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Financial Guaranty Insurance Losses
 6 Months Ended
Jun. 30, 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 3.37% as of June 30, 2015 and 0.0% to 2.95% as of December 31, 2014. Financial guaranty insurance expected LAE reserve was $10 million as of June 30, 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 June 30, 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
$
453

 
$
10

 
$
443

 
$
243

 
$
8

 
$
235

Non-U.S. public finance
30

 
—

 
30

 
30

 
—

 
30

Public Finance
483

 
10

 
473

 
273

 
8

 
265

Structured Finance:
 
 
 
 
 
 
 
 
 
 
 
U.S. RMBS:
 

 
 

 
 

 
 

 
 

 
 

First lien:
 

 
 

 
 

 
 

 
 

 
 

Prime first lien
2

 
—

 
2

 
2

 
—

 
2

Alt-A first lien
76

 
—

 
76

 
87

 
—

 
87

Option ARM
22

 
40

 
(18
)
 
28

 
40

 
(12
)
Subprime
152

 
12

 
140

 
166

 
8

 
158

First lien
252

 
52

 
200

 
283

 
48

 
235

Second lien:
 

 
 

 
 

 
 

 
 

 
 

Closed-end second lien
4

 
36

 
(32
)
 
4

 
39

 
(35
)
HELOCs
5

 
35

 
(30
)
 
3

 
39

 
(36
)
Second lien
9

 
71

 
(62
)
 
7

 
78

 
(71
)
Total U.S. RMBS
261

 
123

 
138

 
290

 
126

 
164

Triple-X life insurance transactions
140

 
—

 
140

 
140

 
—

 
140

TruPS
—

 
—

 
—

 
0

 
—

 
0

Student loans
55

 
—

 
55

 
64

 
—

 
64

Other structured finance
50

 
—

 
50

 
34

 
8

 
26

Structured Finance
506

 
123

 
383

 
528

 
134

 
394

Subtotal
989

 
133

 
856

 
801

 
142

 
659

Other recoverables
—

 
8

 
(8
)
 
—

 
13

 
(13
)
Subtotal
989

 
141

 
848

 
801

 
155

 
646

Effect of consolidating FG VIEs
(70
)
 
(1
)
 
(69
)
 
(80
)
 
(1
)
 
(79
)
Total (1)
$
919

 
$
140

 
$
779

 
$
721

 
$
154

 
$
567

____________________
(1)
See “Components of Net Reserves (Salvage)” table for loss and LAE reserve and salvage and subrogation recoverable components.


Components of Net Reserves (Salvage)

 
 
As of
June 30, 2015
 
As of
December 31, 2014
 
(in millions)
Loss and LAE reserve
$
996

 
$
799

Reinsurance recoverable on unpaid losses
(77
)
 
(78
)
Loss and LAE reserve, net
919

 
721

Salvage and subrogation recoverable
(139
)
 
(151
)
Salvage and subrogation payable(1)
7

 
10

Other recoverables
(8
)
 
(13
)
Salvage and subrogation recoverable, net and other recoverable
(140
)
 
(154
)
Net reserves (salvage)
$
779

 
$
567

____________________
(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 June 30, 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
$
(8
)
 
$
—

 
$
(8
)
 
$
20

 
$
—

 
$
20

Loss and LAE reserve, net
140

 
(8
)
 
132

 
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
June 30, 2015
 
(in millions)
Net expected loss to be paid
$
1,397

Less: net expected loss to be paid for FG VIEs and other
133

Total
1,264

Contra-paid, net
(83
)
Salvage and subrogation recoverable, net of reinsurance
132

Loss and LAE reserve, net of reinsurance
(900
)
Other recoveries
8

Net expected loss to be expensed (present value) (1)
$
421

____________________
(1)
Excludes $82 million as of June 30, 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
June 30, 2015
 
(in millions)
2015 (July 1 – September 30)
$
12

2015 (October 1 – December 31)
12

Subtotal 2015
24

2016
40

2017
33

2018
30

2019
29

2020-2024
106

2025-2029
77

2030-2034
55

After 2034
27

Net expected loss to be expensed
421

Discount
494

Total expected future loss and LAE
$
915

 

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
  
 
Second Quarter
 
Six Months
 
2015
 
2014
 
2015

2014
 
(in millions)
Public Finance:
 
 
 
 
 
 
 
U.S. public finance
$
196

 
$
83

 
$
209

 
$
109

Non-U.S. public finance
1

 
(1
)
 
