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Financial Guarantee Insurance Contracts

3 Months Ended

Mar. 31, 2020

6. FINANCIAL GUARANTEE INSURANCE CONTRACTS

Amounts presented in this Note relate only to Ambac’s non-derivative insurance business for insurance policies issued to beneficiaries, including VIEs, for which we do not consolidate the VIE.

Net Premiums Earned:

Gross premiums are received either upfront or in installments. For premiums received upfront, an unearned premium revenue (“UPR”) liability is established, which is initially recorded as the cash amount received. For installment premium transactions, a premium receivable asset and offsetting UPR liability is initially established in an amount equal to: (i) the present value of future contractual premiums due (the “contractual” method) or (ii) if the assets underlying the insured obligation are homogenous pools which are contractually prepayable, the present value of premiums to be collected over the expected life of the transaction (the “expected” method). An appropriate risk-free rate corresponding to the weighted average life of each policy and currency is used to discount the future premiums contractually due or expected to be collected. For example, U.S. dollar exposures are discounted using U.S. Treasury rates. The weighted average risk-free rate at March 31, 2020 and December 31, 2019, was 2.2% and 2.4%, respectively, and the weighted average period of future premiums used to estimate the premium receivable at March 31, 2020 and December 31, 2019, was 8.7 years and 8.5 years, respectively.

Below is the gross premium receivable roll-forward for the respective periods, net of allowance for credit losses:



	Three Months Ended March 31,
	2020			2019
Beginning premium receivable	$	416		$	495
Adjustment to initially apply ASU 2016-13	(3		)	—
Premium receipts	(12		)	(13		)
Adjustments for changes in expected and contractual cash flows ⁽¹⁾	10			—
Accretion of premium receivable discount	2			3
Changes to allowance for credit losses	(2		)	—
Other adjustments (including foreign exchange)	(8		)	2
Ending premium receivable⁽²⁾	$	403		$	487


(1)	Adjustments for changes in expected and contractual cash flows primarily due to changes in indexation rates on certain UK transactions partially offset by reductions in insured exposure as a result of early policy terminations and unscheduled principal paydowns.


(2)	Premium receivable includes premiums to be received in foreign denominated currencies most notably in British Pounds and Euros. At March 31, 2020 and 2019, premium receivables include British Pounds of $128 (£103) and $142 (£109), respectively, and Euros of $24 (€22) and $30 (€27), respectively.

When a bond issue insured by Ambac Assurance has been retired early, typically due to an issuer call, any remaining UPR is recognized at that time to the extent the financial guarantee contract is legally extinguished, causing accelerated premium revenue. For installment premium paying transactions, we offset the recognition of any remaining UPR by the reduction of the related premium receivable to zero (as it will not be collected as a result of the retirement), which may cause negative accelerated premium revenue. Ambac’s accelerated premium revenue for retired obligations for the three months ended March 31, 2020 and 2019 was less than a million dollars and $12, respectively.

The effect of reinsurance on premiums written and earned for the respective periods was as follows:



	Three Months Ended March 31,
	2020					2019
	Written			Earned		Written			Earned
Direct	$	11		$	13	$	3		$	29
Assumed	—			1		—			—
Ceded	(1		)	3		(1		)	2
Net premiums	$	12		$	10	$	4		$	28

The following table summarizes net premiums earned by location of risk for the respective periods:



	Three Months Ended March 31,
	2020		2019
United States	$	7	$	28
United Kingdom	4		4
Other international	—		(5		)
Total	$	10	$	28

The table below summarizes the future gross undiscounted premiums to be collected and future premiums earned, net of reinsurance at March 31, 2020:



	Future Premiums to be Collected ⁽¹⁾		Future Premiums to be Earned Net of Reinsurance ⁽²⁾
Three months ended:
June 30, 2020	$	12	$	10
September 30, 2020	10		10
December 31, 2020	10		10
Twelve months ended:
December 31, 2021	37		36
December 31, 2022	35		34
December 31, 2023	34		32
December 31, 2024	32		30
Five years ended:
December 31, 2029	142		125
December 31, 2034	104		83
December 31, 2039	52		38
December 31, 2044	23		14
December 31, 2049	9		5
December 31, 2054	1		1
Total	$	501	$	428


(1)	Future premiums to be collected are undiscounted, gross of allowance for credit losses, and are used to derive the discounted premium receivable asset recorded on Ambac's balance sheet.

