Guaranty

Assured Guaranty Corp.

Exhibit 99.1
















Assured Guaranty Corp.

Consolidated Financial Statements

December 31, 2017, 2016 and 2015





































Assured Guaranty Corp.

Index to Consolidated Financial Statements

December 31, 2017, 2016 and 2015





Report of Independent Auditors

To the Board of Directors of Assured Guaranty Corp.:
We have audited the accompanying consolidated financial statements of Assured Guaranty Corp. and its subsidiaries (the Company), which comprise the consolidated balance sheets as of December 31, 2017 and December 31, 2016, and the related consolidated statements of operations, of comprehensive income, of shareholder’s equity and of cash flows for each of the three years in the period ended December 31, 2017.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Assured Guaranty Corp. and its subsidiaries at December 31, 2017 and December 31, 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in accordance with accounting principles generally accepted in the United States of America.

/s/ PricewaterhouseCoopers LLP

New York, New York
March 12, 2018



1


Assured Guaranty Corp.
Consolidated Balance Sheets
(dollars in millions except per share and share amounts)
 
As of
December 31, 2017
 
As of
December 31, 2016
Assets
 
 
 
Investment portfolio:
 
 
 
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $2,696 and $2,653)
$
2,937

 
$
2,797

Short-term investments, at fair value
57

 
99

Other invested assets
5

 
91

Equity method investments in affiliates
224

 
306

Total investment portfolio
3,223

 
3,293

Cash
46

 
68

Premiums receivable, net of commissions payable
172

 
213

Ceded unearned premium reserve
223

 
310

Reinsurance recoverable on unpaid losses
205

 
291

Salvage and subrogation recoverable
310

 
125

Credit derivative assets
37

 
58

Deferred tax asset, net
69

 
422

Current income tax receivable
168

 

Financial guaranty variable interest entities’ assets, at fair value
122

 
232

Other assets
132

 
215

Total assets   
$
4,707

 
$
5,227

Liabilities and shareholder’s equity
 
 
 
Unearned premium reserve
$
891

 
$
1,202

Loss and loss adjustment expense reserve
473

 
479

Reinsurance balances payable, net
78

 
83

Note payable to affiliate
300

 
300

Credit derivative liabilities
223

 
306

Current income tax payable

 
11

Financial guaranty variable interest entities’ liabilities with recourse, at fair value
131

 
205

Financial guaranty variable interest entities’ liabilities without recourse, at fair value
2

 
41

Other liabilities
91

 
196

Total liabilities   
2,189

 
2,823

Commitments and contingencies (see Note 16)
 
 
 
Preferred stock ($1,000 liquidation preference, 200,004 shares authorized; none issued and outstanding in 2017 and 2016)

 

Common stock ($720 par value, 500,000 shares authorized; 20,834 shares issued and outstanding in 2017 and 2016)
15

 
15

Additional paid-in capital
1,042

 
1,041

Retained earnings
1,253

 
1,283

Accumulated other comprehensive income, net of tax of $41 and $38
208

 
65

Total shareholder’s equity   
2,518

 
2,404

Total liabilities and shareholder’s equity   
$
4,707

 
$
5,227


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

2


Assured Guaranty Corp.

Consolidated Statements of Operations

(in millions)

 
Year Ended December 31,
 
2017
 
2016
 
2015
Revenues
 
 
 
 
 
Net earned premiums
$
231

 
$
285

 
$
230

Net investment income
136

 
106

 
79

Net realized investment gains (losses):
 
 
 
 
 
Other-than-temporary impairment losses
(4
)
 
(9
)
 
(7
)
Less: portion of other-than-temporary impairment loss recognized in other comprehensive income
2

 
(4
)
 
0

Net impairment loss
(6
)
 
(5
)
 
(7
)
Other net realized investment gains (losses)
45

 
12

 
13

Net realized investment gains (losses)
39

 
7

 
6

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

 
35

 
(57
)
Net unrealized gains (losses)
65

 
7

 
531

Net change in fair value of credit derivatives
71

 
42

 
474

Fair value gains (losses) on committed capital securities
(2
)
 
(1
)
 
15

Fair value gains (losses) on financial guaranty variable interest entities
6

 
14

 
6

Bargain purchase gain and settlement of pre-existing relationships, net
58

 
257

 
54

Other income (loss)
16

 
17

 
11

Total revenues   
555

 
727

 
875

Expenses   
 
 
 
 
 
Loss and loss adjustment expenses
54

 
46

 
200

Amortization of deferred ceding commissions, net
(1
)
 
(3
)
 
0

Interest expense
11

 
11

 
15

Other operating expenses
73

 
82

 
75

Total expenses   
137

 
136

 
290

Income (loss) before income taxes and equity in net earnings of investee
418

 
591

 
585

Provision (benefit) for income taxes
 
 
 
 
 
Current
(198
)
 
58

 
20

Deferred
328

 
8

 
156

Total provision (benefit) for income taxes   
130

 
66

 
176

Equity in net earnings of investee
32

 
44

 
39

Net income (loss)
$
320

 
$
569

 
$
448


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


3


Assured Guaranty Corp.

Consolidated Statements of Comprehensive Income

(in millions)

 
Year Ended December 31,
 
2017
 
2016
 
2015
Net income (loss)    
$
320

 
$
569

 
$
448

Unrealized holding gains (losses) arising during the period on:
 
 
 
 
 
Investments with no other-than-temporary impairment, net of tax provision (benefit) of $33, $17 and $(7)
61

 
24

 
(13
)
Investments with other-than-temporary impairment, net of tax provision (benefit) of $21, $10, and $(3)
39

 
20

 
(6
)
Unrealized holding gains (losses) arising during the period, net of tax
100

 
44

 
(19
)
Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $23, $2 and $2
42

 
5

 
4

Change in net unrealized gains on investments
58

 
39

 
(23
)
 
 
 
 
 
 
Change in cumulative translation adjustment, net of tax provision (benefit) of $(2), $(5) and $(4)
11

 
(22
)
 
(6
)
Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $(5), $0 and $0
(9
)
 

 

Change in cumulative translation adjustment, net of tax
20

 
(22
)
 
(6
)
Other comprehensive income (loss)
78

 
17

 
(29
)
 
 
 
 
 
 
Comprehensive income (loss)
$
398

 
$
586

 
$
419


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


4


Assured Guaranty Corp.

