The vast majority of the Company's investment portfolio is fixed maturity and short-term investments, classified as available-for-sale at the time of purchase (approximately 98.0% based on fair value at December 31, 2011), and therefore carried at fair value with change in fair value recorded in OCI, unless other than temporarily impaired. Changes in fair value for other than temporarily impaired securities are bifurcated between credit losses and non-credit changes in fair value. Credit losses on OTTI securities are recorded in the statement of operations and the non-credit component of OTTI securities are recorded in OCI. For other-than temporarily improved securities where the Company has the intent to sell, both credit and non-credit related changes in fair value are recorded in the consolidated statements of operations. OTTI credit losses adjust the amortized cost of impaired securities and that amortized cost basis is not adjusted for subsequent recoveries in fair value. However, the amortized cost basis is adjusted for accretion and amortization using the effective interest method with a corresponding entry recorded in net investment income.

Realized gains and losses on sales of investments are determined using the specific identification method. Realized loss includes amounts recorded for other than temporary impairments on debt securities.

For mortgage-backed securities, and any other holdings for which there is prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any necessary adjustments due to changes in effective yields and maturities are recognized in current income.

Short-term investments, which are those investments with a maturity of less than one year at time of purchase, are carried at fair value and include amounts deposited in money market funds.

Other invested assets includes assets acquired in refinancing transactions are primarily comprised of franchise loans, which are evaluated for impairment by assessing the probability of collecting expected cash flows. Any impairment is recorded in the consolidated statement of operations and any subsequent increases in expected cash flow are recorded as an increase in yield over the remaining life of the loans. Other invested assets also include trading securities and a 50% equity investment acquired in a restructuring of an insured CDS and other investments. Trading securities are recorded on a trade date basis and carried at fair value. Unrealized gains and losses on trading securities are reflected in net income. The Company's 50% equity investment is carried at its proportionate share of the underlying entity's equity value (See "—Investment in Portfolio Funding Company LLC I" below).

Other invested assets also include trading securities which are recorded on a trade date basis and carried at fair value. Unrealized gains and losses on trading securities are reflected in net income.

Prior to April 1, 2009, if a security was deemed to be OTTI, the entire difference between fair value and the amortized cost of a debt security at the measurement date was recorded in the consolidated statement of operations as a realized loss. The previous amortized cost basis less the OTTI recognized in earnings was the new amortized cost basis of the investment. That new amortized cost basis was not adjusted for subsequent recoveries in fair value. However, if, based on cash flow estimates on the date of impairment, the recoverable value of the investment was greater than the new cost basis (i.e., the fair value on the date of impairment) of the investment, the difference was accreted into net investment income in future periods based upon the amount and timing of expected future cash flows of the security. The cumulative effect of the adoption of the OTTI standard on April 1, 2009 was a $62.2 million pretax ($57.7 million after-tax) reclassification of losses from retained earnings to accumulated OCI ("AOCI").

Since April 1, 2009, if an OTTI has occurred, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI is recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date.

If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI is separated into (1) the amount representing the credit loss and (2) the amount related to all other factors.

The Company has a formal review process to determine OTTI for securities in its investment portfolio where there is no intent to sell and it is not more likely than not it will be required to sell the security before recovery. Factors considered when assessing impairment include:

For these securities, the Company's formal review process includes analyses of the ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. If the net present value is less than the amortized cost of the investment, an OTTI loss is recorded. The net present value is calculated by discounting the Company's best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. The Company's estimates of projected future cash flows are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company develops these estimates using information based on historical experience, credit analysis of an investment, as mentioned above, and market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of the security. For mortgage-backed and asset backed securities, cash flow estimates also include prepayment assumptions and other assumptions regarding the underlying collateral including default rates, recoveries and changes in value. The determination of the assumptions used in these projections requires the use of significant management judgment.

The Company's assessment of a decline in value included management's current assessment of the factors noted above. The Company also seeks advice from its outside investment managers. If that assessment changes in the future, the Company may ultimately record a loss after having originally concluded that the decline in value was temporary.