(2)

Future premiums to be earned, net of reinsurance relate to the unearned premiums liability and deferred ceded premium asset recorded on Ambac’s balance sheet. The use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral is required in the calculation of the premium receivable, as further described in Note 2. Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Ambac's Annual Report on Form 10-K for the year ended December 31, 2019. This results in a different premium receivable balance than if expected lives were considered. If installment paying policies are retired or prepay early, premiums reflected in the premium receivable asset and amounts reported in the above table for such policies may not be collected. Future premiums to be earned also considers the use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral, which may result in different unearned premium than if expected lives were considered. If those bonds types are retired early, premium earnings may be negative in the period of call or refinancing.

Credit impairment (Premium receivables and reinsurance recoverables):

Management evaluates premium receivables and reinsurance recoverables for expected credit losses ("credit impairment") in accordance with the new CECL standard adopted January 1, 2020, which is further described in Note 2. Basis of Presentation and Significant Accounting Policies. Management's evaluation of credit impairment under prior GAAP rules was not materially different.

Most credit impairment disclosures below were only made prospectively from the CECL adoption date as they were not required under prior GAAP rules.

As further discussed in Note 2. Basis of Presentation and Significant Accounting Policies, the key indicator management uses to assess the credit quality of premium receivables is Ambac's internal risk classifications for the insured obligation determined by the Risk Management Group. Below is the amortized cost basis of premium receivables by risk classification code and asset class as of March 31, 2020:



Surveillance Categories as of March 31, 2020
Type of Guaranteed Bond	I		IA		II		III		IV		Total
Public Finance:
Housing revenue	$	162	$	13	$	—	$	—	$	—	$	175
Other	16		—		—		—		—		16
Total Public Finance	178		13		—		—		—		191

Structured Finance:
Mortgage-backed and home equity	4		—		1		3		18		26
Structured insurance	19		—		—		—		—		19
Student loan	4		—		3		13		—		19
Other	6		—		—		—		—		6
Total Structured Finance	32		—		4		16		18		70

International:
Sovereign/sub-sovereign	86		13		—		14		—		113
Investor-owned and public utilities	29		—		—		—		—		29
Other	15		—		—		—		—		15
Total International	130		13		—		14		—		157
Total⁽¹⁾	$	340	$	26	$	4	$	30	$	18	$	417

(1) The underwriting origination dates for all policies included are greater than five years prior to the current reporting date.

Below is a rollforward of the premium receivable allowance for credit losses as of March 31, 2020:



Beginning balance ⁽¹⁾	$	9
Current period provision ⁽²⁾	5
Write-offs of the allowance	—
Recoveries of previously written-off amounts	—
Ending balance	$	14


(1)	At December 31, 2019, $9 of premiums receivable were deemed uncollectible as determined under prior GAAP rules.


(2)	Includes $3from the adoption of ASU 2016-13 on January 1, 2020.

At March 31, 2020, Ambac had past due premiums of $1, of which $1 was over 120 days past due and has been included in the allowance for credit losses.

The key indicator management uses to assess the credit quality of reinsurance recoverables is collateral posted by the reinsurers and independent rating agency credit ratings. For all reinsurance contracts where Ambac has recorded a recoverable, the fair value of collateral posted by the reinsurer to Ambac Assurance exceeds Ambac Assurance's reinsurance recoverable carrying value, net of ceded premiums payable. As a result, Ambac Assurance has no net credit exposure and there is no allowance for credit losses at March 31, 2020.

