GAAP AGO-06-30-2015-10Q
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, 2015
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 3, 2015 was 146,508,128 (includes 47,517 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, 2015
 
As of
December 31, 2014
Assets
 

 
 

Investment portfolio:
 

 
 

Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $10,229 and $9,972)
$
10,582

 
$
10,491

Short-term investments, at fair value
834

 
767

Other invested assets
215

 
126

Total investment portfolio
11,631

 
11,384

Cash
75

 
75

Premiums receivable, net of commissions payable
703

 
729

Ceded unearned premium reserve
282

 
381

Deferred acquisition costs
119

 
121

Reinsurance recoverable on unpaid losses
77

 
78

Salvage and subrogation recoverable
139

 
151

Credit derivative assets
81

 
68

Deferred tax asset, net
439

 
260

Current income tax receivable
11

 
—

Financial guaranty variable interest entities’ assets, at fair value
1,601

 
1,402

Other assets
321

 
276

Total assets
$
15,479

 
$
14,925

Liabilities and shareholders’ equity
 

 
 

Unearned premium reserve
$
4,389

 
$
4,261

Loss and loss adjustment expense reserve
996

 
799

Reinsurance balances payable, net
66

 
107

Long-term debt
1,305

 
1,303

Credit derivative liabilities
1,007

 
963

Current income tax payable
—

 
5

Financial guaranty variable interest entities’ liabilities with recourse, at fair value
1,361

 
1,277

Financial guaranty variable interest entities’ liabilities without recourse, at fair value
171

 
142

Other liabilities
378

 
310

Total liabilities
9,673

 
9,167

Commitments and contingencies (See Note 15)

 

Common stock ($0.01 par value, 500,000,000 shares authorized; 148,257,197 and 158,306,661 shares issued and outstanding)
1

 
2

Additional paid-in capital
1,606

 
1,887

Retained earnings
3,955

 
3,494

Accumulated other comprehensive income, net of tax of $102 and $159
239

 
370

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

 
5

Total shareholders’ equity
5,806

 
5,758

Total liabilities and shareholders’ equity
$
15,479

 
$
14,925


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,
 
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
219

 
$
136

 
$
361

 
$
268

Net investment income
98

 
96

 
199

 
199

Net realized investment gains (losses):
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(11
)
 
(27
)
 
(16
)
 
(30
)
Less: portion of other-than-temporary impairment loss
recognized in other comprehensive income
1

 
(15
)
 
3

 
(13
)
Net impairment loss
(12
)
 
(12
)
 
(19
)
 
(17
)
Other net realized investment gains (losses)
3

 
4

 
26

 
11

Net realized investment gains (losses)
(9
)
 
(8
)
 
7

 
(6
)
Net change in fair value of credit derivatives:
 
 
 
 
 
 
 
Realized gains (losses) and other settlements
8

 
15

 
29

 
34

Net unrealized gains (losses)
82

 
88

 
185

 
(142
)
Net change in fair value of credit derivatives
90

 
103

 
214

 
(108
)
Fair value gains (losses) on committed capital securities
23

 
(6
)
 
25

 
(15
)
Fair value gains (losses) on financial guaranty variable interest entities
5

 
25

 
(2
)
 
182

Bargain purchase gain and settlement of pre-existing relationships
214


—


214


—

Other income (loss)
55

 
7

 
46

 
28

Total revenues
695

 
353

 
1,064

 
548

Expenses
 
 
 
 
 
 
 
Loss and loss adjustment expenses
188

 
57

 
206

 
98

Amortization of deferred acquisition costs
6

 
3

 
10

 
8

Interest expense
26

 
20

 
51

 
40

Other operating expenses
66

 
55

 
122

 
115

Total expenses
286

 
135

 
389

 
261

Income (loss) before income taxes
409

 
218

 
675

 
287

Provision (benefit) for income taxes
 
 
 
 
 
 
 
Current
24

 
18

 
37

 
39

Deferred
88

 
41

 
140

 
47

Total provision (benefit) for income taxes
112

 
59

 
177

 
86

Net income (loss)
$
297

 
$
159

 
$
498

 
$
201

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.97

 
$
0.89

 
$
3.25

 
$
1.12

Diluted
$
1.96

 
$
0.89

 
$
3.23

 
$
1.11

Dividends per share
$
0.12

 
$
0.11

 
$
0.24

 
$
0.22

 
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,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
297

 
$
159

 
$
498

 
$
201

Unrealized holding gains (losses) arising during the period on:
 
 
 
 
 
 
 
Investments with no other-than-temporary impairment, net of tax provision (benefit) of $(54), $29, $(53) and $70
(136
)
 
75

 
(118
)
 
169

Investments with other-than-temporary impairment, net of tax provision (benefit) of $(1), $(8), $(3) and $(5)
(6
)
 
(17
)
 
(8
)
 
(9
)
Unrealized holding gains (losses) arising during the period, net of tax
(142
)
 
58

 
(126
)
 
160

Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $(4), $(3), $2 and $(4)
(5
)
 
(7
)
 
5

 
(9
)
Change in net unrealized gains on investments
(137
)
 
65

 
(131
)
 
169

Other, net of tax provision
6

 
3

 
0

 
3

Other comprehensive income (loss)
$
(131
)
 
$
68

 
$
(131
)
 
