National Public Finance Guarantee Corporation · 2019-02-28 · National Public Finance Guarantee Corporation (“National” or “the Company”) ... (“S&P”) downgraded the

National Public Finance Guarantee Corporation

Statutory-Basis Financial Statements December 31, 2017 and 2016

Page(s)

Independent Auditor’s Report ..................................................................................................................1-2

Statutory-Basis Financial Statements

Statements of Admitted Assets, Liabilities and Capital and Surplus............................................................... 3

Statements of Income ...................................................................................................................................... 4

Statements of Changes in Capital and Surplus ................................................................................................ 5

Statements of Cash Flows ............................................................................................................................... 6

Notes to Statutory-Basis Financial Statements ......................................................................................... 7 - 43

Supplemental Schedules

Summary Investment Schedule ..................................................................................................................... 44

Supplemental Investment Risks Interrogatories ..................................................................................... 45 - 50

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NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION STATUTORY-BASIS STATEMENTS OF ADMITTED ASSETS, LIABILITIES and CAPITAL and SURPLUS

(Dollars in thousands except share and per share amounts)

December 31,2017 December 31, 2016

Admitted Assets

Investments: Fixed maturity securities, at amortized cost

(fair value $3,253,867 and $3,946,254, respectively) $ 3,228,023 $ 3,920,790 Securities purchased under agreements to resell (parent) 124,000 128,500 Short-term investments, at amortized cost

which approximates fair value 20,319 103,728 Investment in preferred stock, at fair value 663 406 Receivables for securities sold 562 161 Other invested assets 75,939 85,276

Total investments 3,449,506 4,238,861 Cash and cash equivalents 176,131 74,640

Total cash and investments 3,625,637 4,313,501 Accrued investment income 26,144 27,881 Current tax receivable 89,836 - Deferred tax asset 5,328 10,572 Other assets 6,995 3,249

Total admitted assets $ 3,753,940 $ 4,355,203

Liabilities, Capital and Surplus

Liabilities:

Deferred premium revenue $ 585,470 $ 786,074 Loss and loss adjustment expense reserves

(net of subrogation recoverable) 227,334 (98,325) Contingency reserve 594,289 745,256 Securities sold under agreements to repurchase (parent) 124,000 128,500 Current income taxes - 5,813 Payable for investments purchased 33,720 31,868 Other liabilities 23,221 25,178

Total liabilities 1,588,034 1,624,364 Capital and Surplus:

Common stock, par value $30 per share; authorized, issued and outstanding - 500,000 shares 15,000 15,000

Additional paid-in capital 574,441 574,441 Unassigned surplus 1,576,465 2,141,398

Total capital and surplus 2,165,906 2,730,839 Total liabilities, capital and surplus $ 3,753,940 $ 4,355,203

The accompanying notes are an integral part of the financial statements.

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NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION STATUTORY-BASIS STATEMENTS OF INCOME

(Dollars in thousands)

Years ended December 31, 2017 2016 Revenues: Gross premiums written $ 13,034 $ 19,039 Ceded premiums written - - Net premiums written 13,034 19,039 Decrease in unearned premiums 200,604 256,345 Premiums earned 213,638 275,384 Expenses: Losses incurred (benefit) 551,957 86,353 Loss adjustment expenses incurred 32,384 28,965 Other underwriting expenses incurred 66,746 61,441 Total underwriting expenses 651,087 176,759 Net underwriting gain (loss) (437,449) 98,625 Investment income: Net investment income (loss) 111,278 117,845 Net realized capital gains (losses), (less tax of $4,903 and $36,452) (85,014) 49,838 Net investment gain (loss) 26,264 167,683 Other income (expense), net (3,664) (14) Income (loss) before income taxes (after capital gains tax) (414,849) 266,294 Provision (benefit) for income taxes (93,463) 74,485 Net income (loss) $ (321,386) $ 191,809


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NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION STATUTORY-BASIS STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS

For the years ended December 31, 2017 and 2016

(Dollars in thousands except share amounts)

Additional Total Common Stock Paid-in Unassigned Capital and

Shares Amount Capital Surplus Surplus

Balance, January 1, 2016 500,000 $ 15,000 $ 574,441 $ 1,888,102 $ 2,477,543 Net income (loss) - - - 191,809 191,809 Change in deferred income taxes - - - (52,268) (52,268) Change in non-admitted assets - - - 68,202 68,202 Change in contingency reserve - - - 164,786 164,786 Change in unrealized capital losses, net of tax - - - (931) (931) Dividends paid - - - (118,302) (118,302) Balance, December 31, 2016 500,000 $ 15,000 $ 574,441 $ 2,141,398 $ 2,730,839 Net income (loss) - - - (321,386) (321,386) Change in deferred income taxes - - - (132,656) (132,656) Change in non-admitted assets - - - (133,996) (133,996) Change in contingency reserve - - - 150,968 150,968 Change in unrealized capital losses, net of tax - - (10,037) (10,037) Dividends paid - - - (117,826) (117,826) Balance, December 31, 2017 500,000 $ 15,000 $ 574,441 $ 1,576,465 $ 2,165,906


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NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION STATUTORY-BASIS STATEMENTS OF CASH FLOWS

(Dollars in thousands)

Years Ended December 31,

2017 2016 Cash from operations Premiums collected, net of reinsurance $ 13,034 $ 19,037 Net investment income (loss) 114,380 125,820 Miscellaneous income (expense) (3,664) (15) Total 123,750 144,842 Loss payments (receipts) 238,322 174,754 Commissions, expenses paid and loss adjustment expenses paid 90,846 71,361 Federal and foreign income taxes paid (recovered) 28,066 78,754 Total 357,234 324,869

Net cash used by operating activities (233,484) (180,027) Cash from investments Proceeds from investments sold, matured or repaid: Fixed-maturity securities 2,609,475 2,723,073 Other invested assets 9,951 - Miscellaneous proceeds 1,324 897 Total investment proceeds 2,620,750 2,723,970 Cost of investments acquired: Fixed-maturity securities 1,987,486 2,376,389 Common stock 265,532 2,977 Other invested assets 197 75,000 Increase in payable for investments purchased, net 3 16 Total investments acquired 2,253,218 2,454,382 Net cash provided (used) by investment activities 367,532 269,588 Cash from financing and miscellaneous sources Securities under agreement to repurchase (4,500) (70,000) Dividends paid (117,826) (118,302) Other cash applied (used) 1,860 2,994

Net cash used for financing and miscellaneous sources (120,466) (185,308) Net change in cash, cash equivalents and short-term investments 13,582 (95,747) Cash, cash equivalents and short-term investments - beginning of year 306,868 402,615 Cash, cash equivalents and short-term investments - end of year $ 320,450 $ 306,868 Note: Supplemental disclosures of cash flow information for non-cash transactions:

Receipt of underlying bonds in exchange for stocks $ - $ 131,673 Securities transfer to MBIA Inc. for partial payment of tax liabilities $ - $ 43,846 Securities transfer from MBIA Inc. for partial refund of tax payment $ 20,977 $ -


NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS As of and for the years ended December 31, 2017 and 2016

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1. Business Developments and Risks and Uncertainties National Public Finance Guarantee Corporation (“National” or “the Company”) is a wholly-owned subsidiary of MBIA Inc. (“the Parent” or “Parent Company”) through an intermediary holding company, National Public Finance Guarantee Holdings, Inc. (“National Holdings”). The financial guarantees issued by National provide unconditional and irrevocable guarantees of the payment of the principal of, and interest or other amounts owing on, insured obligations when due or, in the event National has exercised, at its discretion, the right to accelerate the payment under its policies upon the acceleration of the underlying insured obligations due to default or otherwise. Through its reinsurance of United States (“U.S.”) public finance financial guarantees from MBIA Insurance Corporation (“MBIA Corp.”) and transfers by novation of all policies under a reinsurance agreement with Financial Guaranty Insurance Company (“FGIC”), National’s insurance portfolio consists of municipal bonds, including tax-exempt and taxable indebtedness of U.S. political subdivisions, as well as utility districts, airports, healthcare institutions, higher educational facilities, student loan issuers, housing authorities and other similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. Municipal bonds and privately issued bonds used for the financing of public purpose projects generally are supported by taxes, assessments, user fees or tariffs related to the use of these projects, by lease payments or by other similar types of revenue streams. As of December 31, 2017, National had insured gross par outstanding of $71.9 billion. Business Developments Financial Strength Ratings On June 26, 2017, Standard & Poor’s Financial Services LLC (“S&P”) downgraded the financial strength rating of National from AA- with a stable outlook to A with a stable outlook. National’s ability to write new business and to compete with other financial guarantors is largely dependent on the financial strength ratings assigned to National by major rating agencies, and with the A rating assigned by S&P, it would be difficult for National to compete with higher-rated competitors. Therefore, at that time, National ceased its efforts to actively pursue writing new financial guarantee business. On November 28, 2017, the Company provided notice to S&P terminating the agreements by which S&P agreed to provide financial strength ratings to National. On December 1, 2017, S&P affirmed National’s A with a stable outlook rating and subsequently withdrew all of its ratings. On September 28, 2017, National provided notice to Kroll Bond Rating Agency (“Kroll”) terminating the agreement by which Kroll agreed to provide a financial strength rating to National. On December 5, 2017, Kroll downgraded the financial strength rating of National from AA+ to AA with a negative outlook and subsequently withdrew its rating. On September 28, 2017, MBIA Inc., on behalf of its subsidiary, National, provided notice to Moody’s Investors Services (“Moody’s”) terminating the agreement by which Moody’s agreed to provide financial strength ratings to National. On January 17, 2018, Moody’s downgraded the financial strength rating of National to Baa2 from A3 with a stable outlook. Moody’s, at its discretion and in the absence of any contract with the Company, continues to maintain ratings on MBIA Inc. and its subsidiaries. Key Lending Agreements Asset Swap National maintains a simultaneous and matched repurchase and reverse repurchase facility (“Asset Swap”) with MBIA Inc. which provides MBIA Inc. with eligible assets to pledge under investment agreements and derivative contracts. The Asset Swap facility resets on a quarterly basis. These agreements are accounted for as secured borrowings and are recorded at contract value plus accrued interest. The reverse repurchase agreement is included in securities purchased under agreements to resell (parent) and the repurchase agreement is included in securities sold under agreements to repurchase (parent) on the balance sheet, both of which are equal in amount. Refer to “Note 3. Investments” or further information.


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Advances Agreement MBIA Inc., National, MBIA Corp. and certain other subsidiaries are party to an intercompany advances agreement (the “MBIA Advances Agreement”). The MBIA Advances Agreement permits National to make advances to MBIA Inc. and other MBIA group companies that are party to the agreement at a rate per annum equal to London Inter-bank Offered Rate (“LIBOR”) plus 0.25%. The agreement also permits other affiliates to advance funds to National or MBIA Corp. at a rate per annum equal to LIBOR minus 0.10%. Advances by National cannot exceed 3% of its admitted assets as of the last quarter end. As of December 31, 2017 and 2016, there were no amounts drawn under the agreement. Dividend In both 2017 and 2016, National declared and paid dividends of $118 million, to its ultimate parent, MBIA Inc. Risks and Uncertainties National continues to surveil and remediate its existing insured portfolio and will seek opportunities to enhance shareholder value using its strong financial resources, while protecting the interests of all of its policyholders. Certain state and local governments and territory obligors that National insures remain under financial and budgetary stress. This could lead to an increase in defaults by such entities on the payment of their obligations and losses or impairments on a greater number of the Company’s insured transactions. National monitors and analyzes these situations and other stressed credits closely, and the overall extent and duration of this stress is uncertain.

In particular, the Commonwealth of Puerto Rico and certain of its instrumentalities (“Puerto Rico”) are experiencing significant fiscal stress and constrained liquidity due to, among other things, Puerto Rico’s structural budget imbalance, the lack of access to the capital markets, a stagnating local economy, net migration of people out of Puerto Rico and a high debt burden. Although Puerto Rico has tried to address its challenges through various fiscal policies, it continues to experience significant fiscal stress. Puerto Rico defaulted on scheduled debt service for National insured bonds and National paid gross claims in the aggregate of $242 million during 2017. On January 1, 2018, Puerto Rico also defaulted on scheduled debt service for National insured bonds and National paid gross claims in the aggregate of $69 million. On September 20, 2017, Hurricane Maria made landfall in Puerto Rico as a Category 4 hurricane resulting in catastrophic damage to much of the island’s basic infrastructure, including its electrical transmission and distribution grid, telecommunications network, housing, roads, bridges, water and sewer systems. On September 21, 2017, the President of the United States approved a Major Disaster Declaration for Puerto Rico and the Federal Emergency Management Agency (“FEMA”) made federal disaster assistance available to Puerto Rico to supplement its recovery efforts. Hurricane Maria’s impact on Puerto Rico will likely also impact its ability to both repay its legacy indebtedness and participate in ongoing debt restructuring negotiations. The physical damage and resultant lost economic activity may exceed the collective aid Puerto Rico receives from private insurance, relief from FEMA and other federal agencies and programs. Economic activity in Puerto Rico may not return to pre-hurricane levels and Puerto Rico’s recovery could be more shallow and protracted than that experienced by other similarly affected governments, given Puerto Rico’s prior constrained liquidity and economic activity. While the federal government has made aid available to Puerto Rico, there can be no assurance that such aid will continue in the amounts necessary to offset the adverse impacts from Hurricane Maria in their entirety. In addition, the necessary and greater involvement of the federal government, through its actions to deliver disaster relief and other support services, in addition to the evolving role of the Financial Oversight and Management Board for Puerto Rico (“Oversight Board”) and the role of Puerto Rico in its own recovery, heightens political risk in connection with the restructuring of legacy debt. This risk could lead the Oversight Board, Puerto Rico or the federal government to seek to extract greater concessions from creditors based on the uncertainty of Puerto Rico’s long-term recovery prospects. In this event, losses at National on select Puerto Rico exposures could increase materially. 2. Summary of Significant Accounting Policies Basis of Presentation The statutory financial statements of National are presented on the basis of accounting practices prescribed or permitted by the New York State Department of Financial Services (“NYSDFS”). The NYSDFS recognizes only statutory accounting practices prescribed or permitted by the State of New York for determining and reporting the financial condition and results of operations of an insurance company, and determining its solvency under the New York Insurance Law (“NYIL”). The National Association of


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Insurance Commissioners (“NAIC”) Accounting Practices and Procedures Manual (“NAIC SAP”) has been adopted as a component of prescribed or permitted practices by the State of New York. The Superintendent of the NYSDFS has the right to permit other specific practices that deviate from prescribed practices. Effective January 1, 2010, National was granted a permitted practice by the NYSDFS to reset its unassigned funds (surplus) to zero by netting its negative unassigned surplus of $1.6 billion against $2.2 billion of gross paid-in and contributed surplus as summarized in the table below. Total policyholders’ surplus was not impacted by this permitted practice. In thousands 2017 2016 NET INCOME Net income (loss), state basis $ (321,386) $ 191,809 State prescribed practices that increase/decrease

NAIC SAP: - - State prescribed practices that increase/decrease

NAIC SAP: - - NAIC SAP basis $ (321,386) $ 191,809 SURPLUS Policyholders' surplus, state basis $ 2,165,906 $ 2,730,839 State prescribed practices that increase/decrease

NAIC SAP: - - State prescribed practices that increase/decrease

NAIC SAP: Gross paid-in and contributed surplus (1,623,146) (1,623,146) Unassigned surplus 1,623,146 1,623,146 NAIC SAP basis $ 2,165,906 $ 2,730,839

Use of Estimates in the Preparation of the Financial Statements The preparation of financial statements in conformity with Statutory Accounting Principles (“SAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. As additional information becomes available or actual amounts become determinable, the recorded estimates are revised and reflected in operating results. Actual results could differ from those estimates. Cash, Cash Equivalents and Short-Term Investments Cash and cash equivalents include cash on hand and short-term, highly liquid investments with original maturities of three months or less at the date of purchase. Effective December 31, 2017, cash equivalents also includes money market funds. Short-term investments and cash equivalents are stated at amortized cost.


