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Expected Loss to be Paid (Recovered) | 3 Months Ended
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Mar. 31, 2026
Expected Losses [Abstract] |
Expected Loss to be Paid (Recovered) | Expected Loss to be Paid (Recovered) In order to effectively evaluate and manage the economics and liquidity of the entire insured portfolio regardless of contractual form written (i.e., credit derivative form or traditional FG insurance) or the applicable accounting model, management assigns ratings and calculates expected loss to be paid (recovered), on a contract-by-contract basis, in the same manner for all its insured exposures regardless of form or differing accounting models. The exposure reported in Note 4. Outstanding Exposure, includes policies accounted for under various accounting models depending on the characteristics of the contract and the Company’s control rights. The three primary models are: (i) FG insurance, as described in Note 6. Contracts Accounted for as Financial Guaranty Insurance; (ii) credit derivatives, as described in Note 8. Derivatives, and Note 11. Fair Value Measurement; and (iii) FG VIE consolidation, as described in Note 10. Variable Interest Entities. The Company has paid claims and may pay future claims and/or recover past claims on policies which fall under each of these accounting models. This note provides information regarding expected loss to be paid (recovered), regardless of the accounting method. Net expected loss to be paid (recovered) is equal to the present value of expected future cash outflows for loss and LAE payments, net of: (i) inflows for expected salvage, subrogation and other recoveries; (ii) excess spread on underlying collateral, as applicable; and (iii) amounts ceded to reinsurers. Cash flows are discounted at current risk-free rates. The Company updates the discount rates each quarter and reflects the effect of such changes in economic loss development. Expected cash outflows and inflows are probability weighted cash flows that reflect management’s assumptions about the likelihood of all possible outcomes based on all information available to the Company. Those assumptions consider the relevant facts and circumstances and are consistent with the information tracked and monitored through the Company’s surveillance and risk-management functions. Expected loss to be paid (recovered) is important in that it represents the present value of amounts that the Company expects to pay or recover in future periods. The Company removes any expected loss to be paid (recovered) associated with Loss Mitigation Securities. For Loss Mitigation Securities, the difference between the purchase price of the insured obligation and the fair value excluding the value of the Company’s insurance (on the date of acquisition) is treated as a paid loss. See Note 9. Investments, and Note 11. Fair Value Measurement. Similarly, in cases where issuers of insured obligations elected (or where an issuer and the Company negotiated) to deliver the underlying collateral, insured obligation or a new security to the Company, expected loss to be paid (recovered) is adjusted accordingly and the asset received is prospectively recorded based on the applicable GAAP guidance for that instrument. Economic loss development (benefit) represents the change in net expected loss to be paid (recovered) attributable to the effects of changes in the economic performance of insured transactions, changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts. Loss Estimation Process 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 loss on a policy is subject to significant uncertainty over the life of the insured transaction. Credit performance can be affected by, among other things, economic, fiscal and financial conditions and political developments over the life of most contracts. The Company guarantees payment of interest and principal when those amounts are scheduled to be paid and generally cannot be required to pay on an accelerated basis, although in certain circumstances it may elect to do so. When obligors default on their obligations, the Company is only required to pay the shortfall between the debt service due in any given period and the amount paid by the obligors. The Company does not use traditional actuarial approaches to determine its estimates of expected losses. The determination of expected loss to be paid (recovered) is an inherently subjective process involving numerous estimates, assumptions and judgments by management, using both internal and external data sources with regard to frequency and severity of loss, economic projections, governmental actions, legal developments, negotiations, recovery rates, delinquency and prepayment