XML 27 R14.htm IDEA: XBRL DOCUMENT v3.19.2
Contracts Accounted for as Insurance
 6 Months Ended
Jun. 30, 2019
Insurance [Abstract]  
Contracts Accounted for as Insurance
Contracts Accounted for as Insurance

Premiums

The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid, includes contracts that are accounted for as insurance contracts, derivatives, or consolidated FG VIEs. Amounts presented in this note relate only to contracts accounted for as insurance. See Note 8, Contracts Accounted for as Credit Derivatives for amounts that relate to CDS and Note 9, Variable Interest Entities for amounts that are accounted for as consolidated FG VIEs.

Net Earned Premiums
 
 
Second Quarter
 
Six Months
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Financial guaranty:
 
 
 
 
 
 
 
Scheduled net earned premiums
$
85

 
$
92

 
$
172

 
$
180

Accelerations from refundings and terminations
20

 
39

 
46

 
91

Accretion of discount on net premiums receivable
5

 
4

 
9

 
8

Financial guaranty insurance net earned premiums
110

 
135

 
227

 
279

Non-financial guaranty net earned premiums
2

 
1

 
3

 
2

  Net earned premiums (1)
$
112

 
$
136

 
$
230

 
$
281

 ___________________
(1)
Excludes $11 million and $3 million for Second Quarter 2019 and 2018, respectively, and $14 million and $6 million for Six Months 2019 and 2018, respectively, related to consolidated FG VIEs.

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

 
Six Months
 
2019
 
2018
 
(in millions)
Beginning of year
$
904

 
$
915

Less: Non-financial guaranty insurance premium receivable
1

 
1

Financial guaranty insurance premiums receivable
903

 
914

Gross written premiums on new business, net of commissions (1)
98

 
459

Gross premiums received, net of commissions
(127
)
 
(415
)
Adjustments:
 
 
 
Changes in the expected term
(10
)
 
(3
)
Accretion of discount, net of commissions on assumed business
4

 
—

Foreign exchange translation and remeasurement (2)
(3
)
 
(14
)
Cancellation of assumed reinsurance
—

 
(10
)
Financial guaranty insurance premium receivable (3)
865

 
931

Non-financial guaranty insurance premium receivable
1

 
1

June 30,
$
866


$
932

____________________
(1)
For transactions where one of the Company's financial guaranty contracts is replaced by another of the Company's insurance subsidiary's contracts, gross written premium in this table represents only the incremental amount in excess of the original gross written premiums. Six Months 2018 included $330 million of gross written premiums assumed from SGI on June 1, 2018, when the Company closed a reinsurance transaction with SGI (SGI Transaction). See Note 11, Reinsurance.

(2)
Includes foreign exchange loss on remeasurement recorded in the condensed consolidated statements of operations of $3 million in Six Months 2019 and $13 million in Six Months 2018. The remaining foreign exchange translation in Six Months 2018 was recorded in other comprehensive income (OCI) prior to the combination of the European subsidiaries.

(3)
Excludes $8 million and $9 million as of June 30, 2019 and June 30, 2018, respectively, related to consolidated FG VIEs.

Approximately 73% and 72% of installment premiums at June 30, 2019 and December 31, 2018, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro.
 
The timing and cumulative amount of actual collections may differ from those of expected collections in the table below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations, changes in expected lives and new business.

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

 
As of
June 30, 2019
 
(in millions)
2019 (July 1 - September 30)
31

2019 (October 1 - December 31)
26

2020
98

2021
78

2022
78

2023
65

2024-2028
278

2029-2033
184

2034-2038
97

After 2038
100

Total (1)
$
1,035

 ____________________
(1)
Excludes expected cash collections on consolidated FG VIEs of $10 million.

The timing and cumulative amount of actual net earned premiums may differ from those of expected net earned premiums in the table below due to factors such as accelerations, commutations, changes in expected lives and new business.

