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 ceding companies the right to recapture business they had ceded to AG Re and AGC, 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 business it had ceded to AG Re and/or AGC, and in connection therewith, to receive payment from AG Re or AGC of an amount equal to the 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 June 30, 2015, if each third party insurer 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 $76 million and $40 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 Six Months 2015, the Company entered into a commutation agreement to reassume previously ceded U.S. public finance par. In Six Months 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.

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



	Second Quarter						Six Months
	2015			2014			2015			2014
	(in millions)
Premiums Written:
Direct	$	23		$	17		$	52		$	48
Assumed	(1		)	0			2			(1		)
Ceded	2			2			2			(22		)
Net	$	24		$	19		$	56		$	25
Premiums Earned:
Direct	$	224		$	147		$	372		$	287
Assumed	12			9			22			20
Ceded	(17		)	(20		)	(33		)	(39		)
Net	$	219		$	136		$	361		$	268
Loss and LAE:
Direct	$	186		$	70		$	212		$	104
Assumed	19			9			12			15
Ceded	(17		)	(22		)	(18		)	(21		)
Net	$	188		$	57		$	206		$	98

Other Monoline Exposures

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 change based on the rating of the monoline. As of June 30, 2015, based on fair value, the Company had fixed-maturity securities in its investment portfolio consisting of $296 million insured by National Public Finance Guarantee Corporation ("NPFGC"), $240 million insured by Ambac Assurance Corporation ("Ambac") and $31 million insured by other guarantors.

Exposure by Reinsurer



	Ratings at		Par Outstanding (1)
	August 5, 2015		As of June 30, 2015
Reinsurer	Moody’s Reinsurer Rating	S&P Reinsurer Rating	Ceded Par Outstanding		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	$	6,006	$	—	$	30
Tokio Marine & Nichido Fire Insurance Co., Ltd.	Aa3 (3)	AA- (3)	4,768		—		—
Syncora Guarantee Inc.	WR	WR	3,671		1,612		160
Mitsui Sumitomo Insurance Co. Ltd.	A1	A+ (3)	1,927		—		—
ACA Financial Guaranty Corp.	NR (4)	WR	745		19		—
Ambac	WR	WR	117		4,725		12,320
Swiss Reinsurance Co.	Aa3	AA-	25		—		—
NPFGC (5)	A3	AA-	—		5,680		5,391
MBIA	(6)	(6)	—		2,704		469
Financial Guaranty Insurance Co.	WR	WR	—		1,797		690
Ambac Assurance Corp. Segregated Account	NR	NR	—		100		903
CIFG Assurance North America Inc.	WR	WR	—		102		3,914
Other	Various	Various	196		853		138
Total			$	17,455	$	17,592	$	24,015

____________________


(1)	Includes par related to insured credit derivatives.

(2) Represents “Withdrawn Rating.”

(3) The Company benefits from trust arrangements that satisfy the triple-A credit requirement of S&P and/or Moody’s.

(4) Represents “Not Rated.”


(5)	NPFGC is also rated AA+ by KBRA.


(6)	MBIA includes subsidiaries MBIA Insurance Corp. rated B by S&P and B2 by Moody's and MBIA U.K. Insurance Ltd. rated B by S&P and Ba2 by Moody’s.

Amounts Due (To) From Reinsurers

As of June 30, 2015



	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 (f/k/a Ram Re)	$	—	$	(7	)	$	—		$	15
Tokio Marine & Nichido Fire Insurance Co., Ltd.	—		(12		)	—			51
Syncora Guarantee Inc.	—		(28		)	—			8
Mitsui Sumitomo Insurance Co. Ltd.	—		(3		)	—			19
Swiss Reinsurance Co.	—		(2		)	—			—
Ambac	43		—			(17		)	—
Ambac Assurance Corp. Segregated Account	11		—			(70		)	—
CIFG Assurance North America Inc.	—		—			(20		)	—
MBIA	5		—			(11		)	—
NPFGC	6		—			(10		)	—
Financial Guaranty Insurance Co.	4		—			(7		)	—
Other	2		(3		)	—			—
Total	$	71	$	(55	)	$	(135	)	$	93

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. Currently, the facility covers losses occurring from January 1, 2015 through December 31, 2021, subject to the payment of certain additional premium by AGC, AGM and MAC on or before January 1, 2016. If AGC, AGM and MAC elect not to pay such additional premium, the facility terminates on January 1, 2016. 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 paid approximately $19 million of premiums for the term January 1, 2014 through December 31, 2014 and also paid approximately $19 million of premiums for the term January 1, 2015 through December 31, 2015.