rates, timing of cash flows 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 reporting period, and have a material effect on the Company’s financial statements. Each quarter, the Company may revise its scenarios and update its assumptions, including the probability weightings of its scenarios, based on public as well as nonpublic information obtained through its surveillance and loss mitigation activities. Changes over a reporting period in the Company’s loss estimates for public finance obligations supported by specified revenue streams, such as revenue bonds issued by toll road authorities, municipal and regulated utilities, airport authorities or healthcare systems, generally will be influenced by factors impacting their revenue levels, such as changes in demand, changing demographics and other economic and regulatory factors, especially if the obligations do not benefit from financial support from other tax revenues or governmental authorities. Changes over a reporting period in the Company’s loss estimates for its tax-supported and general obligation 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 actions that affect the issuer’s ability to refinance maturing obligations or issue new debt at a reasonable cost; changes in the priority and amount of pensions and other obligations owed to workers; developments in restructuring or settlement negotiations; and other political and economic factors. Changes in loss estimates may also be affected by the Company’s loss mitigation efforts and other variables. Changes in the Company’s loss estimates for structured finance transactions can be influenced by the performance of the assets supporting those transactions, by macroeconomic factors and by specific actions taken to mitigate losses. For example, changes over a reporting period in the Company’s loss estimates for its RMBS transactions may be influenced by factors such as the level, timing and severity of loan defaults experienced, changes in housing prices, discount rates, prepayments and the results of the Company’s loss mitigation activities. In recent years, expected losses to be paid (recovered) for U.S. RMBS have also been affected by changes in the amount of recoveries on first lien deferred principal balances and second lien charged-off loans. Actual losses will ultimately depend on future events, transaction performance or other factors that are difficult to predict. As a result, the Company’s current projections of certain losses may be subject to considerable uncertainty and may not reflect the Company’s ultimate claims paid. In some instances, the terms of the Company’s policy or the terms of certain workout orders and resolutions give the Company the option to pay principal losses that have been recognized in the transaction but which it is not yet required to pay, thereby reducing the amount of guaranteed interest due in the future. The Company has sometimes exercised this option, which results in an acceleration of cash outflows but reduces overall losses paid. The Company’s reserve committees estimate expected loss to be paid (recovered) by reviewing analyses that consider various scenarios with corresponding probabilities assigned to them. Depending upon the characteristics 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, sector-driven loss severity assumptions and/or judgmental assessments. In the case of its assumed business, the Company may conduct its own analysis or use loss estimates provided by ceding insurers. Each quarter, the Company’s reserve committees review and refresh their loss projection assumptions, scenarios and the probabilities they assign to those scenarios based on developments during the period and their view of future performance. Net Expected Loss to be Paid (Recovered) and Net Economic Loss Development (Benefit) by Accounting Model
|  | Net Expected Loss to be Paid (Recovered) |  |  |  |  | Net Economic Loss Development (Benefit)
|  | As of |  |  |  | First Quarter
Accounting Model |  | March 31, 2026 |  | December 31, 2025 |  |  |  |  |  | 2026 |  | 2025
|  | (in millions)
FG insurance (see Note 6) |  | $ | 129 |  |  | $ | 88 |  |  |  |  |  |  | $ | 44 |  |  | $ | 48 |
FG VIEs (see Note 10) |  | 12 |  |  | 13 |  |  |  |  |  |  | — |  |  | — |
Credit derivatives (see Note 8) |  | — |  |  | — |  |  |  |  |  |  | — |  |  | (63) |
Total |  | $ | 141 |  |  | $ | 101 |  |  |  |  |  |  | $ | 44 |  |  | $ | (15) |
The following tables present a roll forward of net expected loss to be paid (recovered) for all contracts, which are accounted for under one of the following accounting models: FG insurance, credit derivative or FG VIE. The Company used risk-free rates for U.S. and non-U.S. currencies that ranged from 1.93% to 5.68% with a weighted average of 4.16% as of March 31, 2026 and 1.93% to 5.35% with a weighted average of 3.92% as of December 31, 2025. Net Expected Loss to be Paid (Recovered) Roll Forward