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Investments Bonds with an NAIC designation of 1 or 2 that are not backed by other loans are reported at amortized cost. Amortized cost is calculated using the effective yield method. For bonds purchased at a price below par value, discounts are accreted over the remaining term of the bonds. For bonds purchased at a price above par value, which have call features, premiums are amortized to the call date that produces the lowest yield. For premium bonds that do not have call features, such premium is amortized over the remaining term of the bond. Investments in bonds, loan-backed bonds and structured securities with an NAIC designation of 3 through 6 that are not backed by other loans are reported at the lower of amortized cost (as described above) or fair value as determined by independent third-parties. In cases where specific market quotes are unavailable, interpreting market data and estimating market values require considerable judgment by management. Accordingly, the estimates presented are not necessarily indicative of the amount National could realize in the market. Statement of Accounting Principles (“SSAP”) No. 43R “Loan-backed and Structured Securities – Revised” establishes principles for investments in loan-backed and structured securities and increased disclosures regarding other-than-temporarily impaired securities. Loan-backed bonds and structured securities with an NAIC designation of 1 or 2 are reported at amortized cost using the effective interest method, including anticipated prepayments at the date of purchase. Changes in the estimated cash flows from the original purchase assumptions are accounted for using the retrospective method. Prepayment assumptions for loan-backed and structured securities were obtained from an independent third-party data service or internal estimates. Investment income is recorded as earned. All investment income due and accrued with amounts that are over 90 days past due are recorded as non-admitted assets. Realized gains and losses on the sale of investments are determined using the first-in, first-out method and are included in the Statements of Income as a separate component of revenues. Unrealized gains and losses from the revaluation of bonds and common stocks not valued at amortized cost are credited or charged to unassigned surplus. Investments in shares of common stock of Parent Company are carried at fair value, which is based on quoted market prices, and reduced by elimination of the reciprocal ownership interest as required under SSAP No. 97 “Investments in Subsidiary, Controlled and Affiliated Entities” and NYIL. Preferred stock is stated at fair value based upon quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. During the fourth quarter of 2016, National acquired an ownership interest in a limited partnership. National recorded its ownership interest within “Other invested assets” on its Balance Sheets. National’s ownership interest is reported using the equity method of accounting with the investment carried at fair value, as defined in SSAP No. 48 “Joint Ventures, Partnerships and Limited Liability Companies”. The remaining other invested assets pertain to investments in surplus debenture bonds carried at amortized cost. Refer to “Note 5. Fair Value of Financial Instruments” for further information regarding valuation methodologies and related disclosures. Other-Than-Temporary Impairments on Investment Securities National’s securities, other than loan-backed and structured securities, for which fair value is less than amortized cost are reviewed no less than quarterly to assess whether such a decline in value is other-than-temporary. This evaluation includes both qualitative and quantitative considerations. In assessing whether a decline in value is other-than-temporary, National considers several factors, including but not limited to (a) the magnitude and duration of the decline, (b) credit indicators and the reasons for the decline, such as general interest rate or credit spread movements, credit rating downgrades, issuer-specific changes in credit spreads, and the financial condition of the issuer, (c) any guarantees associated with a security such as those provided by financial guarantee insurance companies, and (d) National’s ability and intent to retain the investment for the period of time sufficient to allow for an anticipated recovery in value. Based on this assessment, if National determines that a decline in the value of an investment is other-than-temporary, the investment is written down to its fair value and a realized loss is recorded in the Statements of Income.


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For loan-backed and structured securities, National estimates cash flows expected to be collected over the life of the security. If National determines that based on current information and events, there is a decrease in cash flows expected to be collected (that is they will be unable to collect all cash flows expected at acquisition plus any additional cash flows expected to be collected arising from changes in estimates after acquisition) an other-than-temporary impairment (“OTTI”) shall be considered to have occurred. For loan-backed securities that management has no intent to sell and believes that it is more likely than not such securities will not be required to be sold prior to recovery, only the credit loss component of the OTTI is recognized as a realized loss representing the difference between the securities’ amortized cost basis and the present value of cash flows expected to be collected from these securities. If management intends to sell the security or if management believes that it is more likely than not such securities will be required to be sold prior to recovery, the entire amount of the unrealized loss is recognized as a realized loss. These assessments require management to exercise judgment as to whether an investment is impaired based on market conditions and trends and the availability of relevant data. See “Note 5. Fair Value of Financial Instruments” for further information regarding valuation methodologies and related disclosures. Premium Revenue Recognition National’s premiums written consist of upfront premiums and installment premiums received and accrued for policies issued in current and prior years. Upfront premiums are earned proportionately to the ratio of scheduled periodic maturity of principal and payment of interest (“debt service”) to the original total principal and interest insured. Installment premiums are earned on a straight-line basis over each installment period, generally one year or less. Unearned premiums represent the portion of premiums written that is applicable to the unexpired risk of insured obligations. When an insured obligation is retired early, is called by the issuer, or is in substance paid in advance through a refunding accomplished by placing U.S. Government securities in escrow, the remaining unearned premium is earned at that time, since there is no longer risk to National. As the outstanding principal of an installment-based policy is paid down by the issuer of a National-insured obligation, less premium is collected and recognized by National. Additionally, National may receive premiums upon the early termination of installment-based policies, which are earned when received. Premiums ceded to reinsurers reduce the amount of earned premium National will recognize from its insurance policies. For both upfront and installment policies, ceded premium is recognized in earnings in proportion to and at the same time as the related gross premium revenue is recognized. Expenses incurred in connection with the acquisition of new insurance business, including ceding commissions expenses, are charged to operations as incurred. Expenses incurred are reduced for ceding commissions received or receivable, to the extent admissible. National does not utilize anticipated investment income as a factor in the premium deficiency calculation. National had no premium deficiency as of December 31, 2017 or 2016. Fees National collects insurance related fees for services performed in connection with certain transactions. Depending upon the type of fee received, the fee is either recognized when it is received or deferred and recognized as the related service has been completed. These fees are included as a reduction to “Other underwriting expenses” within the Statements of Income. Loss and Loss Adjustment Expense (“LAE”) Reserves National’s financial guarantee insurance provides an unconditional and irrevocable guarantee of the payment of the principal of, and interest or other amounts owing on, insured obligations when due or, in the event that National has the right, at its discretion, to accelerate insured obligations upon default or otherwise, upon such acceleration by National. Loss and LAE reserves are established by National’s Loss Reserve Committee, which consists of members of senior management, and require the use of judgment and estimates with respect to the occurrence, timing and amount of a loss on an insured obligation.


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National recognizes loss reserves on a contract-by-contract basis where an insured event has occurred (i.e., a payment default on the insured obligation) or an insured event is expected in the future based upon credit deterioration which has already occurred and has been identified. Case reserves are measured based on the probability-weighted present value of expected net cash inflows and outflows to be paid under the contract, discounted using a rate equal to the yield-to-maturity of National’s fixed-income investment portfolio, excluding cash and cash equivalents and other investments not intended to defease long-term liabilities. The loss reserve is subsequently remeasured each reporting period for expected increases or decreases due to changes in the likelihood of default and potential recoveries. Subsequent changes to the measurement of the loss reserves are recognized as losses incurred in the period of change. Measurement and recognition of loss reserves are reported net of any reinsurance. National estimates the likelihood of possible claims payments and possible recoveries using probability-weighted expected cash flows based on information available as of the measurement date, including market information. The methods for making such estimates are continually reviewed and any adjustments are reflected in the period determined. Once a case basis reserve is established for an insured obligation, National continues to record premium revenue to the extent premiums have been or are expected to be collected on that obligation. National does not establish loss reserves for all payments due under an insured obligation. Case basis reserves cover the estimated amount of principal and interest National expects to pay on its insured obligations and the costs of settlement and other loss mitigation expenses, net of expected recoveries. National recognizes potential salvage and subrogation recoveries on paid losses based on a similar probability-weighted net cash flow projection discounted using the same rate discussed above, as of the measurement date. When National becomes entitled to potential recoveries which are typically based on salvage rights, the rights conferred to National through the transactional documents (inclusive of the insurance agreement), subrogation rights embedded within insurance policies, or the underlying collateral of an insured obligation, it reports this type of salvage and subrogation as a contra-liability within “Loss and LAE reserves” on National’s balance sheet. References in the aforementioned and following disclosures to these items should be considered to be salvage and subrogation for purposes of financial reporting on a statutory basis. A number of variables are taken into account in establishing specific case basis reserves for individual policies. These variables include creditworthiness of the underlying issuer of the insured obligation, whether the obligation is secured or unsecured and the expected recovery rates on the insured obligation, the projected cash flow or market value of any assets that support the insured obligation and the historical and projected loss rates on such assets. Factors that may affect the actual ultimate underwriting losses for any policy include the state of the economy, changes in interest rates, rates of inflation and the salvage values of specific collateral. Management believes that National’s reserves are adequate to cover the net cost of claims. However, because the reserves are based on management’s judgment and estimates, there can be no assurance that the ultimate liability will not exceed such estimates. Refer to “Note 9. Loss and Loss Adjustment Expense Reserves” for additional information regarding the Company’s loss reserving methodology. Contingency Reserve A contingency reserve is established for the protection of all policyholders by direct charges to unassigned surplus and is established by National for past business and new business, as follows: 1. For policies in force prior to July 1, 1989, National establishes and maintains a contingency reserve equal to 50% of the

cumulative earned premiums on such policies. 2. For policies written on or after July 1, 1989, a contingency reserve, which represents the greater of 50% of premiums written or

a stated percentage of the principal guaranteed dependent on the category of obligation insured, is established over a 15 to 20 year period. The stated percentage ranges from 0.55% on municipal general obligation bonds to 2.5% on certain industrial development bonds and non-investment grade obligations.


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Contingency reserves are established and maintained net of collateral and reinsurance. The reserves may be released in the same manner in which they were established and withdrawals, to the extent there may be excess, may be made with either the prior written approval of the Superintendent of the NYSDFS or upon thirty days prior written notice, depending upon the circumstances specified in Article 69, Section 6903 of the NYIL. Contingency reserves established for policies which are terminated, matured or net of refundings to the extent that the refunded issue is paid off or secured by obligations, which are directly payable or guaranteed by the U.S. Government, may be released without prior approval or notice. National continually assesses its contingency reserve to determine if amounts are excessive in relation to the outstanding insured obligations and could potentially release additional contingency reserves in the future upon demonstrating to the satisfaction of the NYSDFS that the amounts are excessive. Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase National maintains an Asset Swap with MBIA Inc. Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as secured borrowings and are recorded at contract value plus accrued interest. The Asset Swap facility requires each of these agreements to be fully collateralized, with assets having an aggregate fair value in excess of the securities borrowed. The borrower of the securities is permitted to sell or repledge those securities. Under the facility, the fair value of the securities held as collateral by National is in excess of the fair value of the securities pledged as collateral to MBIA Inc. as National loans government and agency securities to MBIA Inc. in exchange for assets rated BBB or higher. Pledged collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the amounts borrowed during the life of the transactions. In the event of decline in the fair value of the pledged collateral under these transactions, additional collateral is obtained or the contract value of the facility is adjusted. Refer to “Note 1. Business Developments and Risks and Uncertainties” and “Note 11. Information Concerning Parent, Subsidiary and Affiliates” for further information. Income Taxes National files its U.S. Corporation Income Tax Return as a member of MBIA Inc. consolidated group and participates in the MBIA Inc. tax sharing agreement under which National is allocated its share of the consolidated tax liability or tax benefit as determined under the tax sharing agreement. To the extent that the consolidated tax liability of the Parent Company and its subsidiaries is less than National’s tax liability on a separate company basis, the difference would be held in escrow for two years in the event National were to incur a tax loss which could be carried back. Current tax losses not carried back on a separate return basis would be compensated for under the terms of the tax sharing agreement. Intercompany tax balances are settled annually following the Parent Company’s filing of its federal income tax return. The provision for federal income taxes is based on income from operations. Deferred income taxes are provided based on temporary differences between the financial reporting and tax bases of recording assets and liabilities. Changes in net deferred income taxes are recognized as a separate component of unassigned surplus. Recently Adopted Accounting Pronouncements Effective January 1, 2017, SSAP No. 26 “Bonds” and SSAP No. 43R were amended to clarify what portion of investment proceeds reflects the prepayment penalty of a callable bond with make-whole provisions. Refer to “Note 3. Investments”, for required disclosures on the Company’s prepayment penalties and acceleration fees. In December 2016, the NAIC adopted changes to SSAP No. 2 “Cash, Cash Equivalents, Drafts and Short-term Investments” to reflect that effective December 31, 2017, money market mutual funds should be classified as cash equivalents. This guidance superseded the guidance effective June 2016 that required these investments to be classified as short-term investments. The Company adopted this reclassification in its financial statements. Recent Accounting Pronouncements In December of 2016, the NAIC adopted changes to SSAP No. 103 “Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” to create significant new disclosures for repurchase and reverse repurchase agreement transactions. These changes were effective as of December 31, 2017. Refer to “Note 1: Business Developments and Risks and Uncertainties” and “Note 3. Investments”, for the new disclosures relating to the Company’s Asset Swap.


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In April 2016, the NAIC adopted changes to SSAP No. 41, “Surplus Notes”, which change the measurement of surplus notes that are rated NAIC 2 through 6 or that do not have a rating. The new guidance permits NAIC designation of 1 rated surplus notes to continue to be measured at amortized cost and now permits NAIC designation of 2 rated surplus notes to also be measured at amortized cost. NAIC designation of 3 through 6 and non-rated surplus notes will now be rated at the lower of amortized cost or fair value. The changes were effective January 1, 2017 and the adoption of this guidance did not have a material impact to the Company’s financial statements. 3. Investments

The Company’s investment objective is to optimize long-term returns while emphasizing the preservation of capital through maintenance of high-quality investments with adequate liquidity. The Company’s investment policies limit the amount of credit exposure to any one issuer. The fixed-maturity portfolio comprises high quality taxable and tax-exempt investments of diversified maturities. The following tables set forth the book/adjusted carry value, gross unrealized gains and losses, and fair value of the fixed-maturity investments and equity investments included in the investment portfolio of National as of December 31, 2017 and 2016.

As of December 31, 2017

Gross Gross Book/Adjusted Unrealized Unrealized Fair In thousands Carry Value Gains Losses Value U.S. governments $ 677,021 $ 1,736 $ (5,801) $ 672,956 All other governments 1,803 69 (21) 1,851 States, territories and possessions 162,571 1,042 (1,864) 161,749 Political subdivisions of states,

territories and possessions 60,561 1,335 (190) 61,706 Special revenue and special assessment obligations 722,524 7,447 (5,652) 724,319 Industrial and miscellaneous 1,276,927 15,878 (6,817) 1,285,988 Hybrid securities 89,347 1,160 (149) 90,358 Parent, subsidiaries and affiliates 237,269 17,671 - 254,940

Total fixed-maturity investments 3,228,023 46,338 (20,494) 3,253,867 Investment in preferred stock 663 - - 663

Total investment in preferred stock 663 - - 663

Total fixed-maturity and equity investments $ 3,228,686 $ 46,338 $ (20,494) $ 3,254,530


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As of December 31, 2016

Gross Gross Book/Adjusted Unrealized Unrealized Fair In thousands Carry Value Gains Losses Value U.S. governments $ 563,586 $ 1,300 $ (9,120) $ 555,766 All other governments 1,892 24 (161) 1,755 States, territories and possessions 217,849 1,779 (5,418) 214,210 Political subdivisions of states,

territories and possessions 160,445 4,760 (274) 164,931 Special revenue and special assessment obligations 1,454,896 46,936 (17,665) 1,484,167 Industrial and miscellaneous 1,395,164 10,365 (28,338) 1,377,191 Hybrid securities 14,390 984 (60) 15,314 Parent, subsidiaries and affiliates 112,567 20,353 - 132,920

Total fixed-maturity investments 3,920,789 86,501 (61,036) 3,946,254 Investment in preferred stock 406 - - 406

Total investment in preferred stock 406 - - 406

Total fixed-maturity and equity investments $ 3,921,195 $ 86,501 $ (61,036) $ 3,946,660

Securities which are designated 5* are securities that are unrated but current on principal and interest. The Company did not have any 5* securities in its investment portfolio as of December 31, 2017 and 2016. The following table sets forth the distribution by contractual maturity of National’s fixed-maturity and short-term investments at book/adjusted carry value and fair value as of December 31, 2017. Contractual maturities may differ from expected maturities because borrowers may have the right to call or prepay obligations.

