Financial Guaranty Insurance Contracts

The following table includes information as of June 30, 2012, regarding our financial guaranty claim liabilities, segregated by the surveillance categories that we use in monitoring the risks related to these contracts:



	Surveillance Categories
($ in millions)	Performing		Special Mention		Intensified Surveillance			Case Reserve		Total
Number of policies	8		130		76			106		320
Remaining weighted-average contract period (in years)	9		19		20			25		20
Insured contractual payments outstanding:
Principal	$	18.9	$	1,156.6	$	529.3		$	336.8	$	2,041.6
Interest	3.5		723.2		292.4			169.6		1,188.7
Total	$	22.4	$	1,879.8	$	821.7		$	506.4	$	3,230.3
Gross claim liability	$	0.1	$	23.4	$	255.4		$	101.7	$	380.6
Less:
Gross potential recoveries	0.1		7.8		238.8			75.4		322.1
Discount, net	—		—		(54.4		)	4.7		(49.7		)
Net claim liability (prior to reduction for unearned premium)	$	—	$	15.6	$	71.0		$	21.6	$	108.2
Unearned premium revenue	$	0.1	$	26.1	$	10.8		$	—	$	37.0
Net claim liability reported in the balance sheet	$	—	$	8.1	$	62.9		$	21.6	$	92.6
Reinsurance recoverables	$	—	$	—	$	—		$	—	$	—

A net claim liability is established for a performing credit if there is evidence that credit deterioration has occurred and the expected loss on the credit exceeds the unearned premium revenue for the contract based on the present value of the expected net cash outflows. Included in accounts and notes receivable and unearned premiums on our condensed consolidated balance sheets are the present value of premiums receivable and unearned premiums that are received on an installment basis. The premiums receivable is net of commissions on assumed reinsurance business. The present values of premiums receivable and unearned premiums that are received on an installment basis were $30.9 million and $35.8 million, respectively, as of June 30, 2012, and $34.3 million and $39.8 million, respectively, as of December 31, 2011.

The accretion of these balances is included in either premiums written and premiums earned (for premiums receivable) or policy acquisition costs (for commissions) on our condensed consolidated statements of operations. The accretion included in premiums earned for the three months ended June 30, 2012 and 2011, was $0.3 million, and for the six months ended June 30, 2012 and 2011, was $0.6 million. There was an immaterial amount of accretion recorded in policy acquisition costs for the three and six months ended June 30, 2012 and 2011.

The nominal (non-discounted) premiums, net of commissions that are expected to be collected on financial guaranty contracts with installment premiums, included in premiums receivable as of June 30, 2012, was $38.8 million and is expected to be collected on a declining basis due to no new business being written. The activity related to the net present value of premiums receivable during the three and six months ended June 30, 2012 and 2011, was not material. The weighted-average risk-free rate used to discount the premiums receivable and premiums to be collected was 2.5% at June 30, 2012.

Premiums earned were affected by the following for the periods indicated:



	Three Months Ended June 30,					Six Months Ended June 30,
(In millions)	2012			2011		2012			2011
Refundings	$	10.5		$	9.3	$	18.7		$	14.1
Recaptures/commutations	—			2.8		(16.3		)	2.8
Unearned premium acceleration upon establishment of case reserves	—			1.3		—			1.3
Reinsurance agreements	—			—		(6.0		)	—
Foreign exchange revaluation, gross of commissions	(1.0		)	0.7		(0.8		)	2.0
Adjustments to installment premiums, gross of commissions	—			0.1		0.1			0.3
Total adjustment to premiums earned	$	9.5		$	14.2	$	(4.3	)	$	20.5

The following table shows the expected contractual premium revenue from our existing financial guaranty portfolio, assuming no prepayments (“refundings”) of any financial guaranty obligations, as of June 30, 2012:



