Form 8-K ASSURED GUARANTY LTD For: Jun 23

June 23, 2021 4:53 PM EDT

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Exhibit 99.1






Assured Guaranty Municipal Corp.

Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2021







ASSURED GUARANTY MUNICIPAL CORP.
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





Assured Guaranty Municipal Corp.
Condensed Consolidated Balance Sheets (unaudited)
(dollars in millions except par value and share amounts)
As of
March 31, 2021December 31, 2020
Assets
Investment portfolio:
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $4,705 and $4,740, allowance for credit loss of $62 and $60)$4,861 $4,966 
Short-term investments, at fair value375 424 
AGC surplus note, held-to-maturity, at amortized cost300 300 
Equity method investments (includes $376 and $345 measured at fair value)479 438 
Other invested assets, at fair value
Total investment portfolio6,021 6,132 
Loans receivable from affiliate163 163 
Cash41 63 
Premiums receivable1,089 1,094 
Ceded unearned premium reserve650 658 
Reinsurance recoverable on unpaid losses141 154 
Salvage and subrogation recoverable614 637 
Financial guaranty variable interest entities’ assets, at fair value244 257 
Other assets (includes $16 and $24 measured at fair value)197 192 
Total assets
$9,160 $9,350 
Liabilities and shareholder's equity
Unearned premium reserve$2,982 $2,981 
Loss and loss adjustment expense reserve507 545 
Reinsurance balances payable, net334 349 
Financial guaranty variable interest entities’ liabilities with recourse, at fair value266 279 
Financial guaranty variable interest entities’ liabilities without recourse, at fair value16 16 
Other liabilities (includes $3 and $4 measured at fair value)322 353 
Total liabilities
4,427 4,523 
Commitments and contingencies (see Note 10)
Preferred stock ($1,000 par value, 5,000.1 shares authorized; 0 shares issued and outstanding)— — 
Common stock ($92,025 par value, 163 shares authorized, issued and outstanding)15 15 
Additional paid-in capital698 698 
Retained earnings3,483 3,521 
Accumulated other comprehensive income (loss), net of tax provision (benefit) of $24 and $36133 185 
Total shareholder's equity attributable to Assured Guaranty Municipal Corp.
4,329 4,419 
Noncontrolling interests
404 408 
Total shareholder's equity
4,733 4,827 
Total liabilities and shareholder's equity
$9,160 $9,350 

The accompanying notes are an integral part of these condensed consolidated financial statements.
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Assured Guaranty Municipal Corp.
Condensed Consolidated Statements of Operations (unaudited)
(in millions)
Three Months Ended March 31,
20212020
Revenues
Net earned premiums$60 $60 
Net investment income40 44 
Net realized investment gains (losses)(2)(4)
Fair value gains (losses) on committed capital securities(9)23 
Foreign exchange gain (loss) on remeasurement(51)
Other income (loss)
Total revenues
93 74 
Expenses
Loss and loss adjustment expenses (benefit)(44)
Employee compensation and benefit expenses21 25 
Write-off of insurance licenses of Municipal Assurance Corp.16 — 
Other expenses13 15 
Total expenses
59 (4)
Income (loss) before income taxes and equity in earnings of investees34 78 
Equity in earnings of investees19 (9)
Income (loss) before income taxes53 69 
Less: Provision (benefit) for income taxes
18 
Net income (loss)
44 51 
Less: Noncontrolling interests
— (1)
Net income (loss) attributable to Assured Guaranty Municipal Corp.
$44 $52 

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

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Assured Guaranty Municipal Corp.
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)
(in millions)
Three Months Ended March 31,
20212020
Net income (loss)
$44 $51 
Change in net unrealized gains (losses) on:
Investments with no credit impairment, net of tax provision (benefit) of $(11) and $(12)(51)(113)
Investments with credit impairment, net of tax provision (benefit) of $(1) and $(10)(4)(37)
Change in net unrealized gains (losses) on investments(55)(150)
Change in net unrealized gains (losses) on financial guaranty variable interest entities' liabilities with recourse, net of tax(1)
Other comprehensive income (loss)(56)(142)
Comprehensive income (loss)(12)(91)
Less: Comprehensive income (loss) attributable to noncontrolling interests
(4)(2)
Comprehensive income (loss) attributable to Assured Guaranty Municipal Corp.$(8)$(89)

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

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Assured Guaranty Municipal Corp.
Condensed Consolidated Statements of Shareholder's Equity (unaudited)
(dollars in millions, except share data)

For the Three Months Ended March 31, 2021

Assured Guaranty Municipal Corp. Common Shares OutstandingCommon Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive Income (Loss)
Total Shareholder's Equity Attributable to Assured Guaranty Municipal Corp.Noncontrolling Interests
Total
Shareholder's
Equity
Balance at December 31, 2020163 $15 $698 $3,521 $185 $4,419 $408 $4,827 
Net income— — — 44 — 44 — 44 
Dividends— — — (82)— (82)— (82)
Other comprehensive loss— — — — (52)(52)(4)(56)
Balance at March 31, 2021163 $15 $698 $3,483 $133 $4,329 $404 $4,733 


For the Three Months Ended March 31, 2020

Assured Guaranty Municipal Corp. Common Shares OutstandingCommon Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive Income (Loss)
Total Shareholder's Equity Attributable to Assured Guaranty Municipal Corp.Noncontrolling Interests
Total
Shareholder's
Equity
Balance at December 31, 2019163 $15 $702 $3,415 $118 $4,250 $383 $4,633 
Net income— — — 52 — 52 (1)51 
Dividends— — — (72)— (72)— (72)
Other comprehensive loss— — — — (141)(141)(1)(142)
Balance at March 31, 2020163 $15 $702 $3,395 $(23)$4,089 $381 $4,470 

















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Assured Guaranty Municipal Corp.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in millions)
Three Months Ended March 31,
20212020
Net cash flows provided by (used in) operating activities
$2 $(34)
Investing activities
Fixed-maturity securities:
Purchases(214)(209)
Sales100 44 
Maturities and paydowns146 144 
Short-term investments with original maturities of over three months:
Purchases— (56)
Sales— 
Maturities and paydowns19 
Net sales (purchases) of short-term investments with original maturities of less than three months30 278 
Paydowns on financial guaranty variable interest entities’ assets12 33 
Purchases of other invested assets(15)(3)
Sales and return of capital of other invested assets
Investment in AssuredIM funds (70)(113)
Return of capital from AssuredIM funds 57 — 
Net cash flows provided by (used in) investing activities
69 130 
Financing activities
Dividends paid to Assured Guaranty Municipal Holdings Inc. (82)(72)
Net paydowns of financial guaranty variable interest entities' liabilities(10)(32)
Net cash flows provided by (used in) financing activities
(92)(104)
Effect of foreign exchange rate changes
— (5)
Increase (decrease) in cash and restricted cash
(21)(13)
Cash and restricted cash at beginning of period
63 87 
Cash and restricted cash at end of period
$42 $74 
Supplemental cash flow information
Cash paid (received) during the period for:
Income taxes$$— 
As of March 31, 2021 As of March 31, 2020
Reconciliation of cash and restricted cash to the condensed consolidated balance sheets:
Cash$41 $74 
Restricted cash (included in other assets)— 
Cash and restricted cash at the end of period$42 $74 



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

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Assured Guaranty Municipal Corp.
Notes to Condensed Consolidated Financial Statements (unaudited)
March 31, 2021

1.    Business and Basis of Presentation

Business

Assured Guaranty Municipal Corp. (AGM, or together with its subsidiaries, the Company), a New York domiciled insurance company, is a wholly owned subsidiary of Assured Guaranty Municipal Holdings Inc. (AGMH). AGMH is an indirect, wholly owned 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, as well as asset management services.

The Company applies its credit underwriting judgment, risk management skills and capital markets experience primarily 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, the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. Obligations insured by the Company include bonds issued by U.S. state or municipal governmental authorities and notes issued to finance international infrastructure projects. The Company markets its financial guaranty insurance directly to issuers and underwriters of public finance securities as well as to investors in such obligations. AGM had previously offered insurance and reinsurance in the global structured finance market, but has not done so since mid-2008. AGM markets its financial guaranty insurance directly to issuers and underwriters of, and investors in, public finance securities. In addition, AGM's direct subsidiaries, Assured Guaranty UK Limited (AGUK, formerly known as Assured Guaranty (Europe) plc) and, more recently, Assured Guaranty (Europe) SA (AGE), provide financial guaranties for the international public finance (including infrastructure) market and the asset-backed and other structured finance market. The Company guarantees obligations issued principally in the U.S. and the United Kingdom (U.K.), and also guarantees obligations issued in other countries and regions, including Western Europe, Canada and Australia.

Basis of Presentation

The unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In management's opinion, all material adjustments necessary for a fair statement of the financial condition, results of operations and cash flows of the Company, including its consolidated variable interest entities (VIEs), are reflected in the periods presented and are of a normal, recurring nature. 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 condensed consolidated financial statements are as of March 31, 2021 and cover the three-month period ended March 31, 2021 (First Quarter 2021) and the three-month period ended March 31, 2020 (First Quarter 2020). 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 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Certain prior year balances have been reclassified to conform to the current year's presentation.

The unaudited interim condensed consolidated financial statements include the accounts of AGM, its direct and indirect subsidiaries and its consolidated financial guaranty VIEs (FG VIEs). Intercompany accounts and transactions between and among all consolidated entities have been eliminated.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements of AGM included in Exhibit 99.1 in AGL's Form 8-K dated March 12, 2021, filed with the U.S. Securities and Exchange Commission (SEC).

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As of March 31, 2021, AGM owned the following principal subsidiaries.

100% of AGUK, which was organized in the U.K.
99.9999% of AGE, which was organized in France. AGMH owns the remaining 0.0001%.
60.7% of Municipal Assurance Holdings Inc. (MAC Holdings), which was incorporated in Delaware. AGM's affiliate, Assured Guaranty Corp. (AGC), owned the remaining 39.3% of MAC Holdings. MAC Holdings owned 100% of Municipal Assurance Corp. (MAC), which was domiciled in New York. Effective April 1, 2021, MAC was merged with and into AGM, with AGM as the surviving company.
55% of AG Asset Strategies LLC (AGAS). MAC owned 10% of AGAS, and AGC owns 35%. Effective April 1, 2021, AGM owns 65% of AGAS and AGC owns 35% of AGAS. AGAS is an investment subsidiary that invests in funds (AssuredIM Funds) managed by its affiliate, Assured Investment Management LLC (AssuredIM LLC) and its investment management affiliates (together with AssuredIM LLC, AssuredIM).

Until April 1, 2021, MAC was a principal insurance subsidiary of AGM. On February 24, 2021, the Company received the last regulatory approval required to execute a multi-step transaction to merge MAC with and into AGM, with AGM as the surviving company. The steps leading up to the merger of MAC with and into AGM, with AGM as the surviving company, were effective April 1, 2021, and include (i) the reassumption by AGM and AGC of their respective remaining cessions to MAC, (ii) distributing MAC’s earned surplus to AGM and AGC in accordance with their respective 60.7% and 39.3% direct ownership interests in MAC Holdings, and (iii) AGM’s purchase of AGC’s 39.3% interest in MAC Holdings (MAC Transaction). As a result, the Company wrote off the $16 million carrying value of MAC's licenses in First Quarter 2021, and will recognize the effects of the multi-step process to merge MAC with and into AGM in second quarter 2021, based on outstanding balances on April 1, 2021. The table below presents the approximate effect of the MAC Transaction that will be recorded in Second Quarter 2021.