Book/Adjusted In thousands Carry Value Fair Value Due in one year or less $ 98,286 $ 98,300 Due after one year through five years 1,049,012 1,047,214 Due after five years through ten years 414,510 415,558 Due after ten years 977,974 1,007,291 Loan-backed and structured securities 708,561 705,783

Total fixed-maturity and short-term investments $ 3,248,343 $ 3,274,146


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The following tables set forth the gross unrealized losses of National’s fixed-maturity and equity investments as of December 31, 2017 and 2016. The tables have segregated investments that have been in a continuous unrealized loss position for less than twelve months from those that have been in a continuous unrealized loss position for twelve months or longer. The tables below exclude securities recorded at NAIC fair value where the fair value of these securities was lower than amortized cost.

As of December 31, 2017 Less than 12 Months 12 Months or Longer Total Fair Unrealized Fair Unrealized Fair Unrealized In thousands Value Losses Value Losses Value Losses U.S. governments $ 471,503 $ (1,031) $ 136,227 $ (4,770) $ 607,730 $ (5,801) All other governments - - 310 (21) 310 (21) States, territories and possessions 71,358 (589) 59,687 (1,275) 131,045 (1,864) Political subdivisions of states, territories and possessions 14,603 (190) - - 14,603 (190) Special revenue and special assessment obligations 113,772 (639) 184,025 (5,013) 297,797 (5,652) Industrial and miscellaneous 309,360 (1,842) 148,302 (4,975) 457,662 (6,817) Hybrid securities 31,424 (149) - - 31,424 (149)

Total fixed-maturity investments $ 1,012,020 $ (4,440) $ 528,551 $ (16,054) $ 1,540,571 $ (20,494)

As of December 31, 2016 Less than 12 Months 12 Months or Longer Total Fair Unrealized Fair Unrealize

d Fair Unrealized

In thousands Value Losses Value Losses Value Losses U.S. governments $ 345,903 $ (7,304) $ 53,054 $ (1,816) $ 398,957 $ (9,120) All other governments 1,157 (161) - - 1,157 (161) States, territories and possessions 161,442 (5,418) - - 161,442 (5,418) Political subdivisions of states, territories and possessions 27,707 (264) 1,011 (10) 28,718 (274) Special revenue and special assessment obligations 518,161 (15,824) 64,810 (1,841) 582,971 (17,665) Industrial and miscellaneous 572,868 (27,768) 48,529 (570) 621,397 (28,338) Hybrid securities 2,151 (60) - - 2,151 (60)

Total fixed-maturity investments $ 1,629,389 $ (56,799) $ 167,404 $ (4,237) $ 1,796,793 $ (61,036)

The following tables set forth the unrealized losses of the Company’s loan-backed and structured securities as of December 31, 2017 and 2016. The tables have segregated loan-backed and structured securities that have been in a continuous unrealized loss position for less than twelve months from those that have been in a continuous unrealized loss position for twelve months or longer.

In thousands As of December 31, 2017 The aggregate amount of unrealized losses: Less than 12 Months $ (963) 12 Months or Longer $ (3,744) The aggregate related fair value of securities with unrealized losses: Less than 12 Months $ 197,230 12 Months or Longer $ 173,751


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In thousands As of December 31, 2016 The aggregate amount of unrealized losses: Less than 12 Months $ (9,726) 12 Months or Longer $ (3,654) The aggregate related fair value of securities with unrealized losses: Less than 12 Months $ 513,487 12 Months or Longer $ 137,903

The Company concluded that it does not have the intent to sell securities in an unrealized loss position and it is more likely than not, that it would not have to sell these securities before recovery of their cost basis. In making this conclusion, the Company examined the cash flow projections for its investment portfolios, the potential sources and uses of cash in its businesses, and the cash resources available to its business other than sales of securities. It also considered the existence of any risk management or other plans as of December 31, 2017, that would require the sale of impaired securities. Impaired securities that the Company intends to sell before the expected recovery of such securities’ fair values have been written down to fair value. Prepayment Penalty and Acceleration Fees For securities sold, redeemed or otherwise disposed as a result of a callable feature (including make whole call provisions), the following table discloses the number of securities sold, disposed or otherwise redeemed and the aggregate amount of investment income generated as a result of a prepayment penalty and/or acceleration fees for the year ended December 31, 2017.

For Year Ended

In thousands December 31, 2017 Number of CUSIPs 15 Aggregate Amount of Investment Income $ 338

Restricted Assets The following tables summarize restricted assets, including pledged by restricted asset category as of December 31, 2017 and 2016.

In thousands As of December 31, 2017 Gross (Admitted & Nonadmitted) Restricted Percentage Total Gross Admitted Total Protected Cell (Admitted & Restricted

General Account Total Nonadmitted) to Total

Restricted Asset Account Restricted Total From Increase/ Admitted Restricted to Admitted Category (G/A) Assets Total Prior Year (Decrease) Restricted Total Assets Assets Subject to repurchase

agreements $ 129,221 $ - $ 129,221 $ 131,329 $ (2,108) $ 129,221 3.06 % 3.44 % Subject to reverse

repurchase agreements 124,000 - 124,000 128,500 (4,500) 124,000 2.93 % 3.30 % On deposit with states 5,956 - 5,956 6,224 (268) 5,956 0.14 % 0.16 % Total Restricted Assets $ 259,177 $ - $ 259,177 $ 266,053 $ (6,876) $ 259,177 6.13 % 6.90 %


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In thousands As of December 31, 2016 Gross (Admitted & Nonadmitted) Restricted Percentage Total Gross Admitted Total Protected Cell (Admitted & Restricted

General Account Total Nonadmitted) to Total Restricted Asset Account Restricted Total From Increase/ Admitted Restricted to Admitted

Category (G/A) Assets Total Prior Year (Decrease) Restricted Total Assets Assets Subject to repurchase

agreements $ 131,329 $ - $ 131,329 $ 203,748 $ (72,419) $ 131,329 2.80 % 3.02 % Subject to reverse

repurchase agreements 128,500 - 128,500 198,500 (70,000) 128,500 2.74 % 2.95 % On deposit with states 6,224 - 6,224 6,126 98 6,224 0.13 % 0.14 % Total Restricted Assets $ 266,053 $ - $ 266,053 $ 408,374 $ (142,321) $ 266,053 5.67 % 6.11 %

Repurchase and Reverse Repurchase Agreements National maintains an Asset Swap with MBIA Inc. where National and MBIA Inc. are NY based entities. Cash collateral received under the repurchase agreement and cash collateral provided under the reverse repurchase agreement are equal in size and netted as permitted under these agreements. The following table discloses the carry value and fair value of securities sold under repurchase agreements as of December 31, 2017. As of December 31, 2017 NAIC Designation

In thousands None NAIC 1 NAIC 2 NAIC 3 NAIC 4 NAIC 5 NAIC 6 Non-admitted Total Bonds - book/adjusted carry value $ - $ 129,221 $ - $ - $ - $ - $ - $ - $ 129,221 Bonds - fair value $ - $ 125,979 $ - $ - $ - $ - $ - $ - $ 125,979

The following table discloses the carry value and fair value of securities acquired under the repurchase agreements as of December 31, 2017. As of December 31, 2017 NAIC Designation

In thousands None NAIC 1 NAIC 2 NAIC 3 NAIC 4 NAIC 5 NAIC 6 Non-admitted Total Bonds - book/adjusted carry value $ 10,423 $ 73,248 $ 33,624 $ 1,398 $ - $ - $ - $ - $ 118,693 Bonds - fair value $ 10,156 $ 84,296 $ 36,608 $ 1,418 $ - $ - $ - $ - $ 132,478 4. Investment Income and Gains and Losses As of December 31, 2017 and 2016, there were $1 thousand and $13 thousand, respectively, of non-admitted assets for investment income due and accrued past 90 days. The proceeds and the gross realized gains and losses from sales of fixed-maturity securities for the years ended December 31, 2017 and 2016 are as follows: Years Ended December 31, In thousands 2017 2016 Proceeds from sales $ 2,187,189 $ 2,229,273 Gross realized gains $ 28,251 $ 74,097 Gross realized losses $ (14,729) $ (6,597)


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5. Fair Value of Financial Instruments The Company is required to measure and report certain financial instruments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement of financial instruments held or issued by the Company are determined through the use of observable market data when available. Market data is obtained from a variety of third-party sources, including dealer quotes. If dealer quotes are not available for an instrument that is infrequently traded, the Company uses alternate valuation methods, including either dealer quotes for similar instruments or pricing models that use market data inputs. The use of alternate valuation methods generally requires considerable judgment in the application of estimates and assumptions and changes to such estimates and assumptions may produce materially different fair values. SSAP No. 100 ”Fair Value” establishes a fair value hierarchy that categorizes into three levels the inputs used to measure fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available and reliable. Observable inputs are those the Company believes that market participants would use in pricing an asset or liability based on available market data. Unobservable inputs are those that reflect the Company’s beliefs about the assumptions market participants would use in pricing an asset or liability based on available information. The three levels of the fair value hierarchy are defined as follows:

• Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company can access. Valuations are based on quoted prices that are readily and regularly available in an active market, with significant trading volumes.

• Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable,

either directly or indirectly. Level 2 assets include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, securities which are priced using observable inputs.

• Level 3—Valuations based on inputs that are unobservable or supported by little or no market activity and that are

significant to the overall fair value measurement.

The availability of observable inputs can vary from financial instrument to financial instrument and period to period depending on the type of instrument, market activity, the approach used to measure fair value, and other factors. The Company categorizes a financial instrument within the fair value hierarchy based on the least observable input that is significant to the fair value measurement. When the inputs used to measure fair value of an asset or a liability are categorized within different levels based on the definition of the fair value hierarchy, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. Valuation Techniques Valuation techniques for financial instruments measured at fair value are described below. These determinations were based on available market information and valuation methodologies. Considerable judgment is required to interpret market data to develop estimates and therefore, estimates may not necessarily be indicative of the amount the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Fixed-maturity securities and Short-term investments - Fixed-maturity securities and short-term investments with an NAIC designation of 1 and 2 are carried at amortized cost while fixed-maturity securities and short-term investments with an NAIC designation of 3 through 6 are carried at the lower of amortized cost or fair value. Fair value of fixed-maturity securities and short-term investments are valued based on recently executed transaction prices or quoted market prices that are generally provided by independent third-party pricing vendors. When quoted market prices are not available, fair value is generally determined using quoted prices of similar securities or a valuation model based on observable and unobservable inputs. Inputs vary depending on the type of security. Observable inputs include contractual cash flows, interest rate yield curves, credit default swap spreads, prepayment and volatility scores, diversity scores, cross-currency basis index spreads, and credit spreads for structures similar to the financial instrument in terms of issuer, maturity and seniority. Unobservable inputs


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include cash flow projections and the value of any credit enhancement. When bonds have significant inputs that are observable, they are categorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable, they are categorized in Level 3 of the hierarchy. Cash and cash equivalents - The carrying amounts of these items are a reasonable estimate of their fair value due to the short-term nature and creditworthiness of these instruments. Common and preferred stock - The fair value of common and preferred stock is based upon quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Other invested assets - National has investments in surplus debenture bonds which are classified as Level 2 since they are priced with observable inputs. Additionally, National owns an interest in a limited partnership that is a fixed-income fund, and carries the investment at fair value by applying the net asset value which is classified as Level 3 on the hierarchy. Securities purchased under agreements to resell and Securities sold under agreements to repurchase - The carrying amount of securities purchased under agreements to resell approximates its fair value. The accrued interest related to securities purchased under agreements to resell is included in Accrued investment income as reported on National’s Statement of Assets. The carrying amount of securities sold under agreements to repurchase, includes accrued interest and approximates its fair value. Financial Guarantees - The fair value of financial guarantees, net of reinsurance is determined using discounted cash flow techniques based on inputs that include (i) assumptions of expected losses on financial guarantee policies where loss reserves have not been recognized, (ii) amount of losses expected on financial guarantee policies where loss reserves have been established, net of expected recoveries, (iii) the cost of capital reserves required to support the financial guarantee liability, (iv) operating expenses, and (v) discount rates.

The carrying value of National’s financial guarantees consists of deferred premium revenue and loss and LAE, which include subrogation recoverable, net of reinsurance as reported on National’s Statement of Liabilities and Surplus. Fair Value Measurements The following fair value hierarchy tables present information about the Company’s assets reported on the balance sheets at fair value on a recurring basis as of December 31, 2017 and 2016. There were no liabilities measured at fair value for the years ended December 31, 2017 and 2016: Fair Value at Reporting Date

Balance as of December 31, 2017 In thousands (Level 1) (Level 2) (Level 3)

Assets at fair value Bonds:

Special revenue and special assessment obligations $ - $ 92,574 $ - $ 92,574 Industrial and miscellaneous - 16,406 - 16,406 Hybrid securities - 15,394 - 15,394 Parent, subsidiaries and affiliates - 124,054 - 124,054 Total bonds - 248,428 - 248,428 Other invested assets - - 75,741 75,741

Investment in unaffiliated preferred stock - 663 - 663 Investment in affiliated common stock

(Gross of non-admit of $261,748) 261,748 - - 261,748 Total assets at fair value $ 261,748 $ 249,091 $ 75,741 $ 586,580


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Fair Value at Reporting Date

In thousands (Level 1) (Level 2) (Level 3) Balance as of

December 31, 2016 Assets at fair value Bonds:

Industrial and miscellaneous $ - $ 3,755 $ - $ 3,755 Other invested assets - - 75,456 75,456

Investment in preferred stock - 406 - 406 Total assets at fair value $ - $ 4,161 $ 75,456 $ 79,617

Policy on transfer into and out of Level 1, 2 and 3 Transfers into and out of Levels 1, 2 or 3 are recognized at the end of the quarter. For the years ended December 31, 2017 and 2016, there were no transfers into or out of Level 1, 2 and 3. The following tables present information about changes in Level 3 assets measured at fair value on a recurring basis for the years ended December 31, 2017 and 2016.

