Financial Guaranty Insurance Contracts

The following table includes information as of March 31, 2013 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 thousands)	Performing		Special Mention		Intensified Surveillance			Case Reserve			Total
Number of policies	7		120		70			85			282
Remaining weighted-average contract period (in years)	21		18		20			25			19
Insured contractual payments outstanding:
Principal	$	2,148	$	821,654	$	652,191		$	123,141		$	1,599,134
Interest	195		431,399		356,182			32,411			820,187
Total	$	2,343	$	1,253,053	$	1,008,373		$	155,552		$	2,419,321
Gross claim liability	$	1	$	22,169	$	264,492		$	47,979		$	334,641
Less:
Gross potential recoveries	—		7,588		286,068			68,766			362,422
Discount, net	—		353		(66,397		)	1,445			(64,599		)
Net claim liability (prior to reduction for unearned premium)	$	1	$	14,228	$	44,821		$	(22,232	)	$	36,818
Unearned premium revenue	$	7	$	16,980	$	11,747		$	—		$	28,734
Net claim liability reported in the balance sheet	$	—	$	6,853	$	37,847		$	(22,232	)	$	22,468
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 inflows and outflows. Included in accounts and notes receivable and unearned premiums on our condensed consolidated balance sheets are the present values 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 $28.3 million and $30.7 million, respectively, as of March 31, 2013, and $28.9 million and $33.6 million, respectively, as of December 31, 2012.

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 March 31, 2013 was $0.2 million compared to $0.3 million for the comparable period of 2012. There was an immaterial amount of accretion recorded in policy acquisition costs for the three months ended March 31, 2013 and 2012.

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 March 31, 2013, was $35.5 million and is expected to decrease over time as the portfolio runs off. The activity related to the net present value of premiums receivable during the three months ended March 31, 2013 and 2012 was not material. The weighted-average risk-free rate used to discount the premiums receivable and premiums to be collected was 2.6% at March 31, 2013.

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



	Three Months Ended March 31,
(In thousands)	2013			2012
Refundings	$	4,753		$	8,224
Recaptures/commutations	(2,447		)	(16,269		)
Unearned premium acceleration upon establishment of case reserves	65			—
Reinsurance agreements	—			(5,995		)
Foreign exchange revaluation, gross of commissions	(768		)	212
Adjustments to installment premiums, gross of commissions	2,692			94
Total adjustment to premiums earned	$	4,295		$	(13,734	)

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 March 31, 2013:



(In thousands)	Ending Net Unearned Premiums		Unearned Premium Amortization		Accretion		Total Premium Revenue
Second Quarter 2013	$	220,786	$	6,742	$	226	$	6,968
Third Quarter 2013	214,181		6,605		220		6,825
Fourth Quarter 2013	205,534		8,647		217		8,864
2013	205,534		21,994		663		22,657
2014	183,168		22,366		821		23,187
2015	165,724		17,444		752		18,196
2016	150,560		15,164		707		15,871
2017	136,441		14,119		647		14,766
2013-2017	136,441		91,087		3,590		94,677
2018-2022	78,216		58,225		2,467		60,692
2023-2027	39,420		38,796		1,535		40,331
2028-2032	17,320		22,100		950		23,050
After 2032	—		17,320		1,099		18,419
Total	$	—	$	227,528	$	9,641	$	237,169

The following table shows the significant components of changes in our financial guaranty claim liability for the three months ended March 31, 2013 and 2012, excluding $2.1 million and $2.4 million, respectively, related to our trade credit reinsurance and surety business, which is excluded from the accounting standard regarding accounting for financial guaranty insurance contracts by insurance enterprises.



	Three Months Ended March 31,
(In thousands)	2013			2012
Claim liability at beginning of period	$	64,291		$	60,550
Incurred losses and LAE:
Increase in gross claim liability	8,390			187,111
Increase in gross potential recoveries	(3,946		)	(301,598		)
(Increase)/decrease in discount	(3,555		)	146,579
Increase in unearned premiums	(797		)	(704		)
Incurred losses and LAE	92			31,388
Paid losses and LAE:
Current years	1			—
Prior years	(41,915		)	(8,889		)
Paid losses and LAE:	(41,914		)	(8,889		)
Claim liability at end of period	$	22,469		$	83,049
Components of incurred losses and LAE:
Claim liability established in current period	$	104		$	—
Changes in existing claim liabilities	(12		)	31,388
Total incurred losses and LAE	$	92		$	31,388
Components of decrease in discount:
(Increase)/decrease in discount related to net claim liabilities established in current period	$	(128	)	$	150,611
Increase in discount related to existing net claim liabilities	(3,427		)	(4,032		)
Total (increase)/decrease in discount	$	(3,555	)	$	146,579

Paid losses during the first quarter of 2013 include the impact of the FGIC Commutation.

In the first quarter of 2012, we significantly increased our estimated gross claim liability associated with a project finance credit with net par outstanding of $69 million at March 31, 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 both an increase in our potential recovery and discount amounts.

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:



March 31, 2013	2.09	%
December 31, 2012	2.00	%
March 31, 2012	2.26	%
December 31, 2011	2.80	%