$
172

Comprehensive income (loss)
$
166

 
$
227

 
$
367

 
$
373

 
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 Six Months Ended June 30, 2015
 
(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, 2014
158,306,661

 
 
$
2

 
$
1,887

 
$
3,494

 
$
370

 
$
5

 
$
5,758

Net income
—

 
 
—

 
—

 
498

 
—

 
—

 
498

Dividends ($0.24 per share)
—

 
 
—

 
—

 
(37
)
 
—

 
—

 
(37
)
Common stock repurchases
(10,597,679
)
 
 
(1
)
 
(284
)
 
—

 
—

 
—

 
(285
)
Share-based compensation and other
548,215

 
 
0

 
3

 
—

 
—

 
—

 
3

Other comprehensive loss
—

 
 
—

 
—

 
—

 
(131
)
 
—

 
(131
)
Balance at June 30, 2015
148,257,197

 
 
$
1

 
$
1,606

 
$
3,955

 
$
239

 
$
5

 
$
5,806

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

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Assured Guaranty Ltd.

Consolidated Statements of Cash Flows (unaudited)
 
(in millions)
 
 
Six Months Ended June 30,
 
2015
 
2014
Net cash flows provided by (used in) operating activities
$
105

 
$
222

Investing activities
 

 
 

Fixed-maturity securities:
 

 
 

Purchases
(1,172
)
 
(1,357
)
Sales
1,381

 
444

Maturities
411

 
397

Net sales (purchases) of short-term investments
382

 
(51
)
Net proceeds from paydowns on financial guaranty variable interest entities’ assets
70

 
315

Acquisition of Radian Asset, net of cash acquired
(800
)
 
—

Other
27

 
23

Net cash flows provided by (used in) investing activities
299

 
(229
)
Financing activities
 

 
 

Dividends paid
(37
)

(40
)
Repurchases of common stock
(285
)

(212
)
Share activity under option and incentive plans
(2
)
 
1

Net paydowns of financial guaranty variable interest entities’ liabilities
(78
)
 
(311
)
Proceeds from issuance of long-term debt
—

 
496

Repayment of long-term debt
(2
)
 
(7
)
Net cash flows provided by (used in) financing activities
(404
)
 
(73
)
Effect of foreign exchange rate changes
0

 
2

Increase (decrease) in cash
0

 
(78
)
Cash at beginning of period
75

 
184

Cash at end of period
$
75

 
$
106

Supplemental cash flow information
 

 
 

Cash paid (received) during the period for:
 

 
 

Income taxes
$
51

 
$
68

Interest
$
48

 
$
36

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

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (unaudited)
 
June 30, 2015

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. 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."), and also guarantees obligations issued in other countries and regions, including Australia and Western Europe.

In the past, the Company 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 variable interest entities (“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, 2015 and cover the three-month period ended June 30, 2015 ("Second Quarter 2015"), the three-month period ended June 30, 2014 ("Second Quarter 2014"), six-month period ended June 30, 2015 ("Six Months 2015") and the six-month period ended June 30, 2014 ("Six Months 2014"). 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 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, 2014, filed with the U.S. Securities and Exchange Commission (the “SEC”).


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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 16, Long-Term Debt and Credit Facilities.

Future Application of Accounting Standards

Consolidation

In February 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is intended to improve certain areas of consolidation guidance for legal entities such as limited partnerships, limited liability companies, and securitization structures. The ASU will be effective on January 1, 2016. Early adoption is permitted, including adoption in an interim period. The Company does not expect that ASU 2015-02 will have any material effect on its Consolidated Financial Statements.

Interest

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Topic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU will be effective on January 1, 2016 and should be applied retrospectively. The adoption of this ASU will require the Company to reclassify its debt issuance costs from other assets to long-term debt on the Consolidated Balance Sheet. As of June 30, 2015, the debt issuance costs were approximately $5 million.

Investments

In May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share, which removes the requirement to make certain disclosures and categorize within the fair value hierarchy, certain investments for which fair value is measured using the net asset value per share. The ASU will be effective on January 1, 2016 and should be applied retrospectively to all periods presented; earlier adoption is permitted. The Company has investments with a fair value of $74 million and $76 million, as of June 30, 2015 and December 31, 2014, respectively, that are carried at fair value using the net asset value per share subject to this ASU.


2.
Acquisition of Radian Asset Assurance Inc.

On April 1, 2015 (“Acquisition Date”), AGC completed the acquisition (“Radian Asset Acquisition”) of all of the issued and outstanding capital stock of financial guaranty insurer Radian Asset Assurance Inc. (“Radian Asset”) for $804.5 million; the cash consideration was paid from AGC's available funds and from the proceeds of a $200 million loan from AGC’s direct parent, AGUS. AGC repaid the loan in full to AGUS on April 14, 2015. Radian Asset was merged with and into AGC, with AGC as the surviving company of the merger. The Radian Asset Acquisition added $13.6 billion to the Company's net par outstanding on April 1, 2015, and is consistent with one of the Company's key business strategies of supplementing its book of business through acquisitions.



