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Contracts Accounted for as Insurance

9 Months Ended

Sep. 30, 2021

Premiums

The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered), 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, unless otherwise specified. See Note 6, 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


	Third Quarter				Nine Months
	2021		2020		2021		2020
	(in millions)
Financial guaranty:
Scheduled net earned premiums	$	81	$	85	$	242	$	250
Accelerations from refundings and terminations	8		17		39		64
Accretion of discount on net premiums receivable	13		5		24		15
Financial guaranty insurance net earned premiums	102		107		305		329
Specialty net earned premiums	—		—		2		2
Net earned premiums (1)	$	102	$	107	$	307	$	331

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(1) Excludes $1 million and $2 million for Third Quarter 2021 and 2020, respectively, and $3 million and $4 million for Nine Months 2021 and 2020, respectively, related to consolidated FG VIEs.

Gross Premium Receivable,

Net of Commissions on Assumed Business

Roll Forward


	Nine Months
	2021		2020
	(in millions)
Beginning of year	$	1,372	$	1,286
Less: Specialty insurance premium receivable	1		2
Financial guaranty insurance premiums receivable	1,371		1,284
Gross written premiums on new business, net of commissions	270		342
Gross premiums received, net of commissions	(274)		(297)
Adjustments:
Changes in the expected term	6		(9)
Accretion of discount, net of commissions on assumed business	22		14
Foreign exchange gain (loss) on remeasurement	(22)		(14)
Expected recovery of premiums previously written off	4		—
Financial guaranty insurance premium receivable (1)	1,377		1,320
Specialty insurance premium receivable	1		1
September 30,	$	1,378	$	1,321

____________________

(1) Excludes $6 million for both September 30, 2021 and September 30, 2020 related to consolidated FG VIEs, respectively.

Approximately 77% and 80% of gross premiums receivable, net of commissions at September 30, 2021 and December 31, 2020, 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, restructurings, 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 September 30, 2021
	(in millions)
2021 (October 1 - December 31)	$	49
2022	132
2023	106
2024	98
2025	86
2026-2030	368
2031-2035	265
2036-2040	174
After 2040	368
Total (1)	$	1,646

____________________

(1) Excludes expected cash collections on consolidated FG VIEs of $7 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, restructurings, changes in expected lives and new business.

Scheduled Financial Guaranty Insurance Net Earned Premiums


	As of September 30, 2021
	(in millions)
2021 (October 1 - December 31)	$	80
2022	304
2023	283
2024	261
2025	237
2026-2030	963
2031-2035	672
2036-2040	394
After 2040	536
Net deferred premium revenue (1)	3,730
Future accretion	270
Total future net earned premiums	$	4,000

____________________

(1) Excludes net earned premiums on consolidated FG VIEs of $40 million.

Selected Information for Financial Guaranty Insurance

Policies with Premiums Paid in Installments


	As of
	September 30, 2021		December 31, 2020
	(dollars in millions)
Premiums receivable, net of commissions payable	$	1,377	$	1,371
Gross deferred premium revenue	1,669		1,664
Weighted-average risk-free rate used to discount premiums	1.6%		1.6%
Weighted-average period of premiums receivable (in years)	12.7		12.8

Losses

Loss reserves are discounted at risk-free rates for U.S. dollar denominated financial guaranty insurance obligations that ranged from 0.00% to 2.13% with a weighted average of 0.78% as of September 30, 2021 and 0.00% to 1.72% with a weighted average of 0.60% as of December 31, 2020.

The following tables provide information on net reserve (salvage), which includes loss and LAE reserves and salvage and subrogation recoverable, both net of reinsurance.

Net Reserve (Salvage) by Sector


	As of
Sector	September 30, 2021		December 31, 2020
	(in millions)
Public finance:
U.S. public finance	$	(156)	$	129
Non-U.S. public finance	1		11
Public finance	(155)		140
Structured finance:
U.S. RMBS (1)	(34)		(52)
Other structured finance	36		34
Structured finance	2		(18)
Total	$	(153)	$	122

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(1) Excludes net reserves of $19 million and $32 million as of September 30, 2021 and December 31, 2020, respectively, related to consolidated FG VIEs.

