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Contracts Accounted for as Insurance
 6 Months Ended
Jun. 30, 2018
Insurance [Abstract]  
Contracts Accounted for as Insurance
Contracts Accounted for as Insurance

Premiums

The portfolio of outstanding exposures discussed in Note 4, Outstanding Exposure, includes contracts that meet the definition of insurance contracts, contracts that meet the definition of a derivative, and contracts that are accounted for as consolidated FG VIEs. Amounts presented in this note relate only to insurance contracts. See Note 8, Contracts Accounted for as Credit Derivatives for amounts that relate to CDS and Note 9, Consolidated Variable Interest Entities for amounts that relate to FG VIEs.

Net Earned Premiums
 
 
Second Quarter
 
Six Months
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Scheduled net earned premiums
$
92

 
$
97

 
$
180

 
$
200

Accelerations:
 
 
 
 
 
 
 
Refundings
38

 
49

 
84

 
105

Terminations
1

 
10

 
7

 
12

Total Accelerations
39

 
59

 
91

 
117

Accretion of discount on net premiums receivable
4

 
5

 
8

 
8

  Financial guaranty insurance net earned premiums
135

 
161

 
279

 
325

Non-financial guaranty net earned premiums
1

 
1

 
2

 
1

  Net earned premiums (1)
$
136

 
$
162

 
$
281

 
$
326

 ___________________
(1)
Excludes $3 million and $4 million for Second Quarter 2018 and 2017, respectively, and $6 million and $8 million for Six Months 2018 and 2017, respectively, related to consolidated FG VIEs.

Gross Premium Receivable,
Net of Commissions on Assumed Business
Roll Forward 

 
Six Months
 
2018
 
2017
 
(in millions)
December 31,
$
915

 
$
576

Less: Non-financial guaranty insurance premium receivable
1

 
0

FG insurance premiums receivable
914

 
576

Premiums receivable from acquisitions (see Note 2)
—

 
270

Gross written premiums on new business, net of commissions (2)
459

 
179

Gross premiums received, net of commissions (3)
(415
)
 
(159
)
Adjustments:
 
 
 
Changes in the expected term
(3
)
 
0

Accretion of discount, net of commissions on assumed business
0

 
9

Foreign exchange translation
(14
)
 
35

Cancellation of assumed reinsurance
(10
)
 
—

FG insurance premium receivable (1)
931

 
910

Non-financial guaranty insurance premium receivable
1

 
6

June 30,
$
932


$
916

____________________
(1)
Excludes $9 million and $10 million as of June 30, 2018 and June 30, 2017, respectively, related to consolidated FG VIEs.

(2)
For transactions where the Company replaces a previous Assured Guaranty financial guaranty contract, gross premiums written represents only the incremental gross premium written in excess of the original gross premiums written. Includes $330 million related to the SGI reinsured portfolio. See Note 2, Assumption of Insured Portfolio and Business Combinations.

(3)
Includes $275 million of cash received related to the SGI reinsured portfolio.


Approximately 72%, 72% and 69% of installment premiums at June 30, 2018, December 31, 2017 and June 30, 2017, respectively, are denominated in currencies other than the U.S. dollar, primarily the euro and pound sterling.
 
The timing and cumulative amount of actual collections may differ from expected collections in the tables below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations and changes in expected lives.

 Expected Collections of
Financial Guaranty Insurance Gross Premiums Receivable,
Net of Commissions on Assumed Business
(Undiscounted)

 
As of
June 30, 2018
 
(in millions)
2018 (July 1 - September 30)
$
31

2018 (October 1 - December 31)
26

2019
88

2020
100

2021
82

2022
74

2023-2027
301

2028-2032
199

2033-2037
109

After 2037
105

Total(1)
$
1,115

 ____________________
(1)
Excludes expected cash collections on FG VIEs of $12 million.


Scheduled Financial Guaranty Insurance Net Earned Premiums

 
As of
June 30, 2018
 
(in millions)
2018 (July 1 - September 30)
$
95

2018 (October 1 - December 31)
92

Subtotal 2018
187

2019
331

2020
301

2021
273

2022
247

2023-2027
962

2028-2032
636

2033-2037
374

After 2037
312

Net deferred premium revenue(1)
3,623

Future accretion
182

Total future net earned premiums
$
3,805

 ____________________
(1)
Excludes scheduled net earned premiums on consolidated FG VIEs of $70 million and non-financial guaranty business net earned premium of $13 million.

