Contracts Accounted for as Insurance

12 Months Ended

Dec. 31, 2019

Insurance [Abstract]

Contracts Accounted for as Insurance

Contracts Accounted for as Insurance

Premiums

The portfolio of outstanding exposures discussed in Note 5, Outstanding Insurance Exposure, and Note 6, Expected Loss to be Paid, includes contracts that are accounted for as insurance contracts, derivatives, and consolidated FG VIEs. Amounts presented in this note relate only to contracts accounted for as insurance. See Note 11, Contracts Accounted for as Credit Derivatives for amounts that relate to CDS and Note 14, Variable Interest Entities for amounts that are accounted for as consolidated FG VIEs.

Accounting Policies

Accounting for financial guaranty contracts that meet the scope exception under derivative accounting guidance are subject to industry specific guidance for financial guaranty insurance. The accounting for contracts that fall under the financial guaranty insurance definition are consistent whether contracts are written on a direct basis, assumed from another financial guarantor under a reinsurance treaty, ceded to another insurer under a reinsurance treaty, or acquired in a business combination.

Premiums receivable represent the present value of contractual or expected future premium collections discounted using risk free rates. Unearned premium reserve represents deferred premium revenue, less claim payments made and recoveries received that have not yet been recognized in the statement of operations (contra-paid). The following discussion relates to the deferred premium revenue component of the unearned premium reserve, while the contra-paid is discussed below under "Financial Guaranty Insurance Losses."

The amount of deferred premium revenue at contract inception is determined as follows:

• For premiums received upfront on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is equal to the amount of cash received. Upfront premiums typically relate to public finance transactions.

• For premiums received in installments on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is the present value (discounted at risk free rates) of either (1) contractual premiums due or (2) in cases where the underlying collateral is composed of homogeneous pools of assets, the expected premiums to be collected over the life of the contract. To be considered a homogeneous pool of assets, prepayments must be contractually allowable, the amount of prepayments must be probable, and the timing and amount of prepayments must be reasonably estimable. Installment premiums typically relate to structured finance and infrastructure transactions, where the insurance premium rate is determined at the inception of the contract but the insured par is subject to prepayment throughout the life of the transaction.

• For financial guaranty insurance contracts acquired in a business combination, deferred premium revenue is equal to the fair value of the Company's stand-ready obligation portion of the insurance contract at the date of acquisition based on what a hypothetical similarly rated financial guaranty insurer would have charged for the contract at that date and not the actual cash flows under the insurance contract. The amount of deferred premium revenue may differ significantly from cash collections primarily due to fair value adjustments recorded in connection with a business combination.

• For premiums received in a reinsurance transaction, the cash received is allocated to individual policies in the assumed portfolio and recorded as unearned premium reserve.

When the Company adjusts prepayment assumptions or expected premium collections, an adjustment is recorded to the deferred premium revenue, with a corresponding adjustment to the premium receivable. Premiums receivable are discounted at the risk-free rate at inception and such discount rate is updated only when changes to prepayment assumptions are made that change the expected date of final maturity.

The Company recognizes deferred premium revenue as earned premium over the contractual period or expected period of the contract in proportion to the amount of insurance protection provided. As premium revenue is recognized, a corresponding decrease to the deferred premium revenue is recorded. The amount of insurance protection provided is a function of the insured par amount outstanding. Accordingly, the proportionate share of premium revenue recognized in a given reporting period is a constant rate calculated based on the relationship between the insured par amounts outstanding in the reporting period compared with the sum of each of the insured principal amounts outstanding for all periods. When an insured

financial obligation is retired before its maturity, the financial guaranty insurance contract is extinguished. Any nonrefundable deferred premium revenue related to that contract is accelerated and recognized as premium revenue. When a premium receivable balance is deemed uncollectible, it is written off to bad debt expense.

For assumed reinsurance contracts, net earned premiums reported in the consolidated statements of operations are calculated based upon data received from ceding companies; however, some ceding companies report premium data between 30 and 90 days after the end of the reporting period. The Company estimates net earned premiums for the lag period.  Differences between such estimates and actual amounts are recorded in the period in which the actual amounts are determined. When installment premiums are related to assumed reinsurance contracts, the Company assesses the credit quality and liquidity of the ceding companies and the impact of any potential regulatory constraints to determine the collectability of such amounts.

Ceded unearned premium reserve is recorded as an asset. Direct, assumed and ceded earned premiums are presented together as net earned premiums in the statement of operations. See Note 8, Reinsurance, for a breakout of direct, assumed and ceded premiums. The components of net earned premiums are shown in the table below:

Net Earned Premiums

	Year Ended December 31,
	2019		2018		2017
	(in millions)
Financial guaranty:
Scheduled net earned premiums	$	331	$	367	$	385
Accelerations from refundings and terminations	122		159		286
Accretion of discount on net premiums receivable	17		18		17
Financial guaranty insurance net earned premiums	470		544		688
Specialty net earned premiums	6		4		2
Net earned premiums (1)	$	476	$	548	$	690

 ___________________

(1) Excludes $18 million, $12 million and $15 million for the years ended December 31, 2019, 2018 and 2017, respectively, related to consolidated FG VIEs.

Gross Premium Receivable,

Net of Commissions on Assumed Business

Roll Forward

	Year Ended December 31,
	2019			2018			2017
	(in millions)
Beginning of year	$	904		$	915		$	576
Less: Specialty insurance premium receivable	1			1			—
Financial guaranty insurance premiums receivable	903			914			576
Premiums receivable from acquisitions (see Note 2)	—			—			270
Gross written premiums on new business, net of commissions (1)	689			610			301
Gross premiums received, net of commissions	(318		)	(577		)	(301		)
Adjustments:
Changes in the expected term	(21		)	(8		)	(8		)
Accretion of discount, net of commissions on assumed business	10			9			12
Foreign exchange translation and remeasurement (2)	21			(35		)	64
Cancellation of assumed reinsurance	—			(10		)	—
Financial guaranty insurance premium receivable (3)	1,284			903			914
Specialty insurance premium receivable	2			1			1
December 31,	$	1,286		$	904		$	915

____________________

(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. The year ended December 31, 2018 included $330 million of gross written premiums assumed from SGI on June 1, 2018, when the Company closed an SGI Transaction. See Note 2, Business Combinations and Assumption of Insured Portfolio.

(2) Includes foreign exchange gain (loss) on remeasurement recorded in the consolidated statements of operations of $21 million in 2019, $(33) million in 2018, $61 million in 2017. The remaining foreign exchange translation in 2018 and 2017 was recorded in OCI prior to the Combination, some of which had functional currencies other than the U.S. dollar

(3) Excludes $7 million, $9 million and $10 million as of December 31, 2019, 2018 and 2017, respectively, related to consolidated FG VIEs.

Approximately 78% and 72% of installment premiums at December 31, 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 December 31, 2019
	(in millions)
2020 (January 1 - March 31)	$	35
2020 (April 1 - June 30)	47
2020 (July 1 - September 30)	30
2020 (October 1 - December 31)	18
2021	92
2022	94
2023	82
2024	82
2025-2029	343
2030-2034	240
2035-2039	151
After 2039	352
Total (1)	$	1,566

____________________

(1) Excludes expected cash collections on consolidated FG VIEs of $9 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 December 31, 2019
	(in millions)
2020 (January 1 - March 31)	$	80
2020 (April 1 - June 30)	79
2020 (July 1 - September 30)	77
2020 (October 1 - December 31)	75
Subtotal 2020	311
2021	284
2022	263
2023	245
2024	227
2025-2029	909
2030-2034	634
2035-2039	368
After 2039	494
Net deferred premium revenue (1)	3,735
Future accretion	281
Total future net earned premiums	$	4,016

 ____________________

(1) Excludes net earned premiums on consolidated FG VIEs of $47 million.

Selected Information for Financial Guaranty Insurance

Policies with Premiums Paid in Installments

	As of December 31, 2019			As of December 31, 2018
	(dollars in millions)
Premiums receivable, net of commission payable	$	1,284		$	903
Gross deferred premium revenue	1,637			1,313
Weighted-average risk-free rate used to discount premiums	1.7		%	2.3		%
Weighted-average period of premiums receivable (in years)	13.3			9.1

Financial Guaranty Insurance Acquisition Costs

Accounting Policy

Policy acquisition costs that are directly related and essential to successful insurance contract acquisition, as well as ceding commission income and expense on ceded and assumed reinsurance contracts, are deferred and reported net.

Capitalized policy acquisition costs include the cost of underwriting personnel attributable to successful underwriting efforts. Management uses its judgment in determining the type and amount of costs to be deferred. The Company conducts an annual study to determine deferral rates.

Ceding commission expense on assumed reinsurance contracts and ceding commission income on ceded reinsurance contracts that are associated with premiums received in installments are calculated at their contractually defined commission rates, discounted consistent with premiums receivable for all future periods, and included in DAC, with a corresponding offset to net premiums receivable or reinsurance balances payable.

DAC is amortized in proportion to net earned premiums. Amortization of deferred policy acquisition costs includes the accretion of discount on ceding commission receivable and payable. When an insured obligation is retired early, the remaining related DAC is recognized at that time. Costs incurred for soliciting potential customers, market research, training, administration, unsuccessful acquisition efforts, and product development as well as all overhead type costs are charged to expense as incurred.

Expected losses and LAE, investment income, and the remaining costs of servicing the insured or reinsured business, are considered in determining the recoverability of DAC.

Rollforward of

Deferred Acquisition Costs

	Year Ended December 31,
	2019			2018			2017
	(in millions)
Beginning of year	$	105		$	101		$	106
DAC adjustments from acquisitions (see Note 2)	—			—			(2		)
Costs deferred during the period	23			19			16
Costs amortized during the period	(17		)	(15		)	(19		)
December 31,	$	111		$	105		$	101

Financial Guaranty Insurance Losses

Accounting Policies

Loss and LAE Reserve

Loss and LAE reserve reported on the balance sheet relates only to direct and assumed reinsurance contracts that are accounted for as insurance, substantially all of which are financial guaranty insurance contracts. The corresponding reserve ceded to reinsurers is reported as reinsurance recoverable on unpaid losses and reported in other assets. As discussed in Note 9, Fair Value Measurement, contracts that meet the definition of a derivative, as well as consolidated FG VIEs’ assets and liabilities, are recorded separately at fair value. Any expected losses related to consolidated FG VIEs are eliminated upon consolidation. Any expected losses on credit derivatives are reflected in the fair value of credit derivatives.

Under financial guaranty insurance accounting, the sum of unearned premium reserve and loss and LAE reserve represents the Company's stand‑ready obligation. Unearned premium reserve is deferred premium revenue, less claim payments and recoveries received that have not yet been recognized in the statement of operations (contra-paid). At contract inception, the entire stand-ready obligation is represented by unearned premium reserve. A loss and LAE reserve for an insurance contract is recorded only to the extent, and for the amount, that expected loss to be paid plus contra-paid (“total losses”) exceed the deferred premium revenue, on a contract by contract basis. As a result, the Company has expected loss to be paid that has not yet been expensed. Such amounts will be recognized in future periods as deferred premium revenue amortizes into income.

When a claim or LAE payment is made on a contract, it first reduces any recorded loss and LAE reserve. To the extent there is no loss and LAE reserve on a contract, then such claim payment is recorded as “contra-paid,” which reduces the unearned premium reserve. The contra-paid is recognized in the line item “loss and LAE” in the consolidated statement of operations when and for the amount that total losses exceed the remaining deferred premium revenue on the insurance contract. Loss and LAE in the consolidated statement of operations is presented net of cessions to reinsurers.

Salvage and Subrogation Recoverable

When the Company becomes entitled to the cash flow from the underlying collateral of an insured exposure under salvage and subrogation rights as a result of a claim payment or estimated future claim payment, it reduces the expected loss to be paid on the contract. Such reduction in expected loss to be paid can result in one of the following:

• a reduction in the corresponding loss and LAE reserve with a benefit to the income statement,

• no entry recorded, if “total loss” is not in excess of deferred premium revenue, or

• the recording of a salvage asset with a benefit to the income statement if the transaction is in a net recovery position at the reporting date.

The ceded component of salvage and subrogation recoverable is recorded in the line item other liabilities.

Expected Loss to be Expensed

Expected loss to be expensed represents past or expected future net claim payments that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies. Expected loss to be expensed is the Company's projection of incurred losses that will be recognized in future periods, excluding accretion of discount.

Insurance Contracts' Loss Information

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 0.0% to 2.45% with a weighted average of 1.94% as of December 31, 2019 and 0.0% to 3.06% with a weighted average of 2.74% as of December 31, 2018.

Net Reserve (Salvage)

	As of December 31, 2019			As of December 31, 2018
	(in millions)
Public finance:
U.S. public finance	$	328		$	612
Non-U.S. public finance	5			14
Public finance	333			626
Structured finance:
U.S. RMBS (1)	(78		)	21
Other structured finance	40			30
Structured finance	(38		)	51
Subtotal	295			677
Other payable (recoverable)	—			(3		)
Total	$	295		$	674

____________________

(1) Excludes net reserves of $33 million and $47 million as of December 31, 2019 and December 31, 2018, respectively, related to consolidated FG VIEs.

Components of Net Reserves (Salvage)

	As of December 31, 2019			As of December 31, 2018
	(in millions)
Loss and LAE reserve	$	1,050		$	1,177
Reinsurance recoverable on unpaid losses (1)	(38		)	(34		)
Loss and LAE reserve, net	1,012			1,143
Salvage and subrogation recoverable	(747		)	(490		)
Salvage and subrogation reinsurance payable (2)	30			24
Other payable (recoverable) (1)	—			(3		)
Salvage and subrogation recoverable, net and other recoverable	(717		)	(469		)
Net reserves (salvage)	$	295		$	674

____________________

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

(2)          Recorded as a component of other liabilities in the 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 represents 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 December 31, 2019
	(in millions)
Net expected loss to be paid - financial guaranty insurance	$	683
Contra-paid, net	51
Salvage and subrogation recoverable, net, and other recoverable	717
Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance	(1,012		)
Net expected loss to be expensed (present value) (1)	$	439

____________________

(1) Excludes $33 million as of December 31, 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 December 31, 2019
	(in millions)
2020 (January 1 - March 31)	$	9
2020 (April 1 - June 30)	9
2020 (July 1 - September 30)	9
2020 (October 1 - December 31)	9
Subtotal 2020	36
2021	35
2022	34
2023	32
2024	33
2025-2029	138
2030-2034	91
2035-2039	32
After 2039	8
Net expected loss to be expensed	439
Future accretion	105
Total expected future loss and LAE	$	544

 

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

Loss and LAE

Reported on the

Consolidated Statements of Operations

 

	Loss (Benefit)
	Year Ended December 31,
	2019			2018			2017
	(in millions)
Public finance:
U.S. public finance	$	247		$	90		$	553
Non-U.S. public finance	(7		)	(7		)	(4		)
Public finance	240			83			549
Structured finance:
U.S. RMBS (1)	(154		)	(15		)	(113		)
Other structured finance	7			(4		)	(48		)
Structured finance	(147		)	(19		)	(161		)
Loss and LAE	$	93		$	64		$	388

____________________

(1) Excludes a benefit of $20 million, a benefit of $3 million and a loss of $7 million for the years ended December 31, 2019, 2018 and 2017, 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 December 31, 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)	121			(6		)	24			—		131			(7		)	276			—			276
Remaining weighted-average contract period (in years)	8.0			5.2			17.0			—		9.7			8.3			9.7			—			9.7
Outstanding exposure:
Par	$	2,654		$	(54	)	$	561		$	—	$	5,386		$	(170	)	$	8,377		$	—		$	8,377
Interest	1,149			(15		)	481			—		2,507			(73		)	4,049			—			4,049
Total (2)	$	3,803		$	(69	)	$	1,042		$	—	$	7,893		$	(243	)	$	12,426		$	—		$	12,426
Expected cash outflows (inflows)	$	135		$	(3	)	$	84		$	—	$	4,185		$	(132	)	$	4,269		$	(264	)	$	4,005
Potential recoveries (3)	(598		)	21			(10		)	—		(2,926		)	107			$	(3,406	)	189			(3,217		)
Subtotal	(463		)	18			74			—		1,259			(25		)	863			(75		)	788
Discount	54			(1		)	(21		)	—		(151		)	(3		)	(122		)	17			(105		)
Present value of expected cash flows	$	(409	)	$	17		$	53		$	—	$	1,108		$	(28	)	$	741		$	(58	)	$	683
Deferred premium revenue	$	142		$	(1	)	$	34		$	—	$	480		$	(4	)	$	651		$	(48	)	$	603
Reserves (salvage)	$	(441	)	$	17		$	35		$	—	$	742		$	(25	)	$	328		$	(33	)	$	295

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:
Par	$	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 amounts related to FG VIEs.

(3) Represents expected inflows for future payments by obligors pursuant to restructuring agreements, settlements or litigation judgments, excess spread on any underlying collateral and other estimated recoveries. Potential recoveries also include recoveries on certain investment grade credits, related mainly to exposures that were previously BIG and for which claims have been paid in the past.

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.

For example, AGM has issued financial guaranty insurance policies in respect of the obligations of municipal obligors under interest rate swaps. AGM insures periodic payments owed by the municipal obligors to the bank counterparties. In certain cases, AGM also insures termination payments that may be owed by the municipal obligors to the bank counterparties. If (i) AGM has been downgraded below the rating trigger set forth in a swap under which it has insured the termination payment, which rating trigger varies on a transaction by transaction basis; (ii) the municipal obligor has the right to cure by, but has failed in, posting collateral, replacing AGM or otherwise curing the downgrade of AGM; (iii) the transaction documents include as a condition that an event of default or termination event with respect to the municipal obligor has occurred, such as the rating of the municipal obligor being downgraded past a specified level, and such condition has been met; (iv) the bank counterparty has elected to terminate the swap; (v) a termination payment is payable by the municipal obligor; and (vi) the municipal obligor has failed to make the termination payment payable by it, then AGM would be required to pay the termination payment due by the municipal obligor, in an amount not to exceed the policy limit set forth in the financial guaranty insurance policy. Taking into consideration whether the rating of the municipal obligor is below any applicable specified trigger, if the financial strength ratings of AGM were downgraded below "A" by S&P Global Ratings, a division of

Standard & Poor’s Financial Services LLC (S&P) or below "A2" by Moody's, and the conditions giving rise to the obligation of AGM to make a payment under the swap policies were all satisfied, then AGM could pay claims in an amount not exceeding approximately $377 million in respect of such termination payments.

As another example, with respect to variable rate demand obligations (VRDOs) for which a bank has agreed to provide a liquidity facility, a downgrade of AGM or AGC may provide the bank with the right to give notice to bondholders that the bank will terminate the liquidity facility, causing the bondholders to tender their bonds to the bank. Bonds held by the bank accrue interest at a “bank bond rate” that is higher than the rate otherwise borne by the bond (typically the prime rate plus 2.00% — 3.00%, and capped at the lesser of 25% and the maximum legal limit). In the event the bank holds such bonds for longer than a specified period of time, usually 90-180 days, the bank has the right to demand accelerated repayment of bond principal, usually through payment of equal installments over a period of not less than five years. In the event that a municipal obligor is unable to pay interest accruing at the bank bond rate or to pay principal during the shortened amortization period, a claim could be submitted to AGM or AGC under its financial guaranty policy. As of December 31, 2019, AGM and AGC had insured approximately $3.1 billion net par of VRDOs, of which approximately $43 million of net par constituted VRDOs issued by municipal obligors rated BBB- or lower pursuant to the Company’s internal rating. The specific terms relating to the rating levels that trigger the bank’s termination right, and whether it is triggered by a downgrade by one rating agency or a downgrade by all rating agencies then rating the insurer, vary depending on the transaction.

In addition, AGM may be required to pay claims in respect of AGMH’s former financial products business if Dexia SA and its affiliates, from which the Company had purchased AGMH and its subsidiaries, do not comply with their obligations following a downgrade of the financial strength rating of AGM. A downgrade of the financial strength rating of AGM could trigger a payment obligation of AGM in respect to AGMH's former guaranteed investment contracts (GIC) business. Most GICs insured by AGM allow for the termination of the GIC contract and a withdrawal of GIC funds at the option of the GIC holder in the event of a downgrade of AGM below a specified threshold, generally below A- by S&P or A3 by Moody's. AGMH's former subsidiary FSA Asset Management LLC is expected to have sufficient eligible and liquid assets to satisfy any expected withdrawal and collateral posting obligations resulting from future rating actions affecting AGM.