Loss and Loss Expense Reserves:

Ambac’s loss and loss expense reserves (“loss reserves”) are based on management’s on-going review of the financial guarantee credit portfolio. Below are the components of the loss reserves liability and the Subrogation recoverable asset at March 31, 2020 and December 31, 2019:



	March 31, 2020:											December 31, 2019:
	Present Value of Expected Net Cash Flows					Unearned Premium Revenue			Gross Loss and Loss Expense Reserves			Present Value of Expected Net Cash Flows					Unearned Premium Revenue			Gross Loss and Loss Expense Reserves
Balance Sheet Line Item	Claims and Loss Expenses		Recoveries			Unearned Premium Revenue			Gross Loss and Loss Expense Reserves			Claims and Loss Expenses		Recoveries			Unearned Premium Revenue			Gross Loss and Loss Expense Reserves
Loss and loss expense reserves	$	2,112	$	(245	)	$	(70	)	$	1,797		$	1,835	$	(233	)	$	(54	)	$	1,548
Subrogation recoverable	135		(2,327		)	—			(2,192		)	131		(2,160		)	—			(2,029		)
Totals	$	2,247	$	(2,572	)	$	(70	)	$	(395	)	$	1,966	$	(2,394	)	$	(54	)	$	(482	)

Below is the loss reserves roll-forward, net of subrogation recoverable and reinsurance, for the affected periods:



	Three Months Ended March 31,
	2020			2019
Beginning gross loss and loss expense reserves	$	(482	)	$	(107	)
Reinsurance recoverable	26			23
Beginning balance of net loss and loss expense reserves	(508		)	(130		)
Losses and loss expenses (benefit):
Current year	27			1
Prior years	90			12
Total ^{(1) (2)}	117			12
Loss and loss expenses paid (recovered):
Current year	—			—
Prior years	39			64
Total	39			64
Foreign exchange effect	—			6
Ending net loss and loss expense reserves	(430		)	(176		)
Impact of VIE consolidation	—			(72		)
Reinsurance recoverable ⁽³⁾	35			26
Ending gross loss and loss expense reserves	$	(395	)	$	(222	)


(1)	Total losses and loss expenses (benefit) includes $(10) and $(5) for the three months ended March 31, 2020 and 2019, respectively, related to ceded reinsurance.


(2)	Ambac records the impact of estimated recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties ("R&W"s) by transaction sponsors within losses and loss expenses (benefit). The losses and loss expense (benefit) incurred associated with changes in estimated R&Ws for the three months ended March 31, 2020 and 2019 was $(36) and $4, respectively.


(3)	Represents reinsurance recoverable on future loss and loss expenses. Additionally, the Balance Sheet line "Reinsurance recoverable on paid and unpaid losses" includes reinsurance recoverables (payables) of $1 and $1 as of March 31, 2020 and 2019, respectively, related to previously presented loss and loss expenses and subrogation.

For 2020, the adverse development in prior years was primarily a result of deterioration in Public Finance credits, primarily Puerto Rico, partially offset by positive development in the RMBS portfolio.

For 2019, the adverse development in prior years was primarily a result of deterioration in Public Finance credits, partially offset by positive development in the RMBS and Ambac UK portfolios.

The tables below summarize information related to policies currently included in Ambac’s loss reserves or subrogation recoverable at March 31, 2020 and December 31, 2019. Gross par exposures include capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bond. The weighted average risk-free rate used to discount loss reserves at March 31, 2020 and December 31, 2019 was 0.9% and 2.1%, respectively.