6

 
0

Public finance
197

 
82

 
215

 
109

Structured Finance:
 
 
 
 
 
 
 
U.S. RMBS:
 
 
 
 
 
 
 
First lien:
 
 
 
 
 
 
 
Prime first lien
(1
)
 
0

 
(1
)
 
0

Alt-A first lien
(9
)
 
10

 
(11
)
 
17

Option ARM
0

 
(22
)
 
(1
)
 
(30
)
Subprime
1

 
10

 
1

 
2

First lien
(9
)
 
(2
)
 
(12
)
 
(11
)
Second lien:
 
 
 
 
 
 
 
Closed-end second lien
(2
)
 
(1
)
 
(1
)
 
(1
)
HELOCs
2

 
(18
)
 
11

 
(10
)
Second lien
0

 
(19
)
 
10

 
(11
)
Total U.S. RMBS
(9
)
 
(21
)
 
(2
)
 
(22
)
Triple-X life insurance transactions
1

 
2

 
7

 
15

TruPS
0

 
0

 
(1
)
 
(1
)
Student loans
1

 
3

 
(5
)
 
6

Other structured finance
0

 
(1
)
 
(1
)
 
(2
)
Structured finance
(7
)
 
(17
)
 
(2
)
 
(4
)
Loss and LAE on insurance contracts before FG VIE consolidation
190

 
65

 
213

 
105

Effect of consolidating FG VIEs
(2
)
 
(8
)
 
(7
)
 
(7
)
Loss and LAE
$
188

 
$
57

 
$
206

 
$
98



 
The following table provides information on financial guaranty insurance contracts categorized as BIG.
 
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of June 30, 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)
266

 
(54
)
 
76

 
(14
)
 
126

 
(41
)
 
468

 
—

 
468

Remaining weighted-average contract period (in years)
9.7

 
6.5

 
10.3

 
8.1

 
9.2

 
6.7

 
10.1

 
—

 
10.1

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Principal
$
12,125

 
$
(1,621
)
 
$
3,696

 
$
(307
)
 
$
3,147

 
$
(136
)
 
$
16,904

 
$
—

 
$
16,904

Interest
6,019

 
(542
)
 
2,005

 
(122
)
 
1,039

 
(37
)
 
8,362

 
—

 
8,362

Total(2)
$
18,144

 
$
(2,163
)
 
$
5,701

 
$
(429
)
 
$
4,186

 
$
(173
)
 
$
25,266

 
$
—

 
$
25,266

Expected cash outflows (inflows)
$
561

 
$
(28
)
 
$
1,012

 
$
(79
)
 
$
1,659

 
$
(49
)
 
$
3,076

 
$
(339
)
 
$
2,737

Potential recoveries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Undiscounted R&W
17

 
(1
)
 
(49
)
 
1

 
(127
)
 
6

 
(153
)
 
9

 
(144
)
Other(3)
(446
)
 
14

 
(209
)
 
6

 
(399
)
 
19

 
(1,015
)
 
180

 
(835
)
Total potential recoveries
(429
)
 
13

 
(258
)
 
7

 
(526
)
 
25

 
(1,168
)
 
189

 
(979
)
Subtotal
132

 
(15
)
 
754

 
(72
)
 
1,133

 
(24
)
 
1,908

 
(150
)
 
1,758

Discount
10

 
(1
)
 
(190
)
 
13

 
(365
)
 
3

 
(530
)
 
36

 
(494
)
Present value of expected cash flows
$
142

 
$
(16
)
 
$
564

 
$
(59
)
 
$
768

 
$
(21
)
 
$
1,378

 
$
(114
)
 
$
1,264

Deferred premium revenue
$
631

 
$
(59
)
 
$
144

 
$
(4
)
 
$
296

 
$
(19
)
 
$
989

 
$
(107
)
 
$
882

Reserves (salvage)(4)
$
7

 
$
(8
)
 
$
459

 
$
(54
)
 
$
433

 
$
(8
)
 
$
829

 
$
(69
)
 
$
760

 
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 AGL’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. AGM insures periodic payments owed by the municipal obligors to the bank counterparties. In certain cases, 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 $132 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 $355 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 June 30, 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 $1.9 billion as of June 30, 2015 were terminated, the assets of the GIC issuers (which had an aggregate market value which exceed the liabilities by $0.9 billion) would be sufficient to fund the withdrawal of the GIC funds.