Consolidated Statements of Shareholder’s Equity

Years Ended December 31, 2017, 2016 and 2015

(in millions)

 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Income
 
Total
Shareholder’s
Equity
Balance at December 31, 2014
$

 
$
15

 
$
1,042

 
$
435

 
$
77

 
$
1,569

Net income

 

 

 
448

 

 
448

Dividends

 

 

 
(90
)
 

 
(90
)
Other comprehensive loss 

 

 

 

 
(29
)
 
(29
)
Balance at December 31, 2015

 
15

 
1,042

 
793

 
48

 
1,898

Net income

 

 

 
569

 

 
569

Dividends

 

 

 
(79
)
 

 
(79
)
Other comprehensive income 

 

 

 

 
17

 
17

Other

 

 
(1
)
 

 

 
(1
)
Balance at December 31, 2016

 
15

 
1,041

 
1,283

 
65

 
2,404

Net income

 

 

 
320

 

 
320

Net impact of sale of the European Subsidiaries to affiliate (see Note 1)

 

 

 
(203
)
 
37

 
(166
)
Dividends - cash

 

 

 
(107
)
 

 
(107
)
Dividends - transfer of benefit/health/retirement plans to AG US Services (see Note 15)

 

 

 
(12
)
 

 
(12
)
Reclassification of stranded tax effects (see Note 1)

 

 

 
(28
)
 
28

 

Other comprehensive income (see Note 19)

 

 

 

 
78

 
78

Other

 

 
1

 

 

 
1

Balance at December 31, 2017
$

 
$
15

 
$
1,042

 
$
1,253

 
$
208

 
$
2,518


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



5


Assured Guaranty Corp.
Consolidated Statements of Cash Flows
(in millions)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Operating Activities:
 
 
 
 
 
Net Income
$
320

 
$
569

 
$
448

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
 
 
Non-cash interest and operating expenses
0

 
5

 
4

Net amortization of premium (discount) on investments
(40
)
 
(18
)
 
9

Provision (benefit) for deferred income taxes
328

 
8

 
156

Net realized investment losses (gains)
(39
)
 
(7
)
 
(6
)
Net unrealized losses (gains) on credit derivatives
(65
)
 
(7
)
 
(531
)
Fair value losses (gains) on committed capital securities
2

 
1

 
(15
)
Bargain purchase gain and settlement of pre-existing relationships, net
(58
)
 
(257
)
 
(54
)
Equity in net earnings of investee
(32
)
 
(44
)
 
(39
)
Change in deferred ceding commissions, net
(2
)
 
(5
)
 
(3
)
Change in premiums receivable, net of premiums payable and commissions
14

 
12

 
(4
)
Change in ceded unearned premium reserve
88

 
106

 
82

Change in unearned premium reserve
(328
)
 
(391
)
 
(295
)
Change in loss and loss adjustment expense reserve, net
(60
)
 
(83
)
 
189

Change in current income tax
(198
)
 
16

 
(45
)
Change in financial guaranty variable interest entities' assets and liabilities, net
(1
)
 
(10
)
 
(3
)
Dividends received from investee (see Note 11)
42

 
114

 

Other
(3
)
 
(49
)
 
36

Net cash flows provided by (used in) operating activities    
(32
)
 
(40
)
 
(71
)
Investing activities
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
Purchases
(1,002
)
 
(516
)
 
(1,016
)
Sales
561

 
692

 
1,194

Maturities
192

 
212

 
161

Net sales (purchases) of short-term investments
(19
)
 
184

 
476

Net proceeds from paydowns on financial guaranty variable interest entities’ assets
28

 
511

 
147

Acquisitions, net of cash acquired (see Note 2)
95

 
(442
)
 
(800
)
Proceeds from return of capital (see Note 11)
70

 
4

 

Sale of the European Subsidiaries to affiliates, net of cash sold (see Note 1)
127

 

 

Other
89

 
0

 
42

Net cash flows provided by (used in) investing activities    
141

 
645

 
204

Financing activities
 
 
 
 
 
Dividends paid
(107
)
 
(79
)
 
(90
)
Net paydowns of financial guaranty variable interest entities’ liabilities
(30
)
 
(476
)
 
(48
)
Net cash flows provided by (used in) financing activities    
(137
)
 
(555
)
 
(138
)
Effect of foreign exchange rate changes
4

 
(2
)
 
(1
)
Increase (decrease) in cash and restricted cash
(24
)
 
48

 
(6
)
Cash and restricted cash at beginning of period (see Note 10)
70

 
22

 
28

Cash and restricted cash at end of period (see Note 10)
$
46

 
$
70

 
$
22

Supplemental cash flow information
 
 
 
 
 
Cash paid (received) during the period for:
 
 
 
 
 
Income taxes
$
0

 
$
38

 
$
60

Interest
$
11

 
$
11

 
$
15


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

6


Assured Guaranty Corp.
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015

1.
Business and Basis of Presentation

Business

Assured Guaranty Corp. (AGC and, together with its subsidiaries, the Company), a Maryland domiciled insurance company, is an indirect and wholly-owned operating subsidiary of Assured Guaranty Ltd. (AGL and, together with its subsidiaries, Assured Guaranty). AGL is a Bermuda-based holding company that provides, through its operating subsidiaries, credit protection products to the United States (U.S.) and international public finance (including infrastructure) and structured finance markets.     

The Company applies its credit underwriting judgment, risk management skills and capital markets experience primarily to offer financial guaranty (FG) insurance that protects holders of debt instruments and other monetary obligations from defaults in scheduled payments. If an obligor defaults on a scheduled payment due on an obligation, including a scheduled principal or interest payment (debt service), the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. The Company markets its financial guaranty insurance directly to issuers and underwriters of public finance and structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in the U.S. and the United Kingdom (U.K.), and also guarantees obligations issued in other countries and regions, including Australia and Western Europe.

In the past, the Company sold credit protection by issuing policies that guaranteed payment obligations under credit derivatives, primarily credit default swaps (CDS). Contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company’s obligation to make loss payments are similar to those for financial guaranty insurance contracts. The Company’s credit derivative transactions are governed by International Swaps and Derivative Association, Inc. (ISDA) documentation. The Company has not entered into any new CDS in order to sell credit protection in the U.S. since the beginning of 2009, when regulatory guidelines were issued that limited the terms under which such protection could be sold. The capital and margin requirements applicable under the Dodd-Frank Wall Street Reform and Consumer Protection Act also contributed to the Company not entering into such new CDS in the U.S. since 2009. The Company actively pursues opportunities to terminate existing CDS, which terminations have the effect of reducing future fair value volatility in income and/or reducing rating agency capital charges.

Basis of Presentation

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and, in the opinion of management, reflect all material adjustments that are of a normal recurring nature, necessary for a fair statement of the financial condition, results of operations and cash flows of the Company and its consolidated variable interest entities (VIEs) for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The consolidated financial statements include the accounts of AGC and its subsidiaries and its consolidated VIEs. Intercompany accounts and transactions between and among all consolidated entities have been eliminated. Certain prior year balances have been reclassified to conform to the current year's presentation.

