GAAP AGO-09-30-2013-10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-Q
ý
 
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2013
Or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition Period from              to               
Commission File No. 001-32141 
ASSURED GUARANTY LTD.
(Exact name of registrant as specified in its charter) 
Bermuda
 
98-0429991
(State or other jurisdiction
 
(I.R.S. employer
of incorporation)
 
identification no.)
 
30 Woodbourne Avenue
Hamilton HM 08
Bermuda
(Address of principal executive offices)
(441) 279-5700
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No x
The number of registrant’s Common Shares ($0.01 par value) outstanding as of November 1, 2013 was 181,968,895 (includes 48,273 unvested restricted shares).
 

Table of Contents


ASSURED GUARANTY LTD.

INDEX TO FORM 10-Q
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

PART I.
FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS

Assured Guaranty Ltd.

Consolidated Balance Sheets (unaudited)
 
(dollars in millions except per share and share amounts)
 
 
As of
September 30, 2013
 
As of
December 31, 2012
Assets
 

 
 

Investment portfolio:
 

 
 

Fixed maturity securities, available-for-sale, at fair value (amortized cost of $9,587 and $9,346)
$
9,873

 
$
10,056

Short term investments, at fair value
761

 
817

Other invested assets
126

 
212

Total investment portfolio
10,760

 
11,085

Cash
106

 
138

Premiums receivable, net of ceding commissions payable
906

 
1,005

Ceded unearned premium reserve
480

 
561

Deferred acquisition costs
125

 
116

Reinsurance recoverable on unpaid losses
59

 
58

Salvage and subrogation recoverable
275

 
456

Credit derivative assets
106

 
141

Deferred tax asset, net
767

 
721

Financial guaranty variable interest entities’ assets, at fair value
2,515

 
2,688

Other assets
255

 
273

Total assets
$
16,354

 
$
17,242

Liabilities and shareholders’ equity
 

 
 

Unearned premium reserve
$
4,676

 
$
5,207

Loss and loss adjustment expense reserve
601

 
601

Reinsurance balances payable, net
160

 
219

Long-term debt
819

 
836

Credit derivative liabilities
2,027

 
1,934

Financial guaranty variable interest entities’ liabilities with recourse, at fair value
1,828

 
2,090

Financial guaranty variable interest entities’ liabilities without recourse, at fair value
1,047

 
1,051

Other liabilities
362

 
310

Total liabilities
11,520

 
12,248

Commitments and contingencies (See Note 14)

 

Common stock ($0.01 par value, 500,000,000 shares authorized; 182,208,465 and 194,003,297 shares issued and outstanding)
2

 
2

Additional paid-in capital
2,471

 
2,724

Retained earnings
2,151

 
1,749

Accumulated other comprehensive income, net of tax of $85 and $198
206

 
515

Deferred equity compensation (320,193 and 320,193 shares)
4

 
4

Total shareholders’ equity
4,834

 
4,994

Total liabilities and shareholders’ equity
$
16,354

 
$
17,242

 
The accompanying notes are an integral part of these consolidated financial statements.


1
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Assured Guaranty Ltd.

Consolidated Statements of Operations (unaudited)
 
(dollars in millions except per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
159

 
$
222

 
$
570

 
$
635

Net investment income
99

 
102

 
286

 
301

Net realized investment gains (losses):
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(3
)
 
(4
)
 
(20
)
 
(41
)
Less: portion of other-than-temporary impairment loss
recognized in other comprehensive income
5

 
0

 
0

 
(30
)
Other net realized investment gains (losses)
1

 
6

 
43

 
11

Net realized investment gains (losses)
(7
)
 
2

 
23

 
0

Net change in fair value of credit derivatives:
 
 
 
 
 
 
 
Realized gains (losses) and other settlements
24

 
2

 
(44
)
 
(78
)
Net unrealized gains (losses)
330

 
(38
)
 
(120
)
 
(388
)
Net change in fair value of credit derivatives
354

 
(36
)
 
(164
)
 
(466
)
Fair value gains (losses) on committed capital securities
9

 
(2
)
 
(4
)
 
(12
)
Fair value gains (losses) on financial guaranty variable interest entities
40

 
34

 
253

 
161

Other income
16

 
16

 
(5
)
 
112

Total revenues
670

 
338

 
959

 
731

Expenses


 


 
 
 
 
Loss and loss adjustment expenses
55

 
86

 
69

 
446

Amortization of deferred acquisition costs
4

 
4

 
8

 
14

Interest expense
21

 
21

 
63

 
71

Other operating expenses
54

 
48

 
166

 
163

Total expenses
134

 
159

 
306

 
694

Income (loss) before income taxes
536

 
179

 
653

 
37

Provision (benefit) for income taxes
 

 
 

 
 
 
 
Current
67

 
(9
)
 
125

 
(9
)
Deferred
85

 
46

 
69

 
10

Total provision (benefit) for income taxes
152

 
37

 
194

 
1

Net income (loss)
$
384

 
$
142

 
$
459

 
$
36

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
2.10

 
$
0.73

 
$
2.44

 
$
0.19

Diluted
$
2.09

 
$
0.73

 
$
2.43

 
$
0.19

Dividends per share
$
0.10

 
$
0.09

 
$
0.30

 
$
0.27

 
The accompanying notes are an integral part of these consolidated financial statements.
 

2
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Assured Guaranty Ltd.

Consolidated Statements of Comprehensive Income (unaudited)
 
(in millions)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss)
$
384

 
$
142

 
$
459

 
$
36

Unrealized holding gains (losses) arising during the period on:
 
 
 
 
 
 
 
Investments with no other-than-temporary impairment, net of tax provision (benefit) of $(1), $34, $(99), and $61
(11
)
 
95

 
(280
)
 
169

Investments with other-than-temporary impairment, net of tax provision (benefit) of $(2), $4, $(17) and $(4)
(2
)
 
5

 
(34
)
 
(13
)
Unrealized holding gains (losses) arising during the period, net of tax
(13
)
 
100

 
(314
)
 
156

Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $(2), $(1), $(4) and $(6)
(3
)
 
—

 
(4
)
 
(5
)
Change in net unrealized gains on investments
(10
)
 
100

 
(310
)
 
161

Other, net of tax provision
7

 
1

 
1

 
2

Other comprehensive income (loss)
$
(3
)
 
$
101

 
$
(309
)
 
$
163

Comprehensive income (loss)
$
381

 
$
243

 
$
150

 
$
199

 
The accompanying notes are an integral part of these consolidated financial statements.
 