Surveillance Categories as of March 31, 2020
	I			IA			II			III			IV			V			Total
Number of policies	33			22			14			16			136			3			224
Remaining weighted-average contract period (in years) ⁽¹⁾	24			21			9			17			15			2			15
Gross insured contractual payments outstanding:
Principal	$	727		$	483		$	607		$	1,524		$	3,667		$	37		$	7,046
Interest	394			507			512			326			1,608			11			3,358
Total	$	1,121		$	991		$	1,119		$	1,850		$	5,275		$	48		$	10,404
Gross undiscounted claim liability	$	18		$	44		$	41		$	521		$	1,778		$	48		$	2,450
Discount, gross claim liability	(1		)	(2		)	(1		)	(71		)	(184		)	—			(259		)
Gross claim liability before all subrogation and before reinsurance	17			42			41			450			1,594			47			2,191
Less:
Gross RMBS subrogation⁽²⁾	—			—			—			—			(1,771		)	—			(1,771		)
Discount, RMBS subrogation	—			—			—			—			7			—			7
Discounted RMBS subrogation, before reinsurance	—			—			—			—			(1,764		)	—			(1,764		)
Less:
Gross other subrogation⁽³⁾	—			—			—			(39		)	(777		)	(13		)	(829		)
Discount, other subrogation	—			—			—			1			18			1			21
Discounted other subrogation, before reinsurance	—			—			—			(38		)	(759		)	(11		)	(809		)
Gross claim liability, net of all subrogation and discounts, before reinsurance	17			42			41			412			(929		)	36			(381		)
Less: Unearned premium revenue	(2		)	(9		)	(5		)	(19		)	(34		)	—			(70		)
Plus: Loss expense reserves	—			1			1			4			50			—			55
Gross loss and loss expense reserves	$	15		$	34		$	36		$	397		$	(914	)	$	36		$	(395	)
Reinsurance recoverable reported on Balance Sheet ⁽⁴⁾	$	—		$	6		$	9		$	27		$	(7	)	$	—		$	36


(1)	Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.


(2)	RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.


(3)	Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.


(4)	Reinsurance recoverable reported on the Balance Sheet includes reinsurance recoverables of $35 related to future loss and loss expenses and $1 related to presented loss and loss expenses and subrogation.



Surveillance Categories as of December 31, 2019
	I			IA			II			III			IV			V			Total
Number of policies	34			18			11			16			139			3			221
Remaining weighted-average contract period (in years) ⁽¹⁾	8			21			9			17			14			3			15
Gross insured contractual payments outstanding:
Principal	$	668		$	510		$	277		$	857		$	3,819		$	37		$	6,168
Interest	340			507			128			366			1,678			11			3,029
Total	$	1,007		$	1,016		$	404		$	1,223		$	5,498		$	48		$	9,197
Gross undiscounted claim liability	$	2		$	44		$	21		$	541		$	1,778		$	48		$	2,434
Discount, gross claim liability	—			(5		)	(1		)	(152		)	(381		)	(2		)	(541		)
Gross claim liability before all subrogation and before reinsurance	2			39			20			389			1,397			46			1,893
Less:
Gross RMBS subrogation ⁽²⁾	—			—			—			—			(1,777		)	—			(1,777		)
Discount, RMBS subrogation	—			—			—			—			49			—			49
Discounted RMBS subrogation, before reinsurance	—			—			—			—			(1,727		)	—			(1,727		)
Less:
Gross other subrogation ⁽³⁾	—			—			—			(41		)	(666		)	(13		)	(720		)
Discount, other subrogation	—			—			—			4			47			3			53
Discounted other subrogation, before reinsurance	—			—			—			(37		)	(620		)	(10		)	(666		)
Gross claim liability, net of all subrogation and discounts, before reinsurance	2			39			20			353			(950		)	36			(501		)
Less: Unearned premium revenue	(1		)	(9		)	(1		)	(7		)	(35		)	—			(54		)
Plus: Loss expense reserves	1			1			1			4			67			—			73
Gross loss and loss expense reserves	$	1		$	30		$	20		$	349		$	(918	)	$	36		$	(482	)
Reinsurance recoverable reported on Balance Sheet⁽⁴⁾	$	—		$	6		$	7		$	24		$	(10	)	$	—		$	26


(1)	Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.


(2)	RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.


(3)	Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.


(4)	Reinsurance recoverable reported on Balance Sheet includes reinsurance recoverables of $26 related to future loss and loss expenses and $0 related to presented loss and loss expenses and subrogation.

COVID-19

As a result of the COVID-19 related economic disruption on markets where Ambac provides financial guarantees, including lower tax, project, and business revenues and increases in forbearances or delinquencies on mortgage and student loan payments, we have increased our loss reserves. The duration and depth of the recession; actions such as monetary policy and fiscal stimulus, including the CARES Act in the US that was signed into law on March 27, 2020, and future fiscal stimulus programs; and our insured obligors' financial flexibility and ability to mitigate the operational and economic impact of the recession will determine the ultimate impact to Ambac's insured portfolio. Accordingly, our loss reserves may be under-estimated as a result of the ultimate scope, duration and magnitude of the effects of COVID-19.