Effect of the MAC Transaction
Second Quarter 2021

Increase (Decrease)
(in millions)
Fixed-maturity securities, short-term investments and cash$(232)
Unearned premium reserve(24)
Net income attributable to AGM$
Additional paid-in capital(5)
Accumulated other comprehensive income(1)
Total shareholder's equity attributable to AGM
Noncontrolling interests(211)
Total shareholder's equity (208)
Net par outstanding$(2,128)


Recent Accounting Standards Adopted

Simplification of the Accounting for Income Taxes
    In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions and clarifying certain requirements regarding franchise taxes, goodwill, consolidated tax expenses and annual effective tax rate calculations. The ASU was effective for interim and annual periods beginning after December 15, 2020. This ASU did not have an impact on the Company's consolidated financial statements.
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Recent Accounting Standards Not Yet Adopted

Reference Rate Reform
    
    In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU only apply to contracts that reference the London Interbank Offered Rate (LIBOR) or another reference rate that is expected to be discontinued due to reference rate reform. This ASU is effective upon issuance and may be applied prospectively for contract modifications that occur from March 12, 2020 through December 31, 2022.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which clarifies that certain optional expedients and exceptions in Topic 848 apply to derivatives that are affected by the discounting transition, regardless of whether derivatives reference LIBOR or another rate expected to be discontinued because of reference rate reform. Discounting transition refers to the changing of interest rates used for margining, discounting, or contract price alignment of derivatives to transition to alternative rates. This ASU became effective upon issuance and may be applied on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 or prospectively for contract modifications made on or before December 31, 2022.

The Company has not yet applied the relief afforded by these standard amendments and is evaluating the effect that these ASUs will have on its consolidated financial statements.

2.    Outstanding Exposure

    The Company sells credit protection primarily in financial guaranty insurance form.

Until 2008, the Company also sold credit protection by issuing policies that guaranteed payment obligations under credit derivatives, primarily credit default swaps (CDS). In early 2009, 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 also contributed to the Company not entering into such new CDS in the U.S. since 2008. The Company has, however, acquired portfolios since 2008 that include financial guaranty contracts in credit derivative form.

The Company's 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 its financial guaranty insurance contracts. See Note 8, Fair Value Measurement, for more information.

The Company seeks to limit its exposure to losses by underwriting obligations that it views as investment grade at inception, although on occasion it may underwrite new issuances that it views as below-investment-grade (BIG), typically as part of its loss mitigation strategy for existing troubled exposures. The Company also seeks to acquire portfolios of insurance from financial guarantors that are no longer writing new business by acquiring such companies, providing reinsurance on a portfolio of insurance or reassuming a portfolio of reinsurance it had previously ceded; in such instances, it evaluates the risk characteristics of the target portfolio, which may include some BIG exposures, as a whole in the context of the proposed transaction. The Company diversifies its insured portfolio across sector and geography and, in the structured finance portfolio, typically requires subordination or collateral to protect it from loss. Reinsurance may be used in order to reduce net exposure to certain insured transactions.

The Company has issued financial guaranty insurance policies on public finance obligations and, prior to mid-2008, structured finance obligations. Public finance obligations insured by the Company primarily consist 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, healthcare facilities and government office buildings. The Company also includes within public finance similar obligations issued by territorial and non-U.S. sovereign and sub-sovereign issuers and governmental authorities.

    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 7, Variable Interest Entities. Unless otherwise specified,
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the outstanding par and principal and interest (debt service) amounts presented in this note include outstanding exposures on these VIEs whether or not they are consolidated. Debt service is a measure of the estimated maximum potential exposure to insured obligations before considering the Company’s various legal rights to the underlying collateral and other remedies available to it under its financial guaranty contract. While AGM has ceased insuring new originations of asset-backed securities, a portfolio of such obligations remains outstanding. AGM's wholly owned subsidiaries AGUK and AGE provide financial guarantees in the international public finance market and intend to provide such guarantees in the international structured finance market. AGM has acquired portfolios since 2009 that include financial guaranties of structured finance obligations.

    Debt service and par outstanding exposures presented in these financial statements include 100% of the exposures of AGM and its consolidated subsidiaries, including MAC, despite AGM indirectly owning only 60.7% of MAC as of March 31, 2021. See Note 1, Business and Basis of Presentation.

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 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. Unless otherwise noted, ratings disclosed herein on the Company's insured portfolio reflect its internal ratings.
 
The Company monitors its insured portfolio and refreshes its internal credit ratings on individual exposures in quarterly, semi-annual or annual cycles based on the Company’s view of the exposure’s credit quality, loss potential, volatility and sector. Ratings on exposures in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter although the Company may also review a rating in response to developments impacting the credit when a ratings review is not scheduled. For exposures assumed from its affiliate, the Company may use the ceding company’s credit ratings of transactions where it is impractical for it to assign its own rating.

Exposures identified as BIG are subjected to further review to determine the probability of a loss. See Note 3, Expected Loss to be Paid (Recovered), 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. The Company uses a tax-equivalent yield to calculate the present value of projected payments and recoveries and determine whether a future loss is expected in order to assign the appropriate BIG surveillance category to a transaction. For financial statement measurement purposes, the Company uses risk-free rates, which are determined each quarter, to calculate the expected loss.
 
More extensive monitoring and intervention are employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. For purposes of determining the appropriate surveillance category, 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 in the future pay claims on that transaction that will not be fully 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 are claims 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.

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Impact of COVID-19 Pandemic

    The novel coronavirus that emerged in Wuhan, China in late 2019 and which causes the coronavirus disease known as COVID-19 was declared a pandemic by the World Health Organization in early 2020 and continues to spread throughout the world. Several vaccines have been developed and approved by governments, and distribution of vaccines is proceeding unevenly across the globe. The emergence of COVID-19 and reactions to it, including various closures and capacity and travel restrictions, have had a profound effect on the global economy and financial markets. While the COVID-19 pandemic has been impacting the global economy and the Company for over a year now, its ultimate size, depth, course and duration, and the effectiveness, acceptance and distribution of vaccines for it, remain unknown, and the governmental and private responses to the pandemic continue to evolve. Consequently, and due to the nature of the Company's business, all of the direct and indirect consequences of COVID-19 on the Company are not yet fully known to the Company, and still may not emerge for some time. For information about how the COVID-19 pandemic has impacted the Company's loss projections, see Note 3, Expected Loss to be Paid (Recovered).

The Company's surveillance department has established supplemental periodic surveillance procedures to monitor the impact on its insured portfolio of COVID-19 and governmental and private responses to COVID-19, with emphasis on state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various closures and capacity and travel restrictions or an economic downturn. In addition, the Company's surveillance department has been in contact with certain of its credits that it believes may be more at risk from COVID-19 and governmental and private responses to COVID-19. The Company's internal ratings and loss projections reflect this augmented surveillance activity. Through June 23, 2021, the Company has paid only relatively small first-time insurance claims it believes are due at least in part to credit stress arising specifically from COVID-19. The Company currently projects nearly full reimbursement of these relatively small claims.

Components of Outstanding Exposure

    The Company measures its financial guaranty exposure in terms of (a) gross and net par outstanding and (b) gross and net debt service.

    The Company typically guarantees the payment of debt service when due. Since most of these payments are due in the future, the Company generally uses gross and net par outstanding as a proxy for its financial guaranty exposure. Gross par outstanding generally represents the principal amount of the insured obligation at a point in time. Net par outstanding equals gross par outstanding net of any reinsurance. The Company includes in its par outstanding calculation the impact of any consumer price index inflator to the reporting date as well as, in the case of accreting (zero-coupon) obligations, accretion to the reporting date.

    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 from par and debt service outstanding, which amounts are included in the investment portfolio, because the Company manages such securities as investments and not insurance exposure. As of March 31, 2021 and December 31, 2020, the Company excluded $512 million and $524 million, respectively, of net par attributable to loss mitigation securities.

    Gross debt service outstanding represents the sum of all estimated future debt service payments on the obligations insured, on an undiscounted basis. Net debt service outstanding equals gross debt service outstanding net of any reinsurance. Future debt service payments include the impact of any consumer price index inflator after the reporting date, as well as, in the case of accreting (zero-coupon) obligations, accretion after the reporting date.

    The Company calculates its debt service outstanding as follows:

for insured obligations that are not supported by homogeneous pools of assets (which category includes most of the Company's public finance transactions), as the total estimated contractual future debt service due through maturity, regardless of whether the obligations may be called and regardless of whether, in the case of obligations where principal payments are due when an underlying asset makes a principal payment, the Company believes the obligations will be repaid prior to contractual maturity; and

for insured obligations that are supported by homogeneous pools of assets that are contractually permitted to prepay principal (which category includes, for example, residential mortgage-backed securities (RMBS) and collateralized loan obligations (CLOs)), as the total estimated expected future debt service due on insured obligations through their respective expected terms, which includes the Company's expectations as to whether the obligations may be called
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and, in the case of obligations where principal payments are due when an underlying asset makes a principal payment, when the Company expects principal payments to be made prior to contractual maturity.

    The calculation of debt service requires the use of estimates, which the Company updates periodically, including estimates for the expected remaining term of insured obligations supported by homogeneous pools of assets, updated interest rates for floating and variable rate insured obligations, behavior of consumer price indices for obligations with consumer price index inflators, foreign exchange rates and other assumptions based on the characteristics of each insured obligation. The anticipated sunset of LIBOR after June 30, 2023 has introduced another variable into the Company's calculation of future debt service. Debt service is a measure of the estimated maximum potential exposure to insured obligations before considering the Company’s various legal rights to the underlying collateral and other remedies available to it under its financial guaranty contract.

    Actual debt service may differ from estimated debt service due to refundings, terminations, negotiated restructurings,
prepayments, changes in interest rates on variable rate insured obligations, consumer price index behavior differing from that
projected, changes in foreign exchange rates on non-U.S. dollar denominated insured obligations and other factors.

Financial Guaranty Portfolio
Debt Service Outstanding
Gross Debt Service OutstandingNet Debt Service Outstanding
As ofAs of
March 31, 2021December 31, 2020March 31, 2021December 31, 2020
(in millions)
Public finance$321,458 $321,344 $241,679 $240,785 
Structured finance3,744 3,887 3,522 3,659 
Total financial guaranty (1)$325,202 $325,231 $245,201 $244,444 
_____________________
(1)    Includes 100% of MAC's gross and net debt service outstanding. However, AGM's indirect ownership of MAC was only 60.7% as of March 31, 2021. The net debt service outstanding amount includes $20.3 billion and $21.2 billion as of March 31, 2021 and December 31, 2020, respectively, from MAC. See Note 1, Business and Basis of Presentation.


