Reinsurance and Other Monoline Exposures

The Company assumes exposure on insured obligations (“Assumed Business”) and may cede portions of its exposure on obligations it has insured (“Ceded Business”) in exchange for premiums, net of ceding commissions. The Company 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 March 31, 2016, 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 $50 million and $33 million, respectively.

The Company has Ceded Business to non-affiliated companies to limit its exposure to risk. Under these relationships, the Company ceded 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.

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

Effect of Reinsurance on Statement of Operations



	First Quarter
	2016			2015
	(in millions)
Premiums Written:
Direct	$	21		$	29
Assumed	(2		)	3
Ceded	(17		)	0
Net	$	2		$	32
Premiums Earned:
Direct	$	190		$	148
Assumed	8			10
Ceded	(15		)	(16		)
Net	$	183		$	142
Loss and LAE:
Direct	$	109		$	26
Assumed	(14		)	(7		)
Ceded	(5		)	(1		)
Net	$	90		$	18

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 March 31, 2016, based on fair value, the Company had fixed-maturity securities in its investment portfolio consisting of $157 million insured by National Public Finance Guarantee Corporation ("National"), $139 million insured by Ambac and $8 million insured by other guarantors. In addition, the Company acquired bonds for loss mitigation or other risk management purposes. As of March 31, 2016 these bonds had a fair value of $247 million insured by MBIA Insurance Corp. and $127 million insured by FGIC UK Limited.

Exposure by Reinsurer



	Ratings at		Par Outstanding (1)
	May 3, 2016		As of March 31, 2016
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 (2)	WR (3)	WR	$	4,960	$	—	$	30
Tokio Marine & Nichido Fire Insurance Co., Ltd. (2)	Aa3 (4)	A+ (4)	4,171		—		—
Syncora Guarantee Inc. (2)	WR	WR	2,411		1,319		700
Mitsui Sumitomo Insurance Co. Ltd. (2)	A1	A+ (4)	1,718		—		—
ACA Financial Guaranty Corp.	NR (5)	WR	700		38		—
Ambac	WR	WR	117		3,892		9,589
National (6)	A3	AA-	—		5,139		5,065
MBIA	(7)	(7)	—		1,591		428
FGIC	(8)	(8)	—		1,437		636
Ambac Assurance Corp. Segregated Account	NR	NR	—		86		823
CIFG Assurance North America Inc.	WR	WR	—		43		2,784
Other (2)	Various	Various	76		776		128
Total			$	14,153	$	14,321	$	20,183

____________________


(1)	Includes par related to insured credit derivatives.


(2)	The total collateral posted by all non-affiliated reinsurers required or agreeing to post collateral as of March 31, 2016 was approximately $436 million.

(3) Represents “Withdrawn Rating.”

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

(5) Represents “Not Rated.”


(6)	Rated AA+ by KBRA.


(7)	MBIA includes subsidiaries MBIA Insurance Corp. rated B by S&P and B3 by Moody's and MBIA U.K. Insurance Ltd. rated BB by S&P and Ba2 by Moody’s.


(8)	FGIC includes subsidiaries Financial Guaranty Insurance Company and FGIC UK Limited both of which had their ratings withdrawn by rating agencies.

Amounts Due (To) From Reinsurers

As of March 31, 2016



	Assumed Premium, net of Commissions		Ceded Premium, net of Commissions			Assumed Expected Loss to be Paid			Ceded Expected Loss to be Paid
	(in millions)
American Overseas Reinsurance Company Limited	$	—	$	(6	)	$	—		$	25
Tokio Marine & Nichido Fire Insurance Co., Ltd.	—		(11		)	—			44
Syncora Guarantee Inc.	15		(21		)	—			5
Mitsui Sumitomo Insurance Co. Ltd.	—		(3		)	—			18
Ambac	39		—			(3		)	—
National	6		—			(4		)	—
MBIA	5		—			(10		)	—
FGIC	4		—			(15		)	—
Ambac Assurance Corp. Segregated Account	10		—			(46		)	—
CIFG Assurance North America Inc.	0		—			(63		)	—
Other	—		(12		)	—			—
Total	$	79	$	(53	)	$	(141	)	$	92

Excess of Loss Reinsurance Facility

AGC, AGM and MAC entered into a $360 million aggregate excess of loss reinsurance facility with a number of reinsurers, effective as of January 1, 2016. This facility replaces a similar $450 million aggregate excess of loss reinsurance facility that AGC, AGM and MAC had entered into effective January 1, 2014 and which terminated on December 31, 2015. The new facility covers losses occurring either from January 1, 2016 through December 31, 2023, or January 1, 2017 through December 31, 2024, at the option of AGC, AGM and MAC. It terminates on January 1, 2018, unless AGC, AGM and MAC choose to extend it. The new facility covers certain U.S. public finance credits insured or reinsured by AGC, AGM and MAC as of September 30, 2015, excluding credits that were rated non-investment grade as of December 31, 2015 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 new 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 $1.25 billion in the aggregate. The new facility covers a portion of the next $400 million of losses, with the reinsurers assuming pro rata in the aggregate $360 million of the $400 million of losses and AGC, AGM and MAC jointly retaining the remaining $40 million. 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 $9 million of premiums in 2016 for the term January 1, 2016 through December 31, 2016 and deposited approximately $9 million of securities into trust accounts for the benefit of the reinsurers to be used to pay the premium for January 1, 2017 through December 31, 2017. The main differences between the new facility and the prior facility that terminated on December 31, 2015 are the reinsurance attachment point ($1.25 billion versus $1.5 billion), the total reinsurance coverage ($360 million part of $400 million versus $450 million part of $500 million) and the annual premium ($9 million versus $19 million).