Selected Information for Financial Guaranty Insurance
Policies Paid in Installments

 
As of
June 30, 2018
 
As of
December 31, 2017
 
(dollars in millions)
Premiums receivable, net of commission payable
$
932

 
$
914

Gross deferred premium revenue
1,351

 
1,205

Weighted-average risk-free rate used to discount premiums
2.3
%
 
2.3
%
Weighted-average period of premiums receivable (in years)
9.0

 
9.2




Financial Guaranty Insurance Losses

Insurance Contracts' Loss Information

The following table provides information on net reserve (salvage), comprised of loss and LAE reserves and salvage and subrogation recoverable, both net of reinsurance. The Company used risk-free rates for U.S. dollar denominated financial guaranty insurance obligations that ranged from 0.0% to 3.03% with a weighted average of 2.85% as of June 30, 2018 and 0.0% to 2.78% with a weighted average of 2.39% as of December 31, 2017.

Net Reserve (Salvage) 

 
As of
June 30, 2018
 
As of
December 31, 2017
 
(in millions)
Public finance:
 
 
 
U.S. public finance
$
811

 
$
901

Non-U.S. public finance
19

 
21

Public finance
830

 
922

Structured finance:
 
 
 
U.S. RMBS
76

 
(59
)
Other structured finance
30

 
40

Structured finance
106

 
(19
)
Subtotal
936

 
903

Other payable (recoverable)
(4
)
 
(4
)
Subtotal
932

 
899

Elimination of losses attributable to FG VIEs
(55
)
 
(55
)
Total
$
877

 
$
844



Components of Net Reserves (Salvage)
 
 
As of
June 30, 2018
 
As of
December 31, 2017
 
(in millions)
Loss and LAE reserve
$
1,327

 
$
1,444

Reinsurance recoverable on unpaid losses (1)
(38
)
 
(44
)
Loss and LAE reserve, net
1,289

 
1,400

Salvage and subrogation recoverable
(425
)
 
(572
)
Salvage and subrogation payable(2)
17

 
20

Other payable (recoverable) (1)
(4
)
 
(4
)
Salvage and subrogation recoverable, net, and other recoverable
(412
)
 
(556
)
Net reserves (salvage)
$
877

 
$
844

____________________
(1)
Recorded as a component of other assets in condensed consolidated balance sheets.

(2)
Recorded as a component of other liabilities in condensed consolidated balance sheets.
    

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: (i) the contra-paid which represent the claim payments made and recoveries received that have not yet been recognized in the statement of operations, (ii) 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 (and therefore recognized in income but not yet received), and (iii) 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, 2018
 
(in millions)
Net expected loss to be paid - financial guaranty insurance (1)
$
1,350

Contra-paid, net
66

Salvage and subrogation recoverable, net of reinsurance
408

Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance
(1,288
)
Other recoverable (payable)
4

Net expected loss to be expensed (present value) (2)
$
540

____________________
(1)
See "Net Expected Loss to be Paid (Recovered) by Accounting Model" table in Note 5, Expected Loss to be Paid.

(2)
Excludes $46 million as of June 30, 2018, 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 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, 2018
 
(in millions)
2018 (July 1 – September 30)
$
9

2018 (October 1 – December 31)
9

Subtotal 2018
18

2019
40

2020
43

2021
44

2022
41

2023-2027
169

2028-2032
111

2033-2037
61

After 2037
13

Net expected loss to be expensed
540

Future accretion
170

Total expected future loss and LAE
$
710

 


The following table presents the loss and LAE recorded in the condensed consolidated statements of operations by sector for insurance contracts. Amounts presented are net of reinsurance.

Loss and LAE
Reported on the
Condensed Consolidated Statements of Operations
  
 
Loss (Benefit)
 
Second Quarter
 
Six Months
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Public finance:
 
 
 
 
 
 
 
U.S. public finance
$
62

 
$
79

 
$
34

 
$
191

Non-U.S. public finance
(1
)
 
0

 
(2
)
 
(3
)
Public finance
61

 
79

 
32

 
188

Structured finance:
 
 
 
 
 
 
 
U.S. RMBS
(15
)
 
(1
)
 
7

 
(10
)
Other structured finance
(5
)
 
(4
)
 
(10
)
 
(43
)
Structured finance
(20
)
 
(5
)
 
(3
)
 
(53
)
Loss and LAE on insurance contracts before FG VIE consolidation
41

 
74

 
29

 
135

Gain (loss) related to FG VIE consolidation
3

 
(2
)
 
(3
)
 
(4
)
Loss and LAE
$
44

 
$
72

 
$
26

 
$
131




The following table provides information on financial guaranty insurance contracts categorized as BIG.
 
