The following excerpt is from the company's
SEC filing.
June 30, 2015
Consolidated Balance Sheets (unaudited) as of June 30, 2015 and
December 31, 2014
Consolidated Statements of Operations (unaudited) for the Three
and Six Months Ended June 30, 2015 and 2014
Consolidated Statements of Comprehensive Income (unaudited) for
the Three and Six Months Ended June 30, 2015 and 2014
Consolidated Statement of Shareholder’s Equity (unaudited) for
the Six Months Ended June 30, 2015
Consolidated Statements of Cash Flows (unaudited) for the Six
Months Ended June 30, 2015 and 2014
Notes to Consolidated Financial Statements (unaudited)
Assured Guaranty Corp.
(dollars in millions except per share and share amounts)
Assets
Investment portfolio:
Fixed-maturity securities, available-for-sale, at fair value
(amortized cost of $2,460 and $1,945)
Short-term investments, at fair value
Other invested assets
Equity method investments in affiliates
Total investment portfolio
Premiums receivable, net of commissions payable
Ceded unearned premium reserve
Reinsurance recoverable on unpaid losses
Salvage and subrogation recoverable
Credit derivative assets
Deferred tax asset, net
Financial guaranty variable interest entities’ assets, at fair
value
Other assets
Total assets
Liabilities and shareholder’s equity
Unearned premium reserve
Loss and loss adjustment expense reserve
Reinsurance balances payable, net
Note payable to affiliate
Credit derivative liabilities
Current income tax payable
Financial guaranty variable interest entities’ liabilities with
recourse, at fair value
Financial guaranty variable interest entities’ liabilities
without recourse, at fair value
Other liabilities
Total liabilities
Commitments and contingencies (See Note 16)
Preferred stock ($1,000 liquidation preference, 200,004 shares
authorized; none issued and outstanding)
Common stock ($720 par value, 500,000 shares authorized; 20,834
shares issued and outstanding)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of tax of $15 and
$34
Total shareholder’s equity
Total liabilities and shareholder’s equity
The accompanying notes are an integral part of these
consolidated financial statements.
(in millions)
Three Months Ended June 30,
Revenues
Net earned premiums
Net investment income
Net realized investment gains (losses):
Other-than-temporary impairment losses
Less: portion of other-than-temporary impairment loss recognized
in other comprehensive income
Net impairment loss
Other net realized investment gains (losses)
Net change in fair value of credit derivatives:
Realized gains (losses) and other settlements
Net unrealized gains (losses)
Fair value gains (losses) on committed capital securities
Fair value gains (losses) on financial guaranty variable
interest entities
Bargain purchase gain and settlement of pre-existing
relationships, net
Other income (loss)
Total revenues
Expenses
Loss and loss adjustment expenses
Amortization of deferred ceding commissions
Interest expense
Other operating expenses
Total expenses
Income (loss) before income taxes and equity in net earnings of
investee
Provision (benefit) for income taxes
Total provision (benefit) for income taxes
Equity in net earnings of investee
Net income (loss)
Unrealized holding gains (losses) arising during the period
on:
Investments with no other-than-temporary impairment, net of tax
provision (benefit) o
f $(14), $5, $(13) and $18
Investments with other-than-temporary impairment, net of tax
provision (benefit) of $1, $0, $0 and $1
Unrealized holding gains (losses) arising during the period, net
of tax
Less: reclassification adjustment for gains (losses) included in
net income (loss), net of tax provision (benefit) of $(2), $0, $5
and $0
Change in net unrealized gains (losses) on investments
Change in cumulative translation adjustment, net of tax
provision (benefit) of $2, $1, $(1) and $1
Other comprehensive income (loss)
Comprehensive income (loss)
For the
Paid-in
Capital
Earnings
Accumulated Other Comprehensive Income
Balance at December 31, 2014
Dividends
Other comprehensive loss
Balance at June 30, 2015
Net cash flows provided by (used in) operating activities
Investing activities
Fixed-maturity securities:
Purchases
Maturities
Net sales (purchases) of short-term investments
Net proceeds from paydowns on financial guaranty variable
interest entities’ assets
Acquisition of Radian Asset, net of cash acquired
Repayment of notes receivable from affiliate
Net cash flows provided by (used in) investing activities
Financing activities
Dividends paid
Net paydowns of financial guaranty variable interest entities’
liabilities
Net cash flows provided by (used in) financing activities
Effect of foreign exchange rate changes
Increase (decrease) in cash
Cash at beginning of period
Cash at end of period
Supplemental cash flow information
Cash paid (received) during the period for:
Income taxes
Business and Basis of Presentation
Assured Guaranty Corp. (“AGC” and, together with its
subsidiaries, the “Company”), a Maryland domiciled insurance
company, is an indirect and wholly-owned operating subsidiary of
Assured Guaranty Ltd. (“AGL” and, together with its subsidiaries,
“Assured Guaranty”). AGL 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 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
and cover the three-month period ended
Second Quarter 2015
"), the three-month period ended
June 30, 2014
Second Quarter 2014
"), six-month period ended
Six Months 2015
") and the six-month period ended
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 AGC and its 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 annual consolidated financial
statements of AGC included in Exhibit 99.1 in AGL's Form 8-K dated
April 1, 2015, filed with the U.S. Securities and Exchange
Commission (the “SEC”).
