GAAP AGO-06-30-2014-10Q
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 June 30, 2014
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 August 1, 2014 was 169,208,597 (includes 47,747 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
June 30, 2014
 
As of
December 31, 2013
Assets
 

 
 

Investment portfolio:
 

 
 

Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $10,078 and $9,488)
$
10,530

 
$
9,711

Short-term investments, at fair value
979

 
904

Other invested assets
126

 
170

Total investment portfolio
11,635

 
10,785

Cash
106

 
184

Premiums receivable, net of commissions payable
849

 
876

Ceded unearned premium reserve
440

 
452

Deferred acquisition costs
122

 
124

Reinsurance recoverable on unpaid losses
59

 
36

Salvage and subrogation recoverable
273

 
174

Credit derivative assets
80

 
94

Deferred tax asset, net
571

 
688

Financial guaranty variable interest entities’ assets, at fair value
1,284

 
2,565

Other assets
271

 
309

Total assets
$
15,690

 
$
16,287

Liabilities and shareholders’ equity
 

 
 

Unearned premium reserve
$
4,391

 
$
4,595

Loss and loss adjustment expense reserve
775

 
592

Reinsurance balances payable, net
178

 
148

Long-term debt
1,311

 
816

Credit derivative liabilities
1,917

 
1,787

Current income tax payable
12

 
44

Financial guaranty variable interest entities’ liabilities with recourse, at fair value
1,366

 
1,790

Financial guaranty variable interest entities’ liabilities without recourse, at fair value
124

 
1,081

Other liabilities
374

 
319

Total liabilities
10,448

 
11,172

Commitments and contingencies (See Note 14)

 

Common stock ($0.01 par value, 500,000,000 shares authorized; 174,155,033 and 182,177,866 shares issued and outstanding)
2

 
2

Additional paid-in capital
2,260

 
2,466

Retained earnings
2,643

 
2,482

Accumulated other comprehensive income, net of tax of $143 and $71
332

 
160

Deferred equity compensation (320,193 and 320,193 shares)
5

 
5

Total shareholders’ equity
5,242

 
5,115

Total liabilities and shareholders’ equity
$
15,690

 
$
16,287

 
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 June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
136

 
$
163

 
$
268

 
$
411

Net investment income
96

 
93

 
199

 
187

Net realized investment gains (losses):
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(27
)
 
(16
)
 
(30
)
 
(17
)
Less: portion of other-than-temporary impairment loss
recognized in other comprehensive income
(15
)
 
(9
)
 
(13
)
 
(5
)
Net impairment loss
(12
)
 
(7
)
 
(17
)
 
(12
)
Other net realized investment gains (losses)
4

 
9

 
11

 
42

Net realized investment gains (losses)
(8
)
 
2

 
(6
)
 
30

Net change in fair value of credit derivatives:
 
 
 
 
 
 
 
Realized gains (losses) and other settlements
15

 
(86
)
 
34

 
(68
)
Net unrealized gains (losses)
88

 
160

 
(142
)
 
(450
)
Net change in fair value of credit derivatives
103

 
74

 
(108
)
 
(518
)
Fair value gains (losses) on committed capital securities
(6
)
 
(3
)
 
(15
)
 
(13
)
Fair value gains (losses) on financial guaranty variable interest entities
25

 
143

 
182

 
213

Other income (loss)
7

 
(7
)
 
28

 
(21
)
Total revenues
353

 
465

 
548

 
289

Expenses
 
 
 
 
 
 
 
Loss and loss adjustment expenses
57

 
62

 
98

 
14

Amortization of deferred acquisition costs
3

 
1

 
8

 
4

Interest expense
20

 
21

 
40

 
42

Other operating expenses
55

 
52

 
115

 
112

Total expenses
135

 
136

 
261

 
172

Income (loss) before income taxes
218

 
329

 
287

 
117

Provision (benefit) for income taxes
 
 
 
 
 
 
 
Current
18

 
3

 
39

 
58

Deferred
41

 
107

 
47

 
(16
)
Total provision (benefit) for income taxes
59

 
110

 
86

 
42

Net income (loss)
$
159

 
$
219

 
$
201

 
$
75

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.89

 
$
1.17

 
$
1.12

 
$
0.39

Diluted
$
0.89

 
$
1.16

 
$
1.11

 
$
0.39

Dividends per share
$
0.11

 
$
0.10

 
$
0.22

 
$
0.20

 
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 June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
159

 
$
219

 
$
201

 
$
75

Unrealized holding gains (losses) arising during the period on:
 