Fair Value Measurements in Level 3 of the Fair Value Hierarchy for the Year Ended December 31, 2017 Total gains Total gains and and Transfers Transfers (losses) (losses) Balance at into out of included in included in Balance at

In thousands 12/31/2016 Level 3 Level 3 Net Income Surplus Purchases Issuances Sales Settlements 12/31/2017 Assets:

Other invested assets $ 75,456 $ - $ - $ 6,000 $ 285 $ - $ - $ - $ (6,000) $ 75,741 Total assets $ 75,456 $ - $ - $ 6,000 $ 285 $ - $ - $ - $ (6,000) $ 75,741

Fair Value Measurements in Level 3 of the Fair Value Hierarchy for the Year Ended December 31, 2016

Total gains Total gains and and Transfers Transfers (losses) (losses) Balance at into out of included in included in Balance at

In thousands 12/31/2015 Level 3 Level 3 Net Income Surplus Purchases Issuances Sales Settlements 12/31/ 2016 Assets:

Other invested assets $ - $ - $ - $ - $ 456 $ 75,000 $ - $ - $ - $ 75,456 Total assets $ - $ - $ - $ - $ 456 $ 75,000 $ - $ - $ - $ 75,456


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The tables below present the fair values and admitted values of all assets and liabilities as of December 31, 2017 and 2016 that are financial instruments. The fair values are also categorized into Levels 1, 2 and 3 of the fair value hierarchy as described above. In thousands Fair Value Measurements at Reporting Date

Admitted Value as of December

31, 2017 Type of Financial Instrument Level 1 Level 2 Level 3 Fair Value Assets: Fixed-maturity securities $ 601,008 $ 2,643,114 $ 9,745 $ 3,253,867 $ 3,228,023 Preferred stock - 663 - 663 663 Investment in affiliated common stock 261,748 - - 261,748 - Cash, cash equivalents and short-term investments 176,138 19,985 286 196,409 196,450 Securities purchased under agreements to resell - 124,000 - 124,000 124,000 Other invested assets - 226 - 226 197 Total assets $ 1,038,894 $ 2,787,988 $ 10,031 $ 3,836,913 $ 3,549,333

Liabilities: Securities sold under agreements to repurchase $ - $ 124,391 $ - $ 124,391 $ 124,391 Total liabilities $ - $ 124,391 $ - $ 124,391 $ 124,391

Financial Guarantees: Net of reinsurance $ - $ - $ 2,139,739 $ 2,139,739 $ 812,804

In thousands Fair Value Measurements at Reporting Date

Admitted Value as of December

31, 2016 Type of Financial Instrument Level 1 Level 2 Level 3 Fair Value Assets: Fixed-maturity securities $ 363,677 $ 3,580,707 $ 1,870 $ 3,946,254 $ 3,920,790 Preferred stock - 406 - 406 406 Cash, cash equivalents and short-term investments 177,361 1,007 - 178,368 178,368 Securities purchased under agreements to resell - 128,500 - 128,500 128,500 Other invested assets - 9,820 - 9,820 9,820 Total assets $ 541,038 $ 3,720,440 $ 1,870 $ 4,263,348 $ 4,237,884

Liabilities: Securities sold under agreements to repurchase $ - $ 128,500 $ - $ 128,500 $ 128,500 Total liabilities $ - $ 128,500 $ - $ 128,500 $ 128,500

Financial Guarantees: Net of reinsurance $ - $ - $ 2,579,734 $ 2,579,734 $ 687,758

6. Income Taxes

SSAP No. 101 “Income Taxes” provides for an admission calculation of deferred tax assets (“DTAs”) specific to financial guarantors which state that if the reporting entity meets the minimum capital and reserve requirements for the state of domicile, they shall use the Realization Threshold Limitation Table when calculating the admission of DTAs. The financial guaranty entity table’s threshold limitations are contingent upon the ratio of statutory capital excluding the admitted DTA to the required surplus and contingency reserve (the Aggregate Risk Limit). The Aggregate Risk Limit is the amount of aggregate capital that the NYSDFS requires to be maintained based on the risk characteristic and amount of insurance in force under NYIL.


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The components of DTAs and deferred tax liabilities (“DTLs”) as of December 31, 2017 and 2016 are as follows: DTA/(DTL) Components: 12/31/2017 12/31/2016 Change

In thousands Ordinary Capital Total Ordinary Capital Total Ordinary Capital Total Gross Deferred Tax Assets $ 190,917 $ 21,987 $ 212,904 $ 338,329 $ 374 $ 338,703 $ (147,412) $ 21,613 $ (125,799) Statutory Valuation Allowance - - - - - - - - - Adjusted Gross Deferred Tax Assets 190,917 21,987 212,904 338,329 374 338,703 (147,412) 21,613 (125,799)

- - Gross Deferred Tax Liabilities (6,683) (1,353) (8,036) (4,217) (456) (4,673) (2,466) (897) (3,363)

Net DTA/(DTL) before admissibility test 184,234 20,634 204,868 334,112 (82) 334,030 (149,878) 20,716 (129,162)

Non-admitted deferred tax asset/(liability) 178,906 20,634 199,540 323,540 (82) 323,458 (144,634) 20,716 (123,918)

Net admitted DTAs $ 5,328 $ - $ 5,328 $ 10,572 $ - $ 10,572 $ (5,244) $ - $ (5,244)

Admission calculation components: 12/31/2017 12/31/2016 Change

In thousands Ordinary Capital Total Ordinary Capital Total Ordinary Capital Total

Admission calculation under 11.a. - 11.c.

(a) Admitted pursuant to 11.a. $ 4,507 $ - $ 4,507 $ 8,747 $ - $ 8,747 $ (4,240) $ - $ (4,240)

(b) Admitted pursuant to 11.b. (lessor of b.i. - - - - - - - -

or b.ii.) 821 - 821 1,825 - 1,825 (1,004) - (1,004) (c ) Admitted pursuant to 11.b.i. 821 - 821 1,825 - 1,825 (1,004) - (1,004)

(d) Admitted pursuant to 11.b.ii. N/A N/A 384,917 N/A N/A 409,237 N/A N/A (24,320)

(e) Admitted pursuant to 11.c. 6,683 1,353 8,036 4,217 456 4,673 2,466 897 3,363

(f) Total admitted under 11.a., 11.b., and 11.c. $ 12,011 $ 1,353 $ 13,364 $ 14,789 $ 456 $ 15,245 $ (2,778) $ 897 $ (1,881)

(g) Deferred Tax Liabilities (6,683) (1,353) (8,036) (4,217) (456) (4,673) (2,466) (897) (3,363) Net admitted DTA/(DTL) under 11.a., 11.b., and 11 c $ 5,328 $ - $ 5,328 $ 10,572 $ - $ 10,572 $ (5,244) $ - $ (5,244)

Threshold used in 11.b. (i) Ex DTA Surplus/Policyholders and Contingency Reserves Ratio N/A N/A 599% N/A N/A 532% N/A N/A 67%

The Company has not implemented any tax planning strategies that would affect adjusted gross and net admitted deferred tax assets. The Company has not entered into tax planning strategies involving reinsurance. The Company has no unrecognized DTL for amounts described in SSAP No. 101, paragraph 7(d) and paragraph 31 of accounting principles for income taxes. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”), which among other items reduces the federal corporate tax rate to 21% effective January 1, 2018. As a result, during the fourth quarter of 2017, the Company revalued its net deferred asset using the newly enacted tax rate of 21% and recorded a reduction to its net deferred tax asset of $137 million. The impact on the revaluing of the net deferred tax asset has been recorded to surplus. The Company’s revaluation of its net deferred tax asset is subject to further clarifications of the new law that cannot be estimated at this time. Under the Act, net operating losses (“NOLs”) of property and casualty insurance companies retain their current two-year carryback and 20-year carryforward periods and will not be subject to the 80 percent taxable income limitation and indefinite lived carryforward period applicable to general corporate NOLs. Therefore, NOLs generated after 2017 by the Company’s insurance companies and non-insurance companies will be treated differently under the Act.


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Current Tax and Change in Deferred Tax: Current income tax incurred as of December 31, 2017 and 2016 consists of the following major components: In thousands 12/31/2017 12/31/2016 Current income taxes incurred Current federal income tax expense/(recoverable) $ (94,649) $ 73,143 Foreign Taxes - - Subtotal $ (94,649) $ 73,143 Tax on capital gains/(losses) 4,903 36,452 Other, including prior year (under)/over accrual 1,185 1,342 Federal and foreign income taxes incurred $ (88,561) $ 110,937

The Company does not expect a significant increase in tax contingencies within the twelve month period following the balance sheet date. As of December 31, 2017, the Company does not have any significant uncertain tax positions.


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The tax effects of temporary differences that give rise to significant portions of DTAs and DTLs as of December 31, 2017 and 2016 are as follows: DTAs Resulting from Book/Tax Differences in (in thousands) 12/31/2017 12/31/2016 Change Ordinary Contingency Reserve $ 124,801 $ 260,840 $ (136,039) Unearned Premium Reserve 12,296 27,515 (15,219) Salvage and Subrogation 35,080 40,310 (5,230) Loss Reserves 12,967 - 12,967 Non-admitted Assets 2,534 5,565 (3,031) Other 3,239 4,099 (860) Gross Deferred Tax Assets - Ordinary 190,917 338,329 (147,412)

Statutory Valuation Allowance (-) - Non-admitted deferred tax assets (-) (178,906) (323,540) 144,634 Net deferred tax asset/(liability) $ 12,011 $ 14,789 $ (2,778)

Capital Capital Loss Carryovers & OTTI 19,989 374 19,615 Tax effect of unrealized losses 1,998 - 1,998 Gross Deferred Tax Assets - Capital 21,987 374 21,613

Statutory Valuation Allowance - Capital (-) - - - Non-admitted deferred tax assets - Capital (-) (20,634) 82 (20,716) Admitted Deferred Tax Assets - Capital 1,353 456 897

Total Admitted Deferred Tax Assets $ 13,364 $ 15,245 $ (1,881) DTLs Resulting from Book/Tax Differences in (in thousands) 12/31/2017 12/31/2016 Change Ordinary Loss Reserves - 481(a) Adjustment $ (5,124) $ - $ (5,124) Investments (1,524) (3,979) 2,455 Other (35) (238) 203 Ordinary Deferred Tax Liabilities (6,683) (4,217) (2,466)

Capital Investments (1,353) (293) (1,060) Tax effect of unrealized gains - (163) 163 Other - - - Capital Deferred Tax Liabilities (1,353) (456) (897)

Deferred Tax Liabilities $ (8,036) $ (4,673) $ (3,363) Net Deferred Tax Assets/(Liabilities) $ 5,328 $ 10,572 $ (5,244)

The change in net deferred income taxes as of December 31, 2017 and 2016 is comprised of the following: In thousands 12/31/2017 12/31/2016 Change Total deferred tax assets $ 212,904 $ 338,703 $ (125,799) Total deferred tax liabilities (8,036) (4,673) (3,363) Net deferred tax asset (liability) $ 204,868 $ 334,030 (129,162) Tax effect of unrealized gains/(losses) (3,494) Change in net deferred income tax (expense)/benefit $ (132,656)


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Reconciliation of federal income tax rate to actual effective tax rate: The provision for federal income taxes incurred is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The significant items causing this difference are as follows as of December 31, 2017: In thousands Tax Effect Effective Tax Rate Income before taxes $ (143,481) 35% Tax Reform/Change in Tax Rate 51,689 -13% Change in Contingency Reserve, net of Rate Change 136,039 -33% Other items (152) 0% Total statutory income taxes $ 44,095 -11% Federal income tax incurred (88,561) 22% Change in net deferred income tax 132,656 -32% Total statutory income taxes $ 44,095 -11%

Carryforwards, recoverable taxes, and IRC § 6603 deposits: As of December 31, 2017, the Company did not have any net operating loss, capital loss, or minimum tax carry forwards. National does not have any deposits admitted under Section 6603 of the Internal Revenue Code. The taxes available for recoupment in the event of future net losses are as follows: In thousands Year Ordinary Capital Total 2015 N/A 2,138 2,138 2016 $ 73,938 $ 36,842 $ 110,780 2017 - - - Total $ 73,938 $ 38,980 $ 112,918

As of December 31, 2017, the Company’s federal income tax return was consolidated with the following entities: MBIA, Inc. MBIA Capital Corporation MBIA Insurance Corporation MBIA Investment Management Corporation Municipal Issuers Service Corporation National Public Finance Guarantee Holdings, Inc. MBIA Services Corporation National is included in the consolidated tax return of MBIA Inc., its Parent Company. The method of allocation between the companies is subject to written agreement, and is approved by the members of the consolidated group. The method of allocation between the members is generally based upon separate-company calculations as if each member filed a separate tax return. 7. Reconciliation of Statutory Accounting to GAAP-Basis Accounting The accompanying statutory-basis financial statements have been prepared in conformity with NAIC SAP, which differs in some respects from accounting principles generally accepted in the United States of America (“GAAP”). The more significant of these differences are as follows:


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• upfront premiums are earned on a SAP basis proportionate to the scheduled periodic maturity of principal and payment of

interest (“debt service”) to the original total principal and interest insured. Additionally, under SAP, installment premiums are earned on a straight-line basis over each installment period generally one year or less. Under GAAP, National recognizes and measures premium revenue over the period of the contract in proportion to the amount of insurance protection provided. Upfront and installment premium revenue is measured by applying a constant rate to the insured principal amount outstanding in a given period to recognize a proportionate share of the premium received or expected to be received on a financial guarantee insurance contract. Additionally, under GAAP, installment premiums receivable are recorded at the present value of the premiums due or expected to be collected over the period of the insurance contract using a discount rate which reflects the risk-free rate at the inception of the contract;

• under SAP, acquisition costs, (including ceding commission expense or income) are charged to operations as incurred rather than GAAP’s requirement to defer and amortize the costs as the related premiums are earned;

• a contingency reserve is computed on the basis of statutory requirements and is not permitted under GAAP;

• loss reserves are reported net of insurance loss recoverables and are discounted using a rate equal to the yield-to-maturity of National’s fixed-income portfolio, excluding cash and cash equivalents and other investments not intended to defease long-term liabilities. Under GAAP, loss reserves are discounted using a risk-free rate as of the measurement date and are reported net of the unearned premium revenue and gross of insurance loss recoverables which are reported as an asset;

• salvage and subrogation generally are recorded as a reduction to loss and LAE reserves for GAAP and statutory reporting. In certain instances under GAAP, the Company records salvage and subrogation, including insurance loss recoverables, as an asset. This would occur, for example, when the Company becomes entitled to the underlying collateral of an insured credit under salvage and subrogation rights as a result of a claim payment and the recovery of such salvage is reasonable and estimable;

• certain compensation, which may be in the form of fixed-maturity investments or other assets under SAP are recorded as a reduction in loss and LAE reserves; however under GAAP, compensation for claim payments are recorded based on where those types of assets are reflected on the balance sheet;

• assets and liabilities relating to reinsurance are reported on a net basis. Therefore, incurred losses and LAE are reported net of reinsurance recoverables and deferred premiums are reported net of prepaid reinsurance premium. Under GAAP, these reinsurance balances are required to be shown on a gross basis as an asset;

• certain assets, which consists primarily of an investment in shares of common stock of Parent Company, deferred tax assets, leasehold improvements, furniture and equipment and prepaid expenses, described as “non-admitted,” are excluded from the balance sheet and are charged directly to unassigned surplus under SAP. There were non-admitted assets of $473 million and $339 million as of December 31, 2017 and 2016, respectively. Under GAAP, these amounts are typically reflected as assets except for investments in shares of common stock of Parent Company that are reflected as a return of capital to Parent Company;

• changes in net deferred income taxes are recognized as a separate component of gains and losses in surplus. Under GAAP, changes in National’s net deferred income tax balances are either recognized as a component of net income or other comprehensive income depending on how the underlying pre-tax impact is reflected. Under SAP, the calculation of the valuation allowance on deferred tax assets is performed on a separate company basis, under GAAP a consolidated analysis is permitted;

• investments in bonds are generally carried at amortized cost under SAP. Accordingly, unrealized changes in fair value are not reflected in the statutory-based statements of income and changes in capital and surplus or the statutory statements of admitted assets, liabilities and capital and surplus. Bonds not qualified to be carried at amortized cost are carried at fair value as required by the NAIC with the differences between these values recorded directly to unassigned surplus net of adjustment for deferred federal income taxes, rather than recording the difference in unrealized gains and losses through shareholders’ equity;


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unrealized gains and losses on common stocks are recorded directly to unassigned surplus net of an adjustment for deferred federal income taxes. Investments in shares of common stock of Parent Company are valued based on quoted prices subject to the limitations as required by SSAP No. 97 and NYIL.