AGC's principal subsidiary is Assured Guaranty (UK) Ltd.
(“AGUK”), a company incorporated in the United Kingdom (“U.K.”) as
a U.K. insurance company. AGC owns 100% of AGUK's outstanding
shares and elected to place AGUK into runoff in 2010. AGC owns
39.3% of the outstanding shares of Municipal Assurance Holdings
Inc. ("MAC Holdings"), a Delaware company formed to hold all of the
outstanding shares of Municipal Assurance Corp. ("MAC"), a New York
domiciled insurance company.
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.
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.
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 consolidated financial statements of the
Company. 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 loss
on settlement of these pre-existing reinsurance relationships
primarily represents the net difference between the historical
assumed balances that were recorded by AGC and the fair value of
ceded 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.
The following table shows the net effect of the Radian Asset
Acquisition, including the effects of the settlement of
pre-existing 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
Cash purchase price(1)
Identifiable assets acquired:
Financial guaranty VIE assets
Liabilities assumed:
Unearned premium reserves
Financial guaranty VIE liabilities
Net asset effect of Radian Asset Acquisition
Bargain purchase gain and settlement of pre-existing
relationships resulting from Radian Asset Acquisition,
after-tax
Bargain purchase gain and settlement of pre-existing
relationships resulting from Radian Asset Acquisition, pre-tax
_____________________
The cash purchase price of $804 million was the cash transferred
for the acquisition which was allocated as follows: (1) $798
million for the purchase of net assets of $853 million and (ii) the
settlement of pre-existing relationships between Radian Asset and
AGC at a fair value of $6 million.
Revenue and net income related to Radian Asset from the
Acquisition Date through June 30, 2015 included in the consolidated
statement of operations were approximately $162 million and $117
million, respectively. For Second Quarter 2015 and Six Months 2015,
the Company recognized transaction expenses related to the Radian
Asset Acquisition. These expenses primarily consisted of fees paid
to the Company's legal and financial advisors and to the Company's
independent auditor.
Radian Asset Acquisition-Related Expenses
Professional services
Financial advisory fees
Unaudited Pro Forma Results of Operations
The following unaudited pro forma information presents the
combined results of operations of the Company 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
Pro forma revenues
Pro forma net income
Rating Actions
When a rating agency assigns a public rating to a financial
obligation guaranteed by AGC or its subsidiary AGUK, it generally
awards that obligation the same rating it has assigned to the
financial strength of AGC or AGUK. Investors in products insured by
AGC or AGUK 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, AGC and AGUK manage their 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 AGC were reduced below current levels, the
Company expects it could have adverse effects on AGC's future
business opportunities as well as the premiums AGC 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 AGC and AGUK, or changed the outlook on such ratings.
The rating agencies' most recent actions and proposals related to
AGC and AGUK are:
On March 18, 2014, S&P upgraded the financial strength
ratings of AGC and AGUK 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 A3 ratings of AGC and AGUK
but changed the outlook to negative. 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 AGC and AGUK
under that new methodology. 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.