As of December 31, 2017, AGC owns 39.3% of the outstanding shares of Municipal Assurance Holdings Inc. (MAC Holdings), a Delaware company formed to hold all of the outstanding shares of Municipal Assurance Corp. (MAC), a New York domiciled insurance company.

Assured Guaranty is actively working to combine the operations of its European subsidiaries, Assured Guaranty (Europe) plc (AGE), Assured Guaranty (UK) plc (AGUK), Assured Guaranty (London) plc (AGLN) and CIFG Europe S.A. (CIFGE), through a multi-step transaction, which ultimately is expected to result in AGUK, AGLN and CIFGE transferring their insurance portfolios to and merging with and into AGE. Any such combination will be subject to regulatory and court approvals. As an initial step, on June 26, 2017, AGC sold to its affiliate Assured Guaranty Municipal Corp. (AGM) all of the shares of its direct, wholly owned subsidiaries, AGUK, CIFGE and AGLN (the acquisition of which is described in Note 2,

7


Acquisitions) (collectively, the European Subsidiaries). That sale of AGC's European Subsidiaries was approved by the New York State Department of Financial Services, the Maryland Insurance Administration (MIA) and the U.K. Prudential Regulation Authority (PRA).

The total consideration of $411 million paid by AGM to purchase AGC's European Subsidiaries consisted of: (i) $344 million gross principal amount of the Series A-1 Floating Rate Guaranteed Notes due December 21, 2035 issued by Orkney Re II plc (the Orkney Bonds) and (ii) $139 million of cash.  The carrying value of the European Subsidiaries, as of June 26, 2017, was approximately $651 million. In addition, AGC's approximately $55 million deferred tax liability at June 26, 2017 on unremitted earnings of its European Subsidiaries was transferred to AGM.

AGUK guarantees the Orkney Bonds through a financial guarantee; it cedes 90% of the exposure to AGC and retains the remaining 10%. The $344 million principal amount of Orkney Bonds had a fair value (inclusive of the AGUK's financial guarantee) of $272 million and constituted 90% of the total amount of Orkney Bonds owned by AGM.

In accordance with GAAP guidance on common control transactions, the net loss on the sale of the European Subsidiaries of approximately $166 million is recorded as a direct reduction to shareholder's equity. This net reduction consists of a $203 million dividend, offset by an AOCI increase of $37 million (comprising $17 million of cumulative translation adjustment benefit and $20 million of net unrealized gains). The Orkney Bonds are recorded excluding the value of AGUK's financial guarantee, and are carried in the financial statements of the Company on the same basis as the common parent, Assured Guaranty US Holdings Inc. (AGUS), with approximately $44 million in gains established in accumulated other comprehensive income (AOCI).

Impact of Sale of the European Subsidiaries

 
(in millions)
Consideration received
$
411

 
 
Carrying value of European Subsidiaries
651

Deferred tax liabilities transferred
(55
)
Net carrying value transferred
596

 
 
Impact before other related adjustments
(185
)
Elimination of the financial guarantee on Orkney Bonds
20

Other
(1
)
Net shareholder's equity impact
$
(166
)


Accounting Policies

The Company revalues assets, liabilities, revenue and expenses denominated in non-U.S. currencies into U.S. dollars using applicable exchange rates. Gains and losses relating to translating foreign functional currency financial statements for U.S. GAAP reporting are recorded in other comprehensive income (loss) (OCI). Gains and losses relating to transactions in denominations, other than the functional currency, are reported in the consolidated statement of operations.

The chief operating decision maker manages the operations of the Company at a consolidated level. Therefore, all results of operations are reported as one segment.

Other accounting policies are included in the following notes.



8


Accounting Policies

Acquisitions
Note 2
Expected loss to be paid (insurance, credit derivatives and FG VIE contracts)
Note 5
Contracts accounted for as insurance (premium revenue recognition, loss and loss adjustment expense and policy acquisition cost)
Note 6
Fair value measurement
Note 7
Credit derivatives (at fair value)
Note 8
Variable interest entities (at fair value)
Note 9
Investments and cash
Note 10
Income taxes
Note 13
Note Payable to Affiliate and Credit Facilities
Note 17
Employee benefit plans
Note 18


Adopted Accounting Standards

Accounting for the 2017 Tax Cuts and Jobs Act
    
In January 2018, the Securities and Exchange Commission issued Staff Accounting Bulletin 118 (SAB 118), providing guidance to companies on the accounting for the income tax effects of the 2017 Tax Cuts and Jobs Act (Tax Act) in financial statements for the period that includes the date of enactment, December 22, 2017. SAB 118 states that:
for income tax effects of the Tax Act for which the accounting is incomplete and for which the Company cannot reasonably estimate an amount, qualitative disclosures must be provided;
for income tax effects of the Tax Act for which the accounting is incomplete but for which the Company has determined a reasonable estimate and recorded a provisional amount, disclosures of such items; and
for income tax effects of the Tax Act for which the Company has completed its accounting and determined a final amount, disclosure of such amounts.
For those effects for which the accounting has not been completed by the time the financial statements that include the enactment date are released, SAB 118 allows for a measurement period not to extend beyond one year after the enactment date to adjust those tax effects. In 2017, the Company recorded a provisional tax expense of $42 million attributable to the Tax Act.  See Note 13, Income Taxes for the Company’s disclosures regarding the effects of the Tax Act.

In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Comprehensive Income, which allows entities to elect to reclassify, from accumulated other comprehensive income (AOCI) to retained earnings, stranded tax effects resulting from the Tax Act.  

Under existing U.S. GAAP, deferred tax assets and liabilities are required to be adjusted for the effect of a change in tax laws or rates, with the effect included in income from continuing operations in the reporting period that includes the enactment date, even in situations in which the related income tax effects of items in AOCI were originally recognized in other comprehensive income (rather than in net income). This results in the tax rate for items within AOCI continuing to be recorded at the previous tax rate (stranded tax effects).

The Company adopted this ASU in its 2017 financial statements and elected to reclassify approximately $28 million from AOCI to retained earnings, which is primarily attributable to the reduction in the corporate tax rate.


9


Statement of Cash Flows

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the Emerging Issues Task Force), which addresses the presentation of changes in restricted cash and restricted cash equivalents in the statement of cash flows with the objective of reducing the existing diversity in practice. Under the ASU, entities are required to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows.  As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows.  When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the ASU requires a reconciliation be presented either on the face of the statement of cash flows or in the notes to the financial statements showing the totals in the statement of cash flows to the related captions in the balance sheet. The ASU was adopted on January 1, 2017 and was applied retrospectively. The required reconciliation is shown in Note 10, Investments and Cash.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The ASU was adopted on January 1, 2017 and did not have an effect on the Company’s consolidated statements of cash flows for the periods presented.