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Assured Guaranty Ltd.

Consolidated Statement of Shareholders’ Equity (unaudited)
 
For the Nine Months Ended September 30, 2013
 
(dollars in millions, except share data)

 
Common Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Income
 
Deferred
Equity Compensation
 
Total
Shareholders’ Equity
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2012
194,003,297

 
$
2

 
$
2,724

 
$
1,749

 
$
515

 
$
4

 
$
4,994

Net income
—

 
—

 
—

 
459

 
—

 
—

 
459

Dividends ($0.30 per share)
—

 
—

 
—

 
(57
)
 
—

 
—

 
(57
)
Common stock repurchases
(12,221,621
)
 
0

 
(259
)
 
—

 
—

 
—

 
(259
)
Share-based compensation and other
426,789

 
0

 
6

 
—

 
—

 
—

 
6

Other comprehensive loss
—

 
—

 
—

 
—

 
(309
)
 
—

 
(309
)
Balance at September 30, 2013
182,208,465

 
$
2

 
$
2,471

 
$
2,151

 
$
206

 
$
4

 
$
4,834

 
The accompanying notes are an integral part of these consolidated financial statements.


4
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Assured Guaranty Ltd.

Consolidated Statements of Cash Flows (unaudited)
 
(in millions)
 
 
Nine Months Ended September 30,
 
2013
 
2012
Net cash flows provided by (used in) operating activities
$
146

 
$
(223
)
Investing activities
 

 
 

Fixed maturity securities:
 

 
 

Purchases
(1,563
)
 
(1,322
)
Sales
812

 
683

Maturities
643

 
758

Net sales (purchases) of short-term investments
44

 
282

Net proceeds from paydowns on financial guaranty variable interest entities’ assets
553

 
407

Acquisition of Municipal Assurance Corp., net of cash acquired
—

 
(91
)
Other
81

 
85

Net cash flows provided by (used in) investing activities
570

 
802

Financing activities
 

 
 

Proceeds from issuance of common stock
—

 
173

Dividends paid
(57
)
 
(51
)
Repurchases of common stock
(259
)
 
(24
)
Share activity under option and incentive plans
—

 
(3
)
Net paydowns of financial guaranty variable interest entities’ liabilities
(409
)
 
(553
)
Repayment of long-term debt
(22
)
 
(204
)
Net cash flows provided by (used in) financing activities
(747
)
 
(662
)
Effect of exchange rate changes
(1
)
 
1

Increase (decrease) in cash
(32
)
 
(82
)
Cash at beginning of period
138

 
215

Cash at end of period
$
106

 
$
133

Supplemental cash flow information
 

 
 

Cash paid (received) during the period for:
 

 
 

Income taxes
$
81

 
$
(11
)
Interest
$
47

 
$
56

The accompanying notes are an integral part of these consolidated financial statements.

5
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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (unaudited)
 
September 30, 2013

1.
Business and Basis of Presentation
 
Business
 
Assured Guaranty Ltd. (“AGL” and, together with its subsidiaries, “Assured Guaranty” or the “Company”) is a Bermuda-based holding company that provides, through its operating subsidiaries, credit protection products to the United States (“U.S.”) and international public finance (including infrastructure) and structured finance markets. The Company applies its credit underwriting judgment, risk management skills and capital markets experience to offer insurance that protects holders of debt instruments and other monetary obligations from defaults in scheduled payments, including scheduled interest and principal payments. The Company markets its credit protection products directly to issuers and underwriters of public finance and structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in the United States and the United Kingdom ("U.K."). The Company also guarantees obligations issued in other countries and regions, including Australia and Western Europe.

Financial guaranty insurance policies provide an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest ("Debt Service") when due. Upon an obligor’s default on scheduled principal or interest payments due on the obligation, the Company is required under the financial guaranty policy to pay the principal or interest shortfall. The Company has issued financial guaranty insurance policies on public finance obligations and structured finance obligations. Public finance obligations insured by the Company consist primarily of general obligation bonds supported by the taxing powers of U.S. state or municipal governmental authorities, as well as tax-supported bonds, revenue bonds and other obligations supported by covenants from state or municipal governmental authorities or other municipal obligors to impose and collect fees and charges for public services or specific infrastructure projects. The Company also includes within public finance obligations those obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including utilities, toll roads, health care facilities and government office buildings. Structured finance obligations insured by the Company are generally issued by special purpose entities and backed by pools of assets such as residential or commercial mortgage loans, consumer or trade receivables, securities or other assets having an ascertainable cash flow or market value. The Company also includes within structured finance obligations other specialized financial obligations.
 
In the past, the Company had sold credit protection by issuing policies that guaranteed payment obligations under credit derivatives. Financial guaranty contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company’s obligation to make loss payments are similar to those for financial guaranty insurance contracts; the Company's credit derivatives are primarily comprised of credit default swaps (“CDS”). The Company’s credit derivative transactions are governed by International Swaps and Derivative Association, Inc. (“ISDA”) documentation. The Company has not entered into any new CDS in order to sell credit protection since the beginning of 2009, when regulatory guidelines were issued that limited the terms under which such protection could be sold. The capital and margin requirements applicable under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) also contributed to the decision of the Company not to enter into such new CDS in the foreseeable future. The Company actively pursues opportunities to terminate existing CDS, which have the effect of reducing future fair value volatility in income and/or reducing rating agency capital charges.

Basis of Presentation
 
The unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and, in the opinion of management, reflect all adjustments that are of a normal recurring nature, necessary for a fair statement of the financial condition, results of operations and cash flows of the Company and its consolidated financial guaranty variable interest entities (“FG VIEs”) for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited interim consolidated financial statements are as of September 30, 2013 and cover the three-month period ended September 30, 2013 ("Third Quarter 2013") and the three-month period ended September 30, 2012 ("Third Quarter 2012"), the nine-month period ended September 30, 2013 ("Nine Months 2013") and the nine-month period

6
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ended September 30, 2012 ("Nine Months 2012"). Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but is not required for interim reporting purposes, has been condensed or omitted. The year-end balance sheet data was derived from audited financial statements.
 
The unaudited interim consolidated financial statements include the accounts of AGL and its direct and indirect subsidiaries (collectively, the “Subsidiaries”) and its consolidated FG VIEs. Intercompany accounts and transactions between and among all consolidated entities have been eliminated. Certain prior year balances have been reclassified to conform to the current year’s presentation.
 