Financial Guaranty Portfolio by Internal Rating
As of March 31, 2021
Public Finance
U.S.
Public Finance
Non-U.S.
Structured Finance
U.S.
Structured Finance
Non-U.S.
Total
Rating Category
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
(dollars in millions)
AAA$248 0.2 %$969 2.6 %$473 17.8 %$99 41.3 %$1,789 1.2 %
AA10,073 8.7 4,015 11.0 975 36.8 23 9.5 15,086 9.7 
A62,055 53.8 9,638 26.3 75 2.8 — — 71,768 46.4 
BBB40,154 34.9 21,658 59.1 200 7.5 118 49.2 62,130 40.1 
BIG2,727 2.4 378 1.0 930 35.1 — — 4,035 2.6 
Total net par outstanding (1)$115,257 100.0 %$36,658 100.0 %$2,653 100.0 %$240 100.0 %$154,808 100.0 %
_____________________
(1)    Includes $13.9 billion of net par outstanding as of March 31, 2021 from MAC, which represents 100% of MAC's net par outstanding. However, AGM's indirect ownership of MAC was only 60.7% as of March 31, 2021.

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Financial Guaranty Portfolio by Internal Rating
As of December 31, 2020
Public Finance
U.S.
Public Finance
Non-U.S.
Structured Finance
U.S.
Structured Finance
Non-U.S.
Total
Rating Category
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
(dollars in millions)
AAA$248 0.2 %$971 2.6 %$487 17.7 %$99 39.9 %$1,805 1.2 %
AA10,226 9.0 4,025 10.7 1,014 36.9 23 9.3 15,288 9.9 
A60,859 53.7 9,808 26.2 85 3.1 — — 70,752 46.0 
BBB39,287 34.7 21,974 58.7 213 7.7 126 50.8 61,600 40.0 
BIG2,754 2.4 674 1.8 953 34.6 — — 4,381 2.9 
Total net par outstanding (1) $113,374 100.0 %$37,452 100.0 %$2,752 100.0 %$248 100.0 %$153,826 100.0 %
_____________________
(1)    Includes $14.5 billion of net par outstanding as of December 31, 2020 from MAC, which represents 100% of MAC's net par outstanding. However, AGM's indirect ownership of MAC was only 60.7% as of March 31, 2021.

    In addition to amounts shown in the table above, the Company had outstanding commitments to provide guaranties of $673 million of public finance gross par as of March 31, 2021. These 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 Net Par Outstanding
As of March 31, 2021
BIG Net Par OutstandingNet Par
BIG 1BIG 2BIG 3Total BIG (1)Outstanding
(in millions)
Public finance:
U.S. public finance$1,001 $42 $1,684 $2,727 $115,257 
Non-U.S. public finance339 — 39 378 36,658 
Public finance1,340 42 1,723 3,105 151,915 
Structured finance:
U.S. RMBS50 — 859 909 1,776 
Other structured finance— — 21 21 1,117 
Structured finance50 — 880 930 2,893 
Total$1,390 $42 $2,603 $4,035 $154,808 
____________________
(1)    There is no BIG net par outstanding for credit derivatives as of March 31, 2021.


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Components of BIG Net Par Outstanding
As of December 31, 2020
BIG Net Par OutstandingNet Par
BIG 1BIG 2BIG 3Total BIG (1)Outstanding
(in millions)
Public finance:
U.S. public finance$1,028 $42 $1,684 $2,754 $113,374 
Non-U.S. public finance634 — 40 674 37,452 
Public finance1,662 42 1,724 3,428 150,826 
Structured finance:
U.S. RMBS107 — 824 931 1,834 
Other structured finance— — 22 22 1,166 
Structured finance107 — 846 953 3,000 
Total$1,769 $42 $2,570 $4,381 $153,826 
____________________
(1)    There is no BIG net par outstanding for credit derivatives as of December 31, 2020.

Exposure to Puerto Rico

    The Company had insured exposure to general obligation bonds of the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) and various obligations of its related authorities and public corporations aggregating $1.9 billion net par as of March 31, 2021. Of that amount, $1.8 billion was rated BIG, while the remainder was rated AA because it relates to second-to-pay policies on obligations insured by an affiliate of the Company. Beginning on January 1, 2016, a number of Puerto Rico exposures have defaulted on bond payments, and the Company has now paid claims on all of its BIG Puerto Rico exposures except the Municipal Finance Agency (MFA).

    On June 30, 2016, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was signed into law. PROMESA established a seven-member financial oversight and management board (FOMB) with authority to require that balanced budgets and fiscal plans be adopted and implemented by Puerto Rico. Title III of PROMESA provides for a process analogous to a voluntary bankruptcy process under chapter 9 of the United States Bankruptcy Code (Bankruptcy Code).

The Company has disagreed with a number of the actions taken by the Commonwealth, the FOMB and others with respect to obligations the Company insures, and has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to these matters. In addition, the Commonwealth, the FOMB and others have taken legal action naming the Company as party. See “Puerto Rico Litigation” below.

Despite these concerns, the Company has engaged in negotiations with the FOMB and other stakeholders in an attempt to reach a consensual resolution, with particular progress being made in the early part of 2021. On February 22, 2021, AGM and AGC agreed to support the revised Puerto Rico General Obligation (GO) and Public Buildings Authority (PBA) plan support agreement (PSA) (GO/PBA PSA) subject to reaching a satisfactory resolution with respect to the Puerto Rico Highways and Transportation Authority (PRHTA) and the Puerto Rico Convention Center District Authority (PRCCDA) bonds they insure. On May 5, 2021, AGM and AGC entered into a PSA (HTA/CCDA PSA) with certain other stakeholders, the Commonwealth, and the FOMB with respect to the PRHTA and the PRCCDA bonds they insure. With the signing of the HTA/CCDA PSA and the expiration of the related withdrawal rights of AGM and AGC under the GO/PBA PSA, AGM and AGC became bound to the GO/PBA PSA. Previously, on May 3, 2019, AGM and AGC entered into a restructuring support agreement (PREPA RSA; together with the GO/PBA PSA and the HTA/CCDA PSA, the Support Agreements) with the Puerto Rico Electric Power Authority (PREPA) and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth and FOMB, that is intended to, among other things, provide a framework for the consensual resolution of the treatment of the Company’s insured PREPA revenue bonds.
    
With the signing of the HTA/CCDA PSA and with the GO/PBA PSA now binding the Company, $1,708 million, or 92% of the Company’s insured net par outstanding of Puerto Rico exposures is covered by a Support Agreement. Each Support Agreement includes a number of conditions and the related debtor’s plan of adjustment must be approved by the Title III court, so there can be no assurance that the consensual resolutions embodied in the Support Agreements will be achieved in their current form, or at all. Even if the consensual resolutions embodied in the Support Agreements are approved and documented as contemplated, they may be subject to further legal challenge or the parties to the legal documents may not live up to their
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obligations. Both economic and political developments, including those related to the COVID-19 pandemic, may impact implementation of the consensual resolutions contemplated by the Support Agreements and the amount the Company realizes under the Support Agreements and related debtors’ plans of adjustment, as well as the performance or resolution of the Puerto Rico exposures not subject to a Support Agreement. The impact of developments relating to Puerto Rico during any quarter or year could be material to the Company's results of operations and shareholders' equity.

Support Agreements

GO/PBA PSA. As of March 31, 2021, the Company had $576 million of insured net par outstanding that is now covered by the GO/PBA PSA: $574 million insured net par outstanding of GOs and $2 million insured net par outstanding of PBA bonds. The GO bonds are supported by the good faith, credit and taxing power of the Commonwealth, while the PBA bonds are supported by a pledge of the rents due under leases of government facilities to departments, agencies, instrumentalities and municipalities of the Commonwealth, and that benefit from a Commonwealth guaranty supported by a pledge of the Commonwealth’s good faith, credit and taxing power. The Commonwealth and the PBA defaulted on their debt service payments due on July 1, 2016, and the Company has been making claim payments on these bonds since that date. The FOMB has filed a petition under Title III of PROMESA with respect to both the Commonwealth and the PBA.

    On February 22, 2021, the FOMB entered into the GO/PBA PSA with certain GO and PBA bondholders and insurers (including AGM) representing approximately $11.7 billion, or approximately 62% of the aggregate amount of general obligation and PBA bond claims. In general, the GO/PBA PSA provides for lower Commonwealth debt service payments per annum relative to the Plan Support Agreement signed in February 2020 (February 2020 PSA), extends the tenor of new recovery bonds, increases the amount of cash distributed to creditors, and provides additional consideration in the form of a contingent value instrument (CVI). This CVI is intended to provide creditors with additional returns tied to outperformance of the Puerto Rico 5.5% Sales and Use Tax receipts against May 2020 certified fiscal plan projections, subject to annual and lifetime caps. The GO/PBA PSA provides for different recoveries based on the bonds’ vintage issuance date, with GO and PBA bonds issued before 2011 (Vintage) receiving higher recoveries than GO and PBA bonds issued in 2011 and thereafter (except that, for purposes of the GO PSA, Series 2011A GO bonds would be treated as Vintage bonds).

On May 11, 2021, the FOMB filed with the Title III court a Third Amended Title III Joint Plan of Adjustment of the Commonwealth (Amended POA) that seeks to restructure approximately $35 billion of debt (including the GO bonds) and other claims against the government of Puerto Rico and certain entities and $50 billion in pension obligations consistent with the terms of the settlements embodied in the GO/PBA PSA and the HTA/CCDA PSA.

HTA/CCDA PSA. As of March 31, 2021, the Company had $643 million of insured net par outstanding that is now covered by the HTA/CCDA PSA: $244 million insured net par outstanding of PRHTA (transportation revenue) bonds and $399 million insured net par outstanding of PRHTA (highway revenue) bonds. The transportation revenue bonds are secured by a subordinate gross lien on gasoline and gas oil and diesel oil taxes, motor vehicle license fees and certain tolls, plus a first lien on up to $120 million annually of taxes on crude oil, unfinished oil and derivative products. The highway revenue bonds are secured by a gross lien on gasoline and gas oil and diesel oil taxes, motor vehicle license fees and certain tolls. The PRCCDA bonds are secured by certain hotel tax revenues. The PRHTA defaulted on the full July 1, 2017 insured debt service payment, and the Company has been making claim payments on these bonds since that date. The FOMB has filed a petition under Title III of PROMESA with respect to PRHTA.

The HTA/CCDA PSA provides for payments to AGM consisting of (i) cash, (ii) new bonds expected to be backed by toll revenue (Toll Bonds); and (iii) a CVI. Under the HTA/CCDA PSA, bondholders and bond insurers of PRHTA will receive, in the aggregate, $389 million of cash; $1,245 million in Toll Bonds; and the CVI.

    On May 27, 2021, the FOMB certified a revised fiscal plan for PRHTA. The revised certified PRHTA fiscal plan will need to be further revised to be consistent with the HTA/CCDA PSA.

    PREPA RSA. As of March 31, 2021, the Company had $489 million insured net par outstanding of PREPA obligations subject to the PREPA RSA. The PREPA obligations are secured by a lien on the revenues of the electric system. The Company has been making claim payments on these bonds since July 1, 2017. On July 2, 2017, the FOMB commenced proceedings for PREPA under Title III of PROMESA.

    The PREPA RSA contemplates the exchange of PREPA’s existing revenue bonds for new securitization bonds issued by a special purpose corporation and secured by a segregated transition charge assessed on electricity bills. Under the PREPA RSA, the Company has the option to guarantee its allocated share of the securitization exchange bonds, which may then be offered and sold in the capital markets. The Company believes that the additive value created by attaching its guarantee to the
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securitization exchange bonds would materially improve its overall recovery under the transaction, as well as generate new insurance premiums; and therefore that its economic results could differ from those reflected in the PREPA RSA.

