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Note 10 - Financial Guaranty Insurance Contracts (Notes)
 6 Months Ended
Jun. 30, 2014
Financial Guaranty Insurance Contracts [Abstract]  
Financial Guarantee Insurance Contracts
Financial Guaranty Insurance Contracts
The following table includes information as of June 30, 2014 regarding our financial guaranty claim liabilities on non-derivative transactions, segregated by the surveillance categories that we use in monitoring the risks related to these contracts:
 
Surveillance Categories
($ in thousands)
Performing
 
Special
Mention
 
Intensified
Surveillance
 
Case
Reserve
 
Total
Number of policies
5

 
173

 
97

 
79

 
354

Remaining weighted-average contract period (in years)
21

 
16

 
19

 
18

 
17

Insured contractual payments outstanding:
 
 
 
 
 
 
 
 
 
Principal
$
1,443

 
$
1,018,341

 
$
681,284

 
$
93,356

 
$
1,794,424

Interest
159

 
536,743

 
384,351

 
25,376

 
946,629

Total
$
1,602

 
$
1,555,084

 
$
1,065,635

 
$
118,732

 
$
2,741,053

 
 
 
 
 
 
 
 
 
 
Gross claim liability
$
1

 
$
16,543

 
$
246,341

 
$
32,031

 
$
294,916

Less:
 
 
 
 
 
 
 
 
 
Gross potential recoveries
—

 
1,442

 
309,894

 
54,512

 
365,848

Discount, net
—

 
2,414

 
(120,205
)
 
(612
)
 
(118,403
)
Net claim liability (asset) (prior to reduction for unearned premium)
$
1

 
$
12,687

 
$
56,652

 
$
(21,869
)
 
$
47,471

Unearned premium revenue
$
6

 
$
16,125

 
$
10,673

 
$
—

 
$
26,804

Net claim liability (asset) reported in the balance sheet
$
—

 
$
5,212

 
$
49,516

 
$
(21,869
)
 
$
32,859

Reinsurance recoverables
$
—

 
$
—

 
$
—

 
$
—

 
$
—


A net claim liability is established for a performing credit if there is evidence that credit deterioration has occurred and the expected loss on the credit exceeds the unearned premium revenue for the contract based on the present value of the expected net cash inflows and outflows. Included in accounts and notes receivable and unearned premiums on our condensed consolidated balance sheets are the present values of premiums receivable and unearned premiums that are received on an installment basis. The premiums receivable is net of commissions on assumed reinsurance business. The present values of premiums receivable and unearned premiums that are received on an installment basis were $24.4 million and $25.5 million, respectively, as of June 30, 2014, and $25.2 million and $27.0 million, respectively, as of December 31, 2013.
The accretion of these balances is included either in premiums written and premiums earned (for premiums receivable) or policy acquisition costs (for commissions) on our condensed consolidated statements of operations. There was an immaterial amount of accretion recorded in policy acquisition costs and premiums earned for the three and six months ended June 30, 2014 and 2013.
The nominal (non-discounted) premiums, net of commissions that are expected to be collected on financial guaranty contracts with installment premiums, included in premiums receivable as of June 30, 2014, was $30.6 million and is expected to decrease over time as the portfolio runs off. The activity related to the net present value of premiums receivable during the three and six months ended June 30, 2014 and 2013 was not material. The weighted-average risk-free rate used to discount the premiums receivable and premiums to be collected was 2.6% at June 30, 2014.
 
Premiums earned were affected by the following for the periods indicated:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2014
 
2013
 
2014

2013
Refundings
$
6,073

 
$
10,288

 
$
8,190

 
$
15,041

Recaptures/Commutations
—

 
—

 
—

 
(2,447
)
Adjustments to installment premiums, gross of commissions
22

 
(10
)
 
161

 
2,682

Unearned premium acceleration upon establishment of case reserves
62

 
4

 
62

 
69

Foreign exchange revaluation, gross of commissions
6

 
(319
)
 
320

 
(1,087
)
Total adjustment to premiums earned
$
6,163

 
$
9,963

 
$
8,733

 
$
14,258



The following table shows the expected contractual premium revenue from our existing financial guaranty portfolio, assuming no refundings of any financial guaranty obligations, as of June 30, 2014:
(In thousands)
Ending Net
Unearned
Premiums
 
