VIEs

Our interests in VIEs for which we are not the primary beneficiary may be accounted for as insurance or reinsurance contracts or credit derivatives, depending on the nature of the transaction. For insurance and reinsurance contracts, we record reserves for losses and LAE, and for credit derivatives, we record cumulative changes in fair value as a derivative asset or liability.

We have determined that we are the primary beneficiary of our NIMS transaction and certain financial guaranty structured finance transactions. Our control rights in these VIEs, which we obtained due to an event of default or breach of a performance trigger as defined in the transaction, generally provide us with either a right to replace the VIE servicer or, in some cases, the right to direct the sale of the VIE assets. In some instances, we have the obligation to absorb the majority of the VIE’s losses and the right to receive the majority of any remaining funds through our residual interest agreement and we have the ability to impact the activities of the VIE in certain limited ways that could impact the economic performance of this VIE. In those instances where we have determined that we are the primary beneficiary, we consolidate the assets and liabilities of the VIE. We have elected to carry the financial assets and financial liabilities of these VIEs at fair value. In certain instances, the operating results of the consolidated VIE may generate taxable income or loss. The following discussion relates to our consolidated and unconsolidated VIEs.

Financial Guaranty Insurance Contracts

In continually assessing our involvement with VIEs, we consider certain events such as the VIE’s failure to meet certain contractual conditions, including performance tests and triggers, servicer termination events and events of default that may, should they occur, provide us with additional control rights over the VIE for a limited number of our transactions. The occurrence of these events would cause us to reassess our initial determination that we are not the primary beneficiary of a VIE. In addition, changes to its governance structure that would allow us to direct the activities of a VIE or our acquisition of additional financial interests in the VIE, would also cause us to reassess our initial determination that we are not the primary beneficiary of a VIE. Many of our financial guaranty contracts provide us with substantial control rights over the activities of VIEs upon the occurrence of default or other performance triggers described above. Therefore, additional VIEs may be consolidated by us if these events were to occur. Prior to the occurrence of these contingent conditions, another party (typically the collateral manager, servicer or equity holder) involved with the transaction holds the power to manage the VIE’s assets and to impact the economic performance of the VIE, without our ability to control or direct such powers.

The following tables provide a summary of our maximum exposure to losses, and the financial impact on our condensed consolidated balance sheets, our condensed consolidated statements of operations and our condensed consolidated statements of cash flows as of and for the periods indicated, as it relates to our consolidated and unconsolidated financial guaranty insurance contracts and credit derivative VIEs:



	Consolidated				Unconsolidated
(In thousands)	March 31, 2014		December 31, 2013		March 31, 2014		December 31, 2013
Balance Sheet:
Other invested assets	$	81,635	$	81,000	$	—	$	—
Premiums receivable	—		—		2,100		2,211
Other assets	92,594		92,023		—		—
Unearned premiums	—		—		1,680		1,872
Reserve for losses and LAE	—		—		9,505		14,094
Derivative liabilities	47,769		68,457		191,945		220,633
VIE debt—at fair value	92,436		91,800		—		—
Other liabilities	190		254		—		—

Maximum exposure (1)	140,242		121,628		4,079,740		4,578,784

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(1)

The difference between the carrying amounts of the net asset/liability position and maximum exposure related to VIEs is primarily due to the difference between the face amount of the obligation and the recorded fair values, which include an adjustment for our non-performance risk, as applicable. For those VIEs that have recourse to our general credit, the maximum exposure is based on the net par amount of our insured obligation. For any VIEs that do not have recourse to our general credit, the maximum exposure is generally based on the recorded net assets of the VIE, as of the reporting date.



	Consolidated					Unconsolidated
	Three Months Ended March 31,					Three Months Ended March 31,
(In thousands)	2014		2013			2014			2013
Statement of Operations:
Premiums earned	$	—	$	—		$	314		$	324
Net investment income	440		443			—			—
Net gain (loss) on investments	195		(1,530		)	—			—
Change in fair value of derivative instruments—gain (loss)	20,117		3,062			29,621			(160,975		)
Net gain on other financial instruments	1,016		1,155			—			—
Provision for losses—increase (decrease)	—		—			894			(10		)
Other operating expenses	447		503			—			—

Net Cash Inflow (Outflow)	—		114			(4,356		)	1,215

NIMS VIE

At March 31, 2014, we had one remaining NIMS transaction. We have determined that we are the primary beneficiary of this NIMS transaction, and have consolidated the assets and liabilities of the VIE. We have elected to carry the financial assets and financial liabilities of the VIE at fair value. At March 31, 2014 and December 31, 2013, the amount of VIE debt and our maximum exposure were immaterial. The amount of income and expense related to this VIE was immaterial for 2014 and 2013.