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements included in AGL’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the U.S. Securities and Exchange Commission (the “SEC”).

As of the date of this filing, the Company's principal insurance company subsidiaries are:

•
Assured Guaranty Municipal Corp. ("AGM"), domiciled in New York;
•
Assured Guaranty Corp. ("AGC"), domiciled in Maryland;
•
Municipal Assurance Corp. ("MAC"), domiciled in New York;
•
Assured Guaranty (Europe) Ltd., organized in the United Kingdom; and
•
Assured Guaranty Re Ltd. (“AG Re”), domiciled in Bermuda.
    
The Company’s organizational structure includes various holdings companies, two of which — Assured Guaranty US Holdings Inc. (“AGUS”) and Assured Guaranty Municipal Holdings Inc. (“AGMH”) — have public debt outstanding. See Note 15, Long Term Debt and Credit Facilities.

2.
Business Changes and Accounting Developments
 
Summarized below are updates of the most significant recent events that have had, or may have in the future, a material effect on the financial position, results of operations or business prospects of the Company.
 
Rating Actions
 
     When a rating agency assigns a public rating to a financial obligation guaranteed by one of AGL’s insurance company subsidiaries, it generally awards that obligation the same rating it has assigned to the financial strength of the AGL subsidiary that provides the guaranty. Investors in products insured by AGL’s insurance company subsidiaries frequently rely on ratings published by nationally recognized statistical rating organizations (“NRSROs”) because such ratings influence the trading value of securities and form the basis for many institutions’ investment guidelines as well as individuals’ bond purchase decisions. Therefore, the Company manages its business with the goal of achieving high financial strength ratings. If the financial strength ratings of the Company’s insurance subsidiaries were reduced below current levels, the Company expects it could have adverse effects on its future business opportunities as well as the premiums it could charge for its insurance policies and consequently, a further downgrade could harm the Company’s new business production and results of operations in a material respect. However, the models used by NRSROs differ, presenting conflicting goals that may make it inefficient or impractical to reach the highest rating level. The models are not fully transparent, contain subjective data (such as assumptions about future market demand for the Company’s products) and change frequently. Ratings reflect only the views of the respective NRSROs and are subject to continuous review and revision or withdrawal at any time.
    
In the last several years, Standard & Poor’s Ratings Services (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”) have downgraded the financial strength ratings of the Company's insurance subsidiaries that they rated at the time of such downgrades. The latest downgrade took place on January 17, 2013, when Moody’s downgraded the financial strength ratings of the Company's insurance subsidiaries, including AGM to A2 from Aa3, AGC to A3 from Aa3, and AG Re to Baa1 from A1. In the same rating action, Moody's also downgraded the senior unsecured debt ratings of AGUS and AGMH to Baa2 from A3. While the outlook for the ratings from S&P and Moody's is now stable, there can be no assurance that S&P and Moody's will not take further action on the Company’s ratings. For a discussion of the effect of rating actions on the Company, see the following:

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•
Note 5, Expected Loss to be Paid
•
Note 8, Financial Guaranty Contracts Accounted for as Credit Derivatives
•
Note 13, Reinsurance and Other Monoline Exposures
•
Note 15, Long Term Debt and Credit Facilities (regarding the impact on the Company's insured leveraged lease transactions)    

In July 2013, MAC was assigned a financial strength rating of AA+ (stable outlook) from Kroll Bond Rating Agency and of AA- (stable outlook) from S&P.
 
Significant Transactions

•
On November 11, 2013, the Company's share repurchase authorization of $400 million replaced the prior authorization. The Company expects the repurchases to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including availability of funds at the holding companies, market conditions, the Company's capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time. It does not have an expiration date. Through November 11, 2013, under the Company’s prior $315 million share repurchase authorization, the Company had repurchased a total of 12.5 million common shares for approximately $264 million at an average price of $21.12 per share. This included 5.0 million common shares purchased on June 5, 2013 from funds associated with WL Ross & Co. LLC and its affiliates (collectively, the “WLR Funds”) and Wilbur L. Ross, Jr., a director of the Company, for $109.7 million. This share purchase reduced the WLR Funds’ and Mr. Ross’s ownership of AGL's common shares to approximately 14.9 million common shares, or to approximately 8% of its total common shares outstanding, from approximately 10.5% of such outstanding common shares.

•
On October 10, 2013, the Company and Deutsche Bank AG terminated one below investment grade transaction under which the Company had provided credit protection to Deutsche Bank through a credit default swap. The transaction had a net par outstanding of $294 million at the time of termination.

•
In August 2013, AGC entered into a settlement agreement with a provider of representations and warranties ("R&W") that resolved AGC’s claims relating to specified residential mortgage-backed securities ("RMBS") transactions that AGC had insured, and AGM entered into a settlement agreement with a servicer of certain RMBS transactions that AGM had insured.

•
On June 21, 2013, AGM entered into a settlement agreement with Flagstar Bank in connection with its litigation for breach of contract against Flagstar on the Flagstar Home Equity Loan Trust, Series 2005-1 and Series 2006-2 second lien transactions. The agreement followed judgments by the court in February and April 2013 in favor of AGM, which Flagstar had planned to appeal. As part of the settlement, AGM received a cash payment of $105 million and Flagstar withdrew its appeal. Flagstar also will reimburse AGM in full for all future claims on AGM’s financial guaranty insurance policies for such transactions. This settlement resolved all RMBS claims that AGM had asserted against Flagstar and each party agreed to release the other from any and all other future RMBS-related claims between them.

•
On May 6, 2013, the Company entered into an agreement with UBS Real Estate Securities Inc. and affiliates ("UBS") and a third party resolving the Company’s claims and liabilities related to specified RMBS transactions that were issued, underwritten or sponsored by UBS and insured by AGM or AGC under financial guaranty insurance policies.

3.
Outstanding Exposure
 
The Company’s financial guaranty contracts are written in either insurance or credit derivative form, but collectively are considered financial guaranty contracts. The Company seeks to limit its exposure to losses by underwriting obligations that are investment grade at inception, diversifying its insured portfolio and maintaining rigorous subordination or collateralization requirements on structured finance obligations. The Company also has utilized reinsurance by ceding business to third-party reinsurers. The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. Some of these VIEs are consolidated as described in Note 9, Consolidation of Variable Interest Entities. The outstanding par and Debt Service amounts presented below include outstanding exposures on VIEs, whether or not they are consolidated.