On May 27, 2021, the FOMB certified a revised fiscal plan for PREPA. The revised certified PREPA fiscal plan will need to be further revised to be consistent with the PREPA RSA.

Other Puerto Rico Exposures

    MFA. As of March 31, 2021, the Company had $151 million net par outstanding of bonds issued by MFA secured by a lien on local property tax revenues. The MFA bond accounts contained sufficient funds to make the MFA bond payments due through the date of this filing that were guaranteed by the Company, and those payments were made in full.

Puerto Rico Litigation

    The Company believes that a number of the actions taken by the Commonwealth, the FOMB and others with respect to obligations it insures are illegal or unconstitutional or both, and has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to these matters. In addition, the Commonwealth, the FOMB and others have taken legal action naming the Company as party.
    
    Currently there are numerous legal actions relating to the default by the Commonwealth and certain of its entities on debt service payments, and related matters, and the Company is a party to a number of them. On July 24, 2019, Judge Laura Taylor Swain of the United States District Court for the District of Puerto Rico (Federal District Court for Puerto Rico) held an omnibus hearing on litigation matters relating to the Commonwealth. At that hearing, she imposed a stay through November 30, 2019, on a series of adversary proceedings and contested matters amongst the stakeholders and imposed mandatory mediation on all parties through that date. On October 28, 2019, Judge Swain extended the stay until December 31, 2019, and has since stayed the proceedings pending the Court's determination on the Commonwealth's plan of adjustment.

    The Company expects that the issues that remain relevant raised in several of the stayed proceedings commenced by the Company or the FOMB, either prior to or following the filing of petitions under Title III of PROMESA, to be addressed either in other subsequently filed adversary proceedings described below or in the proceedings to confirm the plans of adjustment for the Commonwealth, PRHTA or other instrumentalities of the Commonwealth. Issues that the Company believes remain relevant from these earlier proceedings include (i) whether the clawback of certain excise taxes and revenues pledged to secure payment of bonds issued by PRHTA, PRCCDA and Puerto Rico Infrastructure Financing Authority (PRIFA) should be invalidated, (ii) whether administrative rent claims of the PBA against the Commonwealth should be disallowed, (iii) whether certain later vintage Commonwealth general obligation bonds should be invalidated as having been issued in violation of the Puerto Rico constitutional debt limit, (iv) whether Commonwealth general obligation bonds are secured by consensual or statutory liens, and (v) the validity, enforceability and extent of security interests in PRHTA revenues securing PRHTA bonds. One of the stayed proceedings concerns a PREPA RSA entered in 2015 and is no longer relevant in light of the PREPA RSA entered in by the FOMB, the Company and other parties in 2019. For so long as the Company is a party to the Support Agreements, its participation as an adverse party to the FOMB in any PROMESA litigation is to be stayed, with the Company supporting the positions of the FOMB in seeking confirmation of the Commonwealth, PRCCDA and PRHTA plans of adjustment and the approval of the PREPA RSA so long as those plans of adjustment and the PREPA RSA conform to the respective requirements of the Support Agreements.

The Company is involved in three proceedings which have been adjourned indefinitely to permit the FOMB to assess the financial impact of the pandemic on PREPA and its request for approval of the PREPA RSA settlement. The court has required, and the FOMB has provided, periodic reports. Issues the Company believes remain relevant from these proceedings include (i) the approval of the PREPA RSA, (ii) whether certain parties that either had advanced funds to PREPA for the purchase of fuel or had succeeded to such claims can obtain declarations that the advances made by such parties are "current expenses" as defined in the trust agreement pursuant to which the PREPA bonds were issued (Current Expenses) and there is no valid lien securing the PREPA bonds unless and until such parties are paid in full, as well as orders subordinating the PREPA bondholders’ lien and claim to such parties’ claims and declaring the PREPA RSA null and void, and (iii) whether the retirement system for PREPA employees (SREAEE) can obtain declarations that amounts owed to SREAEE are Current Expenses, that there is no valid lien securing the PREPA bonds other than on amounts in the sinking funds and that SREAEE is a third-party beneficiary of certain trust agreement provisions, as well as orders subordinating the PREPA bondholders’ lien and claim to the SREAEE claims. The Company believes these proceedings will resume at some point in the future and the relevant issues resolved in proceedings before the Title III court.

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On May 23, 2018, AGM and AGC filed an adversary complaint in the Federal District Court for Puerto Rico seeking a judgment declaring that (i) the FOMB lacked authority to develop or approve the new fiscal plan for Puerto Rico which it certified on April 19, 2018 (Revised Fiscal Plan); (ii) the Revised Fiscal Plan and the Fiscal Plan Compliance Law (Compliance Law) enacted by the Commonwealth to implement the original Commonwealth Fiscal Plan violate various sections of PROMESA; (iii) the Revised Fiscal Plan, the Compliance Law and various moratorium laws and executive orders enacted by the Commonwealth to prevent the payment of debt service (a) are unconstitutional and void because they violate the Contracts, Takings and Due Process Clauses of the U.S. Constitution and (b) are preempted by various sections of PROMESA; and (iv) no Title III plan of adjustment based on the Revised Fiscal Plan can be confirmed under PROMESA. On August 13, 2018, the court-appointed magistrate judge granted the Commonwealth's and the FOMB's motion to stay this adversary proceeding pending a decision by the United States Court of Appeals for the First Circuit (First Circuit) in an appeal by Ambac Assurance Corporation of an unrelated adversary proceeding decision, which the First Circuit rendered on June 24, 2019. On July 24, 2019, Judge Swain announced a court-imposed stay of a series of adversary proceedings and contested matters through November 30, 2019, with a mandatory mediation element. Judge Swain extended the stay until December 31, 2019, and further extended the stay until March 11, 2020. Pursuant to the request of AGM, AGC and the defendants, Judge Swain ordered on September 6, 2019 that the claims in this complaint be addressed in the Commonwealth plan confirmation process and be subject to her July 24, 2019 stay and mandatory mediation order and be addressed in the Commonwealth plan confirmation process. Judge Swain postponed certain deadlines and hearings, including those related to the plan of adjustment, indefinitely as a result of the COVID-19 pandemic. Pursuant to the court’s order, the FOMB filed an updated status report on September 9, 2020, as well as a subsequent update on October 25, 2020, regarding the effects of the pandemic on the Commonwealth. Subsequently, the court ordered the FOMB to file a further updated report by December 8, 2020 and, no later than February 10, 2021, an amended Commonwealth disclosure statement and plan of adjustment or, at a minimum, a term sheet outlining such amendments necessitated by the COVID-19 pandemic. On February 10, 2021, the FOMB filed a motion to extend the deadline to March 8, 2021 given a recent preliminary agreement with creditors. On March 8, 2021, the FOMB filed a disclosure statement and a second amended Commonwealth plan of adjustment intended to implement a Plan Support Agreement dated as of February 22, 2021, to which AGM and AGC had given their support conditioned on the Plan Support Agreement becoming part of a consensually negotiated and comprehensive solution that would include PRHTA and PRCCDA. On May 5, 2021, the FOMB announced the execution of the Plan Support Agreement that includes PRHTA and PRCCDA. In light of the Plan Support Agreement, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC.

    On January 16, 2020, AGM and AGC along with certain other monoline insurers filed in Federal District Court for Puerto Rico a motion (amending and superseding a motion filed by AGM and AGC on August 23, 2019) for relief from the automatic stay imposed pursuant to Title III of PROMESA to permit AGM and AGC, and the other moving parties to enforce in another forum the application of the revenues securing the PRHTA bonds (the PRHTA Revenues) or, in the alternative, for adequate protection for their property interests in PRHTA Revenues. A preliminary hearing on the motion occurred on June 4, 2020. Pursuant to orders issued on July 2, 2020 and September 9, 2020, Judge Swain denied the motion to the extent it sought stay relief or adequate protection with respect to liens or other property interests in PRHTA Revenues that have not been deposited in the related bond resolution funds. On September 23, 2020, AGM and AGC filed a notice of appeal of this denial and the underlying determinations to the First Circuit, which held oral arguments on February 4, 2021. On March 3, 2021, the First Circuit issued an opinion, finding that the District Court had not abused its discretion in denying lift stay relief. The First Circuit did not rule on whether movants had a property interest, noting that issue was actively being adjudicated before the District Court, which will eventually decide on a final basis, and on a more developed record, whether the insurers have a property interest. In light of the Plan Support Agreement, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC.

    On January 16, 2020, the FOMB brought an adversary proceeding in the Federal District Court for Puerto Rico against AGM, AGC and other insurers of PRHTA bonds, objecting to the bond insurers claims in the Commonwealth Title III proceedings and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee, for lack of standing and for any assertions of secured status or property interests with respect to PRHTA Revenues. Motions for partial summary judgment were filed on April 28, 2020, and a hearing was held on September 23, 2020. On January 20, 2021, Judge Swain ordered that certain discovery identified by the insurers was appropriate prior to a determination on the partial summary judgment motion. In light of the Plan Support Agreement, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC

    On January 16, 2020, the FOMB, on behalf of the PRHTA, brought an adversary proceeding in the Federal District Court for Puerto Rico against AGM, AGC and other insurers of PRHTA bonds, objecting to the bond insurers claims in the PRHTA Title III proceedings and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee and for any assertions of secured status or property interests with respect to PRHTA Revenues. In light of the Plan Support Agreement, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC.
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On January 16, 2020, AGM and AGC along with certain other monoline insurers and the trustee for the PRIFA Rum Tax Bonds filed in Federal District Court for Puerto Rico a motion concerning application of the automatic stay to the revenues securing the PRIFA bonds (the PRIFA Revenues), seeking an order lifting the automatic stay so that AGM and AGC and the other moving parties can enforce rights respecting the PRIFA Revenues in another forum or, in the alternative, that the Commonwealth must provide adequate protection for such parties’ lien on the PRIFA Revenues. A preliminary hearing on the motion occurred on June 4, 2020. Pursuant to orders issued on July 2, 2020 and September 9, 2020, Judge Swain denied the motion to the extent it sought stay relief or adequate protection with respect to PRIFA Revenues that have not been deposited in the related sinking fund. On September 23, 2020 AGM and AGC filed a notice of appeal of this denial and the underlying determinations to the First Circuit, which held oral arguments on February 4, 2021. On March 3, 2021, the First Circuit issued an opinion, finding that the District Court had not abused its discretion in denying lift stay relief. The First Circuit did not rule on whether movants had a property interest, noting that issue was actively being adjudicated before the District Court, which will eventually decide on a final basis, and on a more developed record, whether the insurers have a property interest. In light of the Plan Support Agreement, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC.

On January 16, 2020, the FOMB brought an adversary proceeding in the Federal District Court for Puerto Rico against AGC and other insurers of PRIFA bonds, objecting to the bond insurers claims and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee, for lack of standing and for any assertions of secured status or ownership interests with respect to PRIFA Revenues. Motions for partial summary judgment were filed on April 28, 2020 and a hearing was held on September 23, 2020. On January 20, 2021, Judge Swain ordered that certain discovery identified by the insurers was appropriate prior to a determination on the partial summary judgment motion. In light of the Plan Support Agreement, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC.