|  |  |  | First Quarter
|  |  |  |  |  | 2026 |  | 2025
| (in millions)
Net expected loss to be paid (recovered), beginning of period |  |  |  |  |  | $ | 101 |  |  | $ | 106 |
Economic loss development (benefit) due to: |  |  |  |  |  |  |  |
Accretion of discount |  |  |  |  |  | 2 |  |  | 1 |
Changes in discount rates |  |  |  |  |  | (4) |  |  | 5 |
Changes in timing and assumptions |  |  |  |  |  | 46 |  |  | (21) |
Total economic loss development (benefit) (1) |  |  |  |  |  | 44 |  |  | (15) |
Net (paid) recovered losses (1) |  |  |  |  |  | (4) |  |  | 59 |
Net expected loss to be paid (recovered), end of period |  |  |  |  |  | $ | 141 |  |  | $ | 150 |
____________________ (1) First quarter 2025 amounts include recoveries recognized in connection with the resolution of the LBIE litigation. See Note 8. Derivatives, for additional information. Net Expected Loss to be Paid (Recovered) Roll Forward by Sector
|  | First Quarter 2026
Sector |  | Net Expected Loss to be Paid (Recovered) as of December 31, 2025 |  | Net Economic Loss Development (Benefit) |  | Net (Paid) Recovered Losses (1) |  | Net Expected Loss to be Paid (Recovered) as of March 31, 2026
|  | (in millions)
Public finance: |  |  |  |  |  |  |  |
U.S. public finance |  | $ | (31) |  |  | $ | 45 |  |  | $ | (11) |  |  | $ | 3 |
Non-U.S. public finance |  | 126 |  |  | 2 |  |  | — |  |  | 128 |
Public finance |  | 95 |  |  | 47 |  |  | (11) |  |  | 131 |
Structured finance: |  |  |  |  |  |  |  |
U.S. RMBS |  | (54) |  |  | (2) |  |  | 8 |  |  | (48) |
Other structured finance |  | 60 |  |  | (1) |  |  | (1) |  |  | 58 |
Structured finance |  | 6 |  |  | (3) |  |  | 7 |  |  | 10 |
Total |  | $ | 101 |  |  | $ | 44 |  |  | $ | (4) |  |  | $ | 141 |
|  | First Quarter 2025
Sector |  | Net Expected Loss to be Paid (Recovered) as of December 31, 2024 |  | Net Economic Loss Development (Benefit) |  | Net (Paid) Recovered Losses (1) |  | Net Expected Loss to be Paid (Recovered) as of March 31, 2025
|  | (in millions)
Public finance: |  |  |  |  |  |  |  |
U.S. public finance |  | $ | 18 |  |  | $ | 29 |  |  | $ | (12) |  |  | $ | 35 |
Non-U.S. public finance |  | 98 |  |  | 24 |  |  | — |  |  | 122 |
Public finance |  | 116 |  |  | 53 |  |  | (12) |  |  | 157 |
Structured finance: |  |  |  |  |  |  |  |
U.S. RMBS |  | (43) |  |  | (3) |  |  | 9 |  |  | (37) |
Other structured finance (2) |  | 33 |  |  | (65) |  |  | 62 |  |  | 30 |
Structured finance |  | (10) |  |  | (68) |  |  | 71 |  |  | (7) |
Total |  | $ | 106 |  |  | $ | (15) |  |  | $ | 59 |  |  | $ | 150 |
____________________ (1) Amounts are 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 as reinsurance recoverable on paid losses in “other assets.” (2) First quarter 2025 amounts include recoveries recognized in connection with the resolution of the LBIE litigation. See Note 8. Derivatives, for additional information. Includes cash proceeds for recoveries related to amounts previously paid. The tables above include (i) net LAE paid (recovered) of $2 million and $(61) million for first quarter 2026 and first quarter 2025, respectively, and (ii) net expected LAE to be paid of $13 million and $8 million as of March 31, 2026 and December 31, 2025, respectively. Public Finance The largest components of the public finance net expected losses to be paid (recovered) relate to certain insured healthcare and U.K. regulated utility exposures, as well as Puerto Rico Electric Power Authority (PREPA). The total net expected loss to be paid for public finance exposures is net of expected recoveries of $309 million and $311 million as of March 31, 2026 and December 31, 2025, respectively, for certain claims and LAE that have already been paid. In first quarter 2026, the economic loss development for public finance transactions was primarily attributable to Brightline Trains Florida LLC (Brightline) and PREPA. Thames Water As of March 31, 2026, the Company had £1.8 billion (or $2.4 billion) of net par outstanding of Thames Water Utilities Finance PLC (Thames), a BIG rated U.K. regulated utility. The Company, as part of the Thames senior Class A creditor group, continues to engage the Water Services Regulation Authority (the governmental body responsible for the economic regulation of the privatized water and sewage industry in England and Wales, or Ofwat), His Majesty’s Treasury and other departments of the U.K. Government in restructuring negotiations, and is taking other actions to work out this insured credit. The first scheduled principal payment that comes due under the Company’s Thames exposure is in 2037. The Company