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Radian Asset Acquisition was accounted for under the acquisition method of accounting which required that the assets and liabilities acquired be recorded at fair value. The Company was required to exercise significant judgment to determine the fair value of the assets it acquired and liabilities it assumed in the Radian Asset Acquisition. The most significant of these determinations related to the valuation of Radian Asset's financial guaranty insurance and credit derivative contracts. On an aggregate basis, Radian Asset’s contractual premiums for financial guaranty contracts were less than the premiums a market participant of similar credit quality would demand to acquire those contracts at the Acquisition Date, particularly for below-investment-grade transactions, resulting in a significant amount of the purchase price being allocated to these contracts. For information on the methodology the Company used to measure the fair value of assets it acquired and liabilities it assumed in the Radian Asset Acquisition, including financial guaranty insurance and credit derivative contracts, please refer to Note 8, Fair Value Measurement.

The fair value of the Company's stand-ready obligation on the Acquisition Date is recorded in unearned premium reserve. At the Acquisition Date, the fair value of each financial guaranty contract acquired was in excess of the expected losses for each contract and therefore no explicit loss reserves were recorded on the Acquisition Date. Instead, loss reserves and loss and loss adjustment expenses ("LAE") will be recorded when the expected losses for each contract exceeds the remaining unearned premium reserve, in accordance with the Company's accounting policy described in the Annual Report on Form 10-K. The expected losses acquired by the Company as part of the Radian Asset Acquisition are included in the description of expected losses to be paid under Note 6, Expected Losses to be Paid.

The excess of the fair value of net assets acquired over the consideration transferred was recorded as a bargain purchase gain in "bargain purchase gain and settlement of pre-existing relationships" in net income. In addition, the Company and Radian Asset had pre-existing reinsurance relationships, which were also effectively settled at fair value on the Acquisition Date. The gain on settlement of these pre-existing reinsurance relationships primarily represents the net difference between the historical ceded balances that were recorded by AGM and the fair value of assumed balances acquired from Radian. The Company believes the bargain purchase resulted from the announced desire of Radian Guaranty Inc. to focus its business strategy on the mortgage and real estate markets and to monetize its investment in Radian Asset and thereby accelerate its ability to comply with the financial requirements of the final Private Mortgage Insurer Eligibility Requirements.


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The following table shows the net effect of the Radian Asset Acquisition, including the effects of the settlement of preexisting relationships.
 
Fair Value of Net Assets Acquired, before Settlement of Pre-existing Relationships
 
Net effect of Settlement of Pre-existing Relationships
 
Net Effect of Radian Asset Acquisition
 
(in millions)
Cash purchase price(1)
$
804

 
$
—

 
$
804

Identifiable assets acquired:
 
 
 
 


Investments
1,473

 
—

 
1,473

Cash
4

 
—

 
4

Ceded unearned premium reserve
(3
)
 
(65
)
 
(68
)
Credit derivative assets
30

 
—

 
30

Deferred tax asset, net
263

 
(56
)
 
207

Financial guaranty VIE assets
122

 
—

 
122

Other assets
86

 
(67
)
 
19

Total assets
1,975

 
(188
)
 
1,787

 
 

 
 
 
 
Liabilities assumed:
 
 
 
 
 
Unearned premium reserves
697

 
(216
)
 
481

Credit derivative liabilities
271

 
(26
)
 
245

Financial guaranty VIE liabilities
118

 
—

 
118

Other liabilities
30

 
(49
)
 
(19
)
Total liabilities
1,116

 
(291
)
 
825

Net asset effect of Radian Asset Acquisition
859

 
103

 
962

Bargain purchase gain and settlement of pre-existing relationships resulting from Radian Asset Acquisition, after-tax
55

 
103

 
158

Deferred tax
—

 
56

 
56

Bargain purchase gain and settlement of pre-existing relationships resulting from Radian Asset Acquisition, pre-tax
$
55

 
$
159

 
$
214

_____________________
(1)
The cash purchase price of $804 million was the cash transferred for the acquisition which was allocated as follows: (1) $987 million for the purchase of net assets of $1,042 million, and (2) the settlement of pre-existing relationships between Radian and Assured Guaranty at a fair value of $(183) million.
       
Net income related to Radian Asset from the Acquisition Date through June 30, 2015 included in the consolidated statement of operations were approximately $313 million and $212 million, respectively. For Second Quarter 2015 and Six Months 2015, the Company recognized transaction expenses related to the Radian Asset Acquisition. These expenses were primarily driven by the fees paid to the Company's legal and financial advisors and to the Company's independent auditor.

Radian Asset Acquisition-Related Expenses

 
Second Quarter 2015
 
Six Months 2015
 
(in millions)
Professional services
$
2

 
$
2

Financial advisory fees
10

 
10

Total
$
12

 
$
12


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Unaudited Pro Forma Results of Operations

The following unaudited pro forma information presents the combined results of operations of Assured Guaranty and Radian Asset as if the acquisition had been completed on January 1, 2014, as required under GAAP. The pro forma accounts include the estimated historical results of the Company and Radian Asset and pro forma adjustments primarily comprising the earning of the unearned premium reserve and the expected losses that would be recognized in net income for each prior period presented, as well as the accounting for bargain purchase gain, settlement of pre-existing relationships and Radian acquisition related expenses, all net of tax at the applicable statutory rate.

The unaudited pro forma combined financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined as of January 1, 2014, nor is it indicative of the results of operations in future periods.