    On January 16, 2020, AGM and AGC along with certain other monoline insurers and the trustee for the PRCCDA bonds filed in Federal District Court for Puerto Rico a motion concerning application of the automatic stay to the revenues securing the PRCCDA bonds (the PRCCDA Revenues), seeking an order that an action to enforce rights respecting the PRCCDA Revenues in another forum is not subject to the automatic stay associated with the Commonwealth’s Title III proceeding or, in the alternative, if the court finds that the stay is applicable, lifting the automatic stay so that AGM, AGC and the other moving parties can enforce such rights in another forum or, in the further alternative, if the court finds the automatic stay applicable and does not lift it, that the Commonwealth must provide adequate protection for such parties’ lien on the PRCCDA Revenues. A preliminary hearing on the motion occurred on June 4, 2020. On July 2, 2020, Judge Swain held that a proposed enforcement action by AGM, AGC and other moving parties in another court would be subject to the automatic stay, that such parties have a colorable claim to a security interest in funds deposited in the “Transfer Account” and have shown a reasonable likelihood that a certain account held by Scotiabank is the Transfer Account, but denied the motion to the extent it sought stay relief or adequate protection with respect to PRCCDA Revenues that have not been deposited in the Transfer Account. Pursuant to a memorandum issued on September 9, 2020, Judge Swain held that the final hearing with respect to the Transfer Account shall be deemed to have occurred when the court issues its final decisions in the PRCCDA Adversary Proceeding concerning the identity of the Transfer Account and the parties’ respective rights in the alleged Transfer Account monies. Following the final hearing with respect to the Transfer Account, AGM and AGC intend to appeal the portion of the opinion constituting a denial and the underlying determinations related to the denial to the First Circuit. In light of the Plan Support Agreement, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC.

On January 16, 2020, the FOMB brought an adversary proceeding in the Federal District Court for Puerto Rico against AGC and other insurers of PRCCDA bonds, objecting to the bond insurers claims and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee and for any assertions of secured status or property interests with respect to PRCCDA Revenues. Motions for partial summary judgment were filed on April 28, 2020, and a hearing was held on September 23, 2020. On January 20, 2021, Judge Swain ordered that certain discovery identified by the insurers was appropriate prior to a determination on the partial summary judgment motion. In light of the Plan Support Agreement, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC.

Puerto Rico Par and Debt Service Schedules

    All Puerto Rico exposures are internally rated BIG, except PBA and PRHTA (Transportation revenue) second-to-pay policies on affiliate exposures which are rated AA based on the obligation of the Company's affiliate to pay under its insurance policy if the obligor fails to pay. The following tables show the Company’s insured exposure to general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations.

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Puerto Rico
Gross Par and Gross Debt Service Outstanding
Gross Par OutstandingGross Debt Service Outstanding
As ofAs of
 March 31, 2021December 31, 2020March 31, 2021December 31, 2020
 (in millions)
Exposure to Puerto Rico$2,611 $2,611 $3,709 $3,772 

Puerto Rico
Net Par Outstanding
As of
March 31, 2021December 31, 2020
 (in millions)
Puerto Rico Exposures Subject to a Support Agreement
Commonwealth of Puerto Rico - GO (1)$574 $574 
PBA (Second-to-pay policies on affiliate exposure) (1)
Subtotal - GO/PBA PSA576 576 
PRHTA (Transportation revenue) 165 165 
PRHTA (Transportation revenue) (Second-to-pay policies on affiliate exposure) 79 79 
PRHTA (Transportation revenue) total (1)244 244 
PRHTA (Highway revenue) (1)399 399 
Subtotal - HTA/CCDA PSA643 643 
PREPA (1)489 489 
Subtotal Subject to a Support Agreement1,708 1,708 
Other Puerto Rico Exposures
MFA151 151 
Subtotal Other Puerto Rico Exposures151 151 
Total net exposure to Puerto Rico$1,859 $1,859 
__________________
(1)    As of the date of this filing, the FOMB has certified a filing under Title III of PROMESA for these exposures.

    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 rated BIG by the Company. The Company guarantees payments of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis. In the event that obligors default on their obligations, the Company would only be required to pay the shortfall between the debt service due in any given period and the amount paid by the obligors.

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Amortization Schedule of Puerto Rico BIG Net Par Outstanding
and Net Debt Service Outstanding
As of March 31, 2021
Scheduled BIG Net Par AmortizationScheduled BIG Net Debt Service Amortization
(in millions)
2021 (April 1 - June 30)$— $
2021 (July 1 - September 30)74 116 
2021 (October 1 - December 31)— 
Subtotal 202174 120 
2022108 193 
2023128 208 
2024150 224 
2025139 205 
2026-2030495 745 
2031-2035542 666 
2036-2037142 154 
Total$1,778 $2,515 

Exposure to the U.S. Virgin Islands

    As of March 31, 2021, the Company had $318 million insured net par outstanding to the U.S. Virgin Islands and its related authorities (USVI), of which it rated $141 million BIG. The $177 million USVI net par the Company rated investment grade primarily consisted of bonds secured by a lien on matching fund revenues related to excise taxes on products produced in the USVI and exported to the U.S., primarily rum. The $141 million BIG USVI net par consisted of (a) Public Finance Authority bonds secured by a gross receipts tax and the general obligation, full faith and credit pledge of the USVI and (b) bonds of the Virgin Islands Water and Power Authority secured by a net revenue pledge of the electric system.

    In 2017, Hurricane Irma caused significant damage in St. John and St. Thomas, while Hurricane Maria made landfall on St. Croix as a Category 4 hurricane on the Saffir-Simpson scale, causing loss of life and substantial damage to St. Croix’s businesses and infrastructure, including the power grid. More recently, the COVID-19 pandemic and evolving governmental and private responses to the pandemic have been impacting the USVI economy, especially the tourism sector. The USVI is benefiting from the federal response to the 2017 hurricanes and COVID-19 and has made its debt service payments to date.

3.    Expected Loss to be Paid (Recovered)

    Management compiles and analyzes loss information for all exposures on a consistent basis, in order to effectively evaluate and manage the economics and liquidity of the entire insured portfolio. The Company monitors and assigns ratings and calculates expected loss to be paid (recovered) in the same manner for all its exposures regardless of form or differing accounting models. This note provides information regarding expected claim payments to be made under all contracts in the insured portfolio.

    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 it. Those assumptions consider the relevant facts and circumstances and are consistent with the information tracked and monitored through the Company's risk-management activities. Expected loss to be paid (recovered) is important from a liquidity perspective in that it represents the present value of amounts that the Company expects to pay or recover in future periods for all contracts.

The expected loss to be paid (recovered) is equal to the present value of expected future cash outflows for claim and loss adjustment expense (LAE) payments, net of (i) inflows for expected salvage, subrogation and other recoveries, and (ii) excess spread on underlying collateral. 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. Net expected loss to be paid (recovered) is also net of amounts ceded to reinsurers.

In circumstances where the Company has purchased its own insured obligations that had expected losses, and in cases where issuers of insured obligations elected or the Company and an issuer mutually agreed as part of a negotiation to deliver the
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underlying collateral, insured obligation or a new security to the Company, expected loss to be paid (recovered) is reduced and the asset received is prospectively accounted for under the applicable guidance for that instrument.

Economic loss development represents the change in net expected loss to be paid (recovered) attributable to the effects of 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 Company’s loss reserve committees estimate expected loss to be paid (recovered) for all contracts by reviewing analyses that consider 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, sector-driven loss severity assumptions and/or judgmental assessments. 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, 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 loss 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 life of most contracts.

    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, severity of loss, economic projections, governmental actions, negotiations, recovery rates, delinquency and prepayment rates (with respect to RMBS), 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 assumptions and probability weightings of its scenarios based on public information as well as nonpublic information obtained through its surveillance and loss mitigation activities. Such information includes management's view of the potential impact of COVID-19 on its distressed exposures. Management assesses the possible implications of such information on each insured obligation, considering the unique characteristics of each transaction.

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 projections of losses may be subject to
considerable volatility and may not reflect the Company's ultimate claims paid.

    In some instances, the terms of the Company's policy give it 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 uses cash but reduces projected future losses.

    The following tables present a roll forward of net expected loss to be paid (recovered) for all contracts under all accounting models (insurance, derivative and VIE). The Company used risk-free rates for U.S. dollar denominated obligations that ranged from 0.00% to 2.49% with a weighted average of 1.08% as of March 31, 2021 and 0.00% to 1.72% with a weighted average of 0.69% as of December 31, 2020. Expected losses to be paid for transactions denominated in currencies other than the U.S. dollar represented approximately 31.4% and 32.2% of the total as of March 31, 2021 and December 31, 2020, respectively. The weighted average discount rates for non-U.S. dollar denominated transactions was close to zero primarily due to the low to negative interest rate environment in Europe.

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Net Expected Loss to be Paid (Recovered)
Roll Forward
First Quarter
 20212020
 (in millions)
Net expected loss to be paid (recovered), beginning of period$94 $215 
Economic loss development (benefit) due to:
Accretion of discount— 
Changes in discount rates(5)(13)
Changes in timing and assumptions(31)
Total economic loss development (benefit)(2)(43)
Net (paid) recovered losses(27)(28)
Net expected loss to be paid (recovered), end of period$65 $144 

Net Expected Loss to be Paid (Recovered)
Roll Forward by Sector

First Quarter 2021
Net Expected Loss to be Paid (Recovered) as of December 31, 2020Economic Loss Development (Benefit)(Paid)
Recovered
Losses (1)
Net Expected Loss to be Paid (Recovered) as of March 31, 2021
(in millions)
Public finance:
U.S. public finance$(8)$(8)$(43)$(59)
Non-U.S. public finance29 (10)— 19 
Public finance21 (18)(43)(40)
Structured finance:
U.S. RMBS66 16 16 98 
Other structured finance— — 
Structured finance73 16 16 105 
Total$94 $(2)$(27)$65 

First Quarter 2020
Net Expected Loss to be Paid (Recovered) as of December 31, 2019Economic Loss Development (Benefit)(Paid)
Recovered
Losses (1)
Net Expected Loss to be Paid (Recovered) as of March 31, 2020
(in millions)
Public finance:
U.S. public finance$143 $(1)$(42)$100 
Non-U.S. public finance19 — 20 
Public finance162 — (42)120 
Structured finance:
U.S. RMBS45 (43)14 16 
Other structured finance— — 
Structured finance53 (43)14 24 
Total$215 $(43)$(28)$144 
__________________
(1)     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.

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    The tables above include (1) LAE paid of $2 million and $1 million for First Quarter 2021 and 2020, respectively, and (2) expected LAE to be paid of $6 million as of March 31, 2021 and $8 million as of December 31, 2020.

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 ofFirst Quarter
March 31, 2021December 31, 202020212020
 (in millions)
Insurance (see Notes 4 and 5)$10 $34 $$(50)
FG VIEs (see Note 7) 55 60 (5)
Total$65 $94 $(2)$(43)


Selected U.S. Public Finance Transactions
    
    The Company insured general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $1.9 billion net par as of March 31, 2021, $1.8 billion of which was BIG. For additional information regarding the Company's Puerto Rico exposure, see "Exposure to Puerto Rico" in Note 2, 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 Bankruptcy Code became effective. As of March 31, 2021, the Company’s net par subject to the plan consisted of $57 million of pension obligation bonds. As part of the plan of adjustment, the City will repay claims paid on the pension obligation bonds from certain fixed payments and certain variable payments contingent on the City’s revenue growth, which will likely be impacted by COVID-19.
    