• the statements of cash flows reconcile to cash and cash equivalents under GAAP rather than cash, cash equivalents, short-term investments and securities purchased under agreements to resell (parent). In addition, under SAP, cash flows from operations are reported consistent with the statement of income; and

The following is a reconciliation of statutory policyholders’ surplus to shareholders’ equity on a GAAP-basis for National: As of December 31, In thousands 2017 2016 Statutory policyholders' surplus $ 2,165,906 $ 2,730,839 Premium revenue recognition 189,018 231,392 Deferral of acquisition costs 126,621 161,734 Contingency reserve 594,289 745,256 Loss reserves 49,476 (32,290) Deferred income taxes, net (202,339) (394,207) Derivative assets and liabilities (2,059) (2,212) Investments including unrealized gains (67,817) 57,289 Non-admitted assets and other items 332,242 336,650 GAAP-basis shareholders' equity $ 3,185,337 $ 3,834,451

The following is a reconciliation of statutory net income to net income presented on a GAAP-basis for National: Years Ended December 31, In thousands 2017 2016 Statutory net income (loss) $ (321,386) $ 191,809 Premium revenue recognition (42,374) (41,322) Amortization of acquisition costs (38,358) (49,262) Investments income including realized gains (losses) (3,438) (14,471) Ceding commission expense 2,102 2,510 Losses incurred 85,070 41,403 Current income taxes 59,754 43,378 Other (1,880) 1,385 GAAP-basis net income (loss) $ (260,510) $ 175,430


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8. Capital and Surplus and Dividend Restrictions National is subject to insurance regulations and supervision of the State of New York (its state of incorporation) and all U.S. and non-U.S. jurisdictions in which it is licensed to conduct insurance business. In order to maintain its New York State financial guarantee insurance license, National is required to maintain a minimum of $65 million of policyholders’ surplus. The extent of insurance regulation and supervision varies by jurisdiction, but New York and most other jurisdictions have laws and regulations prescribing minimum standards of solvency and business conduct, which must be maintained by insurance companies. Among other things, these laws prescribe permitted classes and concentrations of investments and limit both the aggregate and individual securities risks that National may insure on a net basis based on the type of obligations insured. In addition, some insurance laws and regulations require the approval or filing of policy forms and rates. National is required to file detailed annual financial statements, as well as interim financial statements, with the NYSDFS and similar supervisory agencies in each of the other jurisdictions in which it is licensed. The operations and accounts of National are subject to examination by regulatory agencies at regular intervals. As of December 31, 2017, National had 500,000 common shares authorized, issued and outstanding, with a par value of $30 per share. National had no preferred stock issued or outstanding as of December 31, 2017. The NYIL regulates the payment of dividends by financial guarantee insurance companies and provides that such companies may not declare or distribute dividends except out of statutory earned surplus. Under NYIL, the sum of (i) the amount of dividends declared or distributed during the preceding 12-month period and (ii) the dividend to be declared may not exceed the lesser of (a) 10% of policyholders’ surplus, as reported in the latest statutory financial statements or (b) 100% of adjusted net investment income for such 12-month period (the net investment income for such 12-month period plus the excess, if any, of net investment income over dividends declared or distributed during the two-year period preceding such 12-month period), unless the Superintendent of the NYSDFS approves a greater dividend distribution based upon a finding that the insurer will retain sufficient surplus to support its obligations. National had a positive earned surplus as of December 31, 2017 and 2016, which provided National with dividend capacity. During 2017 and 2016, National declared and paid a dividend of $118 million, respectively, to its ultimate parent, MBIA Inc. National expects the as-of-right declared and paid dividend amount to be limited to prior year net investment income. As of December 31, 2017, National owns common stock in Parent Company. Refer to “Note 11. Information Concerning Parent, Subsidiary and Affiliates” for additional information regarding the Company’s ownership of common stock in affiliates. As of December 31, 2017, National’s unassigned surplus was $1.6 billion. The portion of unassigned surplus represented by cumulative net unrealized capital gains and losses is a net unrealized loss of $13 million. The deferred taxes generated by cumulative net unrealized capital gains and losses were $3 million. Additionally, the portion of unassigned surplus represented by non-admitted assets is $473 million. 9. Loss and Loss Adjustment Expense Reserves

National’s Insured Portfolio Management (“IPM”) group monitors National’s outstanding insured obligations with the objective of minimizing losses. IPM meets this objective by identifying issuers that, because of deterioration in credit quality or changes in the economic, regulatory or political environment, are at a heightened risk of defaulting on debt service of obligations insured by National. In such cases, IPM works with the issuer, trustee, bond counsel, servicer, underwriter and other interested parties in an attempt to alleviate or remedy the problem and avoid defaults on debt service payments. Once an obligation is insured, National typically requires the issuer, servicer (if applicable) and the trustee to furnish periodic financial and asset-related information, including audited financial statements, to IPM for review. IPM also monitors publicly available information related to insured obligations. Potential problems uncovered through this review, such as poor financial results, low fund balances, covenant or trigger violations and trustee or servicer problems, or other events that could have an adverse impact on the insured obligation, could result in an immediate surveillance review and an evaluation of possible remedial actions. IPM also monitors and evaluates the impact on issuers of general economic conditions, current and proposed legislation and regulations, political developments, as well as state and municipal finances and budget developments.


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The frequency and extent of IPM’s monitoring is based on the criteria and categories described below. Insured obligations that are judged to merit more frequent and extensive monitoring or remediation activities due to a deterioration in the underlying credit quality of the insured obligation or the occurrence of adverse events related to the underlying credit of the issuer are assigned to a surveillance category (“Caution List—Low,” “Caution List—Medium,” “Caution List—High” or “Classified List”) depending on the extent of credit deterioration or the nature of the adverse events. IPM monitors insured obligations assigned to a surveillance category more frequently and, if needed, develops a remediation plan to address any credit deterioration. Remediation actions may involve, among other things, waivers or renegotiations of financial covenants or triggers, waivers of contractual provisions, the granting of consents, transfer of servicing, consideration of restructuring plans, acceleration, security or collateral enforcement, actions in bankruptcy or receivership, litigation and similar actions. The types of remedial actions pursued are based on the insured obligation’s risk type and the nature and scope of the event giving rise to the remediation. As part of any such remedial actions, National seeks to improve its security position and to obtain concessions from the issuer of the insured obligation. From time to time, the issuer of a National-insured obligation may, with the consent of National, restructure the insured obligation by extending the term, increasing or decreasing the par amount or decreasing the related interest rate, with National insuring the restructured obligation. National does not establish any case basis reserves for insured obligations that are assigned to “Caution List—Low,” “Caution List—Medium” or “Caution List—High.” In the event National expects to pay a claim with respect to an insured transaction, it places the insured transaction on its “Classified List” and establishes a case basis reserve. When there are no remaining expected future claim payments, the insured transaction is removed from the “Classified List.” The following provides a description of each surveillance category:

“Caution List—Low” —Includes issuers where debt service protection is adequate under current and anticipated circumstances. However, debt service protection and other measures of credit support and stability may have declined since the transaction was underwritten and the issuer is less able to withstand further adverse events. Transactions in this category generally require more frequent monitoring than transactions that do not appear within a surveillance category. IPM subjects issuers in this category to heightened scrutiny. “Caution List—Medium” —Includes issuers where debt service protection is adequate under current and anticipated circumstances, although adverse trends have developed and are more pronounced than for “Caution List – Low.” Issuers in this category may have breached one or more covenants or triggers. These issuers are more closely monitored by IPM but generally take remedial action on their own. “Caution List—High” —Includes issuers where more proactive remedial action is needed but where no defaults on debt service payments are expected. Issuers in this category exhibit more significant weaknesses, such as low debt service coverage, reduced or insufficient collateral protection or inadequate liquidity, which could lead to debt service defaults in the future. Issuers in this category may have breached one or more covenants or triggers and have not taken conclusive remedial action. Therefore, IPM adopts a remediation plan and takes more proactive remedial actions. “Classified List” —Includes all insured obligations where National has paid a claim or where a claim payment is expected. It also includes insured obligations where a significant LAE payment has been made, or is expected to be made, to mitigate a claim payment. This may include property improvements, bond purchases and commutation payments. Generally, IPM is actively remediating these credits where possible, including restructurings through legal proceedings, usually with the assistance of specialist counsel and advisors.

U.S. public finance insured transactions consist of municipal bonds, including tax-exempt and taxable indebtedness of U.S. political subdivisions, as well as utilities, airports, health care institutions, higher educational facilities, student loan issuers, housing authorities and other similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. The Company estimates future losses by using probability-weighted cash flow scenarios that are customized to each insured transaction. Future loss estimates consider debt service due for each insured transaction, which includes par outstanding and interest due, as well as recoveries for such payments, if any. Gross par outstanding for capital appreciation bonds represents the par amount at the time of issuance of the insurance policy.


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Certain local governments remain under financial and budgetary stress and a few have filed for protection under Title 11 of the United States Code (the “Bankruptcy Code”), or have entered into state statutory proceedings established to assist municipalities in managing through periods of severe fiscal stress. In the case of Puerto Rico, certain credits that the Company insures have filed petitions for covered instrumentalities under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”), which incorporates by reference provisions from the Bankruptcy Code. This could lead to an increase in defaults by such entities on the payment of their obligations and losses or impairments in greater amounts on the Company’s insured transactions. The filing for protection under the Bankruptcy Code or entering state statutory proceedings does not necessarily result in a default or indicate that an ultimate loss will occur. On September 20, 2017, Hurricane Maria made landfall in Puerto Rico as a Category 4 hurricane resulting in catastrophic damage to much of the island’s basic infrastructure, including its electrical transmission and distribution grid, telecommunications network, housing, roads, bridges, water and sewer systems. On September 21, 2017, the President of the United States approved a Major Disaster Declaration for Puerto Rico and the FEMA made federal disaster assistance available to Puerto Rico to supplement its recovery efforts. Hurricane Maria’s impact on Puerto Rico will likely also impact its ability to both repay its legacy indebtedness and participate in ongoing debt restructuring negotiations. The physical damage and resultant lost economic activity may exceed the collective aid Puerto Rico receives from private insurance, relief from FEMA and other federal agencies and programs. Economic activity in Puerto Rico may not return to pre-hurricane levels and Puerto Rico’s recovery could be more shallow and protracted than that experienced by other similarly affected governments, given Puerto Rico’s prior constrained liquidity and economic activity. While the federal government has made aid available to Puerto Rico, there can be no assurance that such aid will continue in the amounts necessary to offset the adverse impacts from Hurricane Maria in their entirety. In addition, the necessary and greater involvement of the federal government, through its actions to deliver disaster relief and other support services, in addition to the evolving role of the Oversight Board and the role of Puerto Rico in its own recovery, heightens political risk in connection with the restructuring of legacy debt. This risk could lead the Oversight Board, Puerto Rico or the federal government to seek to extract greater concessions from creditors based on the uncertainty of Puerto Rico’s long term recovery prospects. In this event, losses at National on select Puerto Rico exposures could increase materially. The Company monitors and analyzes these situations closely, however, the overall extent and duration of such events are uncertain. Discount Rate Loss reserves are discounted on a non-tabular basis by applying a discount rate equal to the yield-to-maturity of National’s fixed-income investment portfolio, excluding cash, cash equivalents and other investments not intended to defease long-term liabilities. LAE reserves are reported net of reinsurance and are not discounted. The discount rates used as of December 31, 2017 and 2016 were 3.25% and 3.18%, respectively. The amount of non-tabular discount as of December 31, 2017 was a negative $477 million compared with a negative $495 million as of December 31, 2016. Loss and LAE Activity Total net loss and LAE for the years ended December 31, 2017 and 2016 was $584 million and $115 million, respectively. For the years ended December 31, 2017 and 2016, losses and LAE incurred related primarily to certain Puerto Rico exposures. Total loss and LAE reserves were $227 million for the year ended December 31, 2017 and in a contra liability position of $98 million for the year ended December 31, 2016. National establishes new case basis reserves in accordance with the policy described in “Note 2. Summary of Significant Accounting Policies.”


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The following tables provide information about the financial guarantees and related claim liability included in each of National’s surveillance categories as of December 31, 2017 and 2016: Surveillance Categories - 2017 Caution List Caution List Caution List Classified $ in millions Low Medium High List Total Number of policies 70 3 1 158 232 Number of issues (1) 13 2 1 11 27 Remaining weighted average contract period (in years) 7.9 3.7 8.7 12.2 10.4 Gross insured contractual payments outstanding (2):

Principal $ 2,401 $ 5 $ 102 $ 3,394 $ 5,902 Interest 2,594 1 46 4,808 7,449 Total $ 4,995 $ 6 $ 148 $ 8,202 $ 13,351 Gross claim liability (3) $ - $ - $ - $ 454 $ 454 Less:

Gross potential recoveries (4) - - - 704 704 Discount, net (5) - - - (477) (477) Net claim liability (recoverable) $ - $ - $ - $ 227 $ 227 Net unearned premium reserve $ 13 $ - $ 6 $ 75 $ 94 Reinsurance recoverable $ - $ - $ - $ - $ - _______________________ (1) - An "issue" represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments on the insured debt. (2) - Represents contractual principal and interest payments due by the issuer of the obligations insured by National. (3) - The gross claim liability with respect to Puerto Rico exposures are net of expected recoveries for polices in a net payable position. (4) - Gross potential recoveries with respect to certain Puerto Rico exposures are net of the claim liability for policies in a net recoverable position. (5) - Represents discount related to Gross claim liability and Gross potential recoveries.

Surveillance Categories - 2016 Caution List Caution List Caution List Classified $ in millions Low Medium High List Total Number of policies 69 4 1 197 271 Number of issues (1) 13 2 1 10 26 Remaining weighted average contract period (in years) 7.8 3.0 9.3 9.0 8.5 Gross insured contractual payments outstanding (2):

Principal $ 2,432 $ 8 $ 107 $ 2,923 $ 5,470 Interest 2,693 1 51 1,520 4,265 Total $ 5,125 $ 9 $ 158 $ 4,443 $ 9,735 Gross claim liability (3) $ - $ - $ - $ 76 $ 76 Less:

Gross potential recoveries (4) - - - 669 669 Discount, net (5) - - - (495) (495) Net claim liability (recoverable) $ - $ - $ - $ (98) $ (98) Net unearned premium reserve $ 11 $ 0 $ 6 $ 52 $ 69 Reinsurance recoverable $ - $ - $ - $ - $ - _______________________ (1) - An "issue" represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments on the insured debt. (2) - Represents contractual principal and interest payments due by the issuer of the obligations insured by National. (3) - The gross claim liability with respect to Puerto Rico exposures are net of expected recoveries for policies in a net payable position. (4) - Gross potential recoveries with respect to certain Puerto Rico exposures are net of the claim liability for policies in a net recoverable position. (5) - Represents discount related to Gross claim liability and Gross potential recoveries.


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A summary of the components of the liability for loss and LAE reserves are shown in the following table as of December 31, 2017 and 2016: As of December 31, In thousands 2017 2016 Gross loss and LAE reserves, January 1 $ (98,765) $ (30,196) Less: Reinsurance recoverable (440) (348) Net loss and LAE reserves, January 1 (98,325) (29,848) Plus: Incurred losses and LAE related to: Current year 70,817 10,963 Prior years 513,523 104,355 Total incurred losses and LAE 584,340 115,318 Less: Paid losses and LAE related to: Current year 3,354 578 Prior years 255,328 183,217 Total paid losses and LAE 258,682 183,795 Net loss and LAE reserves, December 31 227,333 (98,325) Add: Reinsurance recoverable on unpaid losses and LAE (3,479) (440) Gross loss and LAE reserves, December 31 $ 223,854 $ (98,765)

The following tables present changes in National’s loss and LAE reserves as of December 31, 2017 and 2016. Changes in the loss reserve attributable to the accretion of the claim liability discount, changes in discount rate, changes in the timing and amounts of estimated payments and recoveries and changes in assumptions are recorded in “Losses incurred” in National’s Statements of Income. LAE reserves are generally expected to be settled within a one-year period. As of December 31, 2017 and 2016, National’s “Loss and LAE reserves” included $57 million and $45 million respectively, related to LAE. Changes in LAE reserves are recorded in “Loss adjustment expenses incurred” in National’s Statements of Income. In millions Changes in Loss and LAE Reserves for the Year Ended December 31, 2017

Loss and Loss and

LAE LAE Reserve Accretion Changes Changes Reserve

as of of Claim in Changes in as of December 31, Loss Liability Discount in LAE December 31,

2016 Payments Discount Rate Assumptions Reserves Other (1) Reinsurance 2017

$ (98) $ (238) $ (4) $ 8 $ 470 $ 12 $ 81 $ (4) $ 227

(1) - Primarily changes in amount and timing of payments.