Share-Based Payments

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.  The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it previously could for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The ASU was adopted on January 1, 2017 with no material effect on the consolidated financial statements.

Future Application of Accounting Standards

Income Taxes

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory, which removes the current prohibition against immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory.  Under the ASU, the selling (transferring) entity is required to recognize a current income tax expense or benefit upon transfer of the asset.  Similarly, the purchasing (receiving) entity is required to recognize a deferred tax asset or deferred tax liability, as well as the related deferred tax benefit or expense, upon receipt of the asset.  The ASU is to be applied on a modified retrospective basis (i.e. by recording a cumulative effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is adopted). The ASU was adopted on January 1, 2018 with no effect on the consolidated financial statements.

Financial Instruments
    
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities.  The amendments in this ASU are intended to make targeted improvements to GAAP by addressing certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Amendments under this ASU apply to the Company's FG VIE liabilities, for which the Company has historically elected to measure through the income statement under the fair value option, and to certain equity securities in the Company's investment portfolio.

For FG VIE liabilities, the portion of the change in fair value caused by instrument specific credit risk will be separately presented in OCI as opposed to the income statement. Equity securities, except those that are accounted for under the equity method of accounting or that resulted in consolidation of the investee by the Company, will need to be accounted for at fair value with changes in fair value recognized through net income instead of OCI. Effective January 1, 2018, the Company adopted this ASU with a cumulative-effect adjustment to the statement of financial position as of January 1, 2018. This resulted in a reclassification of a $5 million loss, net of tax, from retained earnings to AOCI.


10


Premium Amortization on Purchased Callable Debt Securities

In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Topic 310-20) - Premium Amortization on Purchased Callable Debt Securities.  This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date.  This ASU has no effect on the accounting for purchased callable debt securities held at a discount.  It is to be applied using a modified retrospective approach and the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company does not expect this ASU to have a material effect on its consolidated financial statements.

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to present right-of-use assets and lease liabilities on the balance sheet. ASU 2016-02 is to be applied using a modified retrospective approach and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company intends to adopt this ASU on January 1, 2019. The Company is evaluating the effect that this ASU will have on its consolidated financial statements. The Company currently accounts for its lease expense on a straight-line basis. See Note 16, Commitments and Contingencies for additional information on the Company's leases.

Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The amendments in this ASU are intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions will be required to use forward-looking information to better inform their credit loss estimates as a result of the ASU. While many of the loss estimation techniques applied today will still be permitted, the inputs to those techniques will change to reflect the full amount of expected credit losses. The ASU requires enhanced disclosures to help investors and other financial statement users to better understand significant estimates and judgments used in estimating credit losses, as well as credit quality and underwriting standards of an organization’s portfolio. 

In addition, the ASU amends the accounting for credit losses on available-for-sale securities and purchased financial assets with credit deterioration. The ASU also eliminates the concept of “other than temporary” from the impairment model for certain available-for-sale securities. Accordingly, the ASU states that an entity must use an allowance approach, must limit the allowance to an amount by which the security’s fair value is less than its amortized cost basis, may not consider the length of time fair value has been less than amortized cost, and may not consider recoveries in fair value after the balance sheet date when assessing whether a credit loss exists. For purchased financial assets with credit deterioration, the ASU requires an entity’s method for measuring credit losses to be consistent with its method for measuring expected losses for originated and purchased non-credit-deteriorated assets.

The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For debt instruments such as reinsurance recoverables, loans and held-to-maturity securities, entities will be required to record a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is adopted.  The changes to the impairment model for available-for-sale securities and changes to purchased financial assets with credit deterioration are to be applied prospectively.  The Company is evaluating the effect that this ASU will have on its consolidated financial statements. See Note 10, Investments and Cash for the Company's current accounting policy with respect to available-for-sale securities.


11


2.
    Acquisitions

Accounting Policies

Consistent with one of Assured Guaranty's key business strategies of supplementing its book of business through acquisitions, the Company has acquired three financial guaranty companies since January 1, 2015, as described below. The acquisitions were accounted for under the acquisition method of accounting which requires that the assets and liabilities acquired be recorded at fair value. The Company exercised significant judgment to determine the fair value of the assets it acquired and liabilities it assumed in each of the acquisitions. The most significant of these determinations related to the valuation of the acquired financial guaranty insurance contracts. On an aggregate basis, the acquired companies' contractual premiums for financial guaranty insurance contracts acquired were less than the premiums a market participant of similar credit quality would demand to acquire those contracts at the date of acquisition (particularly for below-investment-grade (BIG) transactions), resulting in a significant amount of the purchase price being allocated to these contracts. For information on the methodology used to measure the fair value of assets acquired and liabilities assumed in the acquisitions, see Note 7, Fair Value Measurement.

The fair value of the Company's stand-ready obligation on the date of acquisition is recorded in unearned premium reserve. Thereafter, loss reserves and loss and loss adjustment expenses (LAE) are recorded in accordance with the Company's accounting policy described in the Note 5, Expected Losses to be Paid and Note 6, Contracts Accounted for as Insurance.

The excess of the fair value of net assets acquired over the consideration transferred was recorded as a bargain purchase gain in "bargain purchase gain and settlement of pre-existing relationships" in net income. In addition, the Company and each of the acquired companies had pre-existing reinsurance relationships, which were effectively settled at fair value on the acquisition dates. The gain or loss on settlement of these pre-existing reinsurance relationships represents the net difference between the historical assumed or ceded balances that were recorded by the Company and the fair value of ceded or assumed balances acquired.

MBIA UK Insurance Limited

On January 10, 2017 (the MBIA UK Acquisition Date), AGC completed its acquisition of MBIA UK Insurance Limited (MBIA UK), the U.K. operating subsidiary of MBIA Insurance Corporation (MBIA) (the MBIA UK Acquisition). As consideration for the outstanding shares of MBIA UK plus $23 million in cash, AGC exchanged all its holdings of notes issued in the Zohar II 2005-1 transaction (Zohar II Notes), which were insured by MBIA. AGC’s Zohar II Notes had total outstanding principal of approximately $347 million and fair value of $334 million as of the MBIA UK Acquisition Date. The MBIA UK Acquisition added approximately $12 billion of net par insured on January 10, 2017.

MBIA UK was renamed Assured Guaranty (London) Ltd. and on June 1, 2017, was re-registered as a public limited company (plc). Further, AGLN was sold by AGC to AGM and then contributed by AGM to AGE on June 26, 2017. See Note 1, Business and Basis of Presentation for additional information on Assured Guaranty's European subsidiaries combination.

12


The following table shows the net effect of the MBIA UK Acquisition, including the effects of the settlement of pre-existing relationships.