    The Company projects its total net expected recovery across its troubled U.S. public finance exposures as of March 31, 2021, including those mentioned above, to be $59 million, compared with a net expected recovery of $8 million as of December 31, 2020. The total net expected loss for troubled U.S. public finance exposures is net of a credit for estimated future recoveries of claims already paid. As of March 31, 2021 that credit was $409 million compared with $492 million as of December 31, 2020. The Company’s net expected losses incorporate management’s probability weighted estimates of all possible scenarios.

    The economic benefit for U.S. public finance transactions was $8 million during First Quarter 2021, and was primarily attributable to Puerto Rico exposures. The economic benefit attributable to the Company’s Puerto Rico exposures reflects adjustments the Company made to the assumptions it uses in its scenarios based on the public information as discussed under "Exposure to Puerto Rico" in Note 2, Outstanding Exposure as well as nonpublic information related to its loss mitigation activities during the period.

Selected Non - U.S. Public Finance Transactions
    
    Expected loss to be paid for non-U.S. public finance transactions was $19 million as of March 31, 2021, compared with $29 million as of December 31, 2020, primarily consisting of: (i) an obligation backed by the availability and toll revenues of a major arterial road, which has been underperforming due to higher costs compared with expectations at underwriting, and (ii) an obligation for which the Company has been paying claims because of the impact of negative Euro Interbank Offered Rate (Euribor) on the transaction.

The economic benefit for non-U.S. public finance transactions, including those mentioned above, was approximately $10 million during First Quarter 2021, and was due to the restructuring of certain exposures and the impact of higher Euribor.
 
U.S. RMBS Loss Projections

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 and any expected representation and warranty (R&W) recoveries/payables to the projected
22


performance of the collateral over time. The resulting projected claim payments or reimbursements are then discounted using risk-free rates.

    The Company's RMBS loss projection methodology assumes that the housing and mortgage markets will improve. Each period the Company makes a judgment as to whether to change the assumptions it uses to make RMBS loss projections based on its observation during the period of the performance of its insured transactions (including early-stage delinquencies, late-stage delinquencies and loss severity) as well as the residential property market and economy in general, and, to the extent it observes changes, it makes a judgment as to whether those changes are normal fluctuations or part of a trend. The assumptions that the Company uses to project RMBS losses are shown in the sections below.

Net Economic Loss Development (Benefit)
U.S. RMBS
First Quarter
20212020
 (in millions)
First lien U.S. RMBS$25 $(43)
Second lien U.S. RMBS(9)— 

As of March 31, 2021, the Company had a net R&W payable of $64 million to R&W counterparties, compared with a net R&W payable of $83 million as of December 31, 2020. The Company’s agreements with providers of R&W generally provide for reimbursement to the Company as claim payments are made and, to the extent the Company later receives reimbursements of such claims from excess spread or other sources, for the Company to provide reimbursement to the R&W providers. When the Company projects receiving more reimbursements in the future than it projects to pay in claims on transactions covered by R&W settlement agreements, the Company has a net R&W payable.

U.S. First Lien RMBS Loss Projections: Alt-A First Lien, Option ARM and Subprime

    The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that are or in the past twelve months have been two or more payments behind, have been modified, are in foreclosure, or have been foreclosed upon). Changes in the amount of non-performing loans from the amount projected in the previous period are one of the primary drivers of loss projections in this portfolio. In order to determine the number of defaults resulting from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of various non-performing categories. The Company arrived at its liquidation rates based on data purchased from a third party provider and assumptions about how delays in the foreclosure process and loan modifications may ultimately affect the rate at which loans are liquidated. Each quarter the Company reviews the most recent 12 months of this data and (if necessary) adjusts its liquidation rates based on its observations. The following table shows liquidation assumptions for various non-performing categories.

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First Lien Liquidation Rates
As of
March 31, 2021 December 31, 2020
Delinquent/Modified in the Previous 12 Months
Alt-A 20%20%
Option ARM2020
Subprime2020
30 - 59 Days Delinquent
Alt-A3535
Option ARM3535
Subprime3030
60 - 89 Days Delinquent
Alt-A 4040
Option ARM4545
Subprime4040
90 + Days Delinquent
Alt-A 5555
Option ARM6060
Subprime4545
Bankruptcy
Alt-A 4545
Option ARM5050
Subprime4040
Foreclosure
Alt-A 6060
Option ARM6565
Subprime5555
Real Estate Owned
All100100

    Towards the end of the first quarter of 2020, lenders began offering mortgage borrowers the option to forbear interest
and principal payments of their loans due to the COVID -19 pandemic, and to repay such amounts at a later date. This resulted
in an increase in early-stage delinquencies in RMBS transactions during the second quarter of 2020 and late-stage delinquencies during the second half of 2020. Early stage delinquencies have recovered to pre-pandemic levels, but late stage delinquencies continue to be elevated as many borrowers remain on COVID-19 forbearance plans. The Company's expected loss estimate assumes that a portion of delinquencies are due to COVID-19 related forbearances, and applies a liquidation rate of 20% to such loans. This is the same liquidation rate assumption used when estimating expected losses for current loans modified or delinquent within the last 12 months, as the Company believes this is the category that most resembles the population of new forbearance delinquencies.

    While the Company uses liquidation rates as described above to project defaults of non-performing loans (including current loans modified or delinquent within the last 12 months), it projects defaults on presently current loans by applying a conditional default rate (CDR) trend. The start of that CDR trend is based on the defaults the Company projects will emerge from currently nonperforming, recently nonperforming and modified loans. The total amount of expected defaults from the non-performing loans is translated into a constant CDR (i.e., the CDR plateau), which, if applied for each of the next 36 months, would be sufficient to produce approximately the amount of defaults that were calculated to emerge from the various delinquency categories. The CDR thus calculated individually on the delinquent collateral pool for each RMBS is then used as the starting point for the CDR curve used to project defaults of the presently performing loans.

In the most heavily weighted scenario (the base case), after the initial 36-month CDR plateau period, each transaction’s CDR is projected to improve over 12 months to an intermediate CDR (calculated as 20% of its CDR plateau); that intermediate CDR is held constant and then steps to a final CDR of 5% of the CDR plateau. In the base case, the Company
24


assumes the final CDR will be reached 2.25 years after the initial 36-month CDR plateau period. Under the Company’s methodology, defaults projected to occur in the first 36 months represent defaults that can be attributed to loans that were modified or delinquent in the last 12 months or that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected CDR trend after the first 36-month period represent defaults attributable to borrowers that are currently performing or are projected to reperform.

Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. Loss severities experienced in first lien transactions had reached historically high levels, and the Company is assuming in the base case that the still elevated levels generally will continue for another 18 months. The Company determines its initial loss severity based on actual recent experience. Each quarter the Company reviews available data and (if necessary) adjusts its severities based on its observations. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning after the initial 18-month period, declining to 40% in the base case over 2.5 years.

The following table shows the range as well as the average, weighted by outstanding net insured par, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for vintage 2004 - 2008 first lien U.S. RMBS.
Key Assumptions in Base Case Expected Loss Estimates
First Lien RMBS
As of March 31, 2021As of December 31, 2020
RangeWeighted AverageRangeWeighted Average
Alt-A First Lien
Plateau CDR3.5%-9.7%5.7%3.5%-9.7%5.8%
Final CDR0.2%-0.5%0.3%0.2%-0.5%0.3%
Initial loss severity:
2005 and prior60%60%
200670%70%
2007+70%70%
Option ARM
Plateau CDR2.8%-6.3%4.9%2.8%-6.4%5.1%
Final CDR0.1%-0.3%0.2%0.1%-0.3%0.3%
Initial loss severity:
2005 and prior60%60%
200660%60%
2007+60%60%
Subprime
Plateau CDR3.8%-7.3%5.6%4.4%-7.5%5.6%
Final CDR0.2%-0.4%0.3%0.2%-0.4%0.3%
Initial loss severity:
2005 and prior60%60%
200670%70%
2007+70%70%


The rate at which the principal amount of loans is voluntarily prepaid may impact both the amount of losses projected (since that amount is a function of the CDR, the loss severity and the loan balance over time) as well as the amount of 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). The assumption for the voluntary conditional prepayment rate (CPR) follows a similar pattern to that of the CDR. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final CPR, which is assumed to be 15% in the base case. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. These CPR assumptions are the same as those the Company used for December 31, 2020.

25


In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien transactions by varying its assumptions of how fast a recovery is expected to occur. One of the variables used to model sensitivities was how quickly the CDR returned to its modeled equilibrium, which was defined as 5% of the initial CDR. The Company also stressed CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios as of March 31, 2021 and December 31, 2020.

Total expected loss to be paid on all first lien U.S. RMBS was $74 million as of March 31, 2021 and $43 million as of December 31, 2020. The $25 million economic loss development in First Quarter 2021 for first lien U.S. RMBS was primarily attributable to lower excess spread of $33 million, partially offset by changes in discount rates of $11 million. Certain transactions benefit from excess spread 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 LIBOR, which increased in First Quarter 2021, and so decreased excess spread. The Company used a similar approach to establish its pessimistic and optimistic scenarios as of March 31, 2021 as it used as of December 31, 2020, increasing and decreasing the periods of stress from those used in the base case. LIBOR may be discontinued, and it is not yet clear how this will impact the calculation of the various interest rates in this portfolio referencing LIBOR.
    
In the Company's most stressful scenario where loss severities were assumed to rise and then recover over nine years and the initial ramp-down of the CDR was assumed to occur over 15 months, expected loss to be paid would increase from current projections by approximately $24 million for all first lien U.S. RMBS transactions.

In the Company's least stressful scenario where 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 nine months), expected loss to be paid would decrease from current projections by approximately $24 million for all first lien U.S. RMBS transactions.
 
U.S. Second Lien RMBS Loss Projections

Second lien RMBS transactions include both home equity lines of credit (HELOC) and closed end second lien mortgages. The Company believes the primary variable affecting its expected losses in second lien RMBS transactions is the amount and timing of future losses or recoveries in the collateral pool supporting the transactions. Expected losses are also a function of the structure of the transaction, the CPR of the collateral, the interest rate environment, and assumptions about loss severity.
 
In second lien transactions, the projection of near-term defaults from currently delinquent loans is relatively straightforward because loans in second lien transactions are generally “charged off” (treated as defaulted) by the securitization’s servicer once the loan is 180 days past due. The Company estimates the amount of loans that will default over the next six months by calculating current representative liquidation rates. As in the case of first lien transactions, second lien transactions have seen an increase in delinquencies because of COVID-19 related forbearances. The Company applies a 20% liquidation rate to such forborn loans, same as in first lien RMBS transactions.

Similar to first liens, the Company then calculates a CDR for six months, which is the period over which the currently delinquent collateral is expected to be liquidated. That CDR is then used as the basis for the plateau CDR period that follows the embedded plateau losses.

For the base case scenario, the CDR (the plateau CDR) was held constant for six months. Once the plateau period has ended, the CDR is assumed to gradually trend down in uniform increments to its final long-term steady state CDR. (The long-term steady state CDR is calculated as the constant CDR that would have yielded the amount of losses originally expected at underwriting.) In the base case scenario, the time over which the CDR trends down to its final CDR is 28 months. Therefore, the total stress period for second lien transactions is 34 months, representing six months of delinquent loan liquidations, followed by 28 months of decrease to the steady state CDR, the same as of December 31, 2020.