In millions Changes in Loss and LAE Reserves for the Year Ended December 31, 2016

Loss and Loss and

LAE LAE Reserve Accretion Changes Changes Reserve

as of of Claim in Changes in as of December 31, Loss Liability Discount in LAE December 31,

2015 Payments Discount Rate Assumptions Reserves Other (1) Reinsurance 2016

$ (30) $ (175) $ (3) $ 15 $ (92) $ 20 $ 167 $ - $ (98)

(1) - Primarily changes in amount and timing of payments.


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10. Insurance in Force National’s insurance in force represents the aggregate amount of the insured principal of, and interest or other amounts owing on insured obligations. National’s ultimate exposure to credit loss in the event of nonperformance by the issuer of the insured obligation is represented by the insurance in force in the tables that follow. Substantially all insurance in force is from the quota share reinsurance agreement with MBIA Corp. and the novation of the FGIC U.S. public finance portfolio to National. The financial guarantees issued by National provide unconditional and irrevocable guarantees of the payment of the principal of, and interest or other amounts owing on, insured obligations when due. The obligations are generally not subject to acceleration, except that National may have the right, at its discretion, to accelerate insured obligations upon default or otherwise. The creditworthiness of each issuer of an insured obligation is evaluated prior to the issuance of insurance, and each insured obligation must comply with National’s underwriting guidelines. Further, the payments to be made by the issuer on the bonds or notes may be backed by a pledge of revenues, reserve funds, letters of credit, investment contracts or collateral in the form of mortgages or other assets. The right to such funds or collateral would typically become National’s upon the payment of a claim by National. National maintains underwriting guidelines based on those aspects of credit quality that it deems important for each category of obligation considered for insurance. As of December 31, 2017, insurance in force had an expected maturity range of 1- 39 years. The distribution of insurance in force by geographic location as of December 31, 2017 and 2016 is presented in the following table: As of December 31, In billions 2017 2016

Geographic Location Insurance in Force % of Insurance

in Force Insurance in Force % of Insurance

in Force California $ 30.3 22.6% $ 42.7 22.3% Illinois 13.1 9.8% 15.3 8.0% New York 9.1 6.8% 16.3 8.5% Puerto Rico 8.2 6.1% 8.5 4.4% New Jersey 7.6 5.7% 11.5 6.0% Texas 6.1 4.5% 9.1 4.8% Hawaii 4.5 3.4% 5.2 2.7% Virginia 4.2 3.1% 5.2 2.7% Florida 3.8 2.8% 8.8 4.6% Oregon 3.6 2.7% 4.2 2.2% Subtotal 90.5 67.5% 126.8 66.2% Nationally diversified 6.5 4.9% 6.9 3.6% Other states 37.0 27.6% 57.8 30.2% Total $ 134.0 100.0% $ 191.5 100.0%


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The insurance in force and insured gross par outstanding by type of bond is presented in the following table: As of December 31, In billions 2017 2016

Bond Type Insurance in

Force Gross Par

Amount Insurance in

Force Gross Par

Amount General obligations (1) $ 42.8 $ 22.9 $ 64.6 $ 38.3 Tax-backed 26.5 12.4 33.0 16.7 Municipal utilities 17.7 11.8 26.0 17.4 Military housing 16.3 7.3 16.8 7.4 Transportation 15.2 6.9 21.8 11.1 General obligations - lease 5.1 3.8 12.2 8.7 Higher education 3.2 2.1 6.8 4.5 Investor-owned utilities (2) 3.1 2.0 3.7 2.3 Health care 2.6 1.8 4.2 2.7 Other (3) 1.1 0.6 1.7 0.9 Municipal housing 0.4 0.3 0.7 0.4 Total $ 134.0 $ 71.9 $ 191.5 $ 110.4 (1) - Includes general obligation unlimited and limited (property) tax bonds, general fund obligation bonds and pension obligation bonds of states, cities, counties, schools and

special districts. (2) - Includes investor owned utilities, industrial development and pollution control revenue bonds. (3) - Includes student loans, certain non-profit enterprises and stadium related financing.

Ceded Exposure Reinsurance enables National to cede exposure for purposes of syndicating risk. National generally retains the right to reassume the business ceded to reinsurers under certain circumstances, including a reinsurer’s rating downgrade below specified thresholds. The aggregate amount of insurance in force ceded by National to reinsurers under reinsurance agreements was $ 2.9 billion and $ 4.7 billion as of December 31, 2017 and 2016, respectively. Under National’s reinsurance agreement with MBIA Corp., if a reinsurer of MBIA Corp. is unable to pay claims ceded by MBIA Corp., National will assume liability for such ceded claim payments. As of December 31, 2017, the total amount of insurance in force for which National would be liable in the event that the reinsurers of MBIA Corp. were unable to meet their obligations is $1.4 billion. National requires certain unauthorized reinsurers to maintain bank letters of credit or establish trust accounts to cover liabilities ceded to such reinsurers under reinsurance contracts. As of December 31, 2017, the total amount available under these letters of credit and trust arrangements was $23 million.


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Premium Summary The components of net premiums written and earned, including premiums assumed from and ceded to other insurers and reinsurers are set forth in the following table: Years Ended December 31, 2017 2016 In thousands Written Earned Written Earned Direct $ 3,481 $ 45,784 $ 7,632 $ 75,873 Assumed 9,553 167,854 11,407 199,511 Gross 13,034 213,638 19,039 275,384 Ceded - - - - Net $ 13,034 $ 213,638 $ 19,039 $ 275,384

Premiums written for the year ended December 31, 2017 related to new policy issuance and amounts assumed from MBIA Corp. Premiums written for the year ended December 31, 2016 were primarily amounts assumed from MBIA Corp. and to a lesser extent premiums written from new business. Ceding commissions paid on assumed reinsurance net of returned ceding commissions, were an expense of $2 million and $3 million for 2017 and 2016, respectively. The maximum amount of return commission, which would have been due to National if all reinsurance contracts were canceled with the return of the unearned premium reserve, would be an income of $96 million and $131 million as of December 31, 2017 and 2016, respectively. National’s direct unearned premium reserve as of December 31, 2017 and 2016 was $149 million and $192 million, respectively. 11. Information Concerning Parent, Subsidiary and Affiliates National is a wholly-owned subsidiary of National Holdings, which is domiciled in the State of Delaware. All outstanding common shares of National Holdings are owned by its parent company, MBIA Inc., a holding company domiciled in the State of Connecticut. During the fourth quarters of 2017 and 2016, National declared and paid dividends of $118 million to its ultimate parent, MBIA Inc. National owns shares directly or indirectly of an upstream intermediate entity. Additionally, National does not have an investment in a foreign subsidiary. In 2017, 73% of all National’s written premiums arise from the quota share reinsurance agreement with MBIA Corp. As of December 31, 2017, National owned 36 million shares of MBIA Inc. common stocks, which were fully non-admitted under statutory accounting and NYIL. As of December 31, 2016, National did not own MBIA Inc. common stock to MBIA Inc. for partial payment of tax liabilities as discussed below. National is a party to the MBIA Tax Sharing Agreement. As of December 31, 2017, National has deposited $234 million into the tax escrow account for the 2015 and 2016 tax years. Subsequent to December 31, 2017, $90 million of these deposits were returned to National as a result of National’s 2017 financial results. National made several estimated net tax payments to MBIA Inc. in 2016, totaling $123 million, which consisted of $79 million in cash and $44 million in shares of MBIA Inc. common stock. For further details on income taxes, refer to “Note 6. Income Taxes”. During 2017, National purchased from MBIA Inc., $129 million principal amount of MBIA Inc. 5.700% Senior Notes due 2034 that were previously repurchased by MBIA Inc. and had not been retired. As of December 31, 2017, National owned $264 million principal amount of the 5.700% Senior Notes due 2034. MBIA Services Corporation (“MBIA Services”) provides support services such as management, legal, accounting, treasury and information technology, among others, to MBIA Inc. and other subsidiaries including National on a fee-for-service basis. The service fees charged to National by MBIA Services and other affiliates were $26 million and $21 million, respectively, for the years ended December 31, 2017 and 2016.


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National has entered into an agreement with MBIA Inc. whereby National held securities under agreements to resell and under an agreement to repurchase of $124 million and $129 million as of December 31, 2017 and 2016, respectively. The interest income related to these agreements was $0.8 million and $0.6 million, respectively, for the years ended December 31, 2017 and 2016. The interest expense related to these agreements was $0.2 million and less than $0.1 million, respectively, for the years ended December 31, 2017 and 2016. As of December 31, 2017 and 2016, there were $4 million and $0.4 million, respectively, of receivables from affiliates included in other assets. As of December 31, 2017 and 2016, there were $1 million and $0.5million, respectively of payables to MBIA Inc. included in other liabilities. The terms of the settlement agreement require that these amounts be settled within 90 days. National had no loans outstanding to any executive officers or directors in 2017 and 2016. National participates in its parent company’s pension, profit sharing/401(k) and 2005 Omnibus Incentive plans. Refer to “Note 12. Retirement Plans and Deferred Compensation” for further information regarding these plans. 12. Retirement Plans and Deferred Compensation National participates in its parent company’s pension plan, which covers substantially all employees. The pension plan is a qualified non-contributory defined contribution plan to which National contributes 10% of each eligible employee's annual compensation. Annual compensation for determining such contributions consists of base salary and bonus, as applicable. Pension benefits vest over a five-year period with 20% vested after two years, 60% vested after three years, 80% vested after four years and 100% vested after five years. The Company funds the annual pension contribution by the following February of each applicable year. Pension expense related to the qualified pension plan for the years ended December 31, 2017 and 2016 was $535 thousand and $178 thousand, respectively. National’s parent company has a qualified profit sharing/401(k) plan in which it participates. The plan is a voluntary contributory plan that allows eligible employees to defer compensation for federal income tax purposes under Section 401(k) of the Internal Revenue Code of 1986, as amended. Employees may contribute, through payroll deductions, up to 25% of eligible compensation. National matches employee contributions up to the first 5% of such compensation and are made in the form of cash, whereby participants may direct the match to an investment of their choice. The benefit of National’s contributions vest over a five-year period with 20% vested after two years, 60% vested after three years, 80% vested after four years and 100% vested after five years. Generally, a participating employee is entitled to distributions from the plan upon termination of employment, retirement, death or disability. Participants who qualify for distribution may receive a single lump sum, transfer assets to another qualified plan or individual retirement account, or receive a series of specified installment payments. Profit sharing/401(k) expense related to the qualified profit-sharing/401(k) plan for the years ended December 31, 2017 and 2016 was $274 thousand and $413 thousand, respectively. In addition to the above two plans, National also participates in its parent company’s non-qualified deferred compensation plan. Contributions to the above plans that exceed limitations established by federal regulations are then contributed to the non-qualified deferred compensation plan. The non-qualified pension expense for the years ended December 31, 2017 and 2016 was $241 thousand and $478 thousand, respectively. The non-qualified profit-sharing/401(k) expense for the years ended December 31, 2017 and 2016 was $132 thousand and $214 thousand, respectively. National participates in its parent company’s 2005 Omnibus Incentive Plan (the “Omnibus Plan”), as amended on May 7, 2009 and May 1, 2012. The Omnibus Plan may grant any type of award including stock options, performance shares, performance units, restricted stock, restricted stock units and dividend equivalents. Following the effective date of the Omnibus Plan, no new options or awards were granted under any of the prior plans authorized by the MBIA Inc. shareholders. The stock option component of the Omnibus Plan enables key employees to acquire shares of MBIA Inc. common stock. The stock option grants, which may be awarded every year, provide the right to purchase shares of MBIA Inc. common stock at the fair value of the stock on the date of grant. Options are exercisable as specified at the time of grant depending on the level of the recipient (generally five years) and expire either seven or ten years from the date of grant (or shorter if specified or following termination of employment).


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Under the restricted stock component of the Omnibus Plan, certain employees are granted restricted shares of MBIA Inc.’s common stock. These awards have a restriction period lasting three, four or five years depending on the type of award, after which time the awards fully vest. During the vesting period these shares may not be sold. Restricted stock may be granted to all employees. MBIA Inc. maintains voluntary retirement benefits, which provide certain benefits to all of National’s eligible employees upon retirement. A description of these benefits is included in MBIA Inc.’s proxy statement. One of the components of the retirement program, for those employees that are retirement eligible, is to continue to vest all performance-based stock options and restricted share awards beyond the retirement date in accordance with the original vesting terms and to immediately vest all outstanding time-based stock options and restricted share grants. National did not have any compensation cost related to the stock option program for the years ended December 31, 2017 and 2016. National’s proportionate share of compensation cost related to the restricted stock program for the years ended December 31, 2017 and 2016 was $3 million and $2 million, respectively. 13. Premium Revenue National has not recorded unearned premium related to future installment payments nor has it recorded premiums receivable on installment contracts as of December 31, 2017. The following table presents a roll forward of National’s expected future undiscounted premiums receivable on installment contracts for the year ended December 31, 2017. In thousands Adjustments

Premiums Receivable as of

Premium Payments

Premiums from New Business

Changes in Expected Term

Premiums Receivable as of

Reinsurance Premiums Payable

as of December 31, 2016 Received Written of Policies Other December 31, 2017 December 31, 2017

$ 268,820 $ (12,912) $ - $ (24,557) $ (169) $ 231,182 $ -

The following table presents the undiscounted future amount of premiums under installment contracts expected to be collected and the period in which those collections are expected to occur:

In thousands Expected Collection of

Premiums Three months ending: March 31, 2018 $ 1,600 June 30, 2018 2,852 September 30, 2018 3,930 December 31, 2018 3,982 Twelve months ending: December 31, 2019 12,159 December 31, 2020 11,872 December 31, 2021 11,548 December 31, 2022 11,297 Five years ending: December 31, 2027 51,791 December 31, 2032 44,174 December 31, 2037 34,324 December 31, 2042 and thereafter 41,653 Total $ 231,182


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The following table presents the unearned premium revenue balance, gross of reinsurance, and the future gross expected premiums earned revenue as of and for the periods presented. The amounts reflected on the financial statements are net of reinsurance which is immaterial. National’s refunded premiums earned for the year ended December 31, 2017 were $137 million.

Expected Future Premium Earnings

In thousands

Unearned Premium Revenue Upfront Installments

Estimated Earnings of

Future Premium

Collections

Total Expected Future

Premium Earnings

December 31, 2017 $ 585,470 Three months ending: March 31, 2018 572,588 9,984 2,898 459 13,341 June 30, 2018 562,606 7,893 2,089 1,163 11,145 September 30, 2018 545,053 16,204 1,349 1,986 19,539 December 31, 2018 535,709 9,024 320 2,951 12,295 Twelve months ending: December 31, 2019 492,919 42,286 504 12,246 55,036 December 31, 2020 453,805 38,610 504 11,987 51,101 December 31, 2021 418,220 35,132 453 11,630 47,215 December 31, 2022 386,743 31,020 457 11,383 42,860 Five years ending: December 31, 2027 239,352 145,011 2,380 52,431 199,822 December 31, 2032 133,620 103,763 1,969 44,890 150,622 December 31, 2037 69,329 62,762 1,529 35,349 99,640 December 31, 2042 and thereafter - 66,197 3,132 44,707 114,036 Total $ 567,886 $ 17,584 $ 231,182 $ 816,652

14. Contingencies and Commitments In the normal course of operating its business, National may be involved in various legal proceedings. Additionally, MBIA Inc. together with its subsidiaries (“MBIA”) may be involved in various legal proceedings that directly or indirectly impact National. MBIA has received subpoenas or informal inquiries from a variety of regulators, regarding a variety of subjects. MBIA has cooperated fully with each of these regulators and has or is in the process of satisfying all such requests. MBIA may receive additional inquiries from these or other regulators and expects to provide additional information to such regulators regarding their inquiries in the future.