Pro Forma Unaudited Results of Operations

 
Six Months 2015
 
Six Months 2014
 
(in millions, except per share amounts)
Pro forma revenues
$
887

 
$
977

Pro forma net income
365

 
470

Pro forma earnings per share:
 
 
 
  Basic
2.38

 
2.60

  Diluted
2.36

 
2.59



3.
Rating Actions
 
 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 strong 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, Standard & Poor's Ratings Services ("S&P") and Moody's Investors Service, Inc. ("Moody's") have changed, multiple times, their financial strength ratings of AGL's insurance subsidiaries, or changed the outlook on such ratings. More recently, Kroll Bond Rating Agency ("KBRA") and A.M. Best Company, Inc. have assigned financial strength ratings to some of AGL's insurance subsidiaries. The rating agencies' most recent actions, proposals and statements related to AGL's insurance subsidiaries are:

•
On March 18, 2014, S&P upgraded the financial strength ratings of all of AGL's insurance subsidiaries to AA (stable outlook) from AA- (stable outlook); it most recently affirmed such ratings in a credit analysis issued on June 29, 2015.

•
On July 2, 2014, Moody's affirmed the ratings of AGL’s insurance subsidiaries, but changed to negative the outlook of the financial strength ratings of AGC and its subsidiary Assured Guaranty (UK) Ltd. ("AGUK"). Moody's adopted changes to its credit methodology for financial guaranty insurance companies on January 20, 2015 and, on February 18, 2015, Moody's published a credit opinion maintaining its existing ratings of AGL and its subsidiaries under that

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that new methodology. Effective April 8, 2015, at the Company's request, Moody’s withdrew the financial strength ratings it had assigned to Assured Guaranty Re Ltd. (“AG Re”) and Assured Guaranty Re Overseas Ltd. ("AGRO"). In a summary opinion published on June 4, 2015, Moody’s noted that, despite adverse developments in Puerto Rico, Moody’s believed that its current ratings on the financial guarantors remained well positioned.

•
On June 22, 2013, KBRA assigned a financial strength rating of AA+ (stable outlook) to MAC, and affirmed that rating on August 3, 2015. On November 13, 2014, KBRA assigned a financial strength rating of AA+ (stable outlook) to AGM. On June 29, 2015 KBRA released a comment reviewing the approach it had taken to Puerto Rico exposures in its stress loss analysis of AGM, noting that its financial model showed AGM’s claims paying resources were sufficient to meet all requirements by a comfortable margin.

•
On May 5, 2015, A.M. Best Company, Inc. assigned a financial strength rating of A+ (Stable) to AGRO.

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

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

•
Note 7, Financial Guaranty Insurance Losses
•
Note 9, Financial Guaranty Contracts Accounted for as Credit Derivatives
•
Note 14, Reinsurance and Other Monoline Exposures
•
Note 16, Long-Term Debt and Credit Facilities


4.
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, or in the case of restructurings of troubled credits, the Company may underwrite new issuances that one or more of the rating agencies may rate below-investment-grade ("BIG") as part of its loss mitigation strategy. The Company diversifies its insured portfolio across asset classes and, in the structured finance portfolio, requires rigorous subordination or collateralization requirements. Reinsurance is utilized in order to reduce net exposure to certain insured transactions.

     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, including VIEs, and backed by pools of assets having an ascertainable cash flow or market value or other specialized financial obligations. Some of these VIEs are consolidated as described in Note 10, 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.

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 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 need to be internally downgraded to BIG and refreshes its internal credit ratings on individual credits in quarterly, semi-annual or annual cycles based on the

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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.
 
Credits identified as BIG are subjected to further review to determine the probability of a loss. See Note 6, 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 4.5% or 5% depending on the insurance subsidiary. (Risk-free rates are used for calculating the expected loss for financial statement measurement 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 50% chance that, on a present value basis, it will pay more claims in 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.

The Company purchases securities that it has insured, and for which it has expected losses to be paid, in order to
mitigate the economic effect of insured losses ("loss mitigation securities"). The Company excludes amounts attributable to loss mitigation securities (unless otherwise indicated) from par and Debt Service outstanding, because it manages such securities as investments and not insurance exposure.    

Financial Guaranty
Debt Service Outstanding

 
Gross Debt Service
Outstanding
 
Net Debt Service
Outstanding
 
June 30,
2015
 
December 31,
2014
 
June 30,
2015
 
December 31,
2014
 
(in millions)
Public finance
$
557,816

 
$
587,245

 
$
532,992

 
$
553,612

Structured finance
54,177

 
59,477

 
51,436

 
56,010

Total financial guaranty
$
611,993

 
$
646,722

 
$
584,428

 
$
609,622


In addition to the amounts shown in the table above, the Company’s net mortgage guaranty insurance debt service was approximately $117 million as of June 30, 2015 and $127 million as of December 31, 2014, related to loans originated in Ireland. As of June 30, 2015, the Company also had exposure to €12 million of surety reinsurance contracts relating to Spanish housing cooperatives risk.