There can be no assurance that any of the rating agencies will
not take negative action on the financial strength ratings of AGC
and AGUK 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 15, Reinsurance and Other Monoline Exposures
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 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%.
(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.
Debt Service Outstanding
Gross Debt Service
Net Debt Service
December 31,
(in millions)
128,582
121,238
62,849
51,064
25,524
24,454
18,832
16,860
Total financial guaranty
154,106
145,692
81,681
67,924
As of
, the Company also had exposure to €12 million of surety
reinsurance contracts relating to Spanish housing cooperatives
risk.
Financial Guaranty Portfolio by Internal Rating
As of June 30, 2015
Public Finance
Non-U.S.
Structured Finance
Rating Category
Net Par
(dollars in millions)
17,525
20,016
11,738
Total net par outstanding(1) (2)
33,796
15,043
55,621
Excludes $387 million of loss mitigation securities insured and
held by the Company as of
, which are primarily in the BIG category.
amounts include $13.6 billion of net par acquired from Radian
Asset.
As of December 31, 2014
16,608
18,664
27,793
12,766
45,992
Excludes $415 million of loss mitigation securities insured and
held by the Company as of
December 31, 2014
In addition to amounts shown in the tables above, AGC had
outstanding commitments to provide guaranties of $126 million for
public finance obligations as of
. The expiration dates for the public finance commitments range
between July 1, 2015 and February 25, 2017, with $2 million
expiring prior to the date of this filing. 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.
Components of BIG Portfolio
Components of BIG Net Par Outstanding
(Insurance and Credit Derivative Form)
BIG Net Par Outstanding
Total BIG
U.S. public finance
Non-U.S. public finance
Structured Finance:
First lien U.S. residential mortgage-backed securities
("RMBS"):
Prime first lien
Alt-A first lien
Option ARM
Subprime
Second lien U.S. RMBS:
Closed-end second lien
Home equity lines of credit (“HELOCs”)
Total U.S. RMBS
Triple-X life insurance transactions
Trust preferred securities (“TruPS”)
Other structured finance
Structured finance:
First lien U.S. RMBS:
and Number of Risks
Number of Risks(2)
Description
Insurance(1)
Total BIG
____________________
Includes net par outstanding for VIEs.
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 $1.8 billion net par as of
, all of which are rated BIG. In Second Quarter 2015, the
Company's Puerto Rico exposures increased due to the Radian Asset
Acquisition, which increased net par by $422 million.
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 (the
"Governor") 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.
Puerto Rico Public Finance Corporation (“PFC”), a subsidiary of
the GDB, failed to make most of an approximately $58 million debt
service payment on August 3, 2015 and to make an approximately $4
million interest payment on September 1, 2015 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.
On September 9, 2015 the Working Group for the Fiscal and
Economic Recovery of Puerto Rico (“Working Group”) established by
the Governor published its “Puerto Rico Fiscal and Economic Growth
Plan” (the “FEGP”). The FEGP projects that the Commonwealth would
face a cumulative financing gap of $27.8 billion from fiscal year
2016 to fiscal year 2020 without corrective action. It recommends
economic development, structural, fiscal and institutional reform
measures that it projects would reduce that gap to $14 billion. The
Working Group asserts that the Commonwealth’s debt, including debt
with a constitutional priority, is not sustainable. The FEGP
includes a recommendation that the Commonwealth’s advisors begin to
work on a voluntary exchange offer to its creditors as part of the
FEGP. The FEGP does not have the force of law and implementation of
its recommendations would require actions by the governments of the
Commonwealth and of the United States as well as the cooperation
and agreement of various creditors. Any eventual solution to the
Commonwealth’s debt issues may differ substantially from that
suggested in the FEGP.
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.
As of June 30, 2015, the Company insured $74 million net par of
PREPA obligations, which was reduced to $73 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.
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, AGC purchased
$186 thousand aggregate principal amount of those bonds.