 
Fair Value of Net Assets Acquired, before Settlement of Pre-existing Relationships
 
Net effect of Settlement of Pre-existing Relationships
 
Net Effect of
MBIA UK Acquisition
 
(in millions)
Purchase price (1)
$
334

 
$

 
$
334

 
 
 
 
 
 
Identifiable assets acquired:
 
 
 
 
 
Investments
459

 

 
459

Cash
72

 

 
72

Premiums receivable, net of commissions payable
274

 
(3
)
 
271

Other assets
16

 
(6
)
 
10

Total assets
821

 
(9
)
 
812

 
 

 
 
 
 
Liabilities assumed:
 
 
 
 
 
Unearned premium reserves
389

 
(6
)
 
383

Current tax payable
25

 

 
25

Other liabilities
4

 
(4
)
 
0

Total liabilities
418

 
(10
)
 
408

Net assets of MBIA UK
403

 
1

 
404

Cash acquired from MBIA Holdings
23

 

 
23

Deferred tax liability
(36
)
 

 
(36
)
Net asset effect of MBIA UK Acquisition
390

 
1

 
391

Bargain purchase gain and settlement of pre-existing relationships resulting from MBIA UK Acquisition, after-tax
56

 
1

 
57

Deferred tax

 
1

 
1

Bargain purchase gain and settlement of pre-existing relationships resulting from MBIA UK Acquisition, pre-tax
$
56

 
$
2

 
$
58

_____________________
(1)
The purchase price of $334 million was allocated as follows: (1) $329 million for the purchase of net assets of $385 million, and (2) the settlement of pre-existing relationships between MBIA UK and Assured Guaranty at a fair value of $5 million.
    
    
The Company believes the bargain purchase gain resulted from MBIA's strategy to address its insurance obligations with regards to the Zohar II Notes, the issuers of which MBIA did not expect would have sufficient funds to repay such notes in full on the scheduled maturity date of such notes in January 2017.     
    
Revenue and net income (excluding the effects of subsequent tax reform) related to MBIA UK from the MBIA UK Acquisition Date through June 26, 2017 (the date of the sale of MBIA UK to AGM) included in the consolidated statement of operations were approximately $149 million and $112 million, respectively, including the bargain purchase gain, settlement of pre-existing relationships, activity during the period and realized gain on the disposition of AGC's Zohar II Notes. For the six months period ended June 30, 2017, the Company recognized transaction expenses related to the MBIA UK Acquisition of $7 million comprising primarily legal and financial advisors fees.


13


Unaudited Pro Forma Results of Operations

The following unaudited pro forma information presents the combined results of operations of the Company and MBIA UK as if the acquisition had been completed on January 1, 2016, as required under GAAP. The pro forma accounts include the estimated historical results of the Company and MBIA UK and pro forma adjustments primarily comprising the earning of the unearned premium reserve and the expected losses that would be recognized in net income for each prior period presented, as well as the accounting for bargain purchase gain, settlement of pre-existing relationships, the realized gain on the disposition of the Zohar II Notes and MBIA UK acquisition related expenses, all net of tax at the applicable statutory rate.

The unaudited pro forma combined financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined as of January 1, 2016, nor is it indicative of the results of operations in future periods. The Company did not include any pro forma combined financial information for 2017 as substantially all of MBIA UK's results of operations for relevant period in 2017 are included in the year ended December 31, 2017 consolidated statements of operations.

Unaudited Pro Forma Results of Operations

 
 
Year Ended December 31, 2016
 
 
(in millions)
Pro forma revenues
 
$
898

Pro forma net income
 
692



CIFG Holding Inc.
    
On July 1, 2016, AGC acquired all of the issued and outstanding capital stock of CIFG Holding Inc. (CIFGH, and together with its subsidiaries, CIFG) (the CIFG Acquisition), the parent of financial guaranty insurer CIFG Assurance North America, Inc. (CIFGNA) for $450.6 million in cash. AGC merged CIFGNA with and into AGC, with AGC as the surviving company, on July 5, 2016. The CIFG Acquisition added $4.4 billion of net par insured on July 1, 2016. The CIFG Acquisition also caused the cancellation of a retrocession from AGC to Assured Guaranty Re Ltd. (AG Re) of $1.2 billion of insured par that had been reinsured by AGC from CIFG, so the CIFG Acquisition added $5.6 billion of net par insured to AGC on July 1, 2016.

At the time of the CIFG Acquisition, CIFGNA had a subsidiary financial guaranty company domiciled in France, CIFGE, which had been put into run-off and surrendered its licenses. CIFGNA had reinsured all of CIFGE’s outstanding financial guaranty business and also had issued a “second-to-pay policy” pursuant to which CIFGNA guaranteed the full and complete payment of any shortfall in amounts due from CIFGE on its insured portfolio; AGC assumed these obligations as part of the CIFGNA merger with and into AGC. CIFGE remains a separate company in runoff, now indirectly owned by AGM. See Note 1, Business and Basis of Presentation for additional information on Assured Guaranty's European subsidiaries combination.
    
    

14


The following table shows the net effect of the CIFG Acquisition, including the effects of the settlement of pre-existing relationships.

 
Fair Value of Net Assets Acquired, before Settlement of Pre-existing Relationships
 
Net effect of Settlement of Pre-existing Relationships
 
Net Effect of CIFG Acquisition
 
(in millions)
Cash Purchase Price (1)
$
450

 
$

 
$
450

Identifiable assets acquired:
 
 
 
 
 
Investments
775

 

 
775

Cash
8

 

 
8

Premiums receivable, net of commissions payable
18

 

 
18

Ceded unearned premium reserve
173

 
(173
)
 

Deferred acquisition costs
1

 
(1
)
 
0

Salvage and subrogation recoverable
23

 

 
23

Credit derivative assets
1

 

 
1

Deferred tax asset, net
194

 
34

 
228

Other assets
4

 

 
4

Total assets
1,197

 
(140
)
 
1,057

 
 

 
 
 
 
Liabilities assumed:
 
 
 
 
 
Unearned premium reserves
306

 
(10
)
 
296

Loss and loss adjustment expense reserve
1

 
(66
)
 
(65
)
Credit derivative liabilities
68

 
0

 
68

Other liabilities
17

 

 
17

Total liabilities
392

 
(76
)
 
316

Net asset effect of CIFG Acquisition
805

 
(64
)
 
741

Bargain purchase gain and settlement of pre-existing relationships resulting from CIFG Acquisition, after-tax
355

 
(64
)
 
291

Deferred tax

 
(34
)
 
(34
)
Bargain purchase gain and settlement of pre-existing relationships resulting from CIFG Acquisition, pre-tax
$
355

 
$
(98
)
 
$
257

_____________________
(1)
The cash purchase price of $450.6 million represents the cash transferred for the acquisition which was allocated as follows: (1) $277 million for the purchase of net assets of $632 million and (2) the settlement of pre-existing relationships between CIFGNA and AGC at a fair value of $173 million.