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Financial Guaranty Portfolio by Internal Rating (2)
As of June 30, 2015

 
 
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
 
$
3,280

 
1.1
%
 
$
695

 
2.1
%
 
$
17,619

 
45.3
%
 
$
3,715

 
53.2
%
 
$
25,309

 
6.5
%
AA
 
80,550

 
25.8

 
2,735

 
8.5

 
8,628

 
22.2

 
395

 
5.7

 
92,308

 
23.6

A
 
171,633

 
55.0

 
7,627

 
23.6

 
2,684

 
6.9

 
378

 
5.4

 
182,322

 
46.7

BBB
 
46,822

 
15.0

 
19,651

 
60.8

 
1,797

 
4.6

 
1,771

 
25.4

 
70,041

 
17.9

BIG
 
9,897

 
3.1

 
1,611

 
5.0

 
8,178

 
21.0

 
718

 
10.3

 
20,404

 
5.3

Total net par outstanding (1)
 
$
312,182

 
100.0
%
 
$
32,319

 
100.0
%
 
$
38,906

 
100.0
%
 
$
6,977

 
100.0
%
 
$
390,384

 
100.0
%
_____________________
(1)
Excludes $1.2 billion of loss mitigation securities insured and held by the Company as of June 30, 2015, which are primarily in the BIG category.

(2)
The June 30, 2015 amounts include $13.1 billion of net par acquired from Radian Asset.



Financial Guaranty Portfolio by Internal Rating
As of December 31, 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
 
$
4,082

 
1.3
%
 
$
615

 
2.0
%
 
$
20,037

 
48.7
%
 
$
5,409

 
59.6
%
 
$
30,143

 
7.5
%
AA
 
90,464

 
28.1

 
2,785

 
8.9

 
8,213

 
19.9

 
503

 
5.5

 
101,965

 
25.3

A
 
176,298

 
54.7

 
7,192

 
22.9

 
2,940

 
7.1

 
445

 
4.9

 
186,875

 
46.3

BBB
 
43,429

 
13.5

 
19,363

 
61.7

 
1,795

 
4.4

 
1,912

 
21.1

 
66,499

 
16.4

BIG
 
7,850

 
2.4

 
1,404

 
4.5

 
8,186

 
19.9

 
807

 
8.9

 
18,247

 
4.5

Total net par outstanding (1)
 
$
322,123

 
100.0
%
 
$
31,359

 
100.0
%
 
$
41,171

 
100.0
%
 
$
9,076

 
100.0
%
 
$
403,729

 
100.0
%
_____________________
(1)
Excludes $1.3 billion of loss mitigation securities insured and held by the Company as of December 31, 2014, which are primarily in the BIG category.

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $1.2 billion for public finance obligations as of June 30, 2015. The expiration dates for the public finance commitments range between July 1, 2015 and February 25, 2017, with $609 million expiring prior to the date of this filing and an additional $477 million expiring prior to December 31, 2015. 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.


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Table of Contents

Components of BIG Portfolio

Components of BIG Net Par Outstanding
(Insurance and Credit Derivative Form)
As of June 30, 2015

 
BIG Net Par Outstanding
 
Net Par
 
BIG 1
 
BIG 2
 
BIG 3
 
Total BIG
 
Outstanding
 
 
 
 
 
(in millions)
 
 
 
 
U.S. public finance
$
7,622

 
$
2,132

 
$
143

 
$
9,897

 
$
312,182

Non-U.S. public finance
952

 
659

 
—

 
1,611

 
32,319

Structured finance:
 
 
 
 
 
 
 
 
 
First lien U.S. residential mortgage-backed securities ("RMBS"):
 

 
 

 
 

 
 

 
 

Prime first lien
246

 
61

 
29

 
336

 
498

Alt-A first lien
543

 
430

 
777

 
1,750

 
2,397

Option ARM
44

 
15

 
101

 
160

 
338

Subprime
218

 
512

 
827

 
1,557

 
3,920

Second lien U.S. RMBS:
 

 
 

 
 

 
 

 
 

Closed-end second lien
0

 
19

 
112

 
131

 
208

Home equity lines of credit (“HELOCs”)
877

 
34

 
548

 
1,459

 
1,567

Total U.S. RMBS
1,928

 
1,071

 
2,394

 
5,393

 
8,928

Triple-X life insurance transactions
—

 
—

 
598

 
598

 
3,133

Trust preferred securities (“TruPS”)
560

 
—

 
306

 
866

 
4,850

Student loans
—

 
81

 
86

 
167

 
1,827

Other structured finance
1,660

 
169

 
43

 
1,872

 
27,145

Total
$
12,722

 
$
4,112

 
$
3,570

 
$
20,404

 
$
390,384


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Components of BIG Net Par Outstanding
(Insurance and Credit Derivative Form)
As of December 31, 2014

 
BIG Net Par Outstanding
 
Net Par
 
BIG 1
 
BIG 2
 
BIG 3
 
Total BIG
 
Outstanding
 
 
 
 
 
(in millions)
 
 
 
 
U.S. public finance
$
6,577

 
$
1,156

 
$
117

 
$
7,850

 
$
322,123

Non-U.S. public finance
1,402

 
2

 
—

 
1,404

 
31,359

Structured finance:
 
 
 
 
 
 
 
 
 
First lien U.S. RMBS:
 

 
 

 
 

 
 

 
 

Prime first lien
68

 
33

 
252

 
353

 
471

Alt-A first lien
585

 
531

 
725

 
1,841

 
2,532

Option ARM
47

 
18

 
118

 
183

 
407

Subprime
156

 
654

 
765

 
1,575

 
4,051

Second lien U.S. RMBS:
 

 
 