On September 2, 2015 PREPA announced that on September 1, 2015,
it and an ad hoc group of uninsured bondholders (the “Ad Hoc
Group”) had reached an agreement on certain economic terms of a
recovery plan, subject to certain terms and conditions. Neither AGM
nor AGC are parties to that agreement. PREPA also announced on
September 2, 2015 that on September 1, 2015, it, the Ad Hoc Group
and certain other creditors (including AGM and AGC) extended the
forbearance agreements through September 18, 2015, but that
National Public Finance Guarantee Corporation, a party to the
original forbearance agreements, had not agreed to the extension.
AGM and AGC declined to extend the forbearance agreements on the
terms offered when they lapsed on September 18, 2015. On September
22, 2015 PREPA announced it and a group of fuel-line lenders had
reached an agreement on the economic terms of a recovery plan,
subject to certain terms and conditions.
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.
As of June 30, 2015, the Company insured $482 million net par of
PRHTA (Transportation revenue) bonds and $103 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.
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.
Gross Par and Gross Debt Service Outstanding
Gross Par Outstanding
Previously Subject to the Voided Recovery Act (1)
Not Previously Subject to the Voided Recovery Act
Total
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.
Total (1) (2)
Exposures Previously Subject to the Voided Recovery Act:
Puerto Rico Aqueduct and Sewer Authority
Puerto Rico Convention Center District Authority
Exposures Not Previously Subject to the Voided Recovery Act:
Commonwealth of Puerto Rico - General Obligation Bonds
Puerto Rico Public Buildings Authority
Puerto Rico Municipal Finance Agency
University of Puerto Rico
Total net exposure to Puerto Rico
In Second Quarter 2015, the Company's Puerto Rico exposures
increased due to the Radian Asset Acquisition, which increased net
par outstanding by $422 million, of which $22 million was for PREPA
and $169 million for PRHTA.
In July 2015, various Puerto Rico issuers made payment on $117
million of par scheduled to be paid; of that amount, $1 million and
$9 million of par was paid by PREPA and PRHTA, respectively.
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
Scheduled Net Par Amortization
Scheduled Net Debt Service Amortization
2015 (July 1 - September 30)
2015 (October 1 - December 31)
2025-2029
2030-2034
2035 -2039
2040 -2044
2045 -2047
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.
Net Direct Economic Exposure to Selected European
Countries(1)
Sovereign and sub-sovereign exposure:
Non-infrastructure public finance (2)
Infrastructure finance
Total sovereign and sub-sovereign exposure
Non-sovereign exposure:
Regulated utilities
RMBS and other structured finance
Total non-sovereign exposure
Total BIG (See Note 6)
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.
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 $203 million to Selected
European Countries (plus Greece) in transactions with $2.1 billion
of net par outstanding. The indirect exposure to credits with a
nexus to Greece is $7 million across several highly rated pooled
corporate obligations with net par outstanding of $199 million.
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 only to financial guaranty insurance contracts.
See Note 9, Financial Guaranty Contracts Accounted for as Credit
Derivatives for amounts that relate to CDS.
Net Earned Premiums
Scheduled net earned premiums
Acceleration of net earned premiums
Accretion of discount on net premiums receivable
Net earned premiums(1)
Excludes $0.6 million and $0.4 million for
, respectively, and $0.9 million and $0.7 million for
, respectively, related to consolidated financial guaranty
("FG") VIEs.
Components of Unearned Premium Reserve
Net(1)
Deferred premium revenue
Contra-paid (2)
Excludes $15 million and $11 million of deferred premium revenue
related to FG VIEs as of June 30, 2015 and December 31, 2014,
respectively.
See Note 7, "Financial Guaranty Insurance Losses– Insurance
Contracts' Loss Information" for an explanation of
"contra-paid".
Gross Premium Receivable,
Net of Commissions on Assumed Business
Roll Forward
Beginning of period, December 31
Premiums receivable acquired in Radian Asset Acquisition on
April 1, 2015
Gross premium written, net of commissions on assumed
business
Gross premiums received, net of commissions on assumed
business
Adjustments:
Changes in the expected term
Accretion of discount, net of commissions on assumed
business
Foreign exchange translation
Consolidation/deconsolidation of FG VIEs
End of period, June 30 (1)
Excludes $14 million and $12 million as of
, respectively, related to consolidated FG VIEs.