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In Third Quarter 2013, the Company changed the manner in which it presents par outstanding and Debt Service in two ways. First, the Company had included securities purchased for loss mitigation purposes both in its invested assets portfolio and its financial guaranty insured portfolio. Beginning with Third Quarter 2013, the Company excluded such loss mitigation securities from its disclosure about its financial guaranty insured portfolio (unless otherwise indicated) because it manages such securities as investments and not insurance exposure; it has taken this approach as of both September 30, 2013 and December 31, 2012. This reduced its below investment grade net par as of September 30, 2013 by $1,211 million from what it would have been without the change. Second, the Company refined its approach to its internal credit ratings and surveillance categories. Please refer to "Refinement of Approach to Internal Credit Ratings and Surveillance Categories" below for additional information.

Debt Service Outstanding

 
Gross Debt Service
Outstanding
 
Net Debt Service
Outstanding
 
September 30,
2013
 
December 31,
2012
 
September 30,
2013
 
December 31,
2012
 
(in millions)
Public finance
$
665,855

 
$
722,478

 
$
624,425

 
$
677,285

Structured finance
91,723

 
110,620

 
85,218

 
103,071

Total financial guaranty
$
757,578

 
$
833,098

 
$
709,643

 
$
780,356

 
In addition to the amounts shown in the table above, the Company’s net mortgage guaranty insurance in force was approximately $150 million as of September 30, 2013. The net mortgage guaranty insurance in force constitutes assumed excess of loss business written between 2004 and 2006 and comprises $142 million covering loans originated in Ireland and $8 million covering loans originated in the U.K.

Financial Guaranty Portfolio by Internal Rating
As of September 30, 2013 

 
 
Public Finance
U.S.
 
Public Finance
Non-U.S.
 
Structured Finance
U.S
 
Structured Finance
Non-U.S
 
Total
Rating
Category (1)
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
 
(dollars in millions)
AAA
 
$
4,169

 
1.2
%
 
$
1,711

 
4.9
%
 
$
34,924

 
55.8
%
 
$
10,125

 
69.0
%
 
$
50,929

 
10.8
%
AA
 
112,319

 
31.1

 
488

 
1.4

 
9,438

 
15.1

 
590

 
4.0

 
122,835

 
25.9

A
 
197,403

 
54.6

 
9,358

 
26.8

 
2,587

 
4.1

 
797

 
5.5

 
210,145

 
44.4

BBB
 
42,684

 
11.8

 
21,729

 
62.2

 
4,329

 
6.9

 
2,162

 
14.7

 
70,904

 
15.0

Below-investment-grade (“BIG”)
 
4,628

 
1.3
%
 
1,626

 
4.7

 
11,306

 
18.1

 
997

 
6.8

 
18,557

 
3.9

Total net par outstanding (excluding loss mitigation bonds)
 
$
361,203

 
100.0
%
 
$
34,912

 
100.0
%
 
$
62,584

 
100.0
%
 
$
14,671

 
100.0
%
 
$
473,370

 
100.0
%
Loss Mitigation Bonds
 
34

 
 
 
—

 
 
 
1,263

 
 
 
—

 
 
 
1,297

 
 
Net Par Outstanding (including loss mitigation bonds)
 
$
361,237

 
 
 
$
34,912

 
 
 
$
63,847

 
 
 
$
14,671

 
 
 
$
474,667

 
 
 

9
Table of Contents

Financial Guaranty Portfolio by Internal Rating
As of December 31, 2012 

 
 
Public Finance
U.S.
 
Public Finance
Non-U.S.
 
Structured Finance
U.S
 
Structured Finance
Non-U.S
 
Total
Rating
Category (1)
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
 
(dollars in millions)
AAA
 
$
4,502

 
1.2
%
 
$
1,706

 
4.5
%
 
$
42,187

 
56.6
%
 
$
13,169

 
70.2
%
 
$
61,564

 
11.9
%
AA
 
124,525

 
32.1

 
875

 
2.3

 
9,543

 
12.8

 
722

 
3.9

 
135,665

 
26.1

A
 
210,124

 
54.1

 
9,781

 
26.1

 
4,670

 
6.3

 
1,409

 
7.5

 
225,984

 
43.6

BBB
 
44,213

 
11.4

 
22,885

 
61.0

 
3,737

 
5.0

 
2,427

 
12.9

 
73,262

 
14.1

BIG
 
4,565

 
1.2

 
2,293

 
6.1

 
14,398

 
19.3

 
1,041

 
5.5

 
22,297

 
4.3

Total net par outstanding (excluding loss mitigation bonds)
 
$
387,929

 
100.0
%
 
$
37,540

 
100.0
%
 
$
74,535

 
100.0
%
 
$
18,768

 
100.0
%
 
$
518,772

 
100.0
%
Loss Mitigation Bonds
 
38

 
 
 
—

 
 
 
1,083

 
 
 
—

 
 
 
1,121

 
 
Net Par Outstanding (including loss mitigation bonds)
 
$
387,967

 
 
 
$
37,540

 
 
 
$
75,618

 
 
 
$
18,768

 
 
 
$
519,893

 
 
____________________
(1)
In Third Quarter 2013, the Company adjusted its approach to assigning internal ratings. See "Refinement of Approach to Internal Credit Ratings and Surveillance Categories" below. This approach is reflected in the "Financial Guaranty Portfolio by Internal Rating" tables as of both September 30, 2013 and December 31, 2012.
 
In accordance with the terms of certain credit derivative contracts, the referenced obligations in such contracts have been delivered to the Company, and they therefore are included in the investment portfolio. Such amounts are still included in the financial guaranty insured portfolio, and totaled $218 million and $220 million in gross par outstanding as of September 30, 2013 and December 31, 2012, respectively.

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $0.6 billion for structured finance and $0.8 billion for public finance obligations at September 30, 2013. The structured finance commitments include the unfunded component of pooled corporate and other transactions. Public finance commitments typically relate to primary and secondary public finance debt issuances. The expiration dates for the public finance commitments range between October 1, 2013 and February 25, 2017, with $0.4 billion expiring prior to December 31, 2013. The commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be canceled at the counterparty’s request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.
 
