Financial Guaranty Insurance Contracts

The following table includes information as of September 30, 2013 regarding our financial guaranty claim liabilities on non-derivative transactions, 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	6		106		72			85			269
Remaining weighted-average contract period (in years)	22		18		20			19			19
Insured contractual payments outstanding:
Principal	$	1,721	$	707,897	$	622,049		$	112,393		$	1,444,060
Interest	156		382,859		322,434			30,267			735,716
Total	$	1,877	$	1,090,756	$	944,483		$	142,660		$	2,179,776
Gross claim liability	$	1	$	20,305	$	206,597		$	34,773		$	261,676
Less:
Gross potential recoveries	—		6,744		254,152			55,265			316,161
Discount, net	—		699		(97,106		)	(1,955		)	(98,362		)
Net claim liability/(asset) (prior to reduction for unearned premium)	$	1	$	12,862	$	49,551		$	(18,537	)	$	43,877
Unearned premium revenue	$	5	$	15,298	$	10,724		$	—		$	26,027
Net claim liability/(asset) reported in the balance sheet	$	—	$	6,398	$	42,677		$	(18,537	)	$	30,538
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 $26.0 million and $28.5 million, respectively, as of September 30, 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 September 30, 2013 and 2012 was $0.2 million for both periods, and for the nine months ended September 30, 2013 and 2012 was $0.7 million and $0.8 million, respectively. There was an immaterial amount of accretion recorded in policy acquisition costs for the three and nine months ended September 30, 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 September 30, 2013, was $32.7 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 and nine months ended September 30, 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 September 30, 2013.

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



	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2013			2012			2013			2012
Refundings	$	6,979		$	7,322		$	22,020		$	26,029
Recaptures/commutations	—			—			(2,447		)	(16,269		)
Unearned premium acceleration upon establishment of case reserves	—			669			69			669
Reinsurance agreements	—			—			—			(5,995		)
Foreign exchange revaluation, gross of commissions	112			616			(975		)	(153		)
Adjustments to installment premiums, gross of commissions	(155		)	(2,390		)	2,527			(2,273		)
Total adjustment to premiums earned	$	6,936		$	6,217		$	21,194		$	2,008

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, 2013:



(In thousands)	Ending Net Unearned Premiums		Unearned Premium Amortization		Accretion		Total Premium Revenue
Fourth Quarter 2013	$	192,191	$	8,414	$	210	$	8,624
2014	168,705		23,486		794		24,280
2015	152,202		16,503		727		17,230
2016	138,307		13,895		683		14,578
2017	125,425		12,882		624		13,506
2013-2017	125,425		75,180		3,038		78,218
2018-2022	71,950		53,475		2,381		55,856
2023-2027	35,983		35,967		1,485		37,452
2028-2032	15,223		20,760		924		21,684
After 2032	—		15,223		1,075		16,298
Total	$	—	$	200,605	$	8,903	$	209,508

The following table shows the significant components of changes in our financial guaranty claim liability for the three and nine months ended September 30, 2013 and 2012, excluding reserves related to our trade credit reinsurance and surety business of $1.6 million and $2.3 million at September 30, 2013 and September 30, 2012, respectively, which are excluded from the accounting standard regarding accounting for financial guaranty insurance contracts by insurance enterprises.



	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2013			2012			2013			2012
Claim liability at beginning of period	$	23,611		$	92,645		$	64,291		$	60,550
Incurred losses and LAE:
(Decrease) increase in gross claim liability	(28,486		)	37,559			(56,477		)	199,257
Decrease (increase) in gross potential recoveries	8,896			(69,624		)	35,339			(261,339		)
Decrease in discount	24,075			36,312			30,208			102,457
Decrease (increase) in unearned premiums	926			225			213			(1,683		)
Incurred losses and LAE	5,411			4,472			9,283			38,692
Deduct paid losses and LAE:
Current years	70			(334		)	103			—
Prior years	(1,586		)	26,843			42,933			28,634
Paid losses and LAE:	(1,516		)	26,509			43,036			28,634
Claim liability at end of period	$	30,538		$	70,608		$	30,538		$	70,608
Components of incurred losses and LAE:
Claim liability established in current period	$	866		$	8,750		$	1,249		$	8,801
Changes in existing claim liabilities	4,545			(4,278		)	8,034			29,891
Total incurred losses and LAE	$	5,411		$	4,472		$	9,283		$	38,692
Components of decrease in discount:
Decrease in discount related to net claim liabilities established in current period	$	268		$	36,094		$	103		$	101,776
Decrease in discount related to existing net claim liabilities	23,807			218			30,105			681
Total decrease in discount	$	24,075		$	36,312		$	30,208		$	102,457

Paid losses during the first nine months of 2013 include $41.6 million related to the FGIC Commutation. Paid losses in the third quarter of 2013 reflect recoveries received during the quarter related to previously paid claims. 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.

In the first nine months of 2012, we significantly increased our estimated gross claim liability associated with a project finance credit 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 serve as collateral for our insured risk, and we have also projected a full recovery of the gross claim over time, which 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:



September 30, 2013	3.00	%
December 31, 2012	2.00	%
September 30, 2012	1.94	%
December 31, 2011	2.80	%