 
 
 
 
 
 
Investments with no other-than-temporary impairment, net of tax provision (benefit) of $29, $(79), $70 and $(98)
75

 
(219
)
 
169

 
(269
)
Investments with other-than-temporary impairment, net of tax provision (benefit) of $(8), $(7), $(5) and $(15)
(17
)
 
(16
)
 
(9
)
 
(32
)
Unrealized holding gains (losses) arising during the period, net of tax
58

 
(235
)
 
160

 
(301
)
Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $(3), $0, $(4) and $(2)
(7
)
 
2

 
(9
)
 
(1
)
Change in net unrealized gains on investments
65

 
(237
)
 
169

 
(300
)
Other, net of tax provision
3

 
(1
)
 
3

 
(6
)
Other comprehensive income (loss)
$
68

 
$
(238
)
 
$
172

 
$
(306
)
Comprehensive income (loss)
$
227

 
$
(19
)
 
$
373

 
$
(231
)
 
The accompanying notes are an integral part of these consolidated financial statements.

3
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Assured Guaranty Ltd.

Consolidated Statement of Shareholders’ Equity (unaudited)
 
For the Six Months Ended June 30, 2014
 
(dollars in millions, except share data)

 
Common Shares Outstanding
 
 
Common Stock Par Value
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Income
 
Deferred
Equity Compensation
 
Total
Shareholders’ Equity
Balance at December 31, 2013
182,177,866

 
 
$
2

 
$
2,466

 
$
2,482

 
$
160

 
$
5

 
$
5,115

Net income
—

 
 
—

 
—

 
201

 
—

 
—

 
201

Dividends ($0.22 per share)
—

 
 
—

 
—

 
(40
)
 
—

 
—

 
(40
)
Common stock repurchases
(8,402,285
)
 
 
0

 
(212
)
 
—

 
—

 
—

 
(212
)
Share-based compensation and other
379,452

 
 
0

 
6

 
—

 
—

 
—

 
6

Other comprehensive income
—

 
 
—

 
—

 
—

 
172

 
—

 
172

Balance at June 30, 2014
174,155,033

 
 
$
2

 
$
2,260

 
$
2,643

 
$
332

 
$
5

 
$
5,242

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

4
Table of Contents

Assured Guaranty Ltd.

Consolidated Statements of Cash Flows (unaudited)
 
(in millions)
 
 
Six Months Ended June 30,
 
2014
 
2013
Net cash flows provided by (used in) operating activities
$
222

 
$
122

Investing activities
 

 
 

Fixed-maturity securities:
 

 
 

Purchases
(1,357
)
 
(987
)
Sales
444

 
632

Maturities
397

 
446

Net sales (purchases) of short-term investments
(51
)
 
(126
)
Proceeds from paydowns on financial guaranty variable interest entities’ assets
315

 
440

Other
23

 
67

Net cash flows provided by (used in) investing activities
(229
)
 
472

Financing activities
 

 
 

Dividends paid
(40
)
 
(38
)
Repurchases of common stock
(212
)
 
(244
)
Share activity under option and incentive plans
1

 
(1
)
Paydowns of financial guaranty variable interest entities’ liabilities
(311
)
 
(289
)
Proceeds from issuance of long-term debt
496


—

Repayment of long-term debt
(7
)
 
(13
)
Net cash flows provided by (used in) financing activities
(73
)
 
(585
)
Effect of exchange rate changes
2

 
(4
)
Increase (decrease) in cash
(78
)
 
5

Cash at beginning of period
184

 
138

Cash at end of period
$
106

 
$
143

Supplemental cash flow information
 

 
 

Cash paid (received) during the period for:
 

 
 

Income taxes
$
68

 
$
69

Interest
$
36

 
$
38

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

5
Table of Contents

Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (unaudited)
 
June 30, 2014

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 financial guaranty insurance that protects holders of debt instruments and other monetary obligations from defaults in scheduled payments. If an obligor defaults on a scheduled payment due on an obligation, including a scheduled principal or interest payment (“Debt Service”), the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. Obligations insured by the Company include bonds issued by U.S. state or municipal governmental authorities; notes issued to finance international infrastructure projects; and asset-backed securities issued by special purpose entities. The Company markets its financial guaranty insurance 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 U.S. and the United Kingdom ("U.K"). The Company also guarantees obligations issued in other countries and regions, including Australia and Western Europe.