Scheduled Financial Guaranty Insurance Net Earned Premiums

 
As of
June 30, 2019
 
(in millions)
2019 (July 1 - September 30)
82

2019 (October 1 - December 31)
80

Subtotal 2019
162

2020
304

2021
277

2022
251

2023
230

2024-2028
905

2029-2033
615

2034-2038
348

After 2038
300

Net deferred premium revenue (1)
3,392

Future accretion
170

Total future net earned premiums
$
3,562

 ____________________
(1)
Excludes net earned premiums on consolidated FG VIEs of $51 million.

Selected Information for Financial Guaranty Insurance
Policies with Premiums Paid in Installments

 
As of
June 30, 2019
 
As of
December 31, 2018
 
(dollars in millions)
Premiums receivable, net of commission payable
$
865

 
$
903

Gross deferred premium revenue
1,251

 
1,313

Weighted-average risk-free rate used to discount premiums
2.3
%
 
2.3
%
Weighted-average period of premiums receivable (in years)
9.1

 
9.1



Financial Guaranty Insurance Losses

The following table provides information on net reserve (salvage), which includes loss and LAE reserves and salvage and subrogation recoverable, both net of reinsurance. To discount loss reserves, the Company used risk-free rates for U.S. dollar denominated financial guaranty insurance obligations that ranged from 0.00% to 2.63% with a weighted average of 2.11% as of June 30, 2019 and 0.00% to 3.06% with a weighted average of 2.74% as of December 31, 2018.

Net Reserve (Salvage) 

 
As of
June 30, 2019
 
As of
December 31, 2018
 
(in millions)
Public finance:
 
 
 
U.S. public finance
$
539

 
$
612

Non-U.S. public finance
5

 
14

Public finance
544

 
626

Structured finance:
 
 
 
U.S. RMBS (1)
(79
)
 
21

Other structured finance
39

 
30

Structured finance
(40
)
 
51

Subtotal
504

 
677

Other payable (recoverable)
(1
)
 
(3
)
Total
$
503

 
$
674

____________________
(1)
Excludes net reserves of $39 million and $47 million as of June 30, 2019 and December 31, 2018, respectively, related to consolidated FG VIEs.
 


Components of Net Reserves (Salvage)
 
 
As of
June 30, 2019
 
As of
December 31, 2018
 
(in millions)
Loss and LAE reserve
$
1,102

 
$
1,177

Reinsurance recoverable on unpaid losses (1)
(41
)
 
(34
)
Loss and LAE reserve, net
1,061

 
1,143

Salvage and subrogation recoverable
(580
)
 
(490
)
Salvage and subrogation reinsurance payable (2)
23

 
24

Other payable (recoverable) (1)
(1
)
 
(3
)
Salvage and subrogation recoverable, net, and other recoverable
(558
)
 
(469
)
Net reserves (salvage)
$
503

 
$
674

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

(2)
Recorded as a component of other liabilities in the 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, 2019
 
(in millions)
Net expected loss to be paid - financial guaranty insurance
$
906

Contra-paid, net
56

Salvage and subrogation recoverable, net, and other recoverable
558

Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance
(1,060
)
Net expected loss to be expensed (present value) (1)
$
460

____________________
(1)    Excludes $33 million as of June 30, 2019, 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, 2019
 
(in millions)
2019 (July 1 - September 30)
8

2019 (October 1 - December 31)
9

Subtotal 2019
17

2020
38

2021
35

2022
34

2023
35

2024-2028
148

2029-2033
99

2034-2038
45

After 2038
9

Net expected loss to be expensed
460

Future accretion
30

Total expected future loss and LAE
$
490

 

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
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Public finance:
 
 
 
 
 
 
 
U.S. public finance
94

 
62

 
$
164

 
$
34

Non-U.S. public finance
(8
)
 
(1
)
 
(8
)
 
(2
)
Public finance
86

 
61

 
156

 
32

Structured finance:
 
 
 
 
 
 
 
U.S. RMBS (1)
(88
)
 
(12
)
 
(115
)
 
4

Other structured finance
1

 
(5
)
 
4

 
(10
)
Structured finance
(87
)
 
(17
)
 
(111
)
 
(6
)
Loss and LAE
$
(1
)
 
$
44

 
$
45

 
$
26


____________________
(1)
Excludes a benefit of $14 million and $3 million for Second Quarter 2019 and 2018, respectively, and a benefit of $15 million and a loss of $3 million for Six Months 2019 and 2018 respectively, related to consolidated FG VIEs.
The following tables provide information on financial guaranty insurance contracts categorized as BIG.
 