 
 

 
 

 
 

Closed-end second lien
—

 
19

 
115

 
134

 
218

HELOCs
1,012

 
36

 
509

 
1,557

 
1,738

Total U.S. RMBS
1,868

 
1,291

 
2,484

 
5,643

 
9,417

Triple-X life insurance transactions
—

 
—

 
598

 
598

 
3,133

TruPS
997

 
—

 
336

 
1,333

 
4,326

Student loans
14

 
68

 
113

 
195

 
1,857

Other structured finance
1,007

 
172

 
45

 
1,224

 
31,514

Total
$
11,865

 
$
2,689

 
$
3,693

 
$
18,247

 
$
403,729



BIG Net Par Outstanding
and Number of Risks
As of June 30, 2015

 
 
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
 
$
10,504

 
$
2,218

 
$
12,722

 
266

 
22

 
288

Category 2
 
3,389

 
723

 
4,112

 
76

 
11

 
87

Category 3
 
3,011

 
559

 
3,570

 
126

 
24

 
150

Total BIG
 
$
16,904

 
$
3,500

 
$
20,404

 
468

 
57

 
525




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Table of Contents

 BIG Net Par Outstanding
and Number of Risks
As of December 31, 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
 
$
10,195

 
$
1,670

 
$
11,865

 
164

 
18

 
182

Category 2
 
2,135

 
554

 
2,689

 
75

 
14

 
89

Category 3
 
2,892

 
801

 
3,693

 
119

 
24

 
143

Total BIG
 
$
15,222

 
$
3,025

 
$
18,247

 
358

 
56

 
414

_____________________
(1)    Includes net par outstanding for 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.
 
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 $5.4 billion net par as of June 30, 2015, all of which are rated BIG. In Second Quarter 2015, the Company's Puerto Rico exposures increased due to (1) the Radian Asset Acquisition, which increased net par by $422 million, and (2) a commutation of previously ceded Puerto Rico exposures.

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, interim financings provided by Government Development Bank for Puerto Rico (“GDB”) and, in some cases, one-time revenue measures or expense adjustment measures. In addition to high debt levels, Puerto Rico faces a challenging economic environment.

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, including Puerto Rico Highway and Transportation Authority ("PRHTA") and Puerto Rico Electric Power Authority ("PREPA"). Subsequently, the Commonwealth stated PREPA might need to seek relief under the Recovery Act due to liquidity constraints. Investors in bonds issued by PREPA filed suit in the United States District Court for the District of Puerto Rico challenging the Recovery Act. On February 6, 2015, the U.S. District Court for the District of Puerto Rico ruled the Recovery Act is preempted by the U.S. Bankruptcy Code and is therefore void; on July 6, 2015, the U.S. Court of Appeals for the First Circuit upheld that ruling. In addition, the Commonwealth's Resident Commissioner has introduced a bill to the U.S. Congress that, if passed, would enable the Commonwealth to authorize one or more of its public corporations to restructure their debts under chapter 9 of the U.S. Bankruptcy Code if they were to become insolvent. The passage of the Recovery Act, its subsequent invalidation, and the introduction of legislation that would enable the Commonwealth to authorize chapter 9 protection for its public corporations have resulted in uncertainty among investors about the rights of creditors of the Commonwealth and its related authorities and public corporations.

On June 28, 2015, Governor García Padilla of Puerto Rico publicly stated that the Commonwealth’s public debt, considering the current level of activity, is unpayable and that a comprehensive debt restructuring may be necessary. On June 29, 2015 a report commissioned by the Commonwealth and authored by former World Bank Chief Economist and former Deputy Director of the International Monetary Fund Dr. Anne Krueger and economists Dr. Ranjit Teja and Dr. Andrew Wolfe and calling for debt restructuring of all Puerto Rico bonds was released ("Krueger Report"). The Governor recently formed a task force to prepare a five-year stability plan and start broad debt negotiation discussions.

On August 3, 2015, Puerto Rico Public Finance Corporation (“PFC”), a subsidiary of the GDB, failed to make most of an approximately $58 million debt service payment because the Commonwealth’s legislature did not appropriate funds for payment.  The Company does not insure any obligations of the PFC. Also on August 3, 2015, the Commonwealth announced that it had temporarily suspended its monthly deposits to the general obligation redemption fund.

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S&P, Moody’s and Fitch Ratings have lowered the credit rating of the Commonwealth’s bonds and on certain of its public corporations several times over the past approximately two years, and the Commonwealth has disclosed its liquidity has been adversely affected by rating agency downgrades and by the limited market access for its debt, and also 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.
 
PREPA

As of June 30, 2015, the Company insured $818 million net par of PREPA obligations, which was reduced to $744 million by a payment made on July 1, 2015. In August 2014, PREPA entered into forbearance agreements with the GDB, its bank lenders, and bondholders and financial guaranty insurers (including AGM and AGC) that hold or guarantee more than 60% of PREPA's outstanding bonds, in order to address its near-term liquidity issues. Creditors, including AGM and AGC, agreed not to exercise available rights and remedies until March 31, 2015, and the bank lenders agreed to extend the maturity of two revolving lines of credit to the same date. PREPA agreed it would continue to make principal and interest payments on its outstanding bonds, and interest payments on its lines of credit. It also agreed it would develop a five year business plan and a recovery program in respect of its operations; a preliminary business plan was released in December 2014. Subsequently, the parties extended these forbearance agreements several times, and they now expire on September 15, 2015.
    