In the past, the Company had sold credit protection by issuing policies that guaranteed payment obligations under credit derivatives, primarily credit default swaps ("CDS"). 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 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 Company not entering into such new CDS since 2009. 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 June 30, 2014 and cover the three-month period ended June 30, 2014 ("Second Quarter 2014"), the three-month period ended June 30, 2013 ("Second Quarter 2013"), six-month period ended June 30, 2014 ("Six Months 2014") and the six-month period ended June 30, 2013 ("Six Months 2013"). 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, 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.
 
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, 2013, filed with the U.S. Securities and Exchange Commission (the “SEC”).


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Table of Contents

The Company's principal insurance company subsidiaries are:

•
Assured Guaranty Municipal Corp. ("AGM"), domiciled in New York;
•
Municipal Assurance Corp. ("MAC"), domiciled in New York;
•
Assured Guaranty Corp. ("AGC"), domiciled in Maryland;
•
Assured Guaranty (Europe) Ltd. ("AGE"), organized in the United Kingdom; and
•
Assured Guaranty Re Ltd. (“AG Re”), domiciled in Bermuda.
 
The Company’s organizational structure includes various holding 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.
Rating Actions and Other Developments
 
 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 the rating agencies 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. However, the methodologies and models used by rating agencies differ, presenting conflicting goals that may make it inefficient or impractical to reach the highest rating level. The methodologies and models are not fully transparent, contain subjective elements and data (such as assumptions about future market demand for the Company’s products) and change frequently. Ratings are subject to continuous review and revision or withdrawal at any time. If the financial strength ratings of one (or more) of the Company’s insurance subsidiaries were reduced below current levels, the Company expects it could have adverse effects on the impacted subsidiary's future business opportunities as well as the premiums the impacted subsidiary could charge for its insurance policies.     

In the last several years, S&P and Moody's have changed, multiple times, their financial strength ratings of the Company's insurance subsidiaries, or changed the outlook on such ratings.

•
 On March 18, 2014, Standard & Poor's Ratings Services ("S&P") upgraded the financial strength ratings of all of AGL's insurance subsidiaries to AA (stable outlook) from AA- (stable outlook); it affirmed such ratings in a credit analysis issued on July 2, 2014.

•
The most recent rating action of Moody's Investors Service, Inc. ("Moody's") was on July 2, 2014, when it affirmed the ratings of AGL and its subsidiaries, but changed to negative the outlook of the financial strength ratings of AGC and its subsidiary Assured Guaranty (UK) Ltd. ("AGUK").

•
On July 15, 2014, Moody’s issued a “Request for Comment” on proposed changes to its credit rating methodology for financial guaranty insurance companies. While Moody’s noted that if changes to the credit rating methodology were adopted as proposed, Moody's does not expect to change outstanding ratings that it has assigned, there can be no assurance that the proposed changes will be adopted as proposed or that, even if they are, Moody’s would not change its ratings on AGM, AGC or AG Re.      

•
The most recent rating action of Kroll Bond Rating Agency was on August 4, 2014, when it affirmed MAC's AA+ (stable outlook) financial strength rating.

There can be no assurance that any of the rating agencies will not take negative action on their financial strength ratings of the Company's insurance subsidiaries in the future.

For a discussion of effects of rating actions on the Company, see the following:

•
Note 6, Financial Guaranty Insurance Losses
•
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)    

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Other Developments

•
Repurchase of Common Shares: The Company repurchased 7.1 million and 8.4 million common shares in Second Quarter 2014 and Six Months 2014, respectively. See Note 17, Shareholders' Equity, for more information.

•
Issuance of long-term debt: The Company issued $500 million in long-term debt. See Note 15, Long-Term Debt and Credit Facilities, for more information.

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 variable interest entities ("VIEs"). Some of these VIEs are consolidated as described in Note 9, Consolidated Variable Interest Entities. Unless otherwise specified, the outstanding par and Debt Service amounts presented in this note include outstanding exposures on VIEs whether or not they are consolidated.

     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 having an ascertainable cash flow or market value or other specialized financial obligations.
 
Surveillance Categories
 
The Company segregates its insured portfolio into investment grade and below-investment-grade ("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 the Company's internal credit ratings focus on future performance rather than lifetime performance.
 
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 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 the performance of many of its structured finance transactions as part of its periodic internal credit rating review of them. The Company models most assumed residential mortgage-backed security ("RMBS") credits with par above $1 million, as well as certain RMBS credits below that amount.
 
Credits identified as BIG are subjected to further review to determine the probability of a loss. See Note 5, Expected Loss to be Paid, for additional information. 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. For surveillance purposes, the Company calculates present value using a constant discount rate of 5%. (A risk-free rate is used for calculating the expected loss for financial statement purposes.)
 
