SunTrust 2011 Annual Report Download - page 182
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Please find page 182 of the 2011 SunTrust annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Notes to Consolidated Financial Statements (Continued)
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NOTE 18 – REINSURANCE ARRANGEMENTS AND GUARANTEES
Reinsurance
The Company provides mortgage reinsurance on certain mortgage loans through contracts with several primary mortgage insurance
companies. Under these contracts, the Company provides aggregate excess loss coverage in a mezzanine layer in exchange for a
portion of the pool’s mortgage insurance premium. As of December 31, 2011, approximately $8.0 billion of mortgage loans were
covered by such mortgage reinsurance contracts. The reinsurance contracts are intended to place limits on the Company’s maximum
exposure to losses by defining the loss amounts ceded to the Company as well as by establishing trust accounts for each contract.
The trust accounts, which are comprised of funds contributed by the Company plus premiums earned under the reinsurance
contracts, are maintained to fund claims made under the reinsurance contracts. If claims exceed funds held in the trust accounts,
the Company does not intend to make additional contributions beyond future premiums earned under the existing contracts.
At December 31, 2011, the total loss exposure ceded to the Company was approximately $309 million; however, the maximum
amount of loss exposure based on funds held in each separate trust account, including net premiums due to the trust accounts, was
limited to $42 million. Of this amount, $38 million of losses have been reserved for as of December 31, 2011, reducing the
Company’s net remaining loss exposure to $4 million. The reinsurance reserve was $148 million as of December 31, 2010. The
decrease in the reserve balance was due to claim payments made to the primary mortgage insurance companies since December 31,
2010, as well as the relinquishment of one trust during the second quarter of 2011. The Company’s evaluation of the required
reserve amount includes an estimate of claims to be paid by the trust in relation to loans in default and an assessment of the
sufficiency of future revenues, including premiums and investment income on funds held in the trusts, to cover future claims.
Future reported losses may exceed $4 million, since future premium income will increase the amount of funds held in the trust;
however, future cash losses, net of premium income, are not expected to exceed $4 million. The amount of future premium income
is limited to the population of loans currently outstanding since additional loans are not being added to the reinsurance contracts;
future premium income could be further curtailed to the extent the Company agrees to relinquish control of other individual trusts
to the mortgage insurance companies. Premium income, which totaled $26 million, $38 million, and $48 million for each of the
years ended December 31, 2011, 2010, and 2009, respectively, is reported as part of noninterest income. The related provision for
losses, which totaled $28 million, $27 million, and $115 million for each of the years ended December 31, 2011, 2010, and 2009,
respectively, is reported as part of other noninterest expense.
Guarantees
The Company has undertaken certain guarantee obligations in the ordinary course of business. The issuance of a guarantee imposes
an obligation for the Company to stand ready to perform and should certain triggering events occur, it also imposes an obligation
to make future payments. Payments may be in the form of cash, financial instruments, other assets, shares of stock, or provisions
of the Company’s services. The following is a discussion of the guarantees that the Company has issued as of December 31, 2011.
The Company has also entered into certain contracts that are similar to guarantees, but that are accounted for as derivatives (see
Note 17, “Derivative Financial Instruments”).
Letters of Credit
Letters of credit are conditional commitments issued by the Company generally to guarantee the performance of a client to a
third party in borrowing arrangements, such as CP, bond financing, and similar transactions. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan facilities to clients and may be reduced by selling
participations to third parties. The Company issues letters of credit that are classified as financial standby, performance standby,
or commercial letters of credit.
As of December 31, 2011 and 2010, the maximum potential amount of the Company’s obligation was $5.2 billion and $6.4
billion, respectively, for financial and performance standby letters of credit. The Company has recorded $105 million and $109
million in other liabilities in the Consolidated Balance Sheets for unearned fees related to these letters of credit as of December
31, 2011 and 2010, respectively. The Company’s outstanding letters of credit generally have a term of less than one year but
may extend longer. If a letter of credit is drawn upon, the Company may seek recourse through the client’s underlying obligation.
If the client’s line of credit is also in default, the Company may take possession of the collateral securing the line of credit,
where applicable. The Company monitors its credit exposure under standby letters of credit in the same manner as it monitors
other extensions of credit in accordance with credit policies. Some standby letters of credit are designed to be drawn upon and
others are drawn upon only under circumstances of dispute or default in the underlying transaction to which the Company is
not a party. In all cases, the Company holds the right to reimbursement from the applicant and may or may not also hold
collateral to secure that right. An internal assessment of the PD and loss severity in the event of default is assessed consistent
with the methodologies used for all commercial borrowers. The management of credit risk regarding letters of credit leverages
the risk rating process to focus higher visibility on the higher risk and higher dollar letters of credit. The associated reserve is