Foreign exchange translation relates to installment premium
receivables denominated in currencies other than the U.S. dollar.
Approximately 13% and 11% of installment premiums at
, 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
Financial Guaranty Gross Premiums Receivable,
(Undiscounted)
2015 (July 1 – September 30)
2015 (October 1 – December 31)
2020-2024
After 2034
Total(1)
Excludes expected cash collections on FG VIEs of $18
million.
Scheduled Financial Guaranty Net Earned Premiums
Net deferred premium revenue(1)
Future accretion
Total future net earned premiums
Excludes scheduled net earned premiums on consolidated FG VIEs
of $15 million.
Selected Information for Financial Guaranty Policies Paid in
Installments
Premiums receivable, net of commission payable
Gross deferred premium revenue
Weighted-average risk-free rate used to discount premiums
Weighted-average period of premiums receivable (in years)
Expected Loss to be Paid
Loss Estimation Process
The Company’s loss reserve committees estimate expected loss to
be paid for all contracts. Surveillance personnel present analyses
related to potential losses to the Company’s loss reserve
committees for consideration in estimating the expected loss to be
paid. Such analyses include the consideration of various scenarios
with corresponding probabilities assigned to them. Depending upon
the nature of the risk, the Company’s view of the potential size of
any loss and the information available to the Company, that
analysis may be based upon individually developed cash flow models,
internal credit rating assessments and sector-driven loss severity
assumptions or judgmental assessments. In the case of its assumed
business, the Company may conduct its own analysis as just
described or, depending on the Company’s view of the potential size
of any loss and the information available to the Company, the
Company may use loss estimates provided by ceding insurers. The
Company monitors the performance of its transactions with expected
losses and each quarter the Company’s loss reserve committees
review and refresh their loss projection assumptions and scenarios
and the probabilities they assign to those scenarios based on
actual developments during the quarter and their view of future
performance.
The financial guaranties issued by the Company insure the credit
performance of the guaranteed obligations over an extended period
of time, in some cases over 30 years, and in most circumstances,
the Company has no right to cancel such financial guaranties. As a
result, the Company's estimate of ultimate losses on a policy is
subject to significant uncertainty over the life of the insured
transaction. Credit performance can be adversely affected by
economic, fiscal and financial market variability over the long
duration of most contracts.
The determination of expected loss to be paid is an inherently
subjective process involving numerous estimates, assumptions and
judgments by management, using both internal and external data
sources with regard to frequency, severity of loss, economic
projections, governmental actions, negotiations and other factors
that affect credit performance. These estimates, assumptions and
judgments, and the factors on which they are based, may change
materially over a quarter, and as a result the Company’s loss
estimates may change materially over that same period. Changes over
a quarter in the Company’s loss estimates for structured finance
transactions generally will be influenced by factors impacting the
performance of the assets supporting those transactions. For
example, changes over a quarter in the Company’s loss estimates for
its RMBS transactions may be influenced by such factors as the
level and timing of loan defaults experienced; changes in housing
prices; results from the Company’s loss mitigation activities; and
other variables. Similarly, changes over a quarter in the Company’s
loss estimates for municipal obligations supported by specified
revenue streams, such as revenue bonds issued by toll road
authorities, municipal utilities or airport authorities, generally
will be influenced by factors impacting their revenue levels, such
as changes in demand; changing demographics; and other economic
factors, especially if the obligations do not benefit from
financial support from other tax revenues or governmental
authorities. On the other hand, changes over a quarter in the
Company’s loss estimates for its tax-supported public finance
transactions generally will be influenced by factors impacting the
public issuer’s ability and willingness to pay, such as changes in
the economy and population of the relevant area; changes in the
issuer’s ability or willingness to raise taxes, decrease spending
or receive federal assistance; new legislation; rating agency
downgrades that reduce the issuer’s ability to refinance maturing
obligations or issue new debt at a reasonable cost; changes in the
priority or amount of pensions and other obligations owed to
workers; developments in restructuring or settlement negotiations;
and other political and economic factors.