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of June 30, 2018
 
 
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)
138

 
(11
)
 
44

 
(1
)
 
150

 
(7
)
 
332

 
—

 
332

Remaining weighted-average contract period (in years)
7.9

 
6.6

 
12.2

 
2.4

 
9.9

 
9.2

 
9.7

 
—

 
9.7

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Principal
$
2,822

 
$
(88
)
 
$
1,102

 
$
(6
)
 
$
6,720

 
$
(165
)
 
$
10,385

 
$
—

 
$
10,385

Interest
1,204

 
(35
)
 
649

 
(1
)
 
3,301

 
(76
)
 
5,042

 
—

 
5,042

Total(2)
$
4,026

 
$
(123
)
 
$
1,751

 
$
(7
)
 
$
10,021

 
$
(241
)
 
$
15,427

 
$
—

 
$
15,427

Expected cash outflows (inflows)
$
93

 
$
(5
)
 
$
314

 
$
(1
)
 
$
4,316

 
$
(89
)
 
$
4,628

 
$
(300
)
 
$
4,328

Potential recoveries(3)
(427
)
 
19

 
(112
)
 
0

 
(2,537
)
 
60

 
(2,997
)
 
189

 
(2,808
)
Subtotal
(334
)
 
14

 
202

 
(1
)
 
1,779

 
(29
)
 
1,631

 
(111
)
 
1,520

Discount
84

 
(5
)
 
(57
)
 
0

 
(214
)
 
(3
)
 
(195
)
 
25

 
(170
)
Present value of expected cash flows
$
(250
)
 
$
9

 
$
145

 
$
(1
)
 
$
1,565

 
$
(32
)
 
$
1,436

 
$
(86
)
 
$
1,350

Deferred premium revenue
$
88

 
$
(4
)
 
$
171

 
$
0

 
$
599

 
$
(2
)
 
$
852

 
$
(68
)
 
$
784

Reserves (salvage)
$
(279
)
 
$
10

 
$
52

 
$
(1
)
 
$
1,179

 
$
(30
)
 
$
931

 
$
(55
)
 
$
876

 
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 2017
 
 
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)
139

 
(22
)
 
46

 
(3
)
 
150

 
(41
)
 
335

 
—

 
335

Remaining weighted-average contract period (in years)
8.9

 
7.3

 
14.0

 
2.9

 
9.6

 
9.3

 
9.9

 
—

 
9.9

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Principal
$
4,397

 
$
(96
)
 
$
1,352

 
$
(8
)
 
$
6,445

 
$
(190
)
 
$
11,900

 
$
—

 
$
11,900

Interest
2,110

 
(42
)
 
1,002

 
(1
)
 
3,098

 
(86
)
 
6,081

 
—

 
6,081

Total(2)
$
6,507

 
$
(138
)
 
$
2,354

 
$
(9
)
 
$
9,543

 
$
(276
)
 
$
17,981

 
$
—

 
$
17,981

Expected cash outflows (inflows)
$
186

 
$
(5
)
 
$
492

 
$
(1
)
 
$
3,785

 
$
(104
)
 
$
4,353

 
$
(307
)
 
$
4,046

Potential recoveries(3)
(595
)
 
20

 
(145
)
 
0

 
(2,273
)
 
67

 
(2,926
)
 
194

 
(2,732
)
Subtotal
(409
)
 
15

 
347

 
(1
)
 
1,512

 
(37
)
 
1,427

 
(113
)
 
1,314

Discount
66

 
(4
)
 
(93
)
 
0

 
(78
)
 
(2
)
 
(111
)
 
23

 
(88
)
Present value of expected cash flows
$
(343
)
 
$
11

 
$
254

 
$
(1
)
 
$
1,434

 
$
(39
)
 
$
1,316

 
$
(90
)
 
$
1,226

Deferred premium revenue
$
112

 
$
(5
)
 
$
129

 
$
0

 
$
540

 
$
(6
)
 
$
770

 
$
(74
)
 
$
696

Reserves (salvage)
$
(380
)
 
$
11

 
$
202

 
$
(1
)
 
$
1,100

 
$
(34
)
 
$
898

 
$
(55
)
 
$
843

____________________
(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 R&W receivables and payables.


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 counterparties exercise contractual rights triggered by the downgrade against insured obligors, and the insured obligors are unable to pay.

Since the filing with the SEC of AGL’s Annual Report on Form 10-K for the year ended December 31, 2017, there have been no material changes to (i) the Company's potential termination payments under interest rate swaps, (ii) the variable rate demand obligations exposure, and (iii) the potential payment obligations under guaranteed investment contracts and availability of sufficient eligible and liquid assets to AGMH's former subsidiary, FSA Asset Management LLC, to satisfy any expected withdrawal and collateral posting obligations. See Note 6, Contracts Accounted for as Insurance, in Part II, Item 8. “Financial Statements and Supplementary Data” of AGL’s Annual Report on Form 10-K for the year ended December 31, 2017 for additional information.