(In millions)	Ending Net Unearned Premiums		Unearned Premium Amortization		Accretion		Total Premium Revenue
Third Quarter 2012	$	265.2	$	8.6	$	0.2	$	8.8
Fourth Quarter 2012	259.2		6.0		0.2		6.2
2012	259.2		14.6		0.4		15.0
2013	233.9		25.3		0.9		26.2
2014	209.5		24.4		0.8		25.2
2015	189.6		19.9		0.8		20.7
2016	172.0		17.6		0.7		18.3
2012 – 2016	172.0		101.8		3.6		105.4
2017 – 2021	99.6		72.4		2.7		75.1
2022 – 2026	50.8		48.8		1.8		50.6
2027 – 2031	22.5		28.3		1.1		29.4
After 2031	—		22.5		1.3		23.8
Total	$	—	$	273.8	$	10.5	$	284.3

The following table shows the significant components of the change in our financial guaranty net claim liability for the periods indicated:



	Three Months Ended June 30,						Six Months Ended June 30,
(In millions)	2012			2011			2012			2011
Net claim liability at beginning of period	$	83.0		$	80.6		$	60.5		$	67.4
Incurred losses and LAE:
(Decrease)/increase in gross claim liability	(25.4		)	22.4			161.7			41.7
Decrease/(increase) in gross potential recoveries	109.9			(30.0		)	(191.7		)	(33.2		)
(Decrease)/increase in discount	(80.5		)	(2.5		)	66.1			(5.8		)
(Decrease)/increase in unearned premiums	(1.2		)	3.4			(1.9		)	4.0
Incurred losses and LAE	2.8			(6.7		)	34.2			6.7
Paid losses and LAE:
Current years	(0.3		)	(0.2		)	(0.3		)	(0.2		)
Prior years	7.1			(2.9		)	(1.8		)	(3.1		)
Paid losses and LAE:	6.8			(3.1		)	(2.1		)	(3.3		)
Net claim liability at end of period	$	92.6		$	70.8		$	92.6		$	70.8
Components of incurred losses and LAE:
Net claim liability established in current period	$	0.1		$	—		$	0.1		$	—
Changes in existing claim liabilities	2.7			(6.7		)	34.1			6.7
Total incurred losses and LAE	$	2.8		$	(6.7	)	$	34.2		$	6.7
Components of (decrease)/increase in discount:
(Decrease)/increase in discount related to net claim liabilities established in current period	$	(84.9	)	$	—		$	65.7		$	(0.1	)
Increase/(decrease) in discount related to existing net claim liabilities	4.4			(2.5		)	0.4			(5.7		)
Total (decrease)/increase in discount	$	(80.5	)	$	(2.5	)	$	66.1		$	(5.8	)

In the first six months of 2012 we significantly increased our estimated gross claim liability associated with a project finance credit within our public finance insured portfolio, with net par outstanding of $69 million at June 30, 2012, based primarily on refinancing risk upon the maturity or scheduled principal amortization of the insured obligations beginning in 2017. Revenues for the project, however, serve as collateral for our insured risk, and we have also projected a full recovery of the gross claim over time, which has resulted in an increase in both our potential recovery and discount amount for the six months ended June 30, 2012. Our net claim liability to our insured sovereign indebtedness to Greece as of June 30, 2012 is $23.1 million, compared to $4.4 million as of December 31, 2011. The increase in this net claim liability reflects our expectation that this exposure to Greece will be settled in full in the second half of 2012, resulting in aggregate net losses approximately equal to this net claim liability (subject to exchange rate fluctuation).

Our financial guaranty loss reserve estimate involves significant judgment surrounding the estimated probability of the likelihood, magnitude and timing of each potential loss based upon different loss scenarios. The probabilities, assumptions and estimates we use to establish our financial guaranty loss reserves are subject to uncertainties, particularly given the current economic and credit environments, including uncertainties regarding our public finance municipal exposures and international sovereign risk exposures. We continue to monitor the uncertainties surrounding our portfolio, and it is possible that the actual losses paid could differ materially from our present estimates.

The weighted-average risk-free rates used to discount the gross claim liability and gross potential recoveries were as follows as of the dates indicated:



June 30, 2012	1.95	%
December 31, 2011	2.80	%
June 30, 2011	3.97	%
December 31, 2010	3.69	%