Puerto Rico:

Ambac has exposure to the Commonwealth of Puerto Rico (the "Commonwealth") and its instrumentalities across several different

issuing entities with total net par exposure of $1,105. Components of Puerto Rico net par outstanding include capital appreciation bonds which are reported at the par amount at the time of issuance of the related insurance policy as opposed to the current accreted value of the bonds. Each issuing entity has its own credit risk profile attributable to discrete revenue sources, direct general obligation pledges or general obligation guarantees. The Commonwealth of Puerto Rico and certain of its instrumentalities have defaulted and may continue to default on debt service payments, including payments owed on bonds insured by Ambac Assurance. Ambac Assurance may be required to make significant amounts of policy payments over the next several years, the recoverability of which is subject to great uncertainty, which may lead to a material increase in permanent losses causing a material adverse impact on our results of operations and financial condition. Our exposure to Puerto Rico is impacted by the amount of monies available for debt service, which is in turn affected by a number of factors including demographic trends, economic conditions (including the impact

from the COVID-19 pandemic), tax policy and revenues, impact of reforms, fiscal plans, government actions, political instability, budgetary performance and flexibility, weather and seismic events, litigation outcomes, as well as federal funding of Commonwealth needs. In the near term, the financial and economic outlook for Puerto Rico is dependent upon a still fragile infrastructure, heightening its vulnerability to additional natural disasters. The longer term recovery of the Commonwealth economy and its essential infrastructure will likely be dependent on, among other factors, the management, usage and efficacy of federal resources.

It is difficult to predict the long-term capacity and willingness of the Puerto Rico government and its instrumentalities to pay debt service on bonded debt and how their debt burden and financial flexibility might affect Ambac Assurance's claim potential, risk profile and long-term financial strength.

Substantial uncertainty exists with respect to the ultimate outcome for creditors in Puerto Rico, such as Ambac Assurance, due to, amongst other matters, legislation enacted by the Commonwealth and the federal government, including PROMESA; actions taken pursuant to such laws, including the Title III filings; the economic consequences of the COVID-19 pandemic; as well as political uncertainty and leadership turnover. Ambac Assurance is involved in multiple litigations relating to actions taken by the Commonwealth or the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”) pursuant to certain enacted legislation, court rulings, and other issues and may not be successful in pursuing claims or protecting its interests. As a result of litigation or other aspects of the restructuring processes, the differences among the credits insured by Ambac Assurance may not be respected.

Ambac Assurance has participated and may continue to participate in mediation related to potential debt restructurings. Mediation may not be productive or may not resolve Ambac Assurance's claims in a manner that avoids significant losses. No assurances can be given that negotiations will be successfully concluded, that Commonwealth, Oversight Board and creditor parties will reach definitive agreements on additional debt restructurings, that any additional negotiated transaction debt restructuring, definitive agreement or Plans of Adjustment will be approved by the court and completed, or that any transaction or Plans of Adjustment will not have a material adverse impact on Ambac's financial condition or results of operations. It is possible that certain restructuring process solutions, together with associated legislation, budgetary, and/or public policy proposals could be adopted and could further impair our exposures, causing losses that could have a material adverse impact on our results of operations and financial condition.

While our reserving scenarios account for a wide range of possible outcomes, reflecting the significant uncertainty regarding future developments and outcomes, given our exposure to Puerto Rico and the economic, fiscal, legal and political uncertainties associated therewith as well as the uncertainties emanating from the COVID-19 pandemic and the damage caused by hurricanes Maria and Irma, our loss reserves may ultimately prove to be insufficient to cover our losses, potentially having a material adverse effect on our results of operations and financial position.