is actively working to mitigate losses and reduce risk. Although uncertainty remains, the Thames creditors and Ofwat are engaged in discussions regarding a comprehensive settlement to restructure and recapitalize Thames. European Renewable Energy and U.K. Student Accommodation Transactions As of March 31, 2026, the Company had insured net par of €758 million (or $876 million) related to BIG European renewable energy transactions that are experiencing operational strain, and £292 million (or $386 million) in BIG U.K. student accommodation transactions that are experiencing weak occupancy rates and financial strain. U.K. Healthcare The Company has guaranteed project financings involving certain National Health Service (NHS) Trusts. As of March 31, 2026, the Company had £417 million (or $552 million) of BIG net par outstanding with expected losses related to NHS Trusts. Proceeds from the financings funded new and refurbished hospital buildings and facilities in the service area of the particular NHS Trust. Certain of the bond issuers are involved in negotiations (including in some cases triggered by contract disputes) with the relevant NHS Trusts regarding various matters including the condition of the hospital facilities and service standards. The Company takes into account the nature and severity of any disputes in its internal ratings. U.S. Healthcare Certain BIG healthcare exposures are experiencing rising labor costs due to competition for labor and shortages in certain markets. Additionally, inflation has increased the cost of medical supplies, medical equipment and pharmacy products, while U.S. hospitals with large Medicaid and Medicare payor mixes have not seen reimbursement levels keep pace with rising costs and may be further impacted by cuts to Medicaid funding that will go into effect in 2026 and 2027. The combined revenue and expense challenges have led to cash flow and liquidity stress in certain transactions. U.S. Transportation As of March 31, 2026, the Company had insured net par of $1.1 billion related to Brightline, supporting the development and operation of a private high speed passenger rail system connecting Miami, Orlando and population centers in between. The Company insures a portion of the senior revenue bonds issued by Brightline, whose credit performance is dependent on ridership growth, fare revenues and available liquidity. Brightline’s revenues and ridership, while growing, have lagged the initial projections. The Company’s exposure benefits from a perpetual senior lien on the assets of Brightline. Puerto Rico All of the Company’s exposure to the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) and its various authorities and public corporations is rated BIG. The Company’s Puerto Rico net par and net debt service outstanding as of March 31, 2026 were $553 million and $632 million, respectively, compared with net par and net debt service outstanding as of December 31, 2025 of $553 million and $643 million, respectively. Defaulting Puerto Rico Exposure As of March 31, 2026, the Company’s only unresolved outstanding insured Puerto Rico exposure subject to a payment default was PREPA. As of March 31, 2026, the Company’s PREPA net par and debt service outstanding were $464 million and $528 million, respectively. As of December 31, 2025, the Company’s PREPA net par and debt service outstanding were $464 million and $537 million, respectively. The PREPA bonds are secured by a lien on the electric system’s stream of net revenues. The default of PREPA’s obligations has been the subject of restructuring negotiations, mediation and litigation since 2014. Puerto Rico Litigation Currently, there are numerous legal actions relating to defaults by PREPA on debt service payments and related matters and the Company is a party to a number of them. The Company has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to the remaining Puerto Rico obligations it still insures. In addition, the Commonwealth, the Financial Oversight and Management Board (FOMB) established under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) and others have taken legal action naming the Company as a party. Certain legal actions involving the Company and relating to defaults by the Commonwealth and certain of its authorities and public corporations were resolved in 2022. The remaining proceedings relate to PREPA’s default, including several recently active proceedings and a number of proceedings that remain stayed by the U.S. District Court for the District of Puerto Rico (Federal District Court of Puerto Rico), pending ultimate determination on a plan of adjustment and disclosure statement to be subsequently submitted, as described below. PREPA – Recently Active Proceedings PREPA Litigation Stay