More extensive monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. The Company expects “future losses” on a transaction when the Company believes there is at least a

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50% chance that, on a present value basis, it will pay more claims over the future of that transaction than it will have reimbursed. 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.

Components of Outstanding Exposure

Unless otherwise noted, ratings disclosed herein on the Company's insured portfolio reflect its internal ratings. The Company classifies those portions of risks benefiting from reimbursement obligations collateralized by eligible assets held in trust in acceptable reimbursement structures as the higher of 'AA' or their current internal rating.

Debt Service Outstanding

 
Gross Debt Service
Outstanding
 
Net Debt Service
Outstanding
 
June 30,
2014
 
December 31,
2013
 
June 30,
2014
 
December 31,
2013
 
(in millions)
Public finance
$
627,173

 
$
650,924

 
$
589,294

 
$
610,011

Structured finance
78,092

 
86,456

 
72,710

 
80,524

Total financial guaranty
$
705,265

 
$
737,380

 
$
662,004

 
$
690,535

 
In addition to the amounts shown in the table above, the Company’s net mortgage guaranty insurance debt service was approximately $152 million as of June 30, 2014. The net mortgage guaranty insurance in force constitutes assumed excess of loss business written between 2004 and 2006 and comprises $144 million covering loans originated in Ireland and $8 million covering loans originated in the U.K.

Financial Guaranty Portfolio by Internal Rating
As of June 30, 2014 

 
 
Public Finance
U.S.
 
Public Finance
Non-U.S.
 
Structured Finance
U.S
 
Structured Finance
Non-U.S
 
Total
Rating
Category
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
 
(dollars in millions)
AAA
 
$
4,239

 
1.3
%
 
$
1,031

 
2.9
%
 
$
26,709

 
51.9
%
 
$
7,597

 
64.5
%
 
$
39,576

 
9.0
%
AA
 
100,089

 
29.5

 
432

 
1.2

 
8,963

 
17.4

 
567

 
4.8

 
110,051

 
25.2

A
 
184,593

 
54.5

 
9,803

 
27.7

 
2,395

 
4.7

 
610

 
5.2

 
197,401

 
45.1

BBB
 
41,174

 
12.1

 
22,529

 
63.6

 
3,331

 
6.5

 
1,939

 
16.5

 
68,973

 
15.8

BIG
 
8,861

 
2.6

 
1,613

 
4.6

 
10,044

 
19.5

 
1,057

 
9.0

 
21,575

 
4.9

Total net par outstanding (excluding loss mitigation bonds)
 
$
338,956

 
100.0
%
 
$
35,408

 
100.0
%
 
$
51,442

 
100.0
%
 
$
11,770

 
100.0
%
 
$
437,576

 
100.0
%
Loss Mitigation Bonds
 
29

 
 
 
—

 
 
 
1,187

 
 
 
—

 
 
 
1,216

 
 
Net Par Outstanding (including loss mitigation bonds)
 
$
338,985

 
 
 
$
35,408

 
 
 
$
52,629

 
 
 
$
11,770

 
 
 
$
438,792

 
 
 

9
Table of Contents

Financial Guaranty Portfolio by Internal Rating
As of December 31, 2013 

 
 
Public Finance
U.S.
 
Public Finance
Non-U.S.
 
Structured Finance
U.S
 
Structured Finance
Non-U.S
 
Total
Rating
Category
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
 
(dollars in millions)
AAA
 
$
4,998

 
1.4
%
 
$
1,016

 
3.0
%
 
$
32,317

 
54.9
%
 
$
9,684

 
69.1
%
 
$
48,015

 
10.5
%
AA
 
107,503

 
30.5

 
422

 
1.2

 
9,431

 
16.0

 
577

 
4.1

 
117,933

 
25.7

A
 
192,841

 
54.8

 
9,453

 
27.9

 
2,580

 
4.4

 
742

 
5.3

 
205,616

 
44.8

BBB
 
37,745

 
10.7

 
21,499

 
63.2

 
3,815

 
6.4

 
1,946

 
13.9

 
65,005

 
14.1

BIG
 
9,094

 
2.6

 
1,608

 
4.7

 
10,764

 
18.3

 
1,072

 
7.6

 
22,538

 
4.9

Total net par outstanding (excluding loss mitigation bonds)
 
$
352,181

 
100.0
%
 
$
33,998

 
100.0
%
 
$
58,907

 
100.0
%
 
$
14,021

 
100.0
%
 
$
459,107

 
100.0
%
Loss Mitigation Bonds
 
32

 
 