Surveillance Categories
 
The Company segregates its insured portfolio into investment grade and BIG surveillance categories to facilitate the appropriate allocation of resources to monitoring and loss mitigation efforts and to aid in establishing the appropriate cycle for periodic review for each exposure. BIG exposures include all exposures with internal credit ratings below BBB-. The Company’s internal credit ratings are based on internal assessments of the likelihood of default and loss severity in the event of default. Internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and are generally reflective of an approach similar to that employed by the rating agencies, except that, beginning this quarter, the Company's internal credit ratings focus on future performance, rather than lifetime performance. See "Refinement of Approach to Internal Credit Ratings and Surveillance Categories" below.
 
The Company monitors its investment grade credits to determine whether any new credits need to be internally downgraded to BIG. The Company refreshes its internal credit ratings on individual credits in quarterly, semi-annual or annual cycles based on the Company’s view of the credit’s quality, loss potential, volatility and sector. Ratings on credits in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter. The Company’s insured credit ratings on assumed credits are based on the Company’s reviews of low-rated credits or credits in volatile sectors, unless such information is not available, in which case, the ceding company’s credit rating of the transactions are used. The Company models most assumed RMBS credits with par above $1 million, as well as certain RMBS credits below that amount.

10
Table of Contents

 
Credits identified as BIG are subjected to further review to determine the probability of a loss (see Note 5, Expected Loss to be Paid). Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a future loss is expected and whether a claim has been paid. The Company expects “future losses” on a transaction when the Company believes there is at least a 50% chance that, on a present value basis, it will pay more claims over the future of that transaction than it will have reimbursed. For surveillance purposes, the Company calculates present value using a constant discount rate of 5%. (A risk-free rate is used for recording of reserves for financial statement purposes.)
 
More extensive monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. In Third Quarter 2013, the Company refined the definitions of its BIG surveillance categories to be consistent with its new approach to assigning internal credit ratings. See "Refinement of Approach to Internal Credit Ratings and Surveillance Categories". The three BIG categories are:
 
•
BIG Category 1: Below-investment-grade transactions showing sufficient deterioration to make future losses possible, but for which none are currently expected.
 
•
BIG Category 2: Below-investment-grade transactions for which future losses are expected but for which no claims (other than liquidity claims which is a claim that the Company expects to be reimbursed within one year) have yet been paid.
 
•
BIG Category 3: Below-investment-grade transactions for which future losses are expected and on which claims (other than liquidity claims) have been paid.
 
Refinement of Approach to Internal Credit Ratings and Surveillance Categories

Typically, when an issuer of a debt security has defaulted on a payment and has not made up that missed payment, the debt security is considered by the rating agencies to be below-investment-grade regardless of its current credit condition. Similarly, the Company had previously considered those securities on which it has made an insurance claim payment that had not been reimbursed to be BIG regardless of their current credit condition.

Structured finance transactions often include mechanisms for reimbursing the Company for its insurance claim payments from assets underlying the transactions to the extent permitted by asset performance. With improvements beginning to occur in the performance of the assets underlying some of the structured finance securities the Company has insured, the Company is receiving reimbursements on some transactions on which it had paid claims in the past. As a result of these improvements, it now projects receiving reimbursements (rather than making claims) in the future on some of those transactions. Under the old approach, a transaction with a projected lifetime loss, no matter how strong on a prospective basis, was required to be rated BIG. During Third Quarter 2013, the Company revised its approach to internal credit ratings. Under its revised approach, a transaction may be rated investment grade if it (a) has turned generally cash-flow positive and (b) is projected to have net future reimbursements with sufficient cushion to warrant an investment grade rating, even if it is projected to have ending lifetime unreimbursed insurance claim payments. The new approach resulted in the upgrade to investment grade of four RMBS transactions with a net par of $264 million that would have been BIG under the previous approach at September 30, 2013 and of one RMBS transactions with a net par of $25 million at December 31, 2012.

The Company also applied its change in approach to internal credit ratings to the Surveillance BIG Category definitions. Previously the BIG Category definitions were based in large part on whether lifetime losses were projected. Under the new approach, the BIG Category definitions are based on whether future losses are projected. In addition to the upgrades out of BIG described above, the change in approach resulted in the migration of a number of risks within BIG Categories. The following table shows the BIG exposure as it would have been categorized under the previous approach and how it is categorized under the new approach:


11
Table of Contents

Below-Investment-Grade
Net Par Outstanding
As of September 30, 2013

 
Previous Approach
 
New Approach
 
Difference
 
(in millions)
BIG 1
$
7,032

 
$
8,986

 
$
1,954

BIG 2
4,805

 
4,805

 
—

BIG 3
6,984

 
4,766

 
(2,218
)
Total
$
18,821

 
$
18,557

 
$
(264
)

Below-Investment-Grade
Net Par Outstanding
As of December 31, 2012

 
Previous Approach
 
New Approach
 
Difference
 
(in millions)
BIG 1
$
9,254

 
$
10,820

 
$
1,566

BIG 2
4,617

 
4,617

 
—

BIG 3
8,451

 
6,860

 
(1,591
)
Total
$
22,322

 
$
22,297

 
$
(25
)

Financial Guaranty Exposures
(Insurance and Credit Derivative Form)
As of September 30, 2013

 
BIG Net Par Outstanding
 
Net Par
 
BIG Net Par as
a % of Total Net Par
 
BIG 1
 
BIG 2
 
BIG 3
 
Total BIG
 
Outstanding
 
Outstanding
 
 
 
 
 
(in millions)
 
 
 
 
 
 
First lien U.S. RMBS:
 

 
 

 
 

 
 

 
 

 
 

Prime first lien
$
75

 
$
333

 
$
9

 
$
417

 
$
561

 
0.1
%
Alt-A first lien
913

 
1,454

 
434

 
2,801

 
3,993

 
0.6

Option ARM
68

 
353

 
211

 
632

 
1,014

 
0.2

Subprime
172

 
921

 
890

 
1,983

 
6,335

 
0.4

Second lien U.S. RMBS:
 

 
 

 
 

 
 

 
 

 
 