and Motion for Relief from the Litigation Stay. In July 2024, the Federal District Court of Puerto Rico entered a global stay of all PREPA-related litigation in the District Court. In February 2025, the Company and certain other PREPA bondholders moved for relief from that litigation stay. In March 2025, the Federal District Court of Puerto Rico granted relief from the litigation stay to permit discrete PREPA-related litigation to go forward. Bondholders’ Administrative Expense Claim. The Federal District Court of Puerto Rico permitted bondholders to file a motion asserting that they are entitled to compensation in the form of an administrative expense priority claim for PREPA’s consumption of net revenues during the pendency of the Title III case. The bondholders filed their administrative expense motion in April 2025. If the bondholders ultimately succeed in establishing an entitlement to an administrative expense priority claim, PREPA would be required under the U.S. Bankruptcy Code to pay such claim in full in cash prior to exiting bankruptcy. On March 16, 2026, the Federal District Court of Puerto Rico denied the bondholders’ administrative expense claim motion purely on legal grounds. The bondholders appealed the decision, and such appeals are currently pending before the First Circuit, with briefing to occur over the next few months. Reinstated Accounting Counterclaim. On March 30, 2026, the Company and certain other bondholders sought relief from the Federal District Court of Puerto Rico’s litigation stay with respect to their counterclaim for an equitable accounting cause of action to recover net revenues that had been wrongfully diverted from debt service since the beginning of the Title III case. On April 13, 2026, the Federal District Court of Puerto Rico issued an order indicating it was inclined to lift the litigation stay to permit the bondholders to pursue such counterclaim. At the request of the Federal District Court of Puerto Rico, the parties submitted a report and discovery plan on April 18, 2026, which included competing proposals and schedules for litigating the counterclaim, including the scope and timing of relevant discovery. Composition of the Financial Oversight and Management Board for Puerto Rico In August 2025, the FOMB announced that the U.S. administration terminated six of its seven board members. On September 18, 2025, three of the terminated board members sued the U.S. administration for reinstatement, alleging that they had been unlawfully terminated without cause and that their offices are a form of property protected by due process. On October 3, 2025, the Federal District Court of Puerto Rico granted the plaintiffs’ request for a preliminary injunction and enjoined the terminations. On December 2, 2025, the U.S. administration filed a notice of appeal of the preliminary injunction to the First Circuit. Subsequently, the U.S. administration requested a stay of the litigation pending the U.S. Supreme Court’s decision in Trump v. Cook, a case involving related questions of the powers of the U.S. President to terminate a member of the Federal Reserve Board of Governors; the requested stay was unopposed and granted on December 30, 2025. Oral arguments in the Trump v. Cook case were heard on January 21, 2026, with a decision expected to follow by the end of the U.S. Supreme Court’s current term in late June or early July 2026. Mediation After the Commonwealth purported to unilaterally terminate a 2019 restructuring support agreement for PREPA’s bonds in March 2022, the Federal District Court of Puerto Rico ordered the parties into mediation and appointed the Honorable Shelley C. Chapman as lead mediator. After the First Circuit issued its decision in the lien and estimation appeal, the Federal District Court of Puerto Rico ordered the FOMB and bondholders to resume mediation, subsequently extending mediation several times. The Federal District Court of Puerto Rico most recently extended the mediation through October 31, 2026. Plan of Adjustment, Disclosure Statement and Related Stayed Proceedings As directed by the Federal District Court of Puerto Rico, the FOMB filed on March 28, 2025 its Fifth Amended Title III Plan of Adjustment and related Disclosure Statement for informational purposes of the parties. The Plan of Adjustment remains before the Federal District Court of Puerto Rico with no schedule for any confirmation proceedings in anticipation that a revised Plan will be submitted. The following proceedings involving the Company and relating to the default by PREPA remain stayed in the Federal District Court of Puerto Rico pending its ultimate determination on a plan of adjustment and disclosure statement: • The Company’s motion to dismiss PREPA’s Title III