HELOC loans generally permit the borrower to pay only interest for an initial period (often ten years) and, after that period, require the borrower to make both the monthly interest payment and a monthly principal payment. This causes the borrower's total monthly payment to increase, sometimes substantially, at the end of the initial interest-only period. In the prior periods, as the HELOC loans underlying the Company's insured HELOC transactions reached their principal amortization period, the Company incorporated an assumption that a percentage of loans reaching their principal amortization periods would default around the time of the payment increase.

26


    The HELOC loans underlying the Company's insured HELOC transactions are now past their original interest-only reset date, although a significant number of HELOC loans were modified to extend the original interest-only period for another five years. As a result, the Company does not apply a CDR increase when such loans reach their principal amortization period. In addition, based on the average performance history, the Company applies a CDR floor of 2.5% for the future steady state CDR on all its HELOC transactions.

When a second lien loan defaults, there is generally a low recovery. The Company assumed, as of March 31, 2021 and December 31, 2020, that it will generally recover 2% of future defaulting collateral at the time of charge-off, with additional amounts of post charge-off recoveries projected to come in over time. A second lien on the borrower’s home may be retained in the Company's second lien transactions after the loan is charged off and the loss applied to the transaction, particularly in cases where the holder of the first lien has not foreclosed. If the second lien is retained and the value of the home increases, the servicer may be able to use the second lien to increase recoveries, either by arranging for the borrower to resume payments or by realizing value upon the sale of the underlying real estate. The Company evaluates its assumptions quarterly based on actual recoveries of charged-off loans observed from period to period. In instances where the Company is able to obtain information on the lien status of charged-off loans, it assumes there will be a certain level of future recoveries of the balance of the charged-off loans where the second lien is still intact. The Company projects future recoveries on these charged- off loans at the rate shown in the table below. Such recoveries are assumed to be received evenly over the next five years. Increasing the recovery rate to 30% would result in an economic benefit of $33 million, while decreasing the recovery rate to 10% would result in an economic loss of $33 million. 

The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected as well as the amount of excess spread. In the base case, an average CPR (based on experience of the past year) is assumed to continue until the end of the plateau before gradually increasing to the final CPR over the same period the CDR decreases. The final CPR is assumed to be 15% for second lien transactions (in the base case), which is lower than the historical average but reflects the Company’s continued uncertainty about the projected performance of the borrowers in these transactions. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. This pattern is consistent with how the Company modeled the CPR as of December 31, 2020. To the extent that prepayments differ from projected levels it could materially change the Company’s projected excess spread and losses.
 
In estimating expected losses, the Company modeled and probability weighted five scenarios, each with a different CDR curve applicable to the period preceding the return to the long-term steady state CDR. The Company believes that the level of the elevated CDR and the length of time it will persist and the ultimate prepayment rate are the primary drivers behind the amount of losses the collateral will likely suffer.

The Company continues to evaluate the assumptions affecting its modeling results. The Company believes the most important driver of its projected second lien RMBS losses is the performance of its HELOC transactions. Total expected loss to be paid on all second lien U.S. RMBS was $24 million as of March 31, 2021 and total expected recovery was $23 million as of December 31, 2020. The $9 million economic benefit in First Quarter 2021 was primarily attributable to a $7 million benefit related to improved performance in certain transactions and higher actual recoveries received for previously charged-off loans, and an $7 million benefit related to changes in discount rates, partially offset by lower excess spread of $5 million.

The following table shows the range as well as the average, weighted by net par outstanding, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for vintage 2004 - 2008 HELOCs.

27


Key Assumptions in Base Case Expected Loss Estimates
HELOCs
As of March 31, 2021As of December 31, 2020
RangeWeighted AverageRangeWeighted Average
Plateau CDR6.3%-17.1%13.1%7.2%-17.4%13.0%
Final CDR trended down to2.5%-3.2%2.5%2.5%-3.2%2.5%
Liquidation rates:
Delinquent/Modified in the Previous 12 Months20%20%
30 - 59 Days Delinquent3030
60 - 89 Days Delinquent4040
90+ Days Delinquent6060
Bankruptcy5555
Foreclosure5555
Real Estate Owned100100
Loss severity (1)98%98%
Projected future recoveries on previously charged-off loans20%20%
___________________
(1)    Loss severities on future defaults.

The Company’s base case assumed a six month CDR plateau and a 28 month ramp-down (for a total stress period of 34 months). The Company also modeled a scenario with a longer period of elevated defaults and another with a shorter period of elevated defaults. In the Company's most stressful scenario, increasing the CDR plateau to eight months and increasing the ramp-down by three months to 31 months (for a total stress period of 39 months) would increase the expected loss by approximately $5 million for HELOC transactions. On the other hand, in the Company's least stressful scenario, reducing the CDR plateau to four months and decreasing the length of the CDR ramp-down to 25 months (for a total stress period of 29 months), and lowering the ultimate prepayment rate to 10% would decrease the expected loss by approximately $5 million for HELOC transactions.

Recovery Litigation

    In the ordinary course of its business, the Company is involved in litigation with third parties to recover insurance losses paid in prior periods or prevent or reduce losses in the future. The impact, if any, of these and other proceedings on the amount of recoveries the Company 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 results of operations in that particular quarter or year.

The Company has asserted claims in a number of legal proceedings in connection with its exposure to Puerto Rico. See Note 2, Outstanding Exposure, for a discussion of the Company's exposure to Puerto Rico and related recovery litigation being pursued by the Company.

4.    Contracts Accounted for as Insurance

Premiums
    
The portfolio of outstanding exposures discussed in Note 2, Outstanding Exposure, and Note 3, Expected Loss to be Paid (Recovered), includes contracts that are accounted for as insurance contracts, derivatives, and consolidated FG VIEs. Amounts presented in this note relate only to contracts accounted for as insurance. See Note 8, Fair Value Measurement for information related to CDS and Note 7, Variable Interest Entities for amounts that are accounted for as consolidated FG VIEs.

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Net Earned Premiums
First Quarter
20212020
(in millions)
Scheduled net earned premiums$46 $48 
Accelerations from refundings and terminations11 
Accretion of discount on net premiums receivable
Net earned premiums (1)$60 $60 
____________________
(1)    Excludes $1 million for both First Quarter 2021 and 2020 related to consolidated FG VIEs.

Gross Premium Receivable
Roll Forward
First Quarter
20212020
(in millions)
Beginning of year$1,094 $1,019 
Gross written premiums on new business 76 43 
Gross premiums received(87)(47)
Adjustments:
Changes in the expected term(4)
Accretion of discount
Foreign exchange gain (loss) on remeasurement— (53)
March 31, (1)$1,089 $960 
____________________
(1)    Excludes $3 million as of both March 31, 2021 and March 31, 2020, related to consolidated FG VIEs.

Approximately 92% and 93% of gross premiums receivable at March 31, 2021 and December 31, 2020, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro.

The timing and cumulative amount of actual collections may differ from those of expected collections in the table below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations, restructurings, changes in expected lives and new business.

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Expected Collections of
Financial Guaranty Insurance Gross Premiums Receivable
(Undiscounted)
As of March 31, 2021
(in millions)
2021 (April 1 - June 30)$33 
2021 (July 1 - September 30)35 
2021 (October 1 - December 31)18 
Subtotal 202186 
202293 
202381 
202473 
202562 
2026-2030268 
2031-2035193 
2036-2040130 
After 2040320 
Total (1)
$1,306 
____________________
(1)    Excludes expected cash collections on consolidated FG VIEs of $3 million.

    The timing and cumulative amount of actual net earned premiums may differ from those of expected net earned premiums in the table below due to factors such as accelerations, commutations, restructurings, changes in expected lives and new business.

Scheduled Financial Guaranty Insurance Net Earned Premiums
  As of March 31, 2021
 (in millions)
2021 (April 1 - June 30)$47 
2021 (July 1 - September 30)46 
2021 (October 1 - December 31)45 
Subtotal 2021138 
2022173 
2023162 
2024151 
2025139 
2026-2030562 
2031-2035395 
2036-2040253 
After 2040372 
Net deferred premium revenue (1)2,345 
Future accretion175 
Total future net earned premiums$2,520 
____________________
(1)    Excludes net earned premiums on consolidated FG VIEs of $38 million.

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Selected Information for Financial Guaranty Insurance
Policies with Premiums Paid in Installments
As of
March 31, 2021December 31, 2020
(dollars in millions)
Premiums receivable$1,089 $1,094 
Gross deferred premium revenue1,240 1,239 
Weighted-average risk-free rate used to discount premiums1.5 %1.5 %
Weighted-average period of premiums receivable (in years)13.6 13.6 


Financial Guaranty Insurance Losses

    Loss reserves, are discounted at risk-free rates for U.S. dollar denominated financial guaranty insurance obligations that ranged from 0.00% to 2.49% with a weighted average of 1.08% as of March 31, 2021 and 0.00% to 1.72% with a weighted average of 0.69% as of December 31, 2020.

The following table provides information on net reserve (salvage), which includes loss and LAE reserves and salvage and subrogation recoverable, both net of reinsurance.

Net Reserve (Salvage) 
As of
 March 31, 2021December 31, 2020
 (in millions)
Public finance:
U.S. public finance$(79)$(33)
Non-U.S. public finance
Public finance(78)(24)
Structured finance:
U.S. RMBS (1)(2)(41)
Other structured finance
Structured finance(34)
Total$(73)$(58)
____________________
(1)    Excludes net reserves of $34 million and $35 million as of March 31, 2021 and December 31, 2020, respectively, related to consolidated FG VIEs.

Components of Net Reserves (Salvage)
As of
March 31, 2021December 31, 2020
(in millions)
Loss and LAE reserve
$507 $545 
Reinsurance recoverable on unpaid losses
(141)(154)
Loss and LAE reserve, net
366 391 
Salvage and subrogation recoverable(614)(637)
Salvage and subrogation reinsurance payable (1)
175 188 
Salvage and subrogation recoverable, net
(439)(449)
Net reserves (salvage)
$(73)$(58)
____________________
(1)    Recorded as a component of reinsurance balances payable, net in the condensed consolidated balance sheets.

The table below provides a reconciliation of net expected loss to be paid (recovered) for financial guaranty insurance contracts to net expected loss to be expensed. Expected loss to be paid (recovered) for financial guaranty insurance contracts
31


differs from expected loss to be expensed due to: (i) the contra-paid which represents the claim payments made and recoveries received that have not yet been recognized in the statement of operations, (ii) salvage and subrogation recoverable for transactions that are in a net recovery position where the Company has not yet received recoveries on claims previously paid (and therefore recognized in income but not yet received), and (iii) loss reserves that have already been established (and therefore expensed but not yet paid).

Reconciliation of Net Expected Loss to be Paid (Recovered) and
Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts
As of March 31, 2021
 (in millions)
Net expected loss to be paid (recovered) - financial guaranty insurance$10 
Contra-paid, net 14 
Salvage and subrogation recoverable, net and other recoverable439 
Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance(366)
Net expected loss to be expensed (present value) (1)$97 
____________________
(1)    Excludes $25 million as of March 31, 2021, related to consolidated FG VIEs.


    The following table provides a schedule of the expected timing of net expected losses to be expensed. The amount and timing of actual loss and LAE may differ from the estimates shown below due to factors such as accelerations, commutations, changes in expected lives and updates to loss estimates. This table excludes amounts related to FG VIEs, which are eliminated in consolidation.
 
Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts
As of March 31, 2021
(in millions)
2021 (April 1 - June 30)$
2021 (July 1 - September 30)
2021 (October 1 - December 31)
Subtotal 2021
2022
2023
202411 
202511 
2026-203029 
2031-203514 
2036-2040
After 2040
Net expected loss to be expensed97 
Future accretion11 
Total expected future loss and LAE$108 


The following table presents the loss and LAE recorded in the condensed consolidated statements of operations by sector for insurance contracts. Amounts presented are net of reinsurance.

32


Loss and LAE
Reported on the
Condensed Consolidated Statements of Operations
Loss (Benefit)
First Quarter
20212020
(in millions)
Public finance:
U.S. public finance$(5)$(1)
Non-U.S. public finance
(7)— 
Public finance(12)(1)
Structured finance:
U.S. RMBS (1)20 (43)
Other structured finance
— 
Structured finance
21 (43)
Loss and LAE$$(44)
____________________
(1)    Excludes a benefit of $2 million and a loss of $7 million for First Quarter 2021 and 2020 respectively, related to consolidated FG VIEs.

The following tables provide information on financial guaranty insurance contracts categorized as BIG.

Financial Guaranty Insurance
BIG Transaction Loss Summary
As of March 31, 2021
BIG Categories
BIG 1BIG 2BIG 3Total BIG, NetEffect of
Consolidating VIEs
Total
GrossCededGrossCededGrossCeded
(dollars in millions)
Number of risks (1)
72 (60)(1)42 (40)116 — 116 
Remaining weighted-average period (in years)
7.9 8.2 7.7 1.9 8.2 8.5 8.0 — 8.0 
Outstanding exposure:
Par
$1,864 $(474)$42 $— $3,450 $(847)$4,035 $— $4,035 
Interest
806 (207)23 — 1,290 (346)1,566 — 1,566 
Total (2)
$2,670 $(681)$65 $— $4,740 $(1,193)$5,601 $— $5,601 
Expected cash outflows (inflows)
$92 $(12)$$— $2,828 $(715)$2,196 $(224)$1,972 
Potential recoveries (3)(260)25 — — (2,607)735 (2,107)156 (1,951)
Subtotal
(168)13 — 221 20 89 (68)21 
Discount
22 (1)— — (31)(14)(24)13 (11)
Present value of
expected cash flows
$(146)$12 $$— $190 $$65 $(55)$10 
Deferred premium revenue
$75 $(7)$$— $150 $(17)$202 $(39)$163 
Reserves (salvage)
$(167)$16 $$— $92 $18 $(39)$(34)$(73)


33


Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 2020
BIG Categories
BIG 1BIG 2BIG 3Total BIG, NetEffect of
Consolidating VIEs
Total
GrossCededGrossCededGrossCeded
(dollars in millions)
Number of risks (1)
76 (63)(1)41 (39)119 — 119 
Remaining weighted-average period (in years)
7.4 7.7 8.0 2.0 8.4 8.8 7.9 — 7.9 
Outstanding exposure:
Par
$2,345 $(576)$42 $— $3,418 $(848)$4,381 $— $4,381 
Interest
939 (238)24 — 1,356 (365)1,716 — 1,716 
Total (2)
$3,284 $(814)$66 $— $4,774 $(1,213)$6,097 $— $6,097 
Expected cash outflows (inflows)
$135 $(13)$$— $2,742 $(695)$2,173 $(224)$1,949 
Potential recoveries (3)(361)45 — — (2,446)693 (2,069)156 (1,913)
Subtotal
(226)32 — 296 (2)104 (68)36 
Discount
17 (1)— — (13)(13)(10)(2)
Present value of
expected cash flows
$(209)$31 $$— $283 $(15)$94 $(60)$34 
Deferred premium revenue
$93 $(7)$$— $145 $(18)$214 $(40)$174 
Reserves (salvage)
$(235)$34 $$— $175 $— $(23)$(35)$(58)
____________________
(1)    A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments. The ceded number of risks represents the number of risks for which the Company ceded a portion of its exposure.
(2)    Includes amounts related to FG VIEs.
(3)    Represents expected inflows for future payments by obligors pursuant to restructuring agreements, settlements or litigation judgments, excess spread on any underlying collateral and other estimated recoveries. Potential recoveries also include recoveries on certain investment grade credits, related mainly to exposures that were previously BIG and for which claims have been paid in the past.

5.    Reinsurance

The Company assumes a portion of an insured risk (Assumed Business) and may cede portions of exposure it has insured (Ceded Business) in exchange for premiums, net of any ceding commissions. The Company historically entered into ceded reinsurance contracts in order to obtain greater business diversification and reduce the net potential loss from large risks.

Ceded and Assumed Business

The Company has Ceded Business to affiliated and non-affiliated companies to limit its exposure to risk. The Company remains primarily liable for all risks it directly underwrites and is required to pay all gross claims. It then seeks reimbursement from the reinsurer for its proportionate share of claims. The Company may be exposed to risk for this exposure if it were required to pay the gross claims and not be able to collect ceded claims from an assuming company experiencing financial distress. The Company's ceded contracts generally allow the Company to recapture ceded financial guaranty business after certain triggering events, such as reinsurer downgrades.
    
    The Company, through MAC, has Assumed Business from its affiliate, AGC. The Company may be exposed to risk in this portfolio in that the Company may be required to pay losses without a corresponding premium in circumstances where AGC is experiencing financial distress and is unable to pay premiums. The Company's agreement with AGC is generally subject to termination at the option of AGC if the Company fails to meet certain financial and regulatory criteria or to maintain a specified minimum financial strength rating. Upon termination due to one of the foregoing events, the Company may be required to return to AGC unearned premiums (net of any ceding commission) and loss reserves calculated on a statutory basis of accounting, attributable to the reinsurance assumed, after which the Company would be released from liability with respect to its Assumed Business from AGC. In addition, in lieu of termination due to one of the aforementioned events, the Company
34


may be obligated to increase the level of ceding commission paid. See Note 1, Business and Basis of Presentation, for a description of the merger of MAC with and into AGM, with AGM as the surviving company, that was effective April 1, 2021, and which includes the reassumption by AGC of its remaining cessions to MAC. Upon the completion of this transaction, the Company no longer has any Assumed Business from AGC.

Effect of Reinsurance

    The following table presents the components of premiums and losses reported in the condensed consolidated statements of operations and the contribution of the Company's Assumed and Ceded Businesses.

Effect of Reinsurance on Statement of Operations
First Quarter
20212020
(in millions)
Premiums Written:
Direct
$78 $39 
Ceded (1)
(12)(2)
Net
$66 $37 
Premiums Earned:
Direct
$79 $72 
Assumed
Ceded (1)
(20)(14)
Net
$60 $60 
Loss and LAE:
Direct
$27 $(47)
Ceded (1)
(18)
Net
$$(44)
 ____________________
(1)    Ceded amounts mainly consist of cessions to affiliates.

Ceded Reinsurance (1)
As of March 31, 2021As of December 31, 2020
Affiliated ReinsurersNon-Affiliated ReinsurersAffiliated ReinsurersNon-Affiliated Reinsurers
(in millions)
Ceded premium payable, net of commissions$156 $$157 $
Ceded expected loss to be recovered (paid)(11)(7)(23)
Ceded unearned premium reserve643 651 
Ceded par outstanding (2)
52,060 382 52,383 388 
____________________
(1)    The total collateral posted by all affiliated and non-affiliated reinsurers required to post, or that had agreed to post, collateral as of March 31, 2021 and December 31, 2020 was approximately $807 million and $857 million, respectively. The collateral excludes amounts posted by AGM for the benefit of AGUK and AGE.
(2)    Of the total par ceded to BIG rated reinsurers, $74 million is rated BIG as of both March 31, 2021 and December 31, 2020. Of the total ceded par to affiliates, $1,247 million and $1,351 million is rated BIG as of March 31, 2021 and December 31, 2020, respectively.

6.    Investments and Cash

Investment Portfolio

The investment portfolio tables shown below include assets managed both externally and internally. As of March 31, 2021, the majority of the investment portfolio is managed by three outside managers and AssuredIM. The Company has established detailed guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor
35


within a sector. The externally managed portfolio must maintain a minimum average rating of A+/A1/A+ by S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC (S&P), Moody's Investors Service, Inc. (Moody's) or Fitch Ratings Inc., respectively.

The investment portfolio also includes investments in (i) securities acquired for loss mitigation purposes or other risk management purposes, (ii) securities managed under an Investment Management Agreement (IMA) with AGM's affiliate, AssuredIM, (iii) short term investments, (iv) a surplus note from AGC and (v) alternative investments such as: equity method investments in AssuredIM Funds, an investment in renewable and clean energy, and another private equity fund. In addition to amounts shown in the table below, the Company agreed to purchase up to $125 million of limited partnership interests in certain of these and other similar investments, of which $91 million was not yet funded as of March 31, 2021.

Investment Portfolio
Carrying Value
As of
 March 31, 2021December 31, 2020
 (in millions)
Fixed-maturity securities (1):
Externally managed$4,009 $4,100 
Loss mitigation and other securities (2)434 443 
Managed by AssuredIM418 423 
Short-term investments375 424 
AGC surplus note300 300 
Equity method investments:
AssuredIM Funds368 345 
Other111 93 
Other invested assets (internally managed)
Total$6,021 $6,132 
____________________
(1)    6.1% of fixed-maturity securities, related primarily to loss mitigation and other risk management strategies, were rated BIG as of both March 31, 2021 and December 31, 2020.
(2)    Includes other fixed-maturities that were obtained or purchased as part of negotiated settlements with insured counterparties or under the terms of the financial guaranties (other risk management securities).

AGM, AGC and MAC (AGL's U.S. Insurance Subsidiaries), through their jointly owned investment subsidiary AGAS, are authorized to invest up to $750 million in AssuredIM Funds, of which $487.5 million was authorized by AGM and MAC. As of March 31, 2021, AGAS has total commitments to AssuredIM Funds of $587 million of which $335 million represents net invested capital and $252 million is undrawn. This capital was committed to several funds, each dedicated to a single strategy, including CLOs, asset-based finance, healthcare structured capital and municipal bonds.

Accrued investment income, which is recorded in other assets, was $50 million and $46 million as of March 31, 2021 and December 31, 2020, respectively. In First Quarter 2021 and First Quarter 2020, the Company did not write off any accrued investment income.

36


Fixed-Maturity Securities and Short-Term Investments
by Security Type
As of March 31, 2021
Security Type
Percent
of
Total(1)
Amortized
Cost
Allowance for Credit LossesGross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
AOCI (2)
Pre-tax Gain
(Loss) on
Securities
with Credit Loss
Weighted
Average
Credit
Rating(3)
(dollars in millions)
Fixed-maturity securities:
Obligations of state and political subdivisions40 %$2,034 $— $159 $(3)$2,190 $— AA-
U.S. government securities71 — (2)72 — AA+
Corporate securities30 1,500 (42)89 (34)1,513 (23)A
Mortgage-backed securities(4):
RMBS304 (20)(19)274 (18)BB+
Commercial mortgage-backed securities (CMBS)171 — — 180 — AAA
Asset-backed securities
CLOs404 — — 405 — AA-
Other55 — — 58 — BB
Non-U.S. government
securities