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of June 30, 2019
 
 
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)
116

 
7

 
27

 
—

 
135

 
6

 
278

 
—

 
278

Remaining weighted-average contract period (in years)
7.8

 
4.7

 
17.6

 
—

 
9.6

 
8.4

 
9.6

 
—

 
9.6

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Principal
$
2,771

 
$
(66
)
 
$
524

 
$
—

 
$
5,650

 
$
(164
)
 
$
8,715

 
$
—

 
$
8,715

Interest
1,215

 
(16
)
 
470

 
—

 
2,670

 
(68
)
 
4,271

 
—

 
4,271

Total (2)
$
3,986

 
$
(82
)
 
$
994

 
$
—

 
$
8,320

 
$
(232
)
 
$
12,986

 
$
—

 
$
12,986

Expected cash outflows (inflows)
$
108

 
$
(4
)
 
$
131

 
$
—

 
$
3,871

 
$
(122
)
 
$
3,984

 
$
(273
)
 
$
3,711

Potential recoveries (3)
(552
)
 
21

 
(51
)
 
—

 
(2,479
)
 
95

 
(2,966
)
 
191

 
(2,775
)
Subtotal
(444
)
 
17

 
80

 
—

 
1,392

 
(27
)
 
1,018

 
(82
)
 
936

Discount
79

 
(4
)
 
(18
)
 
—

 
(97
)
 
(8
)
 
(48
)
 
18

 
(30
)
Present value of expected cash flows
$
(365
)
 
$
13

 
$
62

 
$
—

 
$
1,295

 
$
(35
)
 
$
970

 
$
(64
)
 
$
906

Deferred premium revenue
$
172

 
$
(3
)
 
$
24

 
$
—

 
$
517

 
$
(2
)
 
$
708

 
$
(50
)
 
$
658

Reserves (salvage)
$
(400
)
 
$
15

 
$
43

 
$
—

 
$
916

 
$
(33
)
 
$
541

 
$
(39
)
 
$
502

 
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 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)
128

 
(8
)
 
39

 
(1
)
 
145

 
(7
)
 
312

 
—

 
312

Remaining weighted-average contract period (in years)
7.9

 
6.5

 
13.2

 
2.1

 
10.1

 
9.1

 
9.8

 
—

 
9.8

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Principal
$
3,052

 
$
(71
)
 
$
938

 
$
(6
)
 
$
6,249

 
$
(159
)
 
$
10,003

 
$
—

 
$
10,003

Interest
1,319

 
(29
)
 
592

 
(1
)
 
3,140

 
(72
)
 
4,949

 
—

 
4,949

Total (2)
$
4,371

 
$
(100
)
 
$
1,530

 
$
(7
)
 
$
9,389

 
$
(231
)
 
$
14,952

 
$
—

 
$
14,952

Expected cash outflows (inflows)
$
98

 
$
(5
)
 
$
264

 
$
(1
)
 
$
4,029

 
$
(80
)
 
$
4,305

 
$
(290
)
 
$
4,015

Potential recoveries (3)
(465
)
 
23

 
(81
)
 
—

 
(2,542
)
 
55

 
(3,010
)
 
192

 
(2,818
)
Subtotal
(367
)
 
18

 
183

 
(1
)
 
1,487

 
(25
)
 
1,295

 
(98
)
 
1,197

Discount
83

 
(5
)
 
(53
)
 
—

 
(134
)
 
(2
)
 
(111
)
 
23

 
(88
)
Present value of expected cash flows
$
(284
)
 
$
13

 
$
130

 
$
(1
)
 
$
1,353

 
$
(27
)
 
$
1,184

 
$
(75
)
 
$
1,109

Deferred premium revenue
$
125

 
$
(4
)
 
$
151

 
$
—

 
$
518

 
$
(2
)
 
$
788

 
$
(64
)
 
$
724

Reserves (salvage)
$
(311
)
 
$
15

 
$
48

 
$
(1
)
 
$
993

 
$
(24
)
 
$
720

 
$
(47
)
 
$
673

____________________
(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)
Represents expected inflows for future payments by obligors pursuant to restructuring agreements, settlement or litigation judgments, excess spread on any underlying collateral and other estimated recoveries.


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. See Part II, Item 8, Financial Statements and Supplementary Data, Note 6, Contracts Accounted for as Insurance, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.