Ambac has considered these developments and other factors in evaluating its Puerto Rico loss reserves. During the three months ended March 31, 2020, Ambac had incurred losses associated with its Domestic Public Finance insured portfolio of $178, which was primarily impacted by lower discount rates and the continued uncertainty and volatility of the situation in Puerto Rico. While management believes its reserves are adequate to cover losses in its Public Finance insured portfolio, there can be no assurance that Ambac may not incur additional losses in the future, given the circumstances described herein. Such additional losses may have a material adverse effect on Ambac’s results of operations and financial condition and may result in adverse consequences such as impairing the ability of Ambac Assurance to honor its financial obligations; the initiation of rehabilitation proceedings against Ambac Assurance; decreased likelihood of Ambac Assurance delivering value to Ambac, through dividends or otherwise; and a significant drop in the value of securities issued or insured by Ambac or Ambac Assurance. For public finance credits, including Puerto Rico, for which Ambac has an estimate of expected loss at March 31, 2020, the possible increase in loss reserves under stress or other adverse conditions and circumstances was estimated to be approximately $1,220. This possible increase in loss reserves under stress or other adverse conditions is significant and if we were to experience such incremental losses, our stockholders’ equity as of March 31, 2020 would decrease from $1,062 to $(158). There can be no assurance that losses may not exceed such amount.

Representation and Warranty Recoveries:

Ambac records estimated subrogation recoveries for breaches of R&Ws by sponsors of certain RMBS transactions. For a discussion of the approach utilized to estimate R&W subrogation recoveries, see Note 2. Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Ambac has recorded R&W subrogation recoveries of $1,764 ($1,738 net of reinsurance) and $1,727 ($1,702 net of reinsurance) at March 31, 2020 and December 31, 2019, respectively. R&W recovery proceeds up to the first $1,400 and above $1,600 have been pledged as security on certain of Ambac's long-term debt obligations as described further in Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Below is the rollforward of R&W subrogation for the affected periods:



	Three Months Ended March 31,
	2020		2019
Discounted R&W subrogation (gross of reinsurance) at beginning of period	$	1,727	$	1,771
All other changes ⁽¹⁾	36		(43		)
Discounted R&W subrogation (gross of reinsurance) at end of period	$	1,764	$	1,727


(1)	All other changes which may impact RMBS R&W subrogation recoveries include changes in actual or projected collateral

performance, changes in the creditworthiness of a sponsor and/or the projected timing of recoveries.

Our ability to realize R&W subrogation recoveries is subject to significant uncertainty, including risks inherent in litigation; collectability of such amounts from counterparties (and/or their respective parents and affiliates); timing of receipt of any such recoveries; intervention by OCI, which could impede our ability to take actions required to realize such recoveries; and uncertainty inherent in the assumptions used in estimating such recoveries. Failure to realize R&W subrogation recoveries for any reason or the realization of R&W subrogation recoveries materially below the amount recorded on Ambac's consolidated balance sheet would have a material adverse effect on our results of operations and financial condition and may result in adverse consequences such as impairing the ability of Ambac Assurance to honor its financial obligations; the initiation of rehabilitation proceedings against Ambac Assurance; decreased likelihood of Ambac Assurance delivering value to Ambac, through dividends or otherwise; and a significant drop in the value of securities issued or insured by Ambac or Ambac Assurance.

Insurance intangible asset:

The insurance intangible amortization expense is included in insurance intangible amortization on the Consolidated Statements of Total Comprehensive Income (Loss). For the three months ended March 31, 2020 and 2019, the insurance intangible amortization expense was $13 and $36, respectively. As of March 31, 2020 and December 31, 2019, the gross carrying value of the insurance

intangible asset was $1,261 and $1,273, respectively. Accumulated amortization of the insurance intangible asset was $854 and $847, as of March 31, 2020 and December 31, 2019, respectively, resulting in a net insurance intangible asset of $406 and $427, respectively.

The estimated future amortization expense for the net insurance intangible asset is as follows:



Amortization expense ^{(1) (2)}
2020 (nine months)	$	33
2021	39
2022	35
2023	32
2024	29
Thereafter	239

(1)

The insurance intangible asset will be amortized using a level-yield method based on par exposure of the related financial guarantee insurance or reinsurance contracts. Future amortization considers the use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations. If those bonds types are retired early, amortization expense may differ in the period of call or refinancing.

(2) The weighted-average amortizations period is 7.6 years.