery of those claims will offset in income in future periods), 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
Financial Guaranty Insurance Contracts
 
 
As of
March 31, 2015
 
(in millions)
Net expected loss to be paid
$
1,111

Less: net expected loss to be paid for FG VIEs
122

Total
989

Contra-paid, net
(93
)
Salvage and subrogation recoverable, net of reinsurance
121

Loss and LAE reserve, net of reinsurance
(709
)
Other recoveries
7

Net expected loss to be expensed (present value) (1)
$
315

____________________
(1)
Excludes $86 million as of March 31, 2015, 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. This table excludes amounts related to FG VIEs, which are eliminated in consolidation.
 
Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts 

 
As of
March 31, 2015
 
(in millions)
2015 (April 1 – June 30)
$
7

2015 (July 1 – September 30)
9

2015 (October 1 – December 31)
11

Subtotal 2015
27

2016
36

2017
27

2018
25

2019
23

2020-2024
77

2025-2029
45

2030-2034
34

After 2034
21

Net expected loss to be expensed
315

Discount
389

Total expected future loss and LAE
$
704

 



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

Loss and LAE
Reported on the
Consolidated Statements of Operations
  
 
First Quarter
 
2015

2014
 
(in millions)
Public Finance:
 
 
 
U.S. public finance
$
13

 
$
26

Non-U.S. public finance
5

 
1

Public finance
18

 
27

Structured Finance:
 
 
 
U.S. RMBS:
 
 
 
First lien:
 
 
 
Prime first lien
0

 
0

Alt-A first lien
(2
)
 
7

Option ARM
(1
)
 
(8
)
Subprime
0

 
(8
)
First lien
(3
)
 
(9
)
Second lien:
 
 
 
Closed-end second lien
1

 
—

HELOCs
9

 
8

Second lien
10

 
8

Total U.S. RMBS
7

 
(1
)
Triple-X life insurance transactions
6

 
13

TruPS
(1
)
 
(1
)
Other structured finance
(6
)
 
3

Structured finance
6

 
14

Subtotal
24

 
41

Other
(1
)
 
(1
)
Loss and LAE on insurance contracts before FG VIE consolidation
23

 
40

Effect of consolidating FG VIEs
(5
)
 
1

Loss and LAE
$
18

 
$
41



 
The following table provides information on financial guaranty insurance contracts categorized as BIG.
 
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of March 31, 2015
 
 
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)
164

 
(61
)
 
73

 
(15
)
 
119

 
(38
)
 
356

 
—

 
356

Remaining weighted-average contract period (in years)
9.8

 
7.2

 
8.7

 
7.2

 
9.9

 
7.3

 
10.1

 
—

 
10.1

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Principal
$
11,993

 
$
(2,106
)
 
$
2,701

 
$
(356
)
 
$
2,847

 
$
(142
)
 
$
14,937

 
$
—

 
$
14,937

Interest
6,082

 
(792
)
 
1,262

 
(127
)
 
1,013

 
(45
)
 
7,393

 
—

 
7,393

Total(2)
$
18,075

 
$
(2,898
)
 
$
3,963

 
$
(483
)
 
$
3,860

 
$
(187
)
 
$
22,330

 
$
—

 
$
22,330

Expected cash outflows (inflows)
$
1,655

 
$
(616
)
 
$
759

 
$
(84
)
 
$
1,721

 
$
(91
)
 
$
3,344

 
$
(343
)
 
$
3,001

Potential recoveries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Undiscounted R&W
(1
)
 
(1
)
 
(47
)
 
2

 
(133
)
 
7

 
(173
)
 
8

 
(165
)
Other(3)
(1,583
)
 
600

 
(271
)
 
18

 
(449
)
 
47

 
(1,638
)
 
180

 
(1,458
)
Total potential recoveries
(1,584
)
 
599

 
(318
)
 
20

 
(582
)
 
54

 
(1,811
)
 
188

 
(1,623
)
Subtotal
71

 
(17
)
 
441

 
(64
)
 
1,139

 
(37
)
 
1,533

 
(155
)
 
1,378

Discount
(7
)
 
0

 
(96
)
 
10

 
(336
)
 
7

 
(422
)
 
33

 
(389
)
Present value of expected cash flows
$
64

 
$
(17
)
 
$
345

 
$
(54
)
 
$
803

 
$
(30
)
 
$
1,111

 
$
(122
)
 