Bankruptcy proceeding or, in the alternative, to lift the PROMESA automatic stay to allow for the appointment of a receiver. • Adversary complaint by certain unsecured lenders of PREPA against the Company, among other parties, including various PREPA bondholders and bond insurers, seeking, among other things, declarations that the unsecured lines of credit qualify as “Current Expenses” under the trust agreement, there is no valid lien securing the PREPA bonds unless and until such lenders are paid in full, as well as orders subordinating the PREPA bondholders’ lien and claims to such lenders’ claims, and declaring the PREPA restructuring support agreement executed in May 2019 null and void. • Adversary complaint filed in 2023 by the official committee of unsecured creditors, PREPA’s employee union, PREPA’s retirement system, and certain other unsecured creditors, against the FOMB, PREPA, Puerto Rico Fiscal Agency and Financial Advisory Authority, and the PREPA bond trustee. The 2023 complaint seeks, among other things, declarations that plaintiffs’ claims are “Current Expenses” under the trust agreement, and an order subordinating the PREPA bondholders’ lien and claim to the plaintiffs’ claims. Non-Defaulting Puerto Rico Exposure As of both March 31, 2026 and December 31, 2025, the Company had $76 million, of remaining non-defaulting Puerto Rico net par outstanding related primarily to the Puerto Rico Municipal Finance Agency (MFA). The Company’s MFA exposures are secured by a lien on local tax revenues and remain current on debt service payments. U.S. RMBS Loss Projections The Company projects losses (and recoveries) on its insured U.S. RMBS on a transaction-by-transaction basis by projecting the future cash flow of the underlying collateral pool of mortgages over time. The Company then uses individual models for each transaction to project the Company’s future claims and claim reimbursements based upon these collateral cashflow projections, the payment priorities among the transaction liabilities, and assumptions about future market conditions. The resulting projected claim payments or reimbursements are then discounted using risk-free rates. The Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, which are probability weighted. Each period the Company reviews the assumptions it uses to make RMBS loss and recovery projections based upon the performance of its insured transactions as well as the residential property market, interest rate environment and economy in general. To the extent it observes changes, it makes a judgment as to whether those changes are normal fluctuations or part of a more prolonged trend. The loss and recovery projections for insured RMBS are affected by a variety of assumptions including: (i) the rate at which borrowers from a particular delinquency category (number of monthly payments behind) eventually default (which is referred to as the “liquidation rate”), (ii) projections of how many of the currently performing loans will default and when they will default, (iii) loss severity, which is the amount of loss the transaction experiences on a defaulted loan after the application of net proceeds from the disposal of the underlying property, and (iv) recovery assumptions to reflect observed trends in recoveries of principal balances of modified loans that had been previously written off. In recent years, the two primary drivers of changes in expected loss have been the projected and actual recoveries on previously written off or deferred loan balances, and changes in discount rates. Expected Loss to be Paid (Recovered) and Net Economic Loss Development (Benefit) U.S. RMBS
|  | Net Expected Loss to be Paid (Recovered) |  |  |  | Economic Loss Development (Benefit)
|  | March 31, |  | December 31, |  |  |  |  |  | First Quarter
|  | 2026 |  | 2025 |  |  |  |  |  | 2026 |  | 2025
|  | (dollars in millions)
First lien U.S. RMBS |  | $ | 92 |  |  | $ | 90 |  |  |  |  |  |  | $ | — |  |  | $ | 2 |
Second lien U.S. RMBS |  | (140) |  |  | (144) |  |  |  |  |  |  | (2) |  |  | (5) |
Total U.S. RMBS |  | $ | (48) |  |  | $ | (54) |  |  |  |  |  |  | $ | (2) |  |  | $ | (3) |
Impact of changes in discount rates |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | — |  |  | $ | 1 |
Range of discount rates |  | 3.63 | % | - | 5.06 | % |  | 3.45 | % | - | 4.97 | % |  |  |  |  |  |  |  |
Weighted average discount rate |  | 4.00% |  | 3.84% |  |  |  |  |  |  |  |
First lien U.S. RMBS weighted average future recovery for deferred principal balances |  | 50.0% |  | 50.0% |  |  |  |  |  |  |  |
Second lien U.S. RMBS weighted average future recoveries on charged-off loans |  | 60.0% |  | 60.0% |  |  |  |  |  |  |  |