The Company does not use traditional actuarial approaches to
determine its estimates of expected losses. Actual losses will
ultimately depend on future events or transaction performance and
may be influenced by many interrelated factors that are difficult
to predict. As a result, the Company's current estimates of
probable and estimable losses may be subject to considerable
volatility and may not reflect the Company's future ultimate claims
paid.
The following tables present 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 3.37% as of
and 0.0% to 2.95% as of
Net Expected Loss to be Paid
After Net Expected Recoveries for Breaches of R&W
Net expected loss to be paid, beginning of period
Net expected loss to be paid on Radian Asset portfolio as of
April 1, 2015
Economic loss development due to:
Changes in discount rates
Changes in timing and assumptions
Total economic loss development
Paid losses
Net expected loss to be paid, end of period
Net Expected Loss to be Paid
Roll Forward by Sector
Net Expected
Loss to be Paid (Recovered) as of
March 31, 2015
on Radian Asset portfolio as of
Economic Loss
(Paid)
Recovered
Losses(1)
Net Expected
Paid (Recovered) as of
June 30, 2015(2)
Public Finance:
First lien:
Total first lien
Second lien:
Total second lien
March 31, 2014
June 30, 2014
December 31, 2014(2)
December 31, 2013
Net of ceded paid losses, whether or not such amounts have been
settled with reinsurers. Ceded paid losses are typically settled 45
days after the end of the reporting period. Such amounts are
recorded in reinsurance recoverable on paid losses included in
other assets. The Company paid $2 million and $1 million in LAE
for
, respectively, and $3 million and $2 million in LAE for
Includes expected LAE to be paid of $7 million as of
and $5 million as of
Net Expected Recoveries from
Breaches of R&W Rollforward
Future Net
R&W Benefit as of
March 31, 2015(1)
R&W Benefit of Radian Asset as of
R&W Development
and Accretion of
Discount
During Second Quarter 2015
R&W (Recovered)
During Second Quarter 2015
June 30, 2015(1)
During Second Quarter 2014
During 2015
During 2014
During 2014
(1) See the section "Breaches of Representations and Warranties"
below for eligible assets held in trust.
The following tables present the present value of net expected
loss to be paid for all contracts by accounting model, by sector
and after the benefit for estimated and contractual recoveries for
breaches of R&W.
Net Expected Loss to be Paid (Recovered)
By Accounting Model
FG VIEs(1) and Other
Derivatives(2)
Refer to Note 10, Consolidated Variable Interest Entities.
(2) Refer to Note 9, Financial Guaranty Contracts Accounted for
as Credit Derivatives.
The following tables present the net economic loss development
for all contracts by accounting model, by sector and after the
benefit for estimated and contractual recoveries for breaches of
R&W.
Net Economic Loss Development (Benefit)
(1) Refer to Note 10, Consolidated Variable Interest
Entities.
Selected U.S. Public Finance Transactions
The Company insures general obligation bonds of the Commonwealth
of Puerto Rico and various obligations of its related authorities
and public corporations aggregating $1.8 billion net par as of June
30, 2015, all of which is rated BIG. For additional information
regarding the Company's exposure to general obligations of
Commonwealth of Puerto Rico and various obligations of its related
authorities and public corporations, please refer to "Exposure to
Puerto Rico" in Note 4, Outstanding Exposure.
On February 25, 2015, a plan of adjustment resolving the
bankruptcy filing of the City of Stockton, California under chapter
9 of the U.S. Bankruptcy Code became effective. The Company agreed
as part of the plan to cancel its $40 million of the City’s lease
revenue bonds in exchange for the irrevocable option to take title
to the office building that served as collateral for the lease
revenue bonds. The Company also receives net rental payments from
the office building. The Company no longer reflects the canceled
lease revenue bonds as outstanding insured net par, but instead the
financial statements reflect an investment in the office building
and related lease revenue and expenses. As of
, the office building is carried at approximately $30 million
and is reported as part of Other Assets.