$
989

Deferred premium revenue
$
402

 
$
(75
)
 
$
104

 
$
(6
)
 
$
268

 
$
(25
)
 
$
668

 
$
(111
)
 
$
557

Reserves (salvage)(4)
$
(10
)
 
$
(7
)
 
$
269

 
$
(52
)
 
$
468

 
$
(10
)
 
$
658

 
$
(77
)
 
$
581

 
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 2014
 
 
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)
164

 
(59
)
 
75

 
(15
)
 
119

 
(38
)
 
358

 
—

 
358

Remaining weighted-average contract period (in years)
9.9

 
7.4

 
10.1

 
8.9

 
9.6

 
6.9

 
10.3

 
—

 
10.3

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Principal
$
12,358

 
$
(2,163
)
 
$
2,421

 
$
(286
)
 
$
3,067

 
$
(175
)
 
$
15,222

 
$
—

 
$
15,222

Interest
6,350

 
(838
)
 
1,274

 
(121
)
 
1,034

 
(48
)
 
7,651

 
—

 
7,651

Total(2)
$
18,708

 
$
(3,001
)
 
$
3,695

 
$
(407
)
 
$
4,101

 
$
(223
)
 
$
22,873

 
$
—

 
$
22,873

Expected cash outflows (inflows)
$
1,762

 
$
(626
)
 
$
763

 
$
(77
)
 
$
1,716

 
$
(75
)
 
$
3,463

 
$
(345
)
 
$
3,118

Potential recoveries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Undiscounted R&W
(39
)
 
0

 
(48
)
 
2

 
(171
)
 
9

 
(247
)
 
8

 
(239
)
Other(3)
(1,687
)
 
608

 
(206
)
 
5

 
(404
)
 
30

 
(1,654
)
 
177

 
(1,477
)
Total potential recoveries
(1,726
)
 
608

 
(254
)
 
7

 
(575
)
 
39

 
(1,901
)
 
185

 
(1,716
)
Subtotal
36

 
(18
)
 
509

 
(70
)
 
1,141

 
(36
)
 
1,562

 
(160
)
 
1,402

Discount
3

 
0

 
(117
)
 
11

 
(353
)
 
9

 
(447
)
 
34

 
(413
)
Present value of expected cash flows
$
39

 
$
(18
)
 
$
392

 
$
(59
)
 
$
788

 
$
(27
)
 
$
1,115

 
$
(126
)
 
$
989

Deferred premium revenue
$
378

 
$
(70
)
 
$
119

 
$
(6
)
 
$
312

 
$
(33
)
 
$
700

 
$
(116
)
 
$
584

Reserves (salvage)(4)
$
(42
)
 
$
(5
)
 
$
278

 
$
(53
)
 
$
482

 
$
(10
)
 
$
650

 
$
(79
)
 
$
571

____________________
(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 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. At AGM's current financial strength ratings, if the conditions giving rise to the obligation of AGM to make a termination payment under the swap termination policies were all satisfied, then AGM could pay claims in an amount not exceeding approximately $163 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 approximately $416 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 March 31, 2015, AGM and AGC had insured approximately $5.9 billion net par of VRDOs, of which approximately $0.3 billion of net par constituted VRDOs issued by municipal obligors rated BBB- or lower pursuant to the Company’s internal rating. 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.

In addition, AGM may be required to pay claims in respect of AGMH’s former financial products business if Dexia SA and its affiliates, from which the Company had purchased AGMH and its subsidiaries, do not comply with their obligations following a downgrade of the financial strength rating of AGM. Most of the guaranteed investment contracts ("GICs") insured by AGM allow the GIC holder to terminate the GIC and withdraw the funds in the event of a downgrade of AGM below A3 or A-, with no right of the GIC issuer to avoid such withdrawal by posting collateral or otherwise enhancing its credit. Each GIC contract stipulates the thresholds below which the GIC issuer must post eligible collateral, along with the types of securities eligible for posting and the collateralization percentage applicable to each security type. These collateralization percentages range from 100% of the GIC balance for cash posted as collateral to, typically, 108% for asset-backed securities. If the entire aggregate accreted GIC balance of approximately $2.1 billion as of March 31, 2015 were terminated, the assets of the GIC issuers (which had an aggregate accreted principal of approximately $3.3 billion and an aggregate market value of approximately $3.2 billion) would be sufficient to fund the withdrawal of the GIC funds.