Unearned
Premium
Amortization
 
Accretion
 
Total
Premium
Revenue
3rd quarter 2014
$
163,413

 
$
7,959

 
$
193

 
$
8,152

4th quarter 2014
158,908

 
4,505

 
191

 
4,696

2014
158,908

 
12,464

 
384

 
12,848

2015
143,082

 
15,826

 
719

 
16,545

2016
129,579

 
13,503

 
657

 
14,160

2017
117,700

 
11,878

 
617

 
12,495

2018
106,535

 
11,166

 
562

 
11,728

2014 - 2018
106,535

 
64,837

 
2,939

 
67,776

2019 - 2023
60,317

 
46,218

 
2,148

 
48,366

2024 - 2028
29,858

 
30,459

 
1,368

 
31,827

2029 - 2033
12,701

 
17,157

 
872

 
18,029

After 2033
—

 
12,701

 
1,009

 
13,710

Total
$
—

 
$
171,372

 
$
8,336

 
$
179,708


The following table shows the significant components of changes in our financial guaranty claim liability for the three and six months ended June 30, 2014 and 2013, excluding reserves related to our trade credit reinsurance and surety business of $1.9 million and $2.0 million, respectively, which are excluded from the accounting standard regarding accounting for financial guaranty insurance contracts by insurance enterprises.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2014
 
2013
 
2014

2013
Claim liability at beginning of period
$
27,815

 
$
22,469

 
$
19,458

 
$
64,291

Incurred losses and LAE:
 
 
 
 
 
 
 
Increase (decrease) in gross claim liability
18,979

 
(36,381
)
 
27,119

 
(27,991
)
Decrease in gross potential recoveries
13,188

 
30,389

 
46,146

 
26,443

(Increase) decrease in discount
(28,002
)
 
9,688

 
(59,759
)
 
6,133

Decrease (increase) in unearned premiums
839

 
84

 
(3,271
)
 
(713
)
Incurred losses and LAE
5,004

 
3,780

 
10,235

 
3,872

Paid losses and LAE:
 
 
 
 
 
 
 
Current year
(23
)
 
(34
)
 
(23
)
 
(33
)
Prior years
63

 
(2,604
)
 
3,189

 
(44,519
)
Paid losses and LAE
40

 
(2,638
)
 
3,166

 
(44,552
)
Claim liability at June 30
$
32,859

 
$
23,611

 
$
32,859

 
$
23,611

 
 
 
 
 
 
 
 
Components of incurred losses and LAE:
 
 
 
 
 
 
 
Claim liability established in current period
$
11,103

 
$
279

 
$
12,143

 
$
383

Changes in existing claim liabilities
(6,099
)
 
3,501

 
(1,908
)
 
3,489

Total incurred losses and LAE
$
5,004

 
$
3,780

 
$
10,235

 
$
3,872

 
 
 
 
 
 
 
 
Components of increase in discount:
 
 
 
 
 
 
 
Increase in discount related to claim liabilities established in current period
$
(3,566
)
 
$
(37
)
 
$
(4,057
)
 
$
(165
)
(Increase) decrease in discount related to existing claim liabilities
(24,436
)
 
9,725

 
(55,702
)
 
6,298

Total (increase) decrease in discount
$
(28,002
)
 
$
9,688

 
$
(59,759
)
 
$
6,133


Paid losses during the first half of 2013 include $41.6 million related to a January 2013 commutation with a primary insurer.
Our financial guaranty loss reserve estimate involves significant judgment surrounding the estimated probability of the likelihood, magnitude and timing of each potential loss based upon different loss scenarios. The probabilities, assumptions and estimates we use to establish our financial guaranty loss reserves are subject to uncertainties, particularly given the current economic and credit environments, including uncertainties regarding our public finance municipal exposures and international Sovereign risk exposures. We continue to monitor the uncertainties surrounding our portfolio, and it is possible that the actual losses paid could differ materially from our present estimates.
The weighted-average risk-free rates used to discount the gross claim liability and gross potential recoveries on our financial guaranty contracts were as follows, as of the dates indicated:
 
June 30, 2014
2.63
%
December 31, 2013
2.95
%
June 30, 2013
2.29
%
December 31, 2012
2.00
%