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.

Accounting Policy

For business assumed and ceded, the accounting model of the underlying direct financial guaranty contract dictates the accounting model used for the reinsurance contract (except for those eliminated as FG VIEs). For any assumed or ceded financial guaranty insurance premiums and financial guaranty insurance losses, the accounting models described in Note 6 are followed. For any assumed or ceded credit derivative contracts, the accounting model in Note 8 is followed.

Assumed and Ceded Business

The Company assumes business from third party insurers and reinsurers, including other monoline financial guaranty companies. Under these relationships, the Company assumes a portion of the ceding company’s insured risk in exchange for a portion of the ceding Company's premium for the insured risk (typically, net of a ceding commission). 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 required payment. As of December 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 $45 million and $18 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 to the reinsurer in exchange for the reinsurer receiving a share of the Company's premiums for the insured risk (typically, net of a ceding commission). 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.

Over the past several years, the Company has entered into several commutations in order to reassume previously ceded books of business from its reinsurers. The Company has also canceled assumed reinsurance contracts.

Net Effect of Commutations of Ceded and

Cancellations of Assumed Reinsurance Contracts



	Year Ended December 31,
	2016		2015		2014
	(in millions)
Increase (decrease) in net unearned premium reserve	$	—	$	23	$	20
Increase (decrease) in net par outstanding	28		855		1,167
Commutation gains (losses)	8		28		23

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



	Year Ended December 31,
	2016			2015			2014
	(in millions)
Premiums Written:
Direct	$	165		$	164		$	116
Assumed(1)	(11		)	17			(12		)
Ceded(2)	(17		)	10			15
Net	$	137		$	191		$	119
Premiums Earned:
Direct	$	887		$	792		$	581
Assumed	27			40			47
Ceded	(50		)	(66		)	(58		)
Net	$	864		$	766		$	570
Loss and LAE:
Direct	$	327		$	399		$	132
Assumed	0			45			37
Ceded	(32		)	(20		)	(43		)
Net	$	295		$	424		$	126

____________________


(1)	Negative assumed premiums written were due to changes in expected debt service schedules.


(2)	Positive ceded premiums written were due to commutations and changes in expected debt service schedules.

In addition to the items presented in the table above, the Company records in net change in fair value of credit derivatives on the consolidated statements of operations, the effect of assumed and ceded credit derivative exposures. These amounts were losses of $27 million in 2016 and $3 million in 2015 and gains of $2 million in 2014.

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 third party insurers and reinsurers. 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 December 31, 2016, based on fair value, the Company had fixed-maturity securities in its investment portfolio consisting of $110 million insured by National, $83 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 December 31, 2016 these bonds had a fair value of $332 million insured by MBIA and $126 million insured by FGIC UK Limited. On January 10, 2017, the Company delivered the bonds insured by MBIA in connection with its acquisition of AGLN. See Note 2, Acquisitions, for more information on the acquisition of AGLN.

In accordance with U.S. statutory accounting requirements and U.S. insurance laws and regulations, in order for the Company to receive credit for liabilities ceded to reinsurers domiciled outside of the U.S., such reinsurers must secure their liabilities to the Company. All of the unauthorized reinsurers in the tables below are required to post collateral for the benefit of the Company in an amount at least equal to the sum of their ceded unearned premium reserve, loss reserves and contingency reserves all calculated on a statutory basis of accounting. In addition, certain authorized reinsurers in the tables below post collateral on terms negotiated with the Company.

Monoline and Reinsurer Exposure by Company



	Par Outstanding
	As of December 31, 2016
Reinsurer	Ceded Par Outstanding (1)		Second-to- Pay Insured Par Outstanding (2)		Assumed Par Outstanding
	(in millions)
Reinsurers rated investment grade:
Tokio Marine & Nichido Fire Insurance Co., Ltd. (3) (4)	$	3,436	$	—	$	—
Mitsui Sumitomo Insurance Co. Ltd. (3) (4)	1,273		—		—
National	—		4,420		4,364
Subtotal	4,709		4,420		4,364
Reinsurers rated BIG, had rating withdrawn or not rated:
American Overseas Reinsurance Company Limited (3)	3,573		—		30
Syncora (3)	2,062		1,098		655
ACA Financial Guaranty Corp.	637		20		—
Ambac	115		2,862		6,695
MBIA	—		1,024		165
MBIA UK (5)	—		319		211
FGIC (6)	—		1,194		410
Ambac Assurance Corp. Segregated Account	—		73		614
Other (3)	60		529		120
Subtotal	6,447		7,119		8,900
Total	$	11,156	$	11,539	$	13,264

____________________


(1)	Of the total ceded par to reinsurers rated BIG, had rating withdrawn or not rated, $384 million is rated BIG.


(2)	The par on second-to-pay exposure where the primary insurer and underlying transaction rating are both BIG is $788 million.


(3)	The total collateral posted by all non-affiliated reinsurers required or had agreed to post collateral as of December 31, 2016 was approximately $387 million.

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


(5)	See Note 2, Acquisitions, for more information on MBIA UK.


(6)	FGIC includes subsidiaries Financial Guaranty Insurance Company and FGIC UK Limited.

Amounts Due (To) From Reinsurers

As of December 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)
Reinsurers rated investment grade	$	5	$	(11	)	$	(1	)	$	62
Reinsurers rated BIG, had rating withdrawn or not rated:
Ambac	33		—			(1		)	—
Syncora	13		(18		)	—			(3		)
Ambac Assurance Corp. Segregated Account	6		—			(47		)	—
FGIC	4		—			(13		)	—
MBIA	0		—			(8		)	—
MBIA UK	4		—			0			—
American Overseas Reinsurance Company Limited	—		(5		)	—			28
Other	—		(12		)	—			—
Subtotal	60		(35		)	(69		)	25
Total	$	65	$	(46	)	$	(70	)	$	87

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 had approximately $9 million of cash in trust accounts for the benefit of the reinsurers to be used to pay the premium for January 1, 2017 through December 31, 2017.