The bargain purchase gain reflects the fair value of CIFGH’s assets and liabilities, as well as tax attributes that were recorded in deferred taxes comprising net operating losses (NOL) (after Internal Revenue Code change in control provisions) and other temporary book-to-tax differences for which CIFGH had recorded a full valuation allowance. The Company believes the bargain purchase gain resulted from the nature of the financial guaranty business and the desire of investors in CIFGH to monetize their investments in CIFGH.
    
Revenue and net income related to CIFGH from the CIFG Acquisition Date through 2016 included in the consolidated statement of operations were approximately $295 million and $311 million, respectively. For 2016, the Company recognized transaction expenses related to the CIFG Acquisition of $6 million, comprising primarily legal and financial advisors fees.

The Company has determined that the presentation of pro-forma information is impractical for the CIFG Acquisition as historical financial records are not available on a U.S. GAAP basis.


15


Radian Asset Assurance Inc.

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

The following table shows the net effect of the Radian Asset Acquisition at the Radian Acquisition Date, including the effects of the settlement of pre-existing relationships.

 
Fair Value of Net Assets Acquired, before Settlement of Pre-existing Relationships
 
Net effect of Settlement of Pre-existing Relationships
 
Net Effect of Radian Asset Acquisition
 
(in millions)
Cash purchase price(1)
$
804

 
$

 
$
804

Identifiable assets acquired:
 
 
 
 
 
Investments
1,473

 

 
1,473

Cash
4

 

 
4

Ceded unearned premium reserve
(3
)
 

 
(3
)
Credit derivative assets
30

 

 
30

Deferred tax asset, net
263

 
0

 
263

Financial guaranty variable interest entities' assets
122

 

 
122

Other assets
86

 
0

 
86

Total assets
1,975

 
0

 
1,975

 
 

 
 
 
 
Liabilities assumed:
 
 
 
 
 
Unearned premium reserves
697

 
1

 
698

Credit derivative liabilities
271

 

 
271

Financial guaranty variable interest entities' liabilities
118

 

 
118

Other liabilities
30

 

 
30

Total liabilities
1,116

 
1

 
1,117

Net asset effect of Radian Asset Acquisition
859

 
(1
)
 
858

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

 
(1
)
 
54

Deferred tax

 
0

 
0

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

 
$
(1
)
 
$
54

_____________________
(1)
The cash purchase price of $804 million was the cash transferred for the acquisition which was allocated as follows: (1) $798 million for the purchase of net assets of $853 million and (2) the settlement of pre-existing relationships between Radian Asset and AGC at a fair value of $6 million.

The Company believes the bargain purchase resulted from the announced desire of Radian Guaranty Inc. to focus its business strategy on the mortgage and real estate markets and to monetize its investment in Radian Asset and thereby accelerate its ability to comply with the financial requirements of the final Private Mortgage Insurer Eligibility Requirements.
    
Revenue and net income related to Radian Asset from the Radian Acquisition Date through December 31, 2015 included in the consolidated statement of operations were approximately $423 million and $286 million, respectively. For 2015, the Company recognized transaction expenses related to the Radian Asset Acquisition of $12 million, comprising primarily legal and financial advisors fees.


16


Unaudited Pro Forma Results of Operations

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

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

Unaudited Pro Forma Results of Operations

 
Year Ended December 31, 2015
 
(in millions)
Pro forma revenues
$
866

Pro forma net income
424



3.
Ratings
 
The financial strength ratings (or similar ratings) for AGC and MAC, along with the date of the most recent rating action (or confirmation) by the rating agency, are shown in the table below. Ratings are subject to continuous rating agency review and revision or withdrawal at any time.  In addition, AGC periodically assesses the value of each rating assigned to it, and as a result of such assessment may request that a rating agency add or drop a rating.

 
S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC
 
Kroll Bond Rating Agency
 
Moody’s Investors Service, Inc.
AGC
AA(stable) (6/26/17)
 
AA (stable) (12/1/17)
 
(1)
MAC
AA(stable) (6/26/17)
 
AA+(stable) (7/14/17)
 
____________________
(1)
AGC requested that Moody’s Investors Service, Inc. (Moody's) withdraw its financial strength ratings of AGC in January 2017, but Moody's denied that request. Moody’s continues to rate AGC A3 (stable).
    

There can be no assurance that any of the rating agencies will not take negative action on the financial strength ratings of AGC in the future.

For a discussion of the effects of rating actions on the Company, see Note 6, Contracts Accounted for as Insurance, and Note 14, Reinsurance and Other Monoline Exposures.

4.
Outstanding Exposure

The Company writes financial guaranty contracts in insurance form. Until 2009, the Company also wrote some of its financial guaranty contracts in credit derivative form and has acquired or reinsured portfolios both before and after 2009 that include financial guaranty contracts in credit derivative form. Whether written as an insurance contract or as a credit derivative, the Company considers these financial guaranty contracts. The Company seeks to limit its exposure to losses by underwriting obligations that it views as investment grade at inception, although, as part of its loss mitigation strategy for existing troubled exposures, it may underwrite new issuances that it views as BIG. The Company diversifies its insured portfolio across asset classes and, in the structured finance portfolio, requires rigorous subordination or collateralization requirements. Reinsurance may be used in order to reduce net exposure to certain insured transactions.

     Public finance obligations insured by the Company consist primarily of general obligation bonds supported by the taxing powers of U.S. state or municipal governmental authorities, as well as tax-supported bonds, revenue bonds and other obligations supported by covenants from state or municipal governmental authorities or other municipal obligors to impose and

17


collect fees and charges for public services or specific infrastructure projects. The Company also includes within public finance obligations those obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including utilities, toll roads, health care facilities and government office buildings. 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 9, Consolidated Variable Interest Entities. Unless otherwise specified, the outstanding par and debt service amounts presented in this note include outstanding exposures on VIEs whether or not they are consolidated.

Significant Risk Management Activities

The Portfolio Risk Management Committee, which includes members of AGC's senior management and senior risk and surveillance officers, sets specific risk policies and limits and is responsible for enterprise risk management, establishing the Company's risk appetite, credit underwriting of new business, surveillance and work-out.
    
All transactions in the insured portfolio are assigned internal credit ratings, which are updated based on changes in transaction credit quality. As part of the surveillance process, the Company monitors trends and changes in transaction credit quality, and recommends such remedial actions as may be necessary or appropriate. The Company also develops strategies to enforce its contractual rights and remedies and to mitigate its losses, engage in negotiation discussions with transaction participants and, when necessary, manage the Company's litigation proceedings.

