Reinsurance and Other Monoline Exposures

The Company assumes exposure (Assumed Business) and may cede portions of exposure it has insured (Ceded Business) in exchange for premiums, net of ceding commissions. Substantially all of the Company’s Assumed Business and Ceded Business relates to financial guaranty insurance, except for a modest amount that relates to non-financial guaranty business assumed by AGRO. The Company historically entered into, and with respect to new business originated by AGRO continues to enter into, ceded reinsurance contracts in order to obtain greater business diversification and reduce the net potential loss from large risks.

The following table presents the components of premiums and losses reported in the consolidated statements of operations and the contribution of the Company's Assumed and Ceded Businesses (both financial guaranty and non-financial guaranty).

Effect of Reinsurance on Statement of Operations



	Third Quarter						Nine Months
	2017			2016			2017			2016
	(in millions)
Premiums Written:
Direct	$	46		$	17		$	227		$	80
Assumed (1)	(1		)	(1		)	8			(9		)
Ceded (2)	27			0			37			(17		)
Net	$	72		$	16		$	272		$	54
Premiums Earned:
Direct	$	186		$	237		$	516		$	647
Assumed	6			6			20			19
Ceded	(6		)	(12		)	(24		)	(38		)
Net	$	186		$	231		$	512		$	628
Loss and LAE:
Direct	$	231		$	7		$	377		$	217
Assumed	(1		)	(1		)	(1		)	(4		)
Ceded	(7		)	(15		)	(22		)	(30		)
Net	$	223		$	(9	)	$	354		$	183

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(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 the consolidated statements of operations, the effect of assumed and ceded credit derivative exposures. These amounts were losses of $0.2 million in Third Quarter 2017, $25 million in Third Quarter 2016, $0.8 million for Nine Months 2017 and $26 million for Nine Months 2016.

Amounts Due (To) From All Reinsurers

As of September 30, 2017



	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	$	—		$	1		$	—
Reinsurers rated BIG or not rated:
American Overseas Reinsurance Company Limited	—		(4		)	—			36
Syncora	13		(18		)	—			(11		)
Ambac	31		—			1			—
MBIA	0		—			(3		)	—
Financial Guaranty Insurance Company and FGIC UK Limited	3		—			(16		)	—
Ambac Assurance Corp. Segregated Account	6		—			(46		)	—
Subtotal	53		(22		)	(64		)	25
Other	0		(3		)	—			—
Total	$	58	$	(25	)	$	(63	)	$	25

Assumed and Ceded Financial Guaranty Business

The Company assumes financial guaranty business (Assumed Financial Guaranty Business) from third party insurers, primarily 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 Financial Guaranty 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 Assumed Financial Guaranty 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 September 30, 2017, 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 $49 million and $16 million, respectively.

The Company has ceded financial guaranty 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 financial guaranty business after certain triggering events, such as reinsurer downgrades.

During the first quarter of 2017, the Company entered into a commutation agreement to reassume the entire portfolio previously ceded to one of its unaffiliated reinsurers, consisting predominantly (over 97%) of U.S. public finance and international public and project finance exposures. During Third Quarter 2017, the Company entered into two commutation agreements. In one case, it reassumed the entire portfolio previously ceded to one of its unaffiliated reinsurers under quota share reinsurance, consisting predominantly of U.S. public finance and international public and project finance exposures. In the other case, it reassumed a portion of the portfolio previously ceded to one of its other unaffiliated reinsurers. The table below summarizes the effect of commutations.

Commutations of Ceded Reinsurance Contracts



	Third Quarter				Nine Months
	2017		2016		2017		2016
	(in millions)
Increase (decrease) in net unearned premium reserve	$	62	$	—	$	80	$	—
Increase (decrease) in net par outstanding	3,455		28		4,628		28
Commutation gains (losses)	255		8		328		8

Other Exposures to Monoline Financial Guaranty Insurers

In addition to the Company’s assumed and ceded reinsurance arrangements with other monoline financial guaranty insurers, the Company may also have exposure to such companies in other areas. Second-to-pay insured par outstanding represents transactions the Company has insured that were previously insured by such other monoline financial guaranty insurers. 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 September 30, 2017, based on fair value, the Company had fixed-maturity securities in its investment portfolio consisting of $98 million insured by National Public Finance Guarantee Corporation (National), $69 million insured by Ambac and $8 million insured by other guarantors.

Reinsurance and Other Exposures to Monolines



	Par Outstanding
	As of September 30, 2017
Reinsurer	Ceded Par Outstanding (1)		Assumed Par Outstanding		Second-to- Pay Insured Par Outstanding (2)
	(in millions)
Reinsurers rated investment grade:
National	$	—	$	3,245	$	2,730
Subtotal	—		3,245		2,730
Reinsurers rated BIG or not rated:
American Overseas Reinsurance Company Limited (3)	2,445		—		—
Syncora (3)	1,994		674		1,156
ACA Financial Guaranty Corp.	208		—		10
Ambac and Ambac Assurance UK Limited	112		4,902		1,927
MBIA	—		137		565
Financial Guaranty Insurance Company and FGIC UK Limited	—		275		821
Ambac Assurance Corp. Segregated Account	—		567		51
Subtotal	4,759		6,555		4,530
Other (3)	52		111		410
Total	$	4,811	$	9,911	$	7,670

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(1)	Of the total ceded par to reinsurers rated BIG or not rated, $305 million is rated BIG.


(2)	The par on second-to-pay exposure where the primary insurer and underlying transaction rating are both BIG, and/or not rated, is $774 million.


(3)	The total collateral posted by all non-affiliated reinsurers required to post, or that had agreed to post, collateral as of September 30, 2017 was approximately $123 million.

Assumed and Ceded Non-Financial Guaranty Business

As described in Note 4, Outstanding Exposure, Non-Financial Guaranty Insurance, the Company, through AGRO, assumes non-financial guaranty business from third party insurers (Assumed Non-Financial Guaranty Business). It also retrocedes some of this business to third party reinsurers. The downgrade of AGRO’s financial strength rating by S&P below “A” would require AGRO to post, as of September 30, 2017, an estimated $5 million of collateral in respect of certain of its Assumed Non-Financial Guaranty Business. A further downgrade of AGRO’s S&P rating below A- would give the company ceding such business the right to recapture the business for AGRO’s collateral amount, and, if also accompanied by a downgrade of AGRO's financial strength rating by A.M. Best Company, Inc. below A-, would also require AGRO to post, as of September 30, 2017, an estimated $5 million of collateral in respect of a different portion of AGRO’s Assumed Non-Financial Guaranty Business. AGRO’s ceded contracts generally have equivalent provisions requiring the assuming reinsurer to post collateral and/or allowing AGRO to recapture the ceded business upon certain triggering events, such as reinsurer rating downgrades.

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, that 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 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 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 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 approximately $9 million of premiums for January 1, 2017 through December 31, 2017.