 
—

 
 
 
1,163

 
 
 
—

 
 
 
1,195

 
 
Net Par Outstanding (including loss mitigation bonds)
 
$
352,213

 
 
 
$
33,998

 
 
 
$
60,070

 
 
 
$
14,021

 
 
 
$
460,302

 
 
 
In accordance with the terms of certain credit derivative contracts, the referenced obligations in such contracts have been delivered to the Company and therefore are included in the investment portfolio. Such amounts are still included in the financial guaranty insured portfolio (excluding loss mitigation bonds), and totaled $165 million and $195 million in gross par outstanding as of June 30, 2014 and December 31, 2013, respectively.

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $451 million for structured finance and $424 million for public finance obligations at June 30, 2014. 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 July 1, 2014 and February 25, 2017, with $300 million expiring prior to December 31, 2014. 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.


10
Table of Contents

Components of BIG Portfolio
Components of BIG Net Par Outstanding
(Insurance and Credit Derivative Form)
As of June 30, 2014

 
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
$
51

 
$
301

 
$
29

 
$
381

 
$
509

 
0.1
%
Alt-A first lien
681

 
729

 
1,211

 
2,621

 
3,369

 
0.6

Option ARM
95

 
20

 
433

 
548

 
833

 
0.1

Subprime
223

 
829

 
772

 
1,824

 
5,736

 
0.4

Second lien U.S. RMBS:
 

 
 

 
 

 
 

 
 

 
 

Closed-end second lien
33

 
20

 
87

 
140

 
232

 
0.0

Home equity lines of credit (“HELOCs”)
1,402

 
18

 
251

 
1,671

 
1,901

 
0.4

Total U.S. RMBS
2,485

 
1,917

 
2,783

 
7,185

 
12,580

 
1.6

Trust preferred securities (“TruPS”)
1,217

 
—

 
344

 
1,561

 
4,724

 
0.4

Other structured finance
1,341

 
298

 
716

 
2,355

 
45,908

 
0.5

U.S. public finance
7,170

 
1,269

 
422

 
8,861

 
338,956

 
2.0

Non-U.S. public finance
1,611

 
2

 
—

 
1,613

 
35,408

 
0.4

Total
$
13,824

 
$
3,486

 
$
4,265

 
$
21,575

 
$
437,576

 
4.9
%

Components of BIG Net Par Outstanding
(Insurance and Credit Derivative Form)
As of December 31, 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
$
52

 
$
321

 
$
30

 
$
403

 
$
541

 
0.1
%
Alt-A first lien
656

 
1,137

 
935

 
2,728

 
3,590

 
0.6

Option ARM
71

 
60

 
467

 
598

 
937

 
0.1

Subprime
297

 
908

 
740

 
1,945

 
6,130

 
0.4

Second lien U.S. RMBS:
 

 
 

 
 

 
 

 
 

 
 

Closed-end second lien
8

 
20

 
118

 
146

 
244

 
0.0

HELOCs
1,499

 
20

 
378

 
1,897

 
2,279

 
0.4

Total U.S. RMBS
2,583

 
2,466

 
2,668

 
7,717

 
13,721

 
1.6

TruPS
1,587

 
135

 
—

 
1,722

 
4,970

 
0.4

Other structured finance
1,367

 
309

 
721

 
2,397

 
54,237

 
0.5

U.S. public finance
8,205

 
440

 
449

 
9,094

 
352,181

 
2.0

Non-U.S. public finance
1,009

 
599

 
—

 
1,608

 
33,998

 
0.4

Total
$
14,751

 
$
3,949

 
$
3,838

 
$
22,538

 
$
459,107

 
4.9
%


11
Table of Contents

BIG Net Par Outstanding
and Number of Risks
As of June 30, 2014

 
 
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
 
$
11,613

 
$
2,211

 
$
13,824

 
184

 
29

 
213

Category 2
 
2,608

 
878

 
3,486

 
84

 
18

 
102

Category 3
 
2,883

 
1,382

 
4,265

 
113

 
27

 
140

Total BIG
 
$
17,104

 
$
4,471

 
$
21,575

 
381

 
74

 
455


 BIG Net Par Outstanding
and Number of Risks
As of December 31, 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
 
$
12,391

 
$
2,360

 
$
14,751

 
185

 
25

 
210

Category 2
 
2,323

 
1,626

 
3,949

 
80

 
21

 
101

Category 3
 
3,031

 
807

 
3,838

 
119

 
27

 
146

Total BIG
 
$
17,745

 
$
4,793

 
$
22,538

 
384

 
73

 
457

_____________________
(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.
 
Direct 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 the Company believes heightened uncertainties exist are: Hungary, Ireland, Italy, Portugal and Spain (collectively, the “Selected European Countries”). The Company is closely monitoring its exposures in the Selected European Countries where it believes heightened uncertainties exist. 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.