Net investment income increased due to a shift to longer duration assets, higher income on loss mitigation bonds, and additional earnings on higher invested asset balances. Accrued investment income on fixed maturity and short-term investments was $100.3 million and $97.9 million as of December 31, 2011 and 2010, respectively.

	Year Ended December 31,

	2011			2010			2009
	(in millions)
Income from fixed maturity securities	$	399.2		$	359.7		$	262.4
Income from short-term investments		0.9			3.5			3.2

Gross investment income		400.1			363.2			265.6
Investment expenses		(9.1	)		(8.5	)		(6.4	)

Net investment income	$	391.0		$	354.7		$	259.2

	Year Ended December 31,

	2011			2010			2009
	(in millions)
Realized gains on investment portfolio	$	36.4		$	31.1		$	28.3
Realized losses on investment portfolio		(9.8	)		(5.7	)		(15.2	)
OTTI:
Intent to sell		(5.4	)		(4.0	)		(13.4	)
Credit component of OTTI securities		(39.2	)		(23.4	)		(32.4	)

OTTI		(44.6	)		(27.4	)		(45.8	)

Net realized investment gains (losses)	$	(18.0	)	$	(2.0	)	$	(32.7	)

The following table presents the roll-forward of the credit losses of fixed maturity securities for which the Company has recognized OTTI and where the portion of the fair value adjustment related to other factors was recognized in OCI.

	Year Ended December 31,

	2011			2010		2009
	(in millions)
Balance, beginning of period	$	27.3		$	19.9	$	0.6
Additions for credit losses on securities for which an OTTI was not previously recognized		26.6			7.3		13.6
Eliminations of securities issued by FG VIEs		(13.5	)		—		—
Reductions for securities sold during the period		(6.4	)		—		(0.1	)
Additions for credit losses on securities for which an OTTI was previously recognized		12.7			0.1		6.1
Reductions for credit losses now recognized in earnings due to intention to sell the security		—			—		(0.3	)

Balance, end of period	$	46.7		$	27.3	$	19.9

	As of December 31, 2011

Investment Category	Percent of Total(1)			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI Gain (Loss) on Securities with OTTI			Weighted Average Credit Quality(2)
	(dollars in millions)
Fixed maturity securities:
U.S. government and agencies		8	%	$	850.2	$	72.3	$	(0.1	)	$	922.4	$	—		AA+
Obligations of state and political subdivisions		49			5,097.3		358.6		(0.5	)		5,455.4		5.7		AA
Corporate securities		10			989.0		51.8		(2.4	)		1,038.4		(0.2	)	A+
Mortgage-backed securities(3):
RMBS		14			1,454.3		63.9		(90.3	)		1,427.9		(35.1	)	AA
CMBS		5			475.6		24.4		—			500.0		2.7		AAA
Asset-backed securities		4			439.5		37.7		(19.1	)		458.1		29.2		BBB-
Foreign government securities		3			332.6		13.3		(6.2	)		339.7		—		AAA

Total fixed maturity securities		93			9,638.5		622.0		(118.6	)		10,141.9		2.3		AA
Short-term investments		7			734.0		—		—			734.0		—		AAA

Total investment portfolio		100	%	$	10,372.5	$	622.0	$	(118.6	)	$	10,875.9	$	2.3		AA

	As of December 31, 2010

Investment Category	Percent of Total(1)			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI Gain (Loss) on Securities with OTTI			Weighted Average Credit Quality(2)
	(dollars in millions)
Fixed maturity securities:
U.S. government and agencies		10	%	$	1,000.3	$	48.3	$	(0.4	)	$	1,048.2	$	—		AAA
Obligations of state and political subdivisions		48			4,922.0		99.9		(62.0	)		4,959.9		(1.4	)	AA
Corporate securities		9			980.1		25.2		(12.8	)		992.5		0.2		AA-
Mortgage-backed securities(3):
RMBS		11			1,158.9		56.5		(44.3	)		1,171.1		(8.6	)	AA
CMBS		4			365.7		14.8		(1.4	)		379.1		2.5		AAA
Asset-backed securities		5			498.2		9.9		(5.2	)		502.9		(4.1	)	BBB+
Foreign government securities		3			349.5		5.3		(6.2	)		348.6		—		AA+