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Litigation Ambac Bond Insurance Coverage Cases, Coordinated Proceeding Case No. JCCP 4555 (Super. Ct. of Cal., County of San Francisco) On July 23, 2008, the City of Los Angeles filed a complaint in the Superior Court of the State of California, County of Los Angeles, against a number of financial guarantee insurers, including MBIA. At the same time and subsequently, additional complaints were filed by other municipal entities and quasi-municipal entities. These cases were part of a coordination proceeding in Superior Court, San Francisco County, before Judge Curtis E. A. Karnow. In August of 2011, the plaintiffs filed amended versions of their respective complaints. The claims allege violation of California’s antitrust laws through maintaining a dual credit rating scale that misstated the credit default risk of certain issuers, thereby creating market demand for bond insurance. The plaintiffs also allege that the individual bond insurers participated in risky financial transactions in other lines of business that damaged each bond insurer’s financial condition, and failure to adequately disclose the impact of those transactions on their financial condition. The non-municipal plaintiffs also allege a California unfair competition cause of action. On December 11, 2017, the parties reached a settlement of the litigation, which is expected to be finalized in the first half of 2018, at which point the matter will be dismissed with prejudice.

Lynn Tilton and Patriarch Partners XV, LLC v. MBIA Inc. and MBIA Insurance Corp. v.; Index No.68880/2015 (N.Y. Sup. Ct., County of Westchester) On November 2, 2015, Lynn Tilton and Patriarch Partners XV, LLC filed a complaint in New York State Supreme Court, Westchester County, against MBIA Inc. and MBIA Corp., alleging fraudulent inducement and related claims arising from purported promises made in connection with insurance policies issued by MBIA Corp. on certain collateralized loan obligations managed by Ms. Tilton and affiliated Patriarch entities, and seeking damages. The plaintiffs filed an amended complaint on January 15, 2016. On January 17, 2017, MBIA filed its answer. Discovery concluded in October 2017 and a Trial Readiness Conference was held on November 3, 2017, at which the Court set a schedule for the briefing of summary judgment motions, which was completed as of February 1, 2018 and a decision which is now pending. On January 8, 2018, Justice Gretchen Walsh was assigned to the case.

National Public Finance Guarantee Corporation v. Padilla, Civ. No. 16-cv-2101 (D.P.R. June 15, 2016) (Besosa J.) On June 15, 2016, National filed a complaint in federal court in Puerto Rico challenging the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act (Law 21-2016 or the “Moratorium Act”) as unconstitutional under the United States Constitution. On June 22, 2016, National filed a motion for partial summary judgment on its claim that the Moratorium Act is preempted by the federal Bankruptcy Code. On July 7, 2016, the Puerto Rico defendants filed a motion to stay the case pursuant to the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”), which was granted by the Court in August of 2016. The defendants filed their answer to the complaint on July 26, 2016. On November 15, 2016, the District Court denied National’s motion to lift the stay on litigation pursuant to PROMESA. On January 30, 2017, the District Court denied without prejudice National’s partial motion for a summary judgment. On January 11, 2017, the U.S. Court of Appeals for the First Circuit affirmed the denial of a separate plaintiff’s motion to lift the PROMESA stay in a related action challenging the Moratorium Act. Accordingly, the case remained stayed through May 1, 2017, at which time the PROMESA stay expired. However, on May 3, 2017, Puerto Rico filed a Title III petition under PROMESA, thereby staying this dispute under Title III of PROMESA. On August 1, 2017, the District Court dismissed the case with prejudice. On August 28, 2017, National filed a motion for reconsideration.

Assured Guaranty Corp. et al. v. Commonwealth of Puerto Rico et al., Case No. 3:17-cv-01578 (D.P.R. May 3, 2017) (Swain, J.) On May 3, 2017, the Financial Oversight and Management Board filed a petition under Title III of PROMESA to adjust the debts of Puerto Rico. On the same day, National, together with Assured Guaranty Corp. and Assured Guaranty Municipal Corp., f/k/a Financial Security Assurance Inc., filed an adversary complaint in the case commenced by the Title III filing, alleging that the Fiscal Plan and the Fiscal Plan Compliance Act, signed into law by the Governor of Puerto Rico on April 29, 2017, violate PROMESA and the United States Constitution. On October 6, 2017, National, together with the other plaintiffs in the filing, voluntarily dismissed the complaint without prejudice.

The Bank of New York Mellon v. Puerto Rico Sales Tax Financing Corporation, et al., Case No. 17-133-LTS (D.P.R. May 16, 2017) (Swain, J.) On May 16, 2017, the Bank of New York Mellon, as trustee for COFINA, filed an adversary complaint seeking an interpleader and declaratory relief relating to conflicting directions from multiple stakeholders regarding alleged events of default. National has intervened in this matter. Given the complexity of the issues, the judge granted Bank of New York’s interpleader request ordering a


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freeze on disbursements to all bondholders and temporarily setting aside the funds until the dispute can be resolved between the parties. Under a scheduling order, discovery is underway and motions for summary judgment and opening briefs were filed on February 21, 2018.

Assured Guaranty Corp. et al. v. Commonwealth of Puerto Rico et al., Case No. 17 BK 3567-LTS (D.P.R. June 3, 2017) (Swain, J.) On May 21, 2017, the Oversight Board filed a petition under Title III of PROMESA to adjust the debts for the Puerto Rico Highways & Transportation Authority (“PRHTA”). On June 3, 2017, National, together with Assured Guaranty Corp. and Assured Guaranty Municipal Corp. and Financial Guaranty Insurance Company, filed an adversary complaint PRHTA Title III case, alleging that the Commonwealth and PRHTA are unlawfully diverting pledged special revenues from the payment of certain PRHTA bonds to the Commonwealth’s General Fund. Motions to dismiss were filed on June 28, 2017, and oral arguments were heard on November 21, 2017. On January 30, 2018, the court granted the Commonwealth defendants’ motion to dismiss the PRHTA-related adversary complaint. On February 9, 2018, National, together with Assured Guaranty Corp. and Assured Guaranty Municipal Corp. and Financial Guaranty Insurance Company, filed their notice of appeal of the motions to dismiss to the United States Court of Appeal for the First Circuit.

National Public Finance Guarantee Corp. et al. v. The Financial Oversight and Mgmt. Bd. et al., Case No. 3:17-cv-01882 (D.P.R. June 26, 2017) (Besosa, J.) On June 26, 2017, National, together with Assured Guaranty Corp. and Assured Guaranty Municipal Corp., filed a complaint against the Oversight Board, its chairman and certain of its members seeking declaratory, injunctive and mandamus relief requiring the Oversight Board to comply with certain of its obligations under PROMESA. On July 17, 2017, the plaintiffs filed an amended complaint against the Oversight Board, its chairman, and certain of its members in their official and individual capacities, seeking declaratory relief under PROMESA and asserting a claim for nominal damages against the individual defendants for tortious interference with the PREPA Restructuring Support Agreement. By order of the Court date August 7, 2017, the litigation was stayed.

National Public Finance Guarantee Corp. et al. v. The Financial Oversight and Mgmt. Bd. et al., Case No. 17 BK-04780 (D.P.R. August 7, 2017) On August 7, 2017, National, together with Assured Guaranty Corp., Assured Guaranty Municipal Corp., the Ad Hoc Group of PREPA Bondholders, and Syncora Guarantee Inc. filed an adversary complaint under Title III of PROMESA against PREPA, the Financial Oversight and Management Board for Puerto Rico, Puerto Rico Fiscal Agency and Financial Advisory Authority, et al to enforce Plaintiffs’ contractual interest and constitutional right to revenues that PREPA pledged to bondholders but has thus far refused to turn over. Plaintiffs seek a declaration that Defendants have violated sections 922(d) and 928(a) of the Bankruptcy Code, and that efforts to compel Defendants to apply such revenues to pay for debt service on the Bonds are not stayed as provided under section 922(d) of the Bankruptcy Code. Plaintiffs also seek a declaration that, pursuant to sections 922(d) and 928 of the Bankruptcy Code as incorporated into PROMESA, PREPA is only authorized to use Revenues to pay for current operating expenses in the current time period, not for future expenses that may be deferred to or payable at a later date. In addition to declaratory relief, Plaintiffs also seek injunctive relief prohibiting Defendants from taking or causing to be taken any action that would further violate sections 922(d) and 928(a) of the Bankruptcy Code and ordering Defendants to remit Revenues for the uninterrupted and timely payment of debt service on the Bonds in accordance with sections 922(d) and 928(a) of the Bankruptcy Code. On October 13, 2017, National, together with the other plaintiffs in the filing, voluntarily dismissed without prejudice the above referenced adversary complaint.

The Official Committee of Unsecured Creditors of the Commonwealth of Puerto Rico, as agent of the Commonwealth of Puerto Rico v. Bettina Whyte, as agent of the Puerto Rico Sales Tax Financing Corporation, Adv. Proc. No. 17-257-LTS in Case No. 17 BK 3283-LTS (D.P.R. Sept. 8, 2017) On August 10, 2017, the Court approved and entered a Stipulation and Order Approving Procedure to Resolve Commonwealth-COFINA Dispute in the PROMESA Title III proceeding relating to whether sales and use taxes purportedly pledged by COFINA to secure debt are property of the Commonwealth or COFINA under applicable law. On November 16, 2017, National intervened as a Defendant in the adversary proceeding and filed its answer, affirmative defenses, and counterclaims. On December 21, 2017, the Court issued an order, which, inter alia, dismissed without prejudice, certain claims of the intervenors that exceeded the scope of the Commonwealth-COFINA dispute including certain of National's counterclaims. National’s first counterclaim which seeks a declaratory judgment that the COFINA statutes are constitutional remains a part of this litigation. On January 13, 2018, the Court permitted the Commonwealth Agent to file a second amended complaint. National’s answer was filed on January 30, 2018.


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For those aforementioned actions in which it is a defendant, MBIA is defending against those actions and expects ultimately to prevail on the merits. There is no assurance, however, that MBIA will prevail in these actions. Adverse rulings in these actions could have a material adverse effect on MBIA’s ability to implement its strategy and on its business, results of operations, cash flows and financial condition. At this stage of the litigation, there has not been a determination as to the amount, if any, of damages. Accordingly, MBIA is not able to estimate any amount of loss or range of loss. MBIA similarly can provide no assurance that it will be successful in those actions in which it is a plaintiff. There are no other material lawsuits pending or, to the knowledge of National, threatened, to which National is a party. 15. Leases

National leases its headquarters in Purchase, New York. The initial lease term expires in 2030 with the option to terminate the lease in 2025 upon the payment of a termination amount. At the end of the initial lease term, National has the option to extend the term of the lease for two additional terms of five years at a fixed annual rent based on the fair market rent at the time of any extension. As of December 31, 2017, total future minimum lease payments remaining were $36 million. The total future minimum lease payments include annual rent escalation amounts. The lease agreement has been classified as an operating lease, and operating rent expense is recognized on a straight-line basis. As of December 31, 2017, the minimum aggregate rental commitments are as follows: In thousands Operating Lease Twelve months ending: December 31, 2018 $2,542 December 31, 2019 2,592 December 31, 2020 2,649 December 31, 2021 2,698 December 31, 2022 2,755 Five years ending: December 31, 2027 14,560 December 31, 2030 8,306

Future minimum lease payments receivable with an affiliate under leasing arrangement as of December 31, 2017 are as follows:

In thousands Operating Lease Twelve months ending: December 31, 2018 $1,830 December 31, 2019 1,866 December 31, 2020 1,907 December 31, 2021 1,943 December 31, 2022 1,984 Five years ending: December 31, 2027 10,483 December 31, 2030 5,981


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16. Subsequent Events Subsequent events have been considered through March 1, 2018, the date upon which the audited statutory financial statements were available to be issued. Refer to “Note 14. Contingencies and Commitments” for information about legal proceedings that commenced after December 31, 2017.

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ANNUAL STATEMENT FOR THE YEAR 2017 OF THE National Public Finance Guarantee Corporation

SUMMARY INVESTMENT SCHEDULE Gross Investment Holdings Admitted Assets as Reported in the Annual Statement

1 2 3 4 5 6

Investment Categories Amount Percentage Amount

Securities Lending

Reinvested Collateral Amount

Total (Col. 3+4) Amount Percentage

1. Bonds: 1.1 U.S. treasury securities 604,444,337 15.549% 604,444,337 604,444,337 0.167 1.2 U.S. government agency obligations (excluding mortgage-backed securities): 1.21 Issued by U.S. government agencies 2,077,000 0.053% 2,077,000 2,077,000 0.001 1.22 Issued by U.S. government sponsored agencies 2,623,057 0.067% 2,623,057 2,623,057 0.001 1.3 Non-U.S. government (including Canada, excluding mortgage-backed securities) - 0.000% - 0.000 1.4 Securities issued by states, territories, and possessions and political subdivisions in the U.S.: 1.41 States, territories and possessions general obligations 163,888,528 4.216% 163,888,528 163,888,528 0.045 1.42 Political subdivisions of states, territories and possessions and political subdivisions general obligations 60,561,481 1.558% 60,561,481 60,561,481 0.017 1.43 Revenue and assessment obligations 408,428,079 10.507% 408,428,079 408,428,079 0.113 1.44 Industrial development and similar obligations - 0.000% - 0.000 1.5 Mortgage-backed securities (includes residential and commercial MBS): 1.51 Pass-through securities: 1.511 Issued or guaranteed by GNMA 70,499,386 1.814% 70,499,386 70,499,386 0.019 1.512 Issued or guaranteed by FNMA and FHLMC 290,690,484 7.478% 290,690,484 290,690,484 0.080 1.513 All other - 0.000% - - 0.000 1.52 CMOs and REMICs: 1.521 Issued or guaranteed by GNMA, FNMA, FHLMC or VA 21,446,964 0.552% 21,446,964 21,446,964 0.006

1.522 Issued by non-U.S. Government issuers and collateralized by mortgage-backed securities issued or guaranteed by agencies shown in Line 1.521 - 0.000% - - 0.000

1.523 All other 56,427,427 1.452% 56,427,427 56,427,427 0.016 2. Other debt and other fixed income securities (excluding short term):

2.1 Unaffiliated domestic securities (includes credit tenant - 0.000 loans and hybrid securities) 1,055,760,628 27.159% 1,055,760,628 1,055,760,628 0.291 2.2 Unaffiliated non-U.S. securities (including Canada) 253,907,504 6.532% 253,907,504 253,907,504 0.070 2.3 Affiliated securities 237,268,604 6.104% 237,268,604 237,268,604 0.065 3. Equity interests:

3.1 Investments in mutual funds - 0.000% - 0.000 3.2 Preferred stocks: 3.21 Affiliated - 0.000% - 0.000 3.22 Unaffiliated 663,400 0.017% 663,400 663,400 0.000 3.3 Publicly traded equity securities (excluding preferred stocks): 3.31 Affiliated 261,747,916 6.733% - - 0.000 3.32 Unaffiliated - 0.000% - - 0.000 3.4 Other equity securities: 3.41 Affiliated - 0.000% - - 0.000 3.42 Unaffiliated - 0.000% - - 0.000 3.5 Other equity interests including tangible personal property under lease: 3.51 Affiliated - 0.000% - - 0.000 3.52 Unaffiliated - 0.000% - - 0.000 4. Mortgage loans:

4.1 Construction and land development - 0.000% - - 0.000 4.2 Agricultural - 0.000% - - 0.000 4.3 Single family residential properties - 0.000% - - 0.000 4.4 Multifamily residential properties - 0.000% - - 0.000 4.5 Commercial loans - 0.000% - - 0.000 4.6 Mezzanine real estate loans - 0.000% - - 0.000 5. Real estate investments:

5.1 Property occupied by company - 0.000% - - 0.000 5.2 Property held for production of income (including $0 of property acquired - - 0.000 in satisfaction of debt) - 0.000% 5.3 Property held for sale (including $0 property acquired in satisfaction of debt) - 0.000% - - 0.000 6. Contract loans - 0.000% - - 0.000 7. Derivatives - 0.000% - - 0.000 8. Receivables for securities 561,710 0.014% 561,710 561,710 0.000 9. Securities Lending (Line 10, Asset Page reinvested collateral) - 0.000% - XXX XXX XXX 10. Cash, cash equivalents and short-term investments 320,449,653 8.243% 320,449,653 320,449,653 0.088 11. Other invested assets 75,938,520 1.953% 75,938,520 75,938,520 0.021 12. Total invested assets 3,887,384,680 100.000% 3,625,636,764 0 3,625,636,764 100.000%

*23825201728500100*SUPPLEMENT FOR THE YEAR 2017 OF THE National Public Finance Guarantee Corporation

SUPPLEMENTAL INVESTMENT RISKS INTERROGATORIESFor The Year Ended December 31, 2017

(To Be Filed by April 1)

Of The National Public Finance Guarantee Corporation

Address (City, State and Zip Code) Purchase, NY 10577-2100

NAIC Group Code 00528 NAIC Company Code 23825 Employer’s ID Number 37-6025608

The Investment Risks Interrogatories are to be filed by April 1. They are also to be included with the Audited Statutory Financial Statements.