Closed end second lien
9

 
20

 
121

 
150

 
252

 
0.0

Home equity lines of credit (“HELOCs”)
1,461

 
22

 
472

 
1,955

 
2,365

 
0.4

Total U.S. RMBS
2,698

 
3,103

 
2,137

 
7,938

 
14,520

 
1.7

Trust preferred securities (“TruPS”)
941

 
136

 
919

 
1,996

 
5,164

 
0.4

Other structured finance
1,192

 
312

 
865

 
2,369

 
57,571

 
0.5

U.S. public finance
3,154

 
629

 
845

 
4,628

 
361,203

 
1.0

Non-U.S. public finance
1,001

 
625

 
—

 
1,626

 
34,912

 
0.3

Total
$
8,986

 
$
4,805

 
$
4,766

 
$
18,557

 
$
473,370

 
3.9
%


12
Table of Contents

 Financial Guaranty Exposures
(Insurance and Credit Derivative Form)
As of December 31, 2012

 
BIG Net Par Outstanding
 
Net Par
 
BIG Net Par as
a % of Total Net Par
 
BIG 1
 
BIG 2
 
BIG 3
 
Total BIG
 
Outstanding
 
Outstanding
 
 
 
 
 
(in millions)
 
 
 
 
 
 
First lien U.S. RMBS:
 

 
 

 
 

 
 

 
 

 
 

Prime first lien
$
28

 
$
436

 
$
11

 
$
475

 
$
641

 
0.1
%
Alt-A first lien
753

 
1,962

 
739

 
3,454

 
4,469

 
0.7

Option ARM
333

 
392

 
317

 
1,042

 
1,450

 
0.2

Subprime (including net interest margin securities)
152

 
988

 
921

 
2,061

 
7,048

 
0.4

Second lien U.S. RMBS:
 

 
 

 
 

 
 

 
 

 
 

Closed end second lien
97

 
76

 
58

 
231

 
348

 
0.0

HELOCs
644

 
—

 
1,932

 
2,576

 
3,079

 
0.5

Total U.S. RMBS
2,007

 
3,854

 
3,978

 
9,839

 
17,035

 
1.9

TruPS
1,920

 
—

 
953

 
2,873

 
5,694

 
0.6

Other structured finance
1,310

 
263

 
1,154

 
2,727

 
70,574

 
0.5

U.S. public finance
3,290

 
500

 
775

 
4,565

 
387,929

 
0.9

Non-U.S. public finance
2,293

 
—

 
—

 
2,293

 
37,540

 
0.4

Total
$
10,820

 
$
4,617

 
$
6,860

 
$
22,297

 
$
518,772

 
4.3
%

Below-Investment-Grade Credits
By Category
As of September 30, 2013

 
 
Net Par Outstanding
 
Number of Risks(2)
Description
 
Financial
Guaranty
Insurance(1)
 
Credit
Derivative
 
Total
 
Financial
Guaranty
Insurance(1)
 
Credit
Derivative
 
Total
 
 
(dollars in millions)
BIG:
 
 

 
 

 
 

 
 

 
 

 
 

Category 1
 
$
7,453

 
$
1,533

 
$
8,986

 
154

 
21

 
175

Category 2
 
2,537

 
2,268

 
4,805

 
76

 
25

 
101

Category 3
 
3,588

 
1,178

 
4,766

 
136

 
29

 
165

Total BIG
 
$
13,578

 
$
4,979

 
$
18,557

 
366

 
75

 
441



13
Table of Contents

 Below-Investment-Grade Credits
By Category
As of December 31, 2012

 
 
Net Par Outstanding
 
Number of Risks(2)
Description
 
Financial
Guaranty
Insurance(1)
 
Credit
Derivative
 
Total
 
Financial
Guaranty
Insurance(1)
 
Credit
Derivative
 
Total
 
 
(dollars in millions)
BIG:
 
 

 
 

 
 

 
 

 
 

 
 

Category 1
 
$
7,929

 
$
2,891

 
$
10,820

 
163

 
33

 
196

Category 2
 
2,116

 
2,501

 
4,617

 
76

 
27

 
103

Category 3
 
5,543

 
1,317

 
6,860

 
131

 
29

 
160

Total BIG
 
$
15,588

 
$
6,709

 
$
22,297

 
370

 
89

 
459

_____________________
(1)    Includes net par outstanding for FG VIEs.
 
(2)
A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making Debt Service payments.
 

Economic Exposure to the Selected European Countries

Several European countries continue to experience significant economic, fiscal and/or political strains such that the likelihood of default on obligations with a nexus to those countries may be higher than the Company anticipated when such factors did not exist. The European countries where it believes heightened uncertainties exist are: Greece, Hungary, Ireland, Italy, Portugal and Spain (the “Selected European Countries”). The Company is closely monitoring its exposures in Selected European Countries where it believes heightened uncertainties exist. Published reports have identified countries that may be experiencing reduced demand for their sovereign debt in the current environment. The Company selected these European countries based on these reports and its view that their credit fundamentals are deteriorating. The Company’s economic exposure to the Selected European Countries (based on par for financial guaranty contracts and notional amount for financial guaranty contracts accounted for as derivatives) is shown in the following table, net of ceded reinsurance.

14
Table of Contents

 
Net Economic Exposure to Selected European Countries(1)
September 30, 2013

 
Greece
 
Hungary (2)
 
Ireland
 
Italy
 
Portugal
 
Spain (2)
 
Total
 
(in millions)
Sovereign and sub-sovereign exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

Public finance
$
—

 
$
—

 
$
—

 
$
1,020

 
$
101

 
$
271

 
$
1,392

Infrastructure finance
—

 
417

 
24

 
85

 
96

 
171

 
793

Sub-total
—

 
417

 
24

 
1,105

 
197

 
442

 
2,185

Non-sovereign exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

Regulated utilities
—

 
—

 
—

 
229

 
—

 
—

 
229

RMBS
—

 
220

 
142

 
314

 
—

 
—

 
676

Commercial receivables
—

 
0

 
9

 
62

 
14

 
2

 
87

Pooled corporate
17

 
—

 
103

 
168

 
15

 
502

 
805

Sub-total
17

 
220

 
254

 
773

 
29

 
504

 
1,797

Total
$
17

 
$
637

 
$
278

 
$
1,878

 
$
226

 
$
946

 
$
3,982

Total BIG
$
—

 
$
599

 
$
7

 
$
1

 
$
113

 
$
425

 
$
1,145

 ____________________
(1)                             While the Company’s exposures are shown in U.S. dollars, the obligations the Company insures are in various currencies, including U.S. dollars, Euros and British pounds sterling. Included in the table above is $142 million of reinsurance assumed on a 2004 - 2006 pool of Irish residential mortgages that is part of the Company’s remaining legacy mortgage reinsurance business. One of the residential mortgage-backed securities included in the table above includes residential mortgages in both Italy and Germany, and only the portion of the transaction equal to the portion of the original mortgage pool in Italian mortgages is shown in the table.