Surveillance Categories

The Company segregates its insured portfolio into investment grade and BIG surveillance categories to facilitate the appropriate allocation of resources to monitoring and loss mitigation efforts and to aid in establishing the appropriate cycle for periodic review for each exposure. BIG exposures include all exposures with internal credit ratings below BBB-. The Company’s internal credit ratings are based on internal assessments of the likelihood of default and loss severity in the event of default. Internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and are generally reflective of an approach similar to that employed by the rating agencies, except that the Company's internal credit ratings focus on future performance rather than lifetime performance.

The Company monitors its 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 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. For assumed exposures, 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 5, Expected Loss to be Paid, for additional information. Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a future loss is expected and whether a claim has been paid.The Company uses a tax-equivalent yield, which reflects long-term trends in interest rates, 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. On the other hand, the Company uses risk-free rates, which are determined each quarter, to calculate the expected loss for financial statement measurement purposes.

More extensive monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. The Company expects “future losses” on a transaction when the Company believes there is at least a 50% chance that, on a present value basis, it will pay more claims on that transaction in the future than it will have reimbursed. The three BIG categories are:
 
BIG Category 1: Below-investment-grade transactions showing sufficient deterioration to make future losses possible, but for which none are currently expected.
 
BIG Category 2: Below-investment-grade transactions for which future losses are expected but for which no claims (other than liquidity claims which are claims that the Company expects to be reimbursed within one year) have yet been paid.
 

18


BIG Category 3: Below-investment-grade transactions for which future losses are expected and on which claims (other than liquidity claims) have been paid.

Unless otherwise noted, ratings disclosed herein on the Company's insured portfolio reflect its internal ratings. The Company classifies those portions of risks benefiting from reimbursement obligations collateralized by eligible assets held in trust in acceptable reimbursement structures as the higher of 'AA' or their current internal rating.

Components of Outstanding Exposure

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 it manages such securities as investments and not insurance exposure. As of December 31, 2017 and December 31, 2016, the Company excluded $733 million and $711 million, respectively, of net par attributable to loss mitigation securities (which are mostly BIG), and other loss mitigation strategies. The following table presents the gross and net debt service for financial guaranty contracts.

Financial Guaranty
Debt Service Outstanding

 
Gross Debt Service
Outstanding
 
Net Debt Service
Outstanding
 
December 31,
2017
 
December 31,
2016
 
December 31,
2017
 
December 31,
2016
 
(in millions)
Public finance
$
67,530

 
$
89,942

 
$
33,516

 
$
44,804

Structured finance
7,446

 
13,041

 
5,469

 
9,725

Total financial guaranty
$
74,976

 
$
102,983

 
$
38,985

 
$
54,529

    

Financial Guaranty Portfolio by Internal Rating
As of December 31, 2017

 
 
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
 
$
38

 
0.2
%
 
$
867

 
26.1
%
 
$
687

 
15.9
%
 
$
180

 
23.9
%
 
$
1,772

 
6.7
%
AA
 
2,772

 
15.1

 
1

 
0.0

 
1,362

 
31.7

 
48

 
6.3

 
4,183

 
15.6
A
 
8,872

 
48.3

 
599

 
18.1

 
1,211

 
28.1

 
139

 
18.4

 
10,821

 
40.4
BBB
 
4,646

 
25.3

 
1,714

 
51.6

 
306

 
7.1

 
388

 
51.3

 
7,054

 
26.4
BIG
 
2,043

 
11.1

 
138

 
4.2

 
743

 
17.2

 
1

 
0.1

 
2,925

 
10.9
Total net par outstanding
 
$
18,371

 
100.0
%
 
$
3,319

 
100.0
%
 
$
4,309

 
100.0
%
 
$
756

 
100.0
%
 
$
26,755

 
100.0
%


19


Financial Guaranty Portfolio by Internal Rating
As of December 31, 2016

 
 
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
 
$
71

 
0.3
%
 
$
784

 
20.8
%
 
$
3,535

 
43.6
%
 
$
228

 
21.4
%
 
$
4,618

 
12.3
%
AA
 
3,384

 
13.7

 
252

 
6.7

 
1,807

 
22.2

 
77

 
7.3

 
5,520

 
14.7
A
 
11,823

 
48.1

 
566

 
15.1

 
1,148

 
14.1

 
225

 
21.2

 
13,762

 
36.7
BBB
 
6,440

 
26.2

 
1,807

 
48.1

 
336

 
4.1

 
455

 
42.9

 
9,038

 
24.1
BIG
 
2,873

 
11.7

 
349

 
9.3

 
1,297

 
16.0

 
76

 
7.2

 
4,595

 
12.2
Total net par outstanding
 
$
24,591

 
100.0
%
 
$
3,758

 
100.0
%
 
$
8,123

 
100.0
%
 
$
1,061

 
100.0
%
 
$
37,533

 
100.0
%






20


Financial Guaranty Portfolio
by Sector

 
Gross Par Outstanding
 
Net Par Outstanding
Sector
As of
December 31, 2017
 
As of
December 31, 2016
 
As of
December 31, 2017
 
As of
December 31, 2016
 
(in millions)
Public finance:
 
 
 
 
 
 
 
U.S.:
 
 
 
 
 
 
 
Tax backed
$
8,157

 
$
10,190

 
$
4,480

 
$
5,599

General obligation
16,179

 
21,282

 
4,276

 
6,546

Transportation
4,331

 
4,865

 
2,759

 
3,048

Municipal utilities
5,540

 
6,686

 
2,107

 
2,466

Healthcare
2,790

 
4,297

 
2,048

 
3,147

Infrastructure finance
1,335

 
1,692

 
1,072

 
1,330

Higher education
2,283

 
3,238

 
785

 
1,404

Investor-owned utilities
265

 
349

 
246

 
307

Housing revenue
99

 
250

 
96

 
152

Other public finance
1,159

 
1,355

 
502

 
592

Total public finance—U.S.
42,138

 
54,204

 
18,371

 
24,591

Non-U.S.:
 
 
 
 
 
 
 
Regulated utilities
1,501

 
1,852

 
1,227

 
1,388

Infrastructure finance
1,053

 
1,626

 
989

 
1,365

Pooled infrastructure
1,561

 
1,621

 
780

 
702

Other public finance
323

 
303

 
323

 
303

Total public finance—non-U.S.
4,438

 
5,402

 
3,319

 
3,758

Total public finance
46,576

 
59,606

 
21,690

 
28,349

Structured finance:
 
 
 
 
 
 
 
U.S.:
 
 
 
 
 
 
 
