Financial Guaranty Insurance Contracts

The following table includes information as of September 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	12		120		75			107		314
Remaining weighted-average contract period (in years)	16		18		20			27		20
Insured contractual payments outstanding:
Principal	$	38.8	$	924.5	$	695.0		$	334.2	$	1,992.5
Interest	10.6		537.1		379.7			163.8		1,091.2
Total	$	49.4	$	1,461.6	$	1,074.7		$	498.0	$	3,083.7
Gross claim liability	$	0.4	$	18.4	$	278.9		$	89.9	$	387.6
Less:
Gross potential recoveries	0.1		0.9		319.3			67.3		387.6
Discount, net	—		2.8		(91.2		)	2.4		(86.0		)
Net claim liability (prior to reduction for unearned premium)	$	0.3	$	14.7	$	50.8		$	20.2	$	86.0
Unearned premium revenue	$	0.2	$	23.0	$	13.0		$	—	$	36.2
Net claim liability reported in the balance sheet	$	0.2	$	6.8	$	43.4		$	20.2	$	70.6
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 $29.2 million and $34.8 million, respectively, as of September 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 and nine months ended September 30, 2012, was $0.2 million and $0.8 million, respectively, compared to $0.3 million and $0.9 million, respectively, for the comparable periods in 2011. There was an immaterial amount of accretion recorded in policy acquisition costs for the three and nine months ended September 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 September 30, 2012, was $38.0 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 nine months ended September 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 2.6% at September 30, 2012.

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



	Three Months Ended September 30,					Nine Months Ended September 30,
(In millions)	2012			2011		2012			2011
Refundings	$	7.3		$	4.6	$	26.0		$	18.7
Recaptures/commutations	—			—		(16.3		)	2.8
Unearned premium acceleration upon establishment of case reserves	0.7			1.8		0.7			3.1
Reinsurance agreements	—			—		(6.0		)	—
Foreign exchange revaluation, gross of commissions	0.6			—		(0.2		)	2.0
Adjustments to installment premiums, gross of commissions	(2.4		)	—		(2.3		)	0.3
Total adjustment to premiums earned	$	6.2		$	6.4	$	1.9		$	26.9

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 September 30, 2012:



(In millions)	Ending Net Unearned Premiums		Unearned Premium Amortization		Accretion		Total Premium Revenue
Fourth Quarter 2012	$	254.0	$	6.9	$	0.2	$	7.1
2013	227.3		26.7		0.9		27.6
2014	203.5		23.9		0.8		24.7
2015	184.1		19.4		0.8		20.2
2016	167.0		17.1		0.7		17.8
2012 – 2016	167.0		94.0		3.4		97.4
2017 – 2021	96.6		70.4		2.8		73.2
2022 – 2026	49.0		47.5		1.8		49.3
2027 – 2031	21.3		27.7		1.1		28.8
After 2031	—		21.3		1.3		22.6
Total	$	—	$	260.9	$	10.4	$	271.3

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



	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2012			2011			2012			2011
Net claim liability at beginning of period	$	92.6		$	70.8		$	60.5		$	67.4
Incurred losses and LAE:
Increase in gross claim liability	37.6			15.0			199.3			56.7
Increase in gross potential recoveries	(69.6		)	(50.7		)	(261.3		)	(83.9		)
Decrease in discount	36.4			8.4			102.5			2.6
(Increase)/decrease in unearned premiums	0.1			0.3			(1.8		)	4.3
Incurred losses and LAE	4.5			(27.0		)	38.7			(20.3		)
Paid losses and LAE:
Current years	0.3			—			—			—
Prior years	(26.8		)	(2.3		)	(28.6		)	(5.6		)
Paid losses and LAE:	(26.5		)	(2.3		)	(28.6		)	(5.6		)
Net claim liability at end of period	$	70.6		$	41.5		$	70.6		$	41.5
Components of incurred losses and LAE:
Net claim liability established in current period	$	8.7		$	1.0		$	8.8		$	1.0
Changes in existing claim liabilities	(4.2		)	(28.0		)	29.9			(21.3		)
Total incurred losses and LAE	$	4.5		$	(27.0	)	$	38.7		$	(20.3	)
Components of decrease in discount:
Decrease in discount related to net claim liabilities established in current period	$	36.1		$	1.2		$	101.8		$	1.1
Decrease in discount related to existing net claim liabilities	0.3			7.2			0.7			1.5
Total decrease in discount	$	36.4		$	8.4		$	102.5		$	2.6

In the first nine 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 $70 million at September 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 our potential recovery and a decrease in our discount amount for the nine months ended September 30, 2012. We paid $23.5 million to settle our obligations related to our exposure to insured sovereign indebtedness of Greece in the third quarter of 2012.

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:



September 30, 2012	1.94	%
December 31, 2011	2.80	%
September 30, 2011	3.28	%
December 31, 2010	3.69	%