First Lien U.S. RMBS Loss Projections: Alt-A, Prime, Option ARM and Subprime The majority of projected insured losses in first lien U.S. RMBS transactions stem from future insurance claim payments related to structures that are currently undercollateralized (outstanding insured bonds that did not have their principal balance reduced by collateral losses, but will experience a shortfall at the transaction’s final maturity). Most of any future collateral losses are expected to come from non-performing mortgage loans (those that are or have recently been two or more payments behind, have been modified, are in foreclosure or have been foreclosed upon). Collateral losses are projected to be partially offset by recoveries on deferred principal balances (where information about the amount of deferred balances is disclosed by the trustee of the transaction). The Company establishes its scenarios by assuming various levels of recoveries on known deferred balances and increasing and decreasing the periods and levels of stress on the remaining collateral. In the Company’s most stressful scenario where 20% of deferred principal balances are assumed to be recovered, loss severities experience stress for nine years and the initial ramp-down of the conditional default rates (CDR) was assumed to occur over 16 months, expected loss to be paid would increase from current projections by approximately $32 million for all first lien U.S. RMBS transactions. In the Company’s least stressful scenario where 80% of deferred principal balances are assumed to be recovered, the CDR plateau was six months shorter (30 months, effectively assuming that liquidation rates would improve) and the CDR recovery was more pronounced (including an initial ramp-down of the CDR over eight months), expected loss to be paid would decrease from current projections by approximately $31 million for all first lien U.S. RMBS transactions. Certain transactions benefit from excess spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on the insured obligations) when they are supported by large portions of fixed rate assets (either originally fixed or modified to be fixed) but have insured floating rate debt linked to the Secured Overnight Finance Rate (SOFR). An increase in projected SOFR decreases excess spread, while lower SOFR projections can result in higher excess spread. Due to the current level of SOFR, there are few transactions with substantial excess spread. If projected future interest rates were to fall below the weighted average coupon of the underlying mortgages, excess spread projections may increase. Second Lien U.S. RMBS Loss Projections Second lien U.S. RMBS transactions include both home equity lines of credit (HELOC) and closed-end second lien mortgages. The Company believes the most important drivers of its projected second lien U.S. RMBS claims and reimbursements are the amount and timing of future recoveries from previously charged-off loans and changes in discount rates. In the Company’s most stressful scenario, assuming 40% recoveries on charged-off loans would decrease the expected recovery by approximately $46 million for HELOC transactions. On the other hand, in the Company’s least stressful scenario, assuming 80% recoveries on charged-off loans would increase the expected recovery by approximately $47 million for HELOC transactions. When a second lien loan defaults, there is generally a low recovery. The Company assumes that it will generally recover 2% of future defaulting collateral at the time of charge-off. Additional amounts of post charge-off recoveries are projected to come in evenly over the next five years in instances where the Company is able to obtain information on the lien status. The Company evaluates its assumptions regularly based on actual recoveries of charged-off loans observed from period to period and reasonable expectations of future recoveries. Recovery Litigation and Dispute Resolution In the ordinary course of their respective businesses, certain of the Company’s subsidiaries are involved in litigation or other dispute resolution with third parties to recover insurance losses paid or return benefits received in prior periods or prevent or reduce losses in the future. For example, the Company has asserted claims in a number of legal proceedings in connection with its exposure to Puerto Rico. See above for a discussion of the Company’s exposure to Puerto Rico and related recovery litigation being pursued by the Company. The impact, if any, of these and other proceedings on the amount of recoveries the Company ultimately receives and losses it pays in the future is uncertain, and the impact of any one or more of these proceedings during any quarter or year could be material to the Company’s financial statements.

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