 (2)
See Note 5, Expected Loss to be Paid.
 
When the Company directly insures an obligation, it assigns the obligation to a geographic location or locations based on its view of the geographic location of the risk. For direct exposure this can be a relatively straight-forward determination as, for example, a debt issue supported by availability payments for a toll road in a particular country. The Company may also assign portions of a risk to more than one geographic location. The Company may also have direct exposures to the Selected European Countries in business assumed from unaffiliated monoline insurance companies. In the case of assumed business for direct exposures, the Company depends upon geographic information provided by the primary insurer.

The Company has included in the exposure tables above its indirect economic exposure to the Selected European Countries through policies it provides on (a) pooled corporate and (b) commercial receivables transactions. The Company considers economic exposure to a selected European Country to be indirect when the exposure relates to only a small portion of an insured transaction that otherwise is not related to a Selected European Country. In most instances, the trustees and/or servicers for such transactions provide reports that identify the domicile of the underlying obligors in the pool, although occasionally such information is not available to the Company. The Company has reviewed transactions through which it believes it may have indirect exposure to the Selected European Countries that is material to the transaction and included in the tables above the proportion of the insured par equal to the proportion of obligors so identified as being domiciled in a Selected European Country. The Company may also have indirect exposures to Selected European Countries in business assumed from unaffiliated monoline insurance companies. However, in the case of assumed business for indirect exposures, unaffiliated primary insurers generally do not provide such information to the Company.

The Company no longer guarantees any sovereign bonds of the Selected European Countries. The exposure shown in the “Public Finance Category” is from transactions backed by receivable payments from sub-sovereigns in Italy, Spain and Portugal. Sub-sovereign debt is debt issued by a governmental entity or government backed entity, or supported by such an entity, that is other than direct sovereign debt of the ultimate governing body of the country.


15
Table of Contents

Exposure to Puerto Rico
         
The Company insures general obligations of the Commonwealth of Puerto Rico and various obligations of its instrumentalities. In recent months, investors have expressed concern about Puerto Rico's high debt levels and weak economy. Of the net insured par related to Puerto Rico, $2.1 billion is supported principally by a pledge of the good faith, credit and taxing power of the Commonwealth or by Commonwealth lease rental payments or appropriations. Puerto Rico’s Constitution provides that public debt constitutes a first claim on available Commonwealth resources. Public debt includes general obligation bonds and notes of the Commonwealth and payments required to be made under its guarantees of bonds and notes issued by its public instrumentalities. Of the remaining exposures, a significant portion, $2.9 billion, is secured by dedicated revenues such as special taxes, toll collections and revenues from essential utilities. In aggregate, the Company insures $5.5 billion net par to Puerto Rico obligors.

Neither Puerto Rico nor its instrumentalities are eligible debtors under Chapter 9 of the U.S. bankruptcy code.

Puerto Rico credits insured by the Company are presently current on their debt service payments, and the Commonwealth has never defaulted on any of its debt payments. Further, 92% of the Company’s exposure is rated investment grade internally and by both Moody’s and S&P, while 8%, substantially all of the balance of the exposure, is rated no more than one-notch below investment grade.

The Company has reduced its aggregate net par exposure to Puerto Rico credits by approximately 17% since January 2010, and limited its insurance of new issues to transactions that refunded existing exposure, with a general focus on lowering interest rates.

Management believes recent measures announced by the new Governor of Puerto Rico and his administration in adopting its fiscal 2014 budget in June reflect a strong commitment to improve the financial stability of the Commonwealth and several of its key authorities. In addition, other actions -- including plans to increase the excise tax on petroleum products, signed into law in June 2013; a 60% average rate increase for the Puerto Rico Aqueduct and Sewer Authority, implemented in July 2013; adoption in April 2013 of substantive pension reform plans that have been upheld by Puerto Rico’s Supreme Court; and the government’s reduction in the use of deficit financing and responsiveness to capital markets -- demonstrate that officials of the Commonwealth are focused on making the necessary choices to help Puerto Rico operate within its financial resources and maintain its access to the capital markets, which is a critical source of funding for the Commonwealth.
       
The table below presents the Company’s exposure to Puerto Rico credits:

 
 
Net Par Outstanding
 
Internal Rating
 
 
(in millions)
 
 
Commonwealth of Puerto Rico
 
$
1,885

 
BBB-
Puerto Rico Highways and Transportation Authority (Transportation revenue)
 
928

 
BBB-
Puerto Rico Electric Power Authority
 
860

 
BBB
Puerto Rico Municipal Finance Authority
 
450

 
BBB-
Puerto Rico Aqueduct and Sewer Authority
 
384

 
BB+
Puerto Rico Highways and Transportation Authority (Highway revenue)
 
303

 
BBB
Puerto Rico Sales Tax Financing Corporation
 
267

 
A
Puerto Rico Convention Center District Authority
 
185

 
BBB
Puerto Rico Public Buildings Authority
 
139

 
BBB-
Puerto Rico Public Finance Corporation
 
44

 
BB+
Government Development Bank for Puerto Rico
 
33

 
BBB-
Puerto Rico Infrastructure Financing Authority
 
18

 
BBB-
University of Puerto Rico
 
1

 
BBB-
Total
 
$
5,497

 
 


16
Table of Contents

4.
Financial Guaranty Insurance Premiums

The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, includes financial guaranty contracts that meet the definition of insurance contracts as well as those that meet the definition of a derivative under GAAP. Amounts presented in this note relate only to financial guaranty insurance contracts. See Note 8, Financial Guaranty Contracts Accounted for as Credit Derivatives, for a discussion of credit derivative revenues.

Net Earned Premiums
 
 
Third Quarter
 
Nine Months
 
2013
 
2012
 
2013
 
2012
 
(in millions)
Scheduled net earned premiums
$
117

 
$
144

 
$
358

 
$
441

Acceleration of premium earnings
40

 
73

 
199

 
178

Accretion of discount on net premiums receivable
2

 
4

 
12

 
15

  Total financial guaranty insurance
159

 
221

 
569

 
634

Other
0

 
1

 
1

 
1

  Total net earned premiums(1)
$
159

 
$
222

 
$
570

 
$
635

 ___________________
(1)
Excludes $14 million and $17 million for Third Quarter 2013 and 2012, respectively, and $47 million and $50 million for the Nine Months 2013 and 2012, respectively, related to consolidated FG VIEs.