On July 1, 2015, PREPA made full payment of the $416 million of principal and interest due on its bonds, including bonds insured by AGM and AGC. However, that payment was conditioned on and facilitated by AGM and AGC agreeing, also on July 1, to purchase a portion of $131 million of interest-bearing bonds to help replenish certain of the operating funds PREPA used to make the $416 million of principal and interest payments. On July 31, 2015, AGM and AGC purchased $74 million aggregate principal amount of those bonds.

PREPA and its creditors (including AGM and AGC) continue to negotiate the terms of a potential consensual recovery plan. Since the expiration of relevant confidentiality agreements on July 22, 2015, several competing proposals have been made public. There can be no assurance that the negotiations will result in agreement on an actual consensual recovery plan. PREPA, during the pendency of the forbearance agreements, has suspended deposits into its debt service fund.
    
PRHTA

As of June 30, 2015, the Company insured $934 million net par of PRHTA (Transportation revenue) bonds and $376 million net par of PRHTA (Highway revenue) bonds. In March 2015, legislation was passed in the Commonwealth that, among other things, provided for an increase in oil taxes that would benefit PRHTA, the transfer out of PRHTA of certain deficit-producing transit facilities, and a statutory lien on revenues at PRHTA, subject to certain conditions, including the issuance of at least $1.0 billion of bonds by the Puerto Rico Infrastructure Finance Authority ("PRIFA"). That legislative package would have supported proposals involving the GDB and PRIFA that contemplated PRIFA issuing up to $2.95 billion of bonds and a series of potential actions that would have, among other things, strengthened PRHTA. However, the Governor’s statement in late June 2015 that a comprehensive debt restructuring may be necessary has created uncertainty around this effort, and published reports suggest that there may not be a market for the debt issuance by PRIFA that was contemplated as part of a series of actions that would have strengthened PRHTA. In addition, because certain revenues supporting PRHTA are subject to a prior constitutional claim of the Commonwealth, the increased financial difficulties of the Commonwealth itself has increased the uncertainty regarding the full and timely receipt by PRHTA of such revenues.


17
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The following tables show the Company’s exposure to general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations.

Puerto Rico
Gross Par and Gross Debt Service Outstanding

 
Gross Par Outstanding
 
Gross Debt Service Outstanding
 
June 30,
2015
 
December 31,
2014
 
June 30,
2015
 
December 31,
2014
 
(in millions)
Previously Subject to the Voided Recovery Act (1)
$
3,135

 
$
3,058

 
$
5,408

 
$
5,326

Not Previously Subject to the Voided Recovery Act
3,087

 
2,977

 
4,852

 
4,748

   Total
$
6,222

 
$
6,035

 
$
10,260

 
$
10,074

____________________
(1)
On February 6, 2015, the U.S. District Court for the District of Puerto Rico ruled that the Recovery Act is preempted by the Federal Bankruptcy Code and is therefore void, and on July 6, 2015, the U.S. Court of Appeals for the First Circuit upheld that ruling.

Puerto Rico
Net Par Outstanding

 
 
As of
June 30, 2015
 
As of
December 31, 2014
 
 
Total (1)(2)
 
Internal Rating
 
Total
 
Internal Rating
 
 
(in millions)
Exposures Previously Subject to the Voided Recovery Act:
 
 
 
 
 
 
 
 
PRHTA (Transportation revenue)
 
$
934

 
CCC-
 
$
844

 
BB-
PREPA
 
818

 
CC
 
772

 
B-
Puerto Rico Aqueduct and Sewer Authority
 
403

 
CCC
 
384

 
BB-
PRHTA (Highway revenue)
 
376

 
CCC
 
273

 
BB
Puerto Rico Convention Center District Authority
 
174

 
CCC-
 
174

 
BB-
Total
 
2,705

 
 
 
2,447

 
 
 
 
 
 
 
 
 
 
 
Exposures Not Previously Subject to the Voided Recovery Act:
 
 
 
 
 
 
 
 
Commonwealth of Puerto Rico - General Obligation Bonds
 
1,744

 
CCC
 
1,672

 
BB
Puerto Rico Municipal Finance Agency
 
444

 
CCC-
 
399

 
BB-
Puerto Rico Sales Tax Financing Corporation
 
269

 
CCC+
 
269

 
BBB
Puerto Rico Public Buildings Authority
 
216

 
CCC
 
100

 
BB
GDB
 
33

 
CCC
 
33

 
BB
PRIFA
 
18

 
CCC-
 
18

 
BB-
University of Puerto Rico
 
1

 
CCC-
 
1

 
BB-
Total
 
2,725

 
 
 
2,492

 
 
Total net exposure to Puerto Rico
 
$
5,430

 
 
 
$
4,939

 
 
____________________
(1)
In Second Quarter 2015, the Company's Puerto Rico exposures increased due to (1) the Radian Asset Acquisition, which increased net par outstanding by $422 million, of which $22 million was for PREPA and $169 million for PRHTA, and (2) a commutation of previously ceded Puerto Rico exposures.

(2)
In July 2015, various Puerto Rico issuers made payment on $293 million of par scheduled to be paid; of that amount, $74 million and $31 million of par was paid by PREPA and PRHTA, respectively.


