Note 3 - Derivative Instruments (Notes)

3 Months Ended

Mar. 31, 2013

Derivative Instruments [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Derivative Instruments

We provide a significant portion of our credit protection within our financial guaranty segment in the form of CDS. In many of our CDS transactions, primarily our corporate CDOs, we generally are required to make payments to our counterparty above a specified level of subordination, upon the occurrence of credit events related to the borrowings or bankruptcy of obligors contained within pools of corporate obligations or, in the case of pools of mortgage or other asset-backed obligations, upon the occurrence of credit events related to the specific obligations in the pool. When we provide a CDS providing protection on a specific obligation, we generally guarantee the full and timely payment of principal and interest when due on such obligation. These derivatives have various maturity dates, but the majority of the net par outstanding of our remaining insured CDS transactions, including all of our corporate CDOs, mature within five years.

The following table sets forth our gross unrealized gains and gross unrealized losses on derivative assets and liabilities as of the dates indicated. Certain contracts are in an asset position because the net present value of the contractual premium we receive exceeds the net present value of our estimate of the expected future premiums that a financial guarantor of similar credit quality to us would charge to provide the same credit protection, assuming a transfer of our obligation to such financial guarantor as of the measurement date.

(In thousands)	March 31, 2013		December 31, 2012
Balance Sheets
Derivative assets:
Financial Guaranty credit derivative assets	$	4,851	$	12,024
NIMS assets	1,578		1,585
Total derivative assets	6,429		13,609
Derivative liabilities:
Financial Guaranty credit derivative liabilities	364,146		196,406
Financial Guaranty VIE derivative liabilities	66,752		70,467
Total derivative liabilities	430,898		266,873
Total derivative liabilities, net	$	424,469	$	253,264

The notional value of our derivative contracts at March 31, 2013 and December 31, 2012 was $15.0 billion and $19.2 billion, respectively.

The components of the (losses) gains included in change in fair value of derivative instruments are as follows:

	Three Months Ended March 31,
(In thousands)	2013			2012
Statements of Operations
Net premiums earned—derivatives	$	4,992		$	8,648
Financial Guaranty credit derivatives	(175,724		)	(80,219		)
Financial Guaranty VIE derivatives	3,062			(1,227		)
NIMS related	—			41
Change in fair value of derivative instruments	$	(167,670	)	$	(72,757	)

The valuation of derivative instruments may result in significant volatility from period to period in gains and losses as reported on our condensed consolidated statements of operations. Generally, these gains and losses result, in part, from changes in corporate credit or asset-backed spreads and changes in the market’s perception of the creditworthiness of any: (i) primary obligor of obligations for which we provide secondary credit protection, (ii) underlying corporate entities, or (iii) the credit performance of the assets underlying asset-backed securities (“ABS”). Additionally, when determining the fair value of our liabilities, we are required to incorporate into the fair value of those liabilities an adjustment that reflects our own non-performance risk, and consequently, changes in the market’s perception of our non-performance risk can also result in gains and losses on our derivative instruments. Any incurred gains or losses (which include any claim payments) on our financial guaranty contracts that are accounted for as derivatives are recognized as a change in fair value of derivative instruments. Because our fair value determinations for derivative and other financial instruments in our mortgage insurance and financial guaranty businesses are based on assumptions and estimates that are inherently subject to risk and uncertainty, our fair value amounts could vary significantly from period to period. See Note 4 for more information on our fair value of financial instruments.

The following table shows selected information about our derivative contracts:

($ in thousands)	March 31, 2013
	Number of Contracts	Par/ Notional Exposure		Total Net Asset/ (Liability)
Product
NIMS assets (1)	—	$	—	$	1,578
Corporate CDOs	25	9,670,390		(9,960		)
Non-Corporate CDOs and other derivative transactions:
Trust Preferred Securities (“TruPs”)	13	1,071,305		(42,899		)
CDOs of commercial mortgage-backed securities (“CMBS”)	4	1,831,000		(95,936		)
Other:
Structured finance	5	566,116		(133,603		)
Public finance	23	1,444,177		(63,122		)
Total Non-Corporate CDOs and other derivative transactions	45	4,912,598		(335,560		)
Assumed financial guaranty credit derivatives:
Structured finance	32	187,454		(13,157		)
Public finance	7	110,488		(618		)
Total Assumed	39	297,942		(13,775		)
Financial Guaranty VIE derivative liabilities (2)	1	76,792		(66,752		)
Grand Total	110	$	14,957,722	$	(424,469	)

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(1) Represents NIMS derivative assets related to consolidated NIMS VIEs. Because these investments represent financial guaranty contracts that we issued, they cannot become liabilities, and therefore, do not represent additional par exposure.

(2) Represents the fair value of a CDS included in a VIE that we have consolidated. See Note 5 for more information on this transaction, the underlying reference securities and our maximum exposure to loss from this consolidated financial guaranty transaction. The assets in the VIE represent the only funds available to pay the CDS counterparty for amounts due under the contract; therefore, the notional exposure presented for the CDS is limited to the current trust assets.