Residential Mortgage-Backed Securities (RMBS)
1,792

 
2,220

 
1,452

 
1,774

Pooled corporate obligations
1,322

 
4,663

 
1,149

 
4,305

Consumer receivables
1,119

 
1,201

 
955

 
979

Insurance securitization
1,585

 
2,533

 
510

 
736

Commercial receivables
90

 
170

 
65

 
111

Other structured finance
242

 
400

 
178

 
218

Total structured finance—U.S.
6,150

 
11,187

 
4,309

 
8,123

Non-U.S.:
 
 
 
 
 
 
 
Commercial receivables
280

 
352

 
235

 
267

RMBS
231

 
229

 
230

 
229

Pooled corporate obligations
78

 
335

 
78

 
289

Other structured finance
230

 
296

 
213

 
276

Total structured finance—non-U.S.
819

 
1,212

 
756

 
1,061

Total structured finance
6,969

 
12,399

 
5,065

 
9,184

Total net par outstanding
$
53,545

 
$
72,005

 
$
26,755

 
$
37,533

    
Actual maturities of insured obligations could differ from contractual maturities because borrowers have the right to call or prepay certain obligations. The expected maturities of structured finance obligations are, in general, considerably shorter than the contractual maturities for such obligations.


21


Expected Amortization of
Net Par Outstanding
As of December 31, 2017

 
Public
Finance
 
Structured
Finance
 
Total
 
(in millions)
0 to 5 years
$
7,744

 
$
2,679

 
$
10,423

5 to 10 years
3,357

 
1,146

 
4,503

10 to 15 years
3,155

 
414

 
3,569

15 to 20 years
3,472

 
696

 
4,168

20 years and above
3,962

 
130

 
4,092

Total net par outstanding
$
21,690

 
$
5,065

 
$
26,755



Components of BIG Net Par Outstanding
As of December 31, 2017

 
BIG Net Par Outstanding
 
Net Par
 
BIG 1
 
BIG 2
 
BIG 3
 
Total BIG
 
Outstanding
 
 
 
 
 
(in millions)
 
 
 
 
Public finance:
 
 
 
 
 
 
 
 
 
U.S. public finance
$
381

 
$
302

 
$
1,360

 
$
2,043

 
$
18,371

Non-U.S. public finance
83

 
55

 

 
138

 
3,319

Public finance
464

 
357

 
1,360

 
2,181

 
21,690

Structured finance:
 
 
 
 
 
 
 
 
 
U.S. RMBS
143

 
101

 
353

 
597

 
1,452

Triple-X life insurance transactions

 

 

 

 
330

Trust preferred securities (TruPS)
122

 

 

 
122

 
1,177

Other structured finance
14

 
8

 
3

 
25

 
2,106

Structured finance
279

 
109

 
356

 
744

 
5,065

Total
$
743

 
$
466

 
$
1,716

 
$
2,925

 
$
26,755



22


Components of BIG Net Par Outstanding
As of December 31, 2016

 
BIG Net Par Outstanding
 
Net Par
 
BIG 1
 
BIG 2
 
BIG 3
 
Total BIG
 
Outstanding
 
 
 
 
 
(in millions)
 
 
 
 
Public finance:
 
 
 
 
 
 
 
 
 
U.S. public finance
$
873

 
$
1,364

 
$
636

 
$
2,873

 
$
24,591

Non-U.S. public finance
295

 
54

 

 
349

 
3,758

Public finance
1,168

 
1,418

 
636

 
3,222

 
28,349

Structured finance:
 
 
 
 
 
 
 
 
 
U.S. RMBS
128

 
174

 
425

 
727

 
1,774

Triple-X life insurance transactions

 

 
149

 
149

 
556

TruPS
243

 
95

 

 
338

 
1,607

Other structured finance
40

 
116

 
3

 
159

 
5,247

Structured finance
411

 
385

 
577

 
1,373

 
9,184

Total
$
1,579

 
$
1,803

 
$
1,213

 
$
4,595

 
$
37,533


BIG Net Par Outstanding
and Number of Risks
As of December 31, 2017
 
 
 
Net Par Outstanding
 
Number of Risks(2)
Description
 
Financial
Guaranty
Insurance(1)
 
Credit
Derivative
 
Total
 
Financial
Guaranty
Insurance(1)
 
Credit
Derivative
 
Total
 
 
(dollars in millions)
BIG:
 
 

 
 

 
 

 
 

 
 

 
 

Category 1
 
$
565

 
$
178

 
$
743

 
96

 
7

 
103

Category 2
 
451

 
15

 
466

 
35

 
3

 
38

Category 3
 
1,637

 
79

 
1,716

 
112

 
9

 
121

Total BIG
 
$
2,653

 
$
272

 
$
2,925

 
243

 
19

 
262


BIG Net Par Outstanding
and Number of Risks
As of December 31, 2016

 
 
Net Par Outstanding
 
Number of Risks(2)
Description
 
Financial
Guaranty
Insurance (1)
 
Credit
Derivative
 
Total
 
Financial
Guaranty
Insurance (1)
 
Credit
Derivative
 
Total
 
 
(dollars in millions)
BIG:
 
 

 
 

 
 

 
 

 
 

 
 

Category 1
 
$
1,123

 
$
456

 
$
1,579

 
133

 
10

 
143

Category 2
 
1,644

 
159

 
1,803

 
65

 
6

 
71

Category 3
 
1,100

 
113

 
1,213

 
107

 
9

 
116

Total BIG
 
$
3,867

 
$
728

 
$
4,595

 
305

 
25

 
330

 ____________________
(1)
Includes net par outstanding for VIEs.

(2)
A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments.

23


The Company seeks to maintain a diversified portfolio of insured obligations designed to spread its risk across a number of geographic areas.

Geographic Distribution of
Net Par Outstanding
As of December 31, 2017

 
Number
of Risks
 
Net Par Outstanding
 
Percent of Total Net Par Outstanding
 
(dollars in millions)
U.S.:
 
 
 
 
 
U.S. Public finance:
 
 
 
 
 
California
345

 
$
2,498

 
9.3
%
Texas
424

 
1,956

 
7.3
%
Puerto Rico
17

 
1,669

 
6.2
%
New Jersey
101

 
1,612

 
6.0
%
New York
251

 
1,284

 
4.8
%
Illinois
230

 
1,115

 
4.2
%
Florida
117

 
1,039

 
3.9
%
Pennsylvania
112

 
698

 
2.6
%
District of Columbia
6

 
523

 
2.0
%
Massachusetts
62

 
468

 
1.7
%
Other
1,177

 
5,509

 
20.6
%
Total U.S. public finance
2,842

 
18,371

 
68.6
%
U.S. Structured finance (multiple states)
418

 
4,309

 
16.1
%
Total U.S.
3,260

 
22,680

 
84.7
%
Non-U.S.:
 
 
 
 
 
United Kingdom
78

 
2,456

 
9.2
%
Australia
8