18
Table of Contents

The following table shows the scheduled amortization of the insured general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations. 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 Net Par Outstanding
and Net Debt Service Outstanding
As of June 30, 2015

 
Scheduled Net Par Amortization
 
Scheduled Net Debt Service Amortization
 
 
Previously Subject to the Voided Recovery Act
 
Not Previously Subject to the Voided Recovery Act
 
Total
 
Previously Subject to the Voided Recovery Act
 
Not Previously Subject to the Voided Recovery Act
 
Total
 
 
(in millions)
 
2015 (July 1 - September 30)
$
131

 
$
207

 
$
338

 
$
198

 
$
276

 
$
474

 
2015 (October 1 - December 31)
0

 
33

 
33

 
2

 
35

 
37

 
2016
98

 
204

 
302

 
229

 
332

 
561

 
2017
51

 
171

 
222

 
175

 
289

 
464

 
2018
56

 
123

 
179

 
178

 
232

 
410

 
2019
74

 
130

 
204

 
192

 
232

 
424

 
2020
87

 
183

 
270

 
202

 
280

 
482

 
2021
66

 
60

 
126

 
177

 
147

 
324

 
2022
47

 
68

 
115

 
153

 
152

 
305

 
2023
110

 
41

 
151

 
214

 
123

 
337

 
2024
89

 
85

 
174

 
187

 
165

 
352

 
2025-2029
619

 
395

 
1,014

 
1,032

 
723

 
1,755

 
2030-2034
505

 
475

 
980

 
787

 
712

 
1,499

 
2035 -2039
429

 
283

 
712

 
567

 
382

 
949

 
2040 -2044
97

 
267

 
364

 
171

 
296

 
467

 
2045 -2047
246

 
—

 
246

 
272

 
—

 
272

 
Total
$
2,705

 
$
2,725

 
$
5,430

 
$
4,736

 
$
4,376

 
$
9,112

 

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 has exposure and believes heightened uncertainties exist are: Hungary, 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 direct 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.

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Table of Contents

Net Direct Economic Exposure to Selected European Countries(1)
As of June 30, 2015

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

 
 

 
 

 
 

 
 

Non-infrastructure public finance (2)
$
—

 
$
813

 
$
90

 
$
257

 
$
1,160

Infrastructure finance
291

 
11

 
11

 
126

 
439

Total sovereign and sub-sovereign exposure
291

 
824

 
101

 
383

 
1,599

Non-sovereign exposure:
 

 
 

 
 

 
 

 
 

Regulated utilities
—

 
226

 
—

 
—

 
226

RMBS and other structured finance
175

 
256

 
—

 
13

 
444

Total non-sovereign exposure
175

 
482

 
—

 
13

 
670

Total
$
466

 
$
1,306

 
$
101

 
$
396

 
$
2,269

Total BIG (See Note 6)
$
397

 
$
—

 
$
101

 
$
396

 
$
894

____________________
(1)
While the Company’s exposures are shown in U.S. dollars, the obligations the Company insures are in various currencies, primarily Euros. 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. The Company may also have direct exposures to the Selected European Countries in business assumed from unaffiliated monoline insurance companies, in which case 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 calculates indirect exposure to a country by multiplying the par amount of a transaction insured by the Company times the percent of the relevant collateral pool reported as having a nexus to the country. On that basis, the Company has calculated exposure of $332 million to Selected European Countries (plus Greece) in transactions with $5.2 billion of net par outstanding. The indirect exposure to credits with a nexus to Greece is $10 million across several highly rated pooled corporate obligations with net par outstanding of $404 million.

5.
Financial Guaranty Insurance Premiums

The portfolio of outstanding exposures discussed in Note 4, 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 to financial guaranty insurance contracts, unless otherwise noted. See Note 9, Financial Guaranty Contracts Accounted for as Credit Derivatives for amounts that relate to CDS.


20
Table of Contents

Net Earned Premiums
 
 
Second Quarter
 
Six Months
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Scheduled net earned premiums
$
118

 
$
106

 
$
214

 
$
213

Acceleration of net earned premiums
96

 
24

 
137

 
43

Accretion of discount on net premiums receivable
5

 
5

 
9

 
11

Financial guaranty insurance net earned premiums
219

 
135

 
360

 
267

Other
0

 
1

 
1

 
1

 Net earned premiums(1)
$
219

 
$
136

 
$
361

 
$
268

 ___________________
(1)
Excludes $5 million and $5 million for Second Quarter 2015 and 2014, respectively, and $10 million and $22 million for Six Months 2015 and 2014, respectively, related to consolidated financial guaranty ("FG") VIEs.


Components of Unearned Premium Reserve
 
 
As of June 30, 2015
 
As of December 31, 2014
 
Gross
 
Ceded
 
Net(1)
 
Gross
 
Ceded
 
Net(1)
 
(in millions)
Deferred premium revenue:
 
 
 
 
 
 
 
 
 
 
 
   Financial guaranty insurance
$
4,312

 
$
289

 
$
4,023

 
$
4,167

 
$
387

 
$
3,780

   Other
1

 
—

 
1

 
0

 
—

 
0

Deferred premium revenue
$
4,313

 
$
289

 
$
4,024

 
$
4,167