12
Table of Contents

 
Net Direct Economic Exposure to Selected European Countries(1)
As of June 30, 2014

 
Hungary
 
Ireland
 
Italy
 
Portugal
 
Spain
 
Total
 
 
Sovereign and sub-sovereign exposure:
 

 
 

 
 

 
 

 
 

 
 

Non-infrastructure public finance (2)
$
—

 
$
—

 
$
1,007

 
$
95

 
$
272

 
$
1,374

Infrastructure finance
369

 
—

 
16

 
11

 
155

 
551

Sub-total
369

 
—

 
1,023

 
106

 
427

 
1,925

Non-sovereign exposure:
 

 
 

 
 

 
 

 
 

 
 

Regulated utilities
—

 
—

 
242

 
—

 
—

 
242

RMBS
214

 
144

 
308

 
—

 
—

 
666

Sub-total
214

 
144

 
550

 
—

 
—

 
908

Total
$
583

 
$
144

 
$
1,573

 
$
106

 
$
427

 
$
2,833

Total BIG (See Note 5)
$
583

 
$
—

 
$
—

 
$
106

 
$
427

 
$
1,116

____________________
(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 and Euros. Included in the table above is $144 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)
The exposure shown in the “Non-infrastructure 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.
 
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 excluded from the exposure tables above its indirect economic exposure to the Selected European Countries through policies it provides on pooled corporate and 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. Total net indirect exposure to Selected European Counties in non-sovereign pooled corporate and non-sovereign commercial receivables is $595 million and $84 million, respectively, based on the proportion of the insured par equal to the proportion of obligors identified as being domiciled in a Selected European Country.

Exposure to Puerto Rico
         
The Company insures general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $5.2 billion net par. The Company rates $5.0 billion net par of that amount BIG.

Puerto Rico has experienced significant general fund budget deficits in recent years. These deficits have been covered primarily with the net proceeds of bond issuances, with interim financings provided by Government Development Bank for Puerto Rico (“GDB”) and, in some cases, with onetime revenue measures or expense adjustment measures. In addition to high debt levels, Puerto Rico faces a challenging economic environment.

13
Table of Contents


In June 2014, the Puerto Rico legislature passed the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the "Recovery Act") in order to provide a legislative framework for certain public corporations experiencing severe financial stress to restructure their debt. In its Quarterly Report dated as of July 17, 2014, the Commonwealth stated the Puerto Rico Electric Power Authority (“PREPA”) may need to seek relief under the Recovery Act due to liquidity constraints. In the same report, the Commonwealth disclosed PREPA utilized approximately $42 million on deposit in its reserve account in order to pay debt service due on its bonds on July 1, 2014. Investors in bonds issued by PREPA have filed suit in the United States District Court for the District of Puerto Rico asserting the Recovery Act violates the U.S. Constitution.

Following the enactment of the Recovery Act, S&P, Moody’s and Fitch Ratings lowered the credit rating of the Commonwealth’s bonds and the ratings on certain of Puerto Rico’s public corporations. The Commonwealth disclosed its liquidity has been adversely affected by rating agency downgrades and by the limited market access for its debt. The Commonwealth noted it has relied on short-term financings and interim loans from the GDB and other private lenders, which reliance has constrained its liquidity and increased its near-term refinancing risk. The Commonwealth has also noted it is committed to addressing its fiscal and economic challenges and to repaying the general obligation debt of the Commonwealth and the debt of GDB and the public corporations that are not eligible to seek relief under the Recovery Act.
    
Puerto Rico
Gross Par and Gross Debt Service Outstanding
As of June 30, 2014
 
Gross Par Outstanding
 
Gross Debt Service Outstanding
 
(in millions)
Subject to the terms of the Recovery Act
$
3,195

 
$
5,472

Not subject to the terms of the Recovery Act
3,220

 
5,000

   Total
$
6,415

 
$
10,472



14
Table of Contents

The following table shows the Company’s exposure to general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations.

