Reinsurance

3 Months Ended

Mar. 31, 2020

The Company assumes exposure (Assumed Business) from third party insurers, primarily other monoline financial guaranty companies that currently are in runoff and no longer actively writing new business (Legacy Monoline Insurers), and may cede portions of exposure it has insured (Ceded Business) in exchange for premiums, net of any ceding commissions. The Company, if required, secures its reinsurance obligations to these Legacy Monoline Insurers, typically by depositing in trust assets with a market value equal to its assumed liabilities calculated on a U.S. statutory basis.

Substantially all of the Company’s Assumed Business and Ceded Business relates to financial guaranty business, except for a modest amount that relates to AGRO's specialty business. 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.

Financial Guaranty Business

The Company’s facultative and treaty assumed agreements with the Legacy Monoline Insurers are generally subject to termination at the option of the ceding company:


•	if the Company fails to meet certain financial and regulatory criteria;


•	if the Company fails to maintain a specified minimum financial strength rating; or


•	upon certain changes of control of the Company.

Upon termination due to one of the above events, the Company typically would be required to return to the ceding company unearned premiums (net of ceding commissions) and loss reserves, calculated on a U.S. statutory basis, attributable to the Assumed Business (plus in certain cases, an additional required amount), after which the Company would be released from liability with respect to such business.

As of March 31, 2020, if each third party company ceding business to any of the Company's insurance subsidiaries 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 $41 million and $254 million, respectively.

The Company has ceded financial guaranty business to non-affiliated companies to limit its exposure to risk. 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. The Company’s ceded contracts generally allow the Company to recapture ceded financial guaranty business after certain triggering events, such as reinsurer downgrades.

In April 2020, the Company reassumed $336 million in par from its largest remaining legacy third party financial guaranty reinsurer. This represents 27% of the Company's ceded financial guaranty par outstanding as of March 31, 2020.

Specialty Business

The Company, through AGRO, assumes specialty business from third party insurers (Assumed Specialty Business). It also cedes and retrocedes some of its specialty business to third party reinsurers. A downgrade of AGRO’s financial strength rating by S&P Global Ratings, a division of Standard & Poor's Financial Services LLC (S&P) below "A" would require AGRO to post, as of March 31, 2020, an estimated $0.1 million of collateral in respect of certain of its Assumed Specialty 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 March 31, 2020, an estimated $13 million of collateral in respect of a different portion of AGRO’s Assumed Specialty Business. AGRO’s ceded/retroceded contracts generally have equivalent provisions requiring the assuming reinsurer to post collateral and/or allowing AGRO to recapture the ceded/retroceded business upon certain triggering events, such as reinsurer rating downgrades.

Effect of Reinsurance

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

Effect of Reinsurance on Statement of Operations



	First Quarter
	2020			2019

Premiums Written:
Direct	$	64		$	39
Assumed	—			—
Ceded (1)	—			15
Net	$	64		$	54
Premiums Earned:
Direct	$	94		$	105
Assumed	10			15
Ceded	(1		)	(2		)
Net	$	103		$	118
Loss and LAE:
Direct	$	8		$	54
Assumed	12			1
Ceded	—			(9		)
Net	$	20		$	46

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

Ceded Reinsurance (1)



	As of March 31, 2020		As of December 31, 2019
	(in millions)
Ceded premium payable, net of commissions	$	19	$	20
Ceded expected loss to be recovered (paid)	7		11
Financial guaranty ceded par outstanding (2)	1,255		1,349
Specialty ceded exposure (see Note 4)	306		303

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(1)

The total collateral posted by all non-affiliated reinsurers required to post, or that had agreed to post, collateral as of March 31, 2020 and December 31, 2019 was approximately $67 million and $68 million, respectively. Such collateral is posted (i) in the case of certain reinsurers not authorized or "accredited" in the U.S., in order for the Company to receive credit for the liabilities ceded to such reinsurers in statutory financial statements, and (ii) in the case of certain reinsurers authorized in the U.S., on terms negotiated with the Company.

(2)

Of the total par ceded to unrated or BIG rated reinsurers, $223 million and $224 million is rated BIG as of March 31, 2020 and December 31, 2019, respectively.