Components of Net Reserve (Salvage)


	As of
	September 30, 2021		December 31, 2020
	(in millions)
Loss and LAE reserve	$	981	$	1,088
Reinsurance recoverable on unpaid losses (1)	(7)		(8)
Loss and LAE reserve, net	974		1,080
Salvage and subrogation recoverable	(1,148)		(991)
Salvage and subrogation reinsurance payable (2)	21		33
Salvage and subrogation recoverable, net	(1,127)		(958)
Net reserve (salvage)	$	(153)	$	122

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(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 (recovered) for financial guaranty insurance contracts to net expected loss to be expensed. Expected loss to be paid (recovered) 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 statements 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 (Recovered) and

Net Expected Loss to be Expensed

Financial Guaranty Insurance Contracts


	As of September 30, 2021
	(in millions)
Net expected loss to be paid (recovered) - financial guaranty insurance	$	151
Contra-paid, net	44
Salvage and subrogation recoverable, net, and other recoverable	1,120
Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance	(968)
Net expected loss to be expensed (present value) (1)	$	347

____________________

(1) Excludes $28 million as of September 30, 2021 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 September 30, 2021
	(in millions)
2021 (October 1 - December 31)	$	8
2022	31
2023	31
2024	30
2025	30
2026-2030	118
2031-2035	77
2036-2040	18
After 2040	4
Net expected loss to be expensed	347
Future accretion	104
Total expected future loss and LAE	$	451

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)
	Third Quarter				Nine Months
Sector	2021		2020		2021		2020
	(in millions)
Public finance:
U.S. public finance	$	(23)	$	61	$	7	$	153
Non-U.S. public finance	—		3		(9)		3
Public finance	(23)		64		(2)		156
Structured finance:
U.S. RMBS (1)	(48)		6		(54)		(32)
Other structured finance	3		3		2		6
Structured finance	(45)		9		(52)		(26)
Loss and LAE	$	(68)	$	73	$	(54)	$	130

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(1) Excludes a benefit of $8 million and $1 million for Third Quarter 2021 and 2020, respectively, and a benefit of $13 million and a loss of $7 million for Nine Months 2021 and 2020, 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 September 30, 2021


	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)		17		—		128		(3)		257		—		257
Remaining weighted-average period (in years)	7.8		5.2		9.1		—		9.1		5.9		8.7		—		8.7
Outstanding exposure:
Par	$	2,389	$	(8)	$	180	$	—	$	4,781	$	(58)	$	7,284	$	—	$	7,284
Interest	1,017		(2)		36		—		1,953		(14)		2,990		—		2,990
Total (2)	$	3,406	$	(10)	$	216	$	—	$	6,734	$	(72)	$	10,274	$	—	$	10,274
Expected cash outflows (inflows)	$	135	$	(1)	$	41	$	—	$	3,965	$	(44)	$	4,096	$	(243)	$	3,853
Potential recoveries (3)	(841)		6		(11)		—		(2,994)		54		(3,786)		188		(3,598)
Subtotal	(706)		5		30		—		971		10		310		(55)		255
Discount	21		—		(3)		—		(134)		—		(116)		12		(104)
Present value of expected cash flows	$	(685)	$	5	$	27	$	—	$	837	$	10	$	194	$	(43)	$	151
Deferred premium revenue	$	96	$	—	$	2	$	—	$	400	$	(2)	$	496	$	(40)	$	456
Reserves (salvage)	$	(713)	$	5	$	26	$	—	$	538	$	11	$	(133)	$	(19)	$	(152)

Financial Guaranty Insurance

BIG Transaction Loss Summary

As of December 31, 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)	125		(1)		19		—		126		(4)		270		—		270
Remaining weighted-average period (in years)	7.5		5.0		9.2		—		9.4		6.1		8.7		—		8.7
Outstanding exposure:
Par	$	2,791	$	(10)	$	130	$	—	$	5,009	$	(65)	$	7,855	$	—	$	7,855
Interest	1,092		(2)		36		—		2,175		(16)		3,285		—		3,285
Total (2)	$	3,883	$	(12)	$	166	$	—	$	7,184	$	(81)	$	11,140	$	—	$	11,140
Expected cash outflows (inflows)	$	173	$	(1)	$	29	$	—	$	4,699	$	(50)	$	4,850	$	(259)	$	4,591
Potential recoveries (3)	(707)		20		(3)		—		(3,565)		54		(4,201)		190		(4,011)
Subtotal	(534)		19		26		—		1,134		4		649		(69)		580
Discount	22		—		(3)		—		(132)		(1)		(114)		10		(104)
Present value of expected cash flows	$	(512)	$	19	$	23	$	—	$	1,002	$	3	$	535	$	(59)	$	476
Deferred premium revenue	$	116	$	—	$	2	$	—	$	436	$	(3)	$	551	$	(43)	$	508
Reserves (salvage)	$	(547)	$	19	$	21	$	—	$	660	$	6	$	159	$	(32)	$	127

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(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.