Puerto Rico
Net Par Outstanding
 
 
As of
June 30, 2014
 
As of
December 31, 2013
 
 
Total (1)
 
Internal Rating
 
Total
 
Internal Rating
 
 
(in millions)
Exposures subject to the terms of the Recovery Act:
 
 
 
 
 
 
 
 
Puerto Rico Highways and Transportation Authority (Transportation revenue)
 
$
872

 
BB-
 
$
872

 
BB-
PREPA
 
819

 
B-
 
860

 
BB-
Puerto Rico Aqueduct and Sewer Authority
 
384

 
BB-
 
384

 
BB-
Puerto Rico Highways and Transportation Authority (Highway revenue)
 
302

 
BB
 
302

 
BB
Puerto Rico Convention Center District Authority
 
185

 
BB-
 
185

 
BB-
Puerto Rico Public Finance Corporation
 
—

 
-
 
44

 
B
Total
 
2,562

 
 
 
2,647

 
 
 
 
 
 
 
 
 
 
 
Exposures not subject to the terms of the Recovery Act:
 
 
 
 
 
 
 
 
Commonwealth of Puerto Rico - General Obligation Bonds
 
1,766

 
BB
 
1,885

 
BB
Puerto Rico Municipal Finance Authority
 
450

 
BB-
 
450

 
BB-
Puerto Rico Sales Tax Financing Corporation
 
268

 
BBB
 
268

 
A-
Puerto Rico Public Buildings Authority
 
124

 
BB
 
139

 
BB
GDB
 
33

 
BB
 
33

 
BB
Puerto Rico Infrastructure Financing Authority
 
18

 
BB-
 
18

 
BB-
University of Puerto Rico
 
1

 
BB-
 
1

 
BB-
Total
 
2,660

 
 
 
2,794

 
 
Total net exposure to Puerto Rico
 
$
5,222

 
 
 
$
5,441

 
 
__________________
(1)
In July 2014, various Puerto Rico issuers made payment on $215 million of par scheduled to be paid; of that amount, $46 million of par was paid by PREPA.


15
Table of Contents

The following table shows the scheduled amortization of the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations insured and rated BIG by the Company. The Company guarantees payments of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis. In the event that obligors default on their obligations, the Company would only be required to pay the shortfall between the principal and interest due in any given period and the amount paid by the obligors.
     
Amortization Schedule of Puerto Rico BIG Net Par Outstanding
and BIG Net Debt Service Outstanding
As of June 30, 2014

 
Scheduled BIG Net Par Amortization
 
Scheduled BIG Net Debt Service Amortization
 
 
Subject to the Terms of the Recovery Act
 
Not Subject to the Terms of the Recovery Act
 
Total
 
Subject to the Terms of the Recovery Act
 
Not Subject to the Terms of the Recovery Act
 
Total
 
 
(in millions)
 
2014 (July 1 - December 31)
$
93

 
$
161

 
$
254

 
$
155

 
$
217

 
$
372

(1)
2015
126

 
205

 
331

 
246

 
316

 
562

 
2016
105

 
184

 
289

 
220

 
284

 
504

 
2017
41

 
167

 
208

 
152

 
259

 
411

 
2018
48

 
111

 
159

 
157

 
195

 
352

 
2019
61

 
128

 
189

 
167

 
206

 
373

 
2020
73

 
182

 
255

 
175

 
252

 
427

 
2021
51

 
58

 
109

 
149

 
123

 
272

 
2022
43

 
67

 
110

 
139

 
128

 
267

 
2023
102

 
40

 
142

 
195

 
98

 
293

 
2024-2028
581

 
351

 
932

 
971

 
589

 
1,560

 
2029-2033
375

 
320

 
695

 
641

 
483

 
1,124

 
2034 -2038
461

 
405

 
866

 
603

 
449

 
1,052

 
2039 -2043
156

 
13

 
169

 
230

 
15

 
245

 
2044 -2047
246

 
—

 
246

 
278

 
—

 
278

 
Total
$
2,562

 
$
2,392

 
$
4,954

 
$
4,478

 
$
3,614

 
$
8,092

 
__________________
(1)
In July 2014, various Puerto Rico issuers made scheduled par payments of $215 million plus interest. Of that amount $46 million of par related to PREPA.

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 amounts that relate to CDS.