Components of Unearned Premium Reserve
 
 
As of September 30, 2013
 
As of December 31, 2012
 
Gross
 
Ceded
 
Net(1)
 
Gross
 
Ceded
 
Net(1)
 
(in millions)
Deferred premium revenue:
 
 
 
 
 
 
 
 
 
 
 
   Financial guaranty
$
4,787

 
$
503

 
$
4,284

 
$
5,349

 
$
586

 
$
4,763

   Other
6

 
—

 
6

 
7

 
—

 
7

Total deferred premium revenue
$
4,793

 
$
503

 
$
4,290

 
$
5,356

 
$
586

 
$
4,770

Contra-paid
(117
)
 
(23
)
 
(94
)
 
(149
)
 
(25
)
 
(124
)
Total
$
4,676

 
$
480

 
$
4,196

 
$
5,207

 
$
561

 
$
4,646

 ____________________
(1)
Excludes $197 million and $262 million of deferred premium revenue, and $64 million and $98 million of contra-paid related to FG VIEs as of September 30, 2013 and December 31, 2012, respectively.

 

17
Table of Contents

Gross Premium Receivable, Net of Ceding Commissions Roll Forward
 
 
Nine Months
 
2013
 
2012
 
(in millions)
Balance beginning of period
$
1,005

 
$
1,003

Premium written, net of ceding commissions
72

 
134

Premium payments received, net of ceding commissions
(167
)
 
(225
)
Adjustments:
 
 
 
Changes in the expected term of financial guaranty insurance contracts
(14
)
 
12

Accretion of discount, net of ceding commissions
15

 
19

Foreign exchange translation
(7
)
 
10

Consolidation of FG VIEs
—

 
(5
)
Other adjustments
2

 
(4
)
Balance, end of period (1)
$
906

 
$
944

____________________
(1)
Excludes $19 million and $30 million as of September 30, 2013 and September 30, 2012, respectively, related to consolidated FG VIEs.
 
Gains or losses due to foreign exchange rate changes relate to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 47%, 47% and 50% of installment premiums at September 30, 2013, December 31, 2012 and September 30, 2012, respectively, are denominated in currencies other than the U.S. dollar, primarily Euro and British Pound Sterling.
 
The timing and cumulative amount of actual collections may differ from expected collections in the tables below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations and changes in expected lives.
 
Expected Collections of Gross Premiums Receivable,
Net of Ceding Commissions (Undiscounted)

 
As of
September 30, 2013
 
(in millions)
2013 (October 1 – December 31)
$
40

2014
108

2015
92

2016
85

2017
78

2018-2022
313

2023-2027
191

2028-2032
132

After 2032
153

Total(1)
$
1,192

 ____________________
(1)
Excludes expected cash collections on FG VIEs of $24 million.


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Table of Contents

Scheduled Net Earned Premiums
Financial Guaranty Insurance Contracts
 
 
As of September 30, 2013
 
(in millions)
2013 (October 1–December 31)
$
112

2014
429

2015
375

2016
331

2017
296

2018 - 2022
1,149

2023 - 2027
734

2028 - 2032
443

After 2032
415

Total present value basis(1)
4,284

Discount
246

Total future value
$
4,530

 ____________________
(1)
Excludes scheduled net earned premiums on consolidated FG VIEs of $197 million.

Selected Information for Policies Paid in Installments

 
As of
September 30, 2013
 
As of
December 31, 2012
 
(dollars in millions)
Premiums receivable, net of ceding commission payable
$
906

 
$
1,005

Gross deferred premium revenue
1,647

 
1,908

Weighted-average risk-free rate used to discount premiums
3.4
%
 
3.5
%
Weighted-average period of premiums receivable (in years)
9.5

 
9.6


5.
Expected Loss to be Paid
 
The following table presents a roll forward of the present value of net expected loss to be paid for all contracts, whether accounted for as insurance, credit derivatives or FG VIEs, by sector, after the benefit for net expected recoveries for contractual breaches of R&W. The Company used weighted average risk-free rates for U.S. dollar denominated obligations, which ranged from 0.0% to 4.36% as of September 30, 2013 and 0.0% to 3.28% as of December 31, 2012.

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Table of Contents


Net Expected Loss to be Paid
After Net Expected Recoveries for Breaches of R&W
Roll Forward
Third Quarter 2013

 
Net Expected
Loss to be
Paid as of
June 30, 2013
 
Economic Loss
Development
 
(Paid)
Recovered
Losses(1)
 
Net Expected
Loss to be
Paid as of
September 30, 2013(2)
 
(in millions)
U.S. RMBS:
 

 
 

 
 

 
 

First lien:
 

 
 

 
 

 
 

Prime first lien
$
18

 
$
3

 
$
—

 
$
21

Alt-A first lien
288

 
(85
)
 
3

 
206

Option ARM
(20
)
 
25

 
2

 
7

Subprime
274

 
38

 
(9
)
 
303

Total first lien
560

 
(19
)
 
(4
)
 
537

Second lien:
 

 
 

 
 

 
 

Closed-end second lien
(14
)
 
—

 
1

 
(13
)
HELOCs
(97
)
 
(42
)
 
10

 
(129
)
Total second lien
(111
)
 
(42
)
 
11

 
(142
)
Total U.S. RMBS
449

 
(61
)
 
7

 
395

TruPS
33

 
9

 
8

 
50

Other structured finance
158

 
(13
)
 
(17
)
 
128

U.S. public finance
71

 
44

 
68

 
183

Non-U.S public finance
66

 
(1
)
 
(12
)
 
53

Other
(3
)
 
—

 
—

 
(3
)
Total
$
774

 
$
(22
)
 
$
54

 
$
806



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Table of Contents

Net Expected Loss to be Paid
After Net Expected Recoveries for Breaches of R&W
Roll Forward
Third Quarter 2012

 
Net Expected
Loss to be
Paid as of
June 30, 2012
 
Economic Loss
Development
 
(Paid)
Recovered
Losses(1)
 
Net Expected
Loss to be
Paid as of
September 30, 2012
 
(in millions)
U.S. RMBS:
 

 
 

 
 

 
 

First lien: