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Contracts Accounted for as Insurance
 6 Months Ended
Jun. 30, 2020
Insurance [Abstract]  
Contracts Accounted for as Insurance
Contracts Accounted for as Insurance

Premiums

The portfolio of outstanding exposures discussed in Note 3, Outstanding Insurance Exposure, and Note 4, 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 9, Contracts Accounted for as Credit Derivatives for amounts that relate to CDS and Note 11, Variable Interest Entities for amounts that are accounted for as consolidated FG VIEs.

Net Earned Premiums
 
 
Second Quarter
 
Six Months
 
2020
 
2019
 
2020
 
2019
 
(in millions)
Financial guaranty:
 
 
 
 
 
 
 
Scheduled net earned premiums
$
83

 
$
85

 
$
165

 
$
172

Accelerations from refundings and terminations
32

 
20

 
47

 
46

Accretion of discount on net premiums receivable
5

 
5

 
10

 
9

Financial guaranty insurance net earned premiums
120

 
110

 
222

 
227

Specialty net earned premiums
1

 
2

 
2

 
3

  Net earned premiums (1)
$
121

 
$
112

 
$
224

 
$
230

 ___________________
(1)
Excludes $1 million and $11 million for Second Quarter 2020 and 2019, respectively, and $2 million and $14 million for Six Months 2020 and 2019, respectively, related to consolidated FG VIEs.

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

 
Six Months
 
2020
 
2019
 
(in millions)
Beginning of year
$
1,286

 
$
904

Less: Specialty insurance premium receivable
2

 
1

Financial guaranty insurance premiums receivable
1,284

 
903

Gross written premiums on new business, net of commissions
220

 
98

Gross premiums received, net of commissions
(156
)
 
(127
)
Adjustments:
 
 
 
Changes in the expected term
(9
)
 
(10
)
Accretion of discount, net of commissions on assumed business
9

 
4

Foreign exchange gain (loss) on remeasurement
(55
)
 
(3
)
Financial guaranty insurance premium receivable (1)
1,293

 
865

Specialty insurance premium receivable
1

 
1

June 30,
$
1,294


$
866

____________________
(1)
Excludes $6 million and $8 million as of June 30, 2020 and June 30, 2019, respectively, related to consolidated FG VIEs.

Approximately 79% and 78% of installment premiums at June 30, 2020 and December 31, 2019, 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, 2020
 
(in millions)
2020 (July 1 - September 30)
$
86

2020 (October 1 - December 31)
14

2021
92

2022
106

2023
94

2024
86

2025-2029
342

2030-2034
238

2035-2039
151

After 2039
340

Total (1)
$
1,549

 ____________________
(1)
Excludes expected cash collections on consolidated FG VIEs of $8 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, 2020
 
(in millions)
2020 (July 1 - September 30)
$
84

2020 (October 1 - December 31)
82

Subtotal 2020
166

2021
306

2022
281

2023
259

2024
238

2025-2029
930

2030-2034
653

2035-2039
386

After 2039
518

Net deferred premium revenue (1)
3,737

Future accretion
256

Total future net earned premiums
$
3,993

 ____________________
(1)
Excludes net earned premiums on consolidated FG VIEs of $45 million.

Selected Information for Financial Guaranty Insurance
Policies with Premiums Paid in Installments
 
As of
June 30, 2020
 
As of
December 31, 2019
 
(dollars in millions)
Premiums receivable, net of commission payable
$
1,293

 
$
1,284

Gross deferred premium revenue
1,679

 
1,637

Weighted-average risk-free rate used to discount premiums
1.6
%
 
1.7
%
Weighted-average period of premiums receivable (in years)
12.7

 
13.3



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 1.47% with a weighted average of 0.57% as of June 30, 2020 and 0.00% to 2.45% with a weighted average of 1.94% as of December 31, 2019.

Net Reserve (Salvage) 

 
As of
June 30, 2020
 
As of
December 31, 2019
 
(in millions)
Public finance:
 
 
 
U.S. public finance
$
341

 
$
328

Non-U.S. public finance
5

 
5

Public finance
346

 
333

Structured finance:
 
 
 
U.S. RMBS (1)
(84
)
 
(78
)
Other structured finance
41

 
40

Structured finance
(43
)
 
(38
)
Total
$
303

 
$
295

____________________
(1)
Excludes net reserves of $37 million and $33 million as of June 30, 2020 and December 31, 2019, respectively, related to consolidated FG VIEs.
Components of Net Reserves (Salvage)
 
 
As of
June 30, 2020
 
As of
December 31, 2019
 
(in millions)
Loss and LAE reserve
$
1,076

 
$
1,050

Reinsurance recoverable on unpaid losses (1)
(9
)
 
(38
)
Loss and LAE reserve, net
1,067

 
1,012

Salvage and subrogation recoverable
(795
)
 
(747
)
Salvage and subrogation reinsurance payable (2)
31

 
30

Salvage and subrogation recoverable, net
(764
)
 
(717
)
Net reserves (salvage)
$
303

 
$
295

____________________
(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 for financial guaranty insurance contracts to net expected loss to be expensed. Expected loss to be paid for financial guaranty insurance contracts 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
June 30, 2020
 
(in millions)
Net expected loss to be paid - financial guaranty insurance
$
682

Contra-paid, net
39

Salvage and subrogation recoverable, net, and other recoverable
764

Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance
(1,065
)
Net expected loss to be expensed (present value) (1)
$
420

____________________
(1)    Excludes $32 million as of June 30, 2020, 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, 2020
 
(in millions)
2020 (July 1 - September 30)
$
9

2020 (October 1 - December 31)
9

Subtotal 2020
18

2021
36

2022
37

2023
34

2024
33

2025-2029
131

2030-2034
89

2035-2039
33

After 2039
9

Net expected loss to be expensed
420

Future accretion
56

Total expected future loss and LAE
$
476

 

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
 
2020
 
2019
 
2020
 
2019
 
(in millions)
Public finance:
 
 
 
 
 
 
 
U.S. public finance
$
33

 
$
94

 
$
92

 
$
164

Non-U.S. public finance
—

 
(8
)
 
—

 
(8
)
Public finance
33

 
86

 
92

 
156

Structured finance:
 
 
 
 
 
 
 
U.S. RMBS (1)
4

 
(88
)
 
(38
)
 
(115
)
Other structured finance
—

 
1

 
3

 
4

Structured finance
4

 
(87
)
 
(35
)
 
(111
)
Loss and LAE
$
37

 
$
(1
)
 
$
57

 
$
45


____________________
(1)
Excludes a loss of $2 million and a benefit of $14 million for Second Quarter 2020 and 2019, respectively, and a loss of $8 million and a benefit of $15 million for Six Months 2020 and 2019 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, 2020
 
 
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)
112

 
(1
)
 
19

 
—

 
128

 
(4
)
 
259

 
—

 
259

Remaining weighted-average period (in years)
7.3

 
4.7

 
17.3

 
—

 
9.3

 
6.1

 
9.2

 
—

 
9.2

Outstanding exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Par
$
2,493

 
$
(11
)
 
$
511

 
$
—

 
$
5,326

 
$
(68
)
 
$
8,251

 
$
—

 
$
8,251

Interest
944

 
(3
)
 
436

 
—

 
2,291

 
(18
)
 
3,650

 
—

 
3,650

Total (2)
$
3,437

 
$
(14
)
 
$
947

 
$
—

 
$
7,617

 
$
(86
)
 
$
11,901

 
$
—

 
$
11,901

Expected cash outflows (inflows)
$
155

 
$
(1
)
 
$
73

 
$
—

 
$
4,057

 
$
(54
)
 
$
4,230

 
$
(262
)
 
$
3,968

Potential recoveries (3)
(604
)
 
21

 
(3
)
 
—

 
(2,887
)
 
55

 
(3,418
)
 
188

 
(3,230
)
Subtotal
(449
)
 
20

 
70

 
—

 
1,170

 
1

 
812

 
(74
)
 
738

Discount
18

 
—

 
(10
)
 
—

 
(72
)
 
(1
)
 
(65
)
 
9

 
(56
)
Present value of expected cash flows
$
(431
)
 
$
20

 
$
60

 
$
—

 
$
1,098

 
$
—

 
$
747

 
$
(65
)
 
$
682

Deferred premium revenue
$
134

 
$
—

 
$
23

 
$
—

 
$
453

 
$
(3
)
 
$
607

 
$
(45
)
 
$
562

Reserves (salvage)
$
(465
)
 
$
20

 
$
41

 
$
—

 
$
740

 
$
2

 
$
338

 
$
(37
)
 
$
301

 
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 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

____________________
(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.