16
Table of Contents

Net Earned Premiums
 
 
Second Quarter
 
Six Months
 
2014
 
2013
 
2014
 
2013
 
(in millions)
Scheduled net earned premiums
$
106

 
$
113

 
$
213

 
$
241

Acceleration of net earned premiums
24

 
46

 
43

 
159

Accretion of discount on net premiums receivable
5

 
3

 
11

 
10

Financial guaranty insurance net earned premiums
135

 
162

 
267

 
410

Other
1

 
1

 
1

 
1

 Net earned premiums(1)
$
136

 
$
163

 
$
268

 
$
411

 ___________________
(1)
Excludes $5 million and $15 million for Second Quarter 2014 and 2013, respectively, and $22 million and $33 million for Six Months 2014 and 2013, respectively, related to consolidated FG VIEs.

Components of Unearned Premium Reserve
 
 
As of June 30, 2014
 
As of December 31, 2013
 
Gross
 
Ceded
 
Net(1)
 
Gross
 
Ceded
 
Net(1)
 
(in millions)
Deferred premium revenue:
 
 
 
 
 
 
 
 
 
 
 
   Financial guaranty insurance
$
4,435

 
$
451

 
$
3,984

 
$
4,647

 
$
470

 
$
4,177

   Other
5

 
—

 
5

 
5

 
—

 
5

Deferred premium revenue
$
4,440

 
$
451

 
$
3,989

 
$
4,652

 
$
470

 
$
4,182

Contra-paid
(49
)
 
(11
)
 
(38
)
 
(57
)
 
(18
)
 
(39
)
Unearned premium reserve
$
4,391

 
$
440

 
$
3,951

 
$
4,595

 
$
452

 
$
4,143

 ____________________
(1)
Excludes $132 million and $187 million of deferred premium revenue, and $47 million and $55 million of contra-paid related to FG VIEs as of June 30, 2014 and December 31, 2013, respectively.
 
Gross Premium Receivable,
Net of Commissions on Assumed Business
Roll Forward
 
 
Six Months
 
2014

2013
 
(in millions)
Beginning of period, December 31
$
876

 
$
1,005

Gross premium written, net of commissions on assumed business
61

 
32

Gross premiums received, net of commissions on assumed business
(97
)
 
(109
)
Adjustments:
 
 
 
Changes in the expected term
(13
)
 
1

Accretion of discount, net of commissions on assumed business
12

 
13

Foreign exchange translation
9

 
(27
)
Other adjustments
1

 
0

End of period, June 30 (1)
$
849

 
$
915

____________________
(1)
Excludes $18 million and $20 million as of June 30, 2014 and June 30, 2013, respectively, related to consolidated FG VIEs.
 

17
Table of Contents

Gains or losses due to foreign exchange rate changes relate to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 50% and 48% of installment premiums at June 30, 2014 and December 31, 2013 respectively, are denominated in currencies other than the U.S. dollar, primarily the 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 Commissions on Assumed Business
(Undiscounted)
 
 
As of June 30, 2014
 
(in millions)
2014 (July 1 - September 30)
$
38

2014 (October 1 – December 31)
30

2015
99

2016
86

2017
79

2018
72

2019-2023
283

2024-2028
177

2029-2033
124

After 2033
132

Total(1)
$
1,120

 ____________________
(1)
Excludes expected cash collections on FG VIEs of $23 million.

Scheduled Net Earned Premiums

 
As of June 30, 2014
 
(in millions)
2014 (July 1 - September 30)
$
103

2014 (October 1–December 31)
99

2015
360

2016
334

2017
296

2018
270

2019 - 2023
1,054

2024 - 2028
675

2029 - 2033
412

After 2033
381

Total present value basis(1)
3,984

Discount
235

Total future value
$
4,219

 ____________________
(1)
Excludes scheduled net earned premiums on consolidated FG VIEs of $132 million.


18
Table of Contents

Selected Information for Policies Paid in Installments

 
As of
June 30, 2014
 
As of
December 31, 2013
 
(dollars in millions)
Premiums receivable, net of commission payable
$
849

 
$
876

Gross deferred premium revenue
1,501

 
1,576

Weighted-average risk-free rate used to discount premiums
3.4
%
 
3.4
%
Weighted-average period of premiums receivable (in years)
9.4

 
9.4


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 representations and warranties ("R&W"). The Company used weighted average risk-free rates for U.S. dollar denominated obligations that ranged from 0.0% to 3.78% as of June 30, 2014 and 0.0% to 4.44% as of December 31, 2013.

Net Expected Loss to be Paid
After Net Expected Recoveries for Breaches of R&W
Roll Forward by Sector
Second Quarter 2014
 
Net Expected
Loss to be
Paid as of
March 31, 2014
 
Economic Loss
Development
 
(Paid)
Recovered
Losses(1)
 
Net Expected
Loss to be
Paid as of
June 30, 2014(2)
 
(in millions)