Answer the following interrogatories by reporting the applicable U.S. dollar amounts and percentages of the reporting entity’s total admitted assets held in that category ofinvestments.

1. Reporting entity’s total admitted assets as reported on Page 2 of this annual statement. $ 3,753,940,388

2. Ten largest exposures to a single issuer/borrower/investment.

1

Issuer

2

Description of Exposure

3

Amount

4Percentage of Total

Admitted Assets

2.01 FNMA U.S. Special Revenue & Special Assessmen $ 297,961,862 7.9 %

2.02 MBIA INC Parent, Subsidiaries and Affiliates $ 237,268,604 6.3 %

2.03 National Repurchase Agreement Parent, Subsidiaries and Affiliates $ 124,000,000 3.3 %

2.04 Puerto Rico Sales Tax Fin Corp U.S. Special Revenue & Special Assessmen $ 116,889,162 3.1 %

2.05 Toll Road INV PART II Industrial and Miscellaneous $ 52,196,797 1.4 %

2.06 PUERTO RICO ELECTRIC PWR AUTH U.S. Special Revenue & Special Assessmen $ 45,056,582 1.2 %

2.07 CALIFORNIA ST GO BDS U.S. States, Territories and Possessions $ 43,842,388 1.2 %

2.08 JPMORGAN CHASE & CO Industrial and Miscellaneous $ 34,621,122 0.9 %

2.09 WELLS FARGO & CO Industrial and Miscellaneous $ 32,796,844 0.9 %

2.10 Massachusetts ST GO U.S. States, Territories and Possessions $ 29,521,266 0.8 %

3. Amounts and percentages of the reporting entity’s total admitted assets held in bonds and preferred stocks by NAIC designation.

Bonds 1 2 Preferred Stocks 3 4

3.01 NAIC 1 $ 2,631,248,297 70.1 % 3.07 P/RP-1 $ 663,400 0.0 %

3.02 NAIC 2 $ 311,102,451 8.3 % 3.08 P/RP-2 $ 0 0.0 %

3.03 NAIC 3 $ 267,799,525 7.1 % 3.09 P/RP-3 $ 0 0.0 %

3.04 NAIC 4 $ 11,939,698 0.3 % 3.10 P/RP-4 $ 0 0.0 %

3.05 NAIC 5 $ 1,610,490 0.0 % 3.11 P/RP-5 $ 0 0.0 %

3.06 NAIC 6 $ 164,939,441 4.4 % 3.12 P/RP-6 $ 0 0.0 %

4. Assets held in foreign investments:

4.01 Are assets held in foreign investments less than 2.5% of the reporting entity’s total admitted assets? Yes [ ] No [X]

If response to 4.01 above is yes, responses are not required for interrogatories 5 – 10.

4.02 Total admitted assets held in foreign investments $ 259,231,311 6.9 %

4.03 Foreign-currency-denominated investments $ 0 0.0 %

4.04 Insurance liabilities denominated in that same foreign currency $ 0 0.0 %

285

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SUPPLEMENT FOR THE YEAR 2017 OF THE National Public Finance Guarantee Corporation

SUPPLEMENTAL INVESTMENT RISKS INTERROGATORIES (cont.)5. Aggregate foreign investment exposure categorized by NAIC sovereign designation:

1 2

5.01 Countries designated NAIC 1 $ 242,477,948 6.5 %

5.02 Countries designated NAIC 2 $ 8,818,593 0.2 %

5.03 Countries designated NAIC 3 or below $ 7,934,770 0.2 %

6. Largest foreign investment exposures by country, categorized by the country’s NAIC sovereign designation:1 2

Countries designated NAIC 1:

6.01 Country 1: Cayman Islands $ 87,302,665 2.3 %

6.02 Country 2: Canada $ 68,896,181 1.8 %


6.03 Country 1: Mexico $ 5,472,016 0.1 %

6.04 Country 2: Italy $ 2,834,963 0.1 %

Countries designated NAIC 3 or below:

6.05 Country 1: Guernsey $ 5,643,426 0.2 %

6.06 Country 2: Liberia $ 1,603,642 0.0 %

1 2

7. Aggregate unhedged foreign currency exposure $ 0 0.0 %

8. Aggregate unhedged foreign currency exposure categorized by NAIC sovereign designation:

1 2

8.01 Countries designated NAIC 1 $ 0 0.0 %

8.02 Countries designated NAIC 2 $ 0 0.0 %

8.03 Countries designated NAIC 3 or below $ 0 0.0 %

9. Largest unhedged foreign currency exposures by country, categorized by the country’s NAIC sovereign designation:

Countries designated NAIC 1: 1 2

9.01 Country 1: $ 0 0.0 %

9.02 Country 2: $ 0 0.0 %


9.03 Country 1: $ 0 0.0 %

9.04 Country 2: $ 0 0.0 %

Countries designated NAIC 3 or below:

9.05 Country 1: $ 0 0.0 %

9.06 Country 2: $ 0 0.0 %

10. Ten largest non-sovereign (i.e. non-governmental) foreign issues:

1Issuer

2NAIC Designation

3 4

10.01 Bank of Nova Scotia 1FE & 2FE $ 28,288,255 0.8 %

10.02 Bank of Montreal 1FE $ 20,000,806 0.5 %

10.03 Dryden Senior Loan 1FE $ 16,791,140 0.4 %

10.04 Shell International Finance 1FE $ 13,866,966 0.4 %

10.05 Goldentree Loan Manangement 1FE $ 13,000,000 0.3 %

10.06 Madison Park Funding 1FE $ 10,000,000 0.3 %

10.07 Royal Bank of Canada 1FE $ 10,000,000 0.3 %

10.08 Golub Capital Partners 1FE $ 9,630,000 0.3 %

10.09 Mitsubishi 1FE $ 8,277,345 0.2 %

10.10 MP CLO III LTD 1FE $ 7,750,000 0.2 %

285.1

46


SUPPLEMENTAL INVESTMENT RISKS INTERROGATORIES (cont.)11. Amounts and percentages of the reporting entity’s total admitted assets held in Canadian investments and unhedged Canadian currency exposure:

11.01 Are assets held in Canadian investments less than 2.5% of the reporting entity’s total admitted assets? Yes [X] No [ ]

If response to 11.01 is yes, detail is not required for the remainder of Interrogatory 11.

1 2

11.02 Total admitted assets held in Canadian investments $ 0 0.0 %

11.03 Canadian-currency-denominated investments $ 0 0.0 %

11.04 Canadian-denominated insurance liabilities $ 0 0.0 %

11.05 Unhedged Canadian currency exposure $ 0 0.0 %

12. Report aggregate amounts and percentages of the reporting entity’s total admitted assets held in investments with contractual sales restrictions.

12.01 Are assets held in investments with contractual sales restrictions less than 2.5% of the reporting entity’s total admitted assets? Yes [X] No [ ]

If response to 12.01 is yes, responses are not required for the remainder of Interrogatory 12.

1 2 3

12.02 Aggregate statement value of investments with contractual sales restrictions $ 0 0.0 %

Largest three investments with contractual sales restrictions:

12.03 $ 0 0.0 %

12.04 $ 0 0.0 %

12.05 $ 0 0.0 %

13. Amounts and percentages of admitted assets held in the ten largest equity interests:

13.01 Are assets held in equity interest less than 2.5% of the reporting entity’s total admitted assets? Yes [X] No [ ]

If response to 13.01 is yes, responses are not required for the remainder of Interrogatory 13.

1Issuer

2 3

13.02 $ 0 0.0 %

13.03 $ 0 0.0 %

13.04 $ 0 0.0 %

13.05 $ 0 0.0 %

13.06 $ 0 0.0 %

13.07 $ 0 0.0 %

13.08 $ 0 0.0 %

13.09 $ 0 0.0 %

13.10 $ 0 0.0 %

13.11 $ 0 0.0 %

285.2

47


SUPPLEMENTAL INVESTMENT RISKS INTERROGATORIES (cont.)

14. Amounts and percentages of the reporting entity’s total admitted assets held in nonaffiliated, privately placed equities:

14.01 Are assets held in nonaffiliated, privately placed equities less than 2.5% of the reporting entity’s total admitted assets? Yes [X] No [ ]

If response to 14.01 above is yes, responses are not required for the remainder ofInterrogatory 14.

1 2 3

14.02 Aggregate statement value of investments held in nonaffiliated, privately placed equities $ 0 0.0 %

Largest three investments held in nonaffiliated, privately placed equities:

14.03 $ 0 0.0 %

14.04 $ 0 0.0 %

14.05 $ 0 0.0 %

15. Amounts and percentages of the reporting entity’s total admitted assets held in general partnership interests:

15.01 Are assets held in general partnership interests less than 2.5% of the reporting entity’s total admitted assets? Yes [X] No [ ]


1 2 3

15.02 Aggregate statement value of investments held in general partnership interests $ 0 0.0 %

Largest three investments in general partnership interests:

15.03 $ 0 0.0 %

15.04 $ 0 0.0 %

15.05 $ 0 0.0 %

16. Amounts and percentages of the reporting entity’s total admitted assets held in mortgage loans:

16.01 Are mortgage loans reported in Schedule B less than 2.5% of the reporting entity’s total admitted assets? Yes [X] No [ ]

If response to 16.01 above is yes, responses are not required for the remainder of Interrogatory 16 and Interrogatory 17.

1Type (Residential, Commercial, Agricultural)

2 3

16.02 $ 0 0.0 %

16.03 $ 0 0.0 %

16.04 $ 0 0.0 %

16.05 $ 0 0.0 %

16.06 $ 0 0.0 %

16.07 $ 0 0.0 %

16.08 $ 0 0.0 %

16.09 $ 0 0.0 %

16.10 $ 0 0.0 %

16.11 $ 0 0.0 %

285.3

48


SUPPLEMENTAL INVESTMENT RISKS INTERROGATORIES (cont.)

16. Amount and percentage of the reporting entity’s total admitted assets held in the following categories of mortgage loans:

Loans

16.12 Construction loans $ 0 0.0 %

16.13 Mortgage loans over 90 days past due $ 0 0.0 %

16.14 Mortgage loans in the process of foreclosure $ 0 0.0 %

16.15 Mortgage loans foreclosed $ 0 0.0 %

16.16 Restructured mortgage loans $ 0 0.0 %

17. Aggregate mortgage loans having the following loan-to-value ratios as determined from the most current appraisal as of the annual statement date:

Loan-to-Value Residential Commercial Agricultural1 2 3 4 5 6

17.01 above 95% $ 0 0.0 % $ 0 0.0 % $ 0 0.0 %

17.02 91% to 95% $ 0 0.0 % $ 0 0.0 % $ 0 0.0 %

17.03 81% to 90% $ 0 0.0 % $ 0 0.0 % $ 0 0.0 %

17.04 71% to 80% $ 0 0.0 % $ 0 0.0 % $ 0 0.0 %

17.05 below 70% $ 0 0.0 % $ 0 0.0 % $ 0 0.0 %

18. Amounts and percentages of the reporting entity’s total admitted assets held in each of the five largest investments in real estate:

18.01 Are assets held in real estate reported less than 2.5% of the reporting entity’s total admitted assets? Yes [X] No [ ]


Largest five investments in any one parcel or group of contiguous parcels of real estate.

Description1 2 3

18.02 $ 0 0.0 %18.03 $ 0 0.0 %18.04 $ 0 0.0 %18.05 $ 0 0.0 %18.06 $ 0 0.0 %

19. Report aggregate amounts and percentages of the reporting entity’s total admitted assets held in investments held in mezzanine real estate loans:

19.01 Are assets held in investments held in mezzanine real estate loans less than 2.5% of the reporting entity’s total admitted assets? Yes [X] No [ ]

If response to 19.01 is yes, responses are not required for the remainder of Interrogatory19.

1 2 319.02 Aggregate statement value of investments held in mezzanine real estate loans: $ 0 0.0 %

Largest three investments held in mezzanine real estate loans:

19.03 $ 0 0.0 %19.04 $ 0 0.0 %19.05 $ 0 0.0 %

285.4

49


SUPPLEMENTAL INVESTMENT RISKS INTERROGATORIES (cont.)20. Amounts and percentages of the reporting entity’s total admitted assets subject to the following types of agreements:

At Year-End At End of Each Quarter

1st Qtr 2nd Qtr 3rd Qtr

1 2 3 4 520.01 Securities lending

agreements (do not includeassets held as collateral forsuch transactions) $ 0 0.0 % $ 0 $ 0 $ 0

20.02 Repurchase agreements $ 124,000,000 3.3 % $ 123,500,000 $ 126,500,000 $ 129,500,00020.03 Reverse repurchase

agreements $ 124,000,000 3.3 % $ 123,500,000 $ 126,500,000 $ 129,500,00020.04 Dollar repurchase

agreements $ 0 0.0 % $ 0 $ 0 $ 020.05 Dollar reverse repurchase

agreements $ 0 0.0 % $ 0 $ 0 $ 0

21. Amounts and percentages of the reporting entity’s total admitted assets for warrants not attached to other financial instruments, options, caps, and floors:

Owned Written

1 2 3 421.01 Hedging $ 0 0.0 % $ 0 0.0 %21.02 Income generation $ 0 0.0 % $ 0 0.0 %21.03 Other $ 0 0.0 % $ 0 0.0 %

22. Amounts and percentages of the reporting entity’s total admitted assets of potential exposure for collars, swaps, and forwards:

At Year-End At End of Each Quarter1st Qtr 2nd Qtr 3rd Qtr

1 2 3 4 522.01 Hedging $ 0 0.0 % $ 0 $ 0 $ 022.02 Income generation $ 0 0.0 % $ 0 $ 0 $ 022.03 Replications $ 0 0.0 % $ 0 $ 0 $ 022.04 Other $ 0 0.0 % $ 0 $ 0 $ 0

23. Amounts and percentages of the reporting entity’s total admitted assets of potential exposure for futures contracts:

At Year-End At End of Each Quarter

1 21st Qtr

32nd Qtr

43rd Qtr

5

23.01 Hedging $ 0 0.0 % $ 0 $ 0 $ 0

23.02 Income generation $ 0 0.0 % $ 0 $ 0 $ 0

23.03 Replications $ 0 0.0 % $ 0 $ 0 $ 0

23.04 Other $ 0 0.0 % $ 0 $ 0 $ 0

285.5

50

Documents

National Public Finance Guarantee Corporation · 2019-02-28 · National Public Finance Guarantee Corporation (“National” or “the Company”) ... (“S&P”) downgraded the