The Company has $250 million of net par exposure to the
Louisville Arena Authority. The bond proceeds were used to
construct the KFC Yum Center, home to the University of Louisville
men's and women's basketball teams. Actual revenues available for
Debt Service are well below original projections, and under the
Company's internal rating scale, the transaction is BIG.
In December 2014, the City of Detroit emerged from bankruptcy
under chapter 9 of the U.S. Bankruptcy Code. The Company still
expects to make debt service payments on the 15.5% of the City’s
unlimited tax general obligation (“UTGO”) that were not exchanged
as part of the related settlement. As of
, these bonds had a net par outstanding of $9 million.
As a result of the Radian Asset Acquisition, the Company has
approximately $21 million of net par exposure as of
to bonds issued by Parkway East Public Improvement District,
which is located in Madison County, Mississippi. The bonds, which
are rated BIG, are payable from special assessments on properties
within the District, as well as amounts paid under a contribution
agreement with the County in which the County covenants that it
will provide funds in the event special assessments are not
sufficient to make a debt service payment. The special assessments
have not been sufficient to pay debt service in full. In earlier
years, the County provided funding to cover the balance of the debt
service requirement, but the County now claims that the District’s
failure to reimburse it within the two years stipulated in the
contribution agreement means that the County is not required to
provide funding until it is reimbursed. A declaratory judgment
action is pending against the District and the County to establish
the Company's rights under the contribution agreement. See
"Recovery Litigation" below.
The Company also has $4.6 billion of net par exposure to
healthcare transactions. The BIG net par outstanding in this sector
is $325 million, all of which was acquired as part of the Radian
Asset Acquisition.
The Company projects that its total net expected loss across its
troubled U.S. public finance credits as of
, which incorporated the likelihood of the outcomes mentioned
above, will be
$218 million
, compared with a net expected loss of $54 million as of March
31, 2015. On April 1, 2015, the Radian Asset Acquisition added
$81 million
in net economic losses to be paid for U.S. public finance
credits. In addition, economic loss development in
$86 million
which was primarily attributable to Puerto Rico exposures.
Economic loss development in
$91 million
, which was also primarily attributable to Puerto Rico
exposures.
The Company has insured exposure of approximately $591 million
to infrastructure transactions with refinancing risk as to which
the Company may need to make claim payments that it did not
anticipate paying when the policies were issued. Although the
Company may not experience ultimate loss on a particular
transaction, the aggregate amount of the claim payments may be
substantial and reimbursement may not occur for an extended time.
These transactions generally involve long-term infrastructure
projects that were financed by bonds that mature prior to the
expiration of the project concession. The Company expects the cash
flows from these projects to be sufficient to repay all of the debt
over the life of the project concession, but also expects the debt
to be refinanced in the market at or prior to its maturity. If the
issuer is unable to refinance the debt due to market conditions,
the Company may have to pay a claim when the debt matures, and then
recover its payment from cash flows produced by the project in the
future. The Company generally projects that in most scenarios it
will be fully reimbursed for such payments. However, the recovery
of the payments is uncertain and may take from 10 to 35 years,
depending on the transaction and the performance of the underlying
collateral. The Company estimates total claims for the remaining
transaction with significant refinancing risk, assuming no
refinancing, and based on certain performance assumptions could be
$321 million on a gross basis; such claims would be payable in
2022.
Approach to Projecting Losses in U.S. RMBS
The Company projects losses on its insured U.S. RMBS on a
transaction-by-transaction basis by projecting the performance of
the underlying pool of mortgages over time and then applying the
structural features (i.e., payment priorities and tranching) of the
RMBS to the projected performance of the collateral over time. The
resulting projected claim payments or reimbursements are then
discounted using risk-free rates. For transactions where the
Company projects it will receive recoveries from providers of
R&W, it projects the amount of recoveries and either
establishes a recovery for claims already paid or reduces its
projected claim payments accordingly.
The further behind a mortgage borrower falls in making payments,
the more likely it is that he or she will default. The rate at
which borrowers from a particular delinquency category (number of
monthly payments behind) eventually default is referred to as the
“liquidation rate.” The Company derives its liquidation rate
assumptions from observed roll rates, which are the rates at which
loans progress from one delinquency category to the...
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