Total fixed maturity securities		90			9,274.7		259.9		(132.3	)		9,402.3		(11.4	)	AA
Short-term investments		10			1,055.3		0.3		—			1,055.6		—		AAA

Total investment portfolio		100	%	$	10,330.0	$	260.2	$	(132.3	)	$	10,457.9	$	(11.4	)	AA

(1): Based on amortized cost.
(2): Ratings in the tables above represent the lower of the Moody's and S&P classifications except for bonds purchased for loss mitigation or risk management strategies, which use internal ratings classifications (see below.) The Company's portfolio consists primarily of high-quality, liquid instruments.
(3): Government-agency obligations were approximately 66% of mortgage backed securities as of December 31, 2011 and 64% as of December 31, 2010 based on fair value. Excluding loss mitigation related purchases, government-agency obligations were 71% of mortgage backed securities as of December 31, 2011 and 69% as of December 31, 2010 based on fair value.

The Company continues to receive sufficient information to value its investments and has not had to modify its valuation approach due to the current market conditions. As of December 31, 2011, amounts, net of tax, in AOCI included a net unrealized gain of $3.1 million for securities for which the Company had recognized OTTI and a net unrealized gain of $363.6 million for securities for which the Company had not recognized OTTI. As of December 31, 2010, amounts, net of tax, in AOCI included a net unrealized loss of $5.6 million for securities for which the Company had recognized OTTI and a net unrealized gain of $115.3 million for securities for which the Company had not recognized OTTI.

The Company's investment portfolio in tax-exempt and taxable municipal securities includes issuances by a wide number of municipal authorities across the U.S. and its territories. This is a high quality portfolio of municipal securities with an average rating of AA as of December 31, 2011 and December 31, 2010. Securities rated lower than A-/A3 by S&P or Moody's are not eligible to be purchased for the Company's portfolio.

The following tables present the fair value of the Company's available-for-sale municipal bond portfolio as of December 31, 2011 and December 31, 2010 by state, excluding $403.4 million and $478.3 million of pre-refunded bonds, respectively. The credit ratings are based on the underlying ratings and do not include any benefit from bond insurance.

	As of December 31, 2011

State	State General Obligation		Local General Obligation		Revenue		Fair Value		Amortized Cost		Average Credit Rating
	(in millions)
Texas	$	86.3	$	342.0	$	345.6	$	773.9	$	724.0	AA
New York		12.3		60.3		622.6		695.2		653.8	AA
California		19.1		50.9		296.8		366.8		336.2	AA
Florida		34.2		61.7		247.4		343.3		316.9	AA
Illinois		16.2		86.9		197.1		300.2		281.5	AA
Massachusetts		42.5		9.7		163.7		215.9		198.9	AA
Washington		37.8		52.5		123.4		213.7		199.7	AA
Arizona		—		7.7		164.6		172.3		163.0	AA
Ohio		—		52.7		85.9		138.6		128.8	AA
Michigan		—		37.2		99.0		136.2		128.5	AA
All others		310.5		271.8		1,113.6		1,695.9		1,588.6	AA

Total	$	558.9	$	1,033.4	$	3,459.7	$	5,052.0	$	4,719.9	AA

	As of December 31, 2010

State	State General Obligation		Local General Obligation		Revenue		Fair Value		Amortized Cost		Average Credit Rating
	(in millions)
Texas	$	76.8	$	294.4	$	251.9	$	623.1	$	620.7	AA
New York		11.4		40.0		496.2		547.6		545.1	AA
California		17.2		56.0		330.2		403.4		401.0	AA
Florida		45.2		45.1		213.6		303.9		300.5	AA
Illinois		10.5		91.0		195.6		297.1		300.9	AA
Washington		80.0		37.2		89.2		206.4		204.6	AA
Massachusetts		38.0		8.6		137.3		183.9		185.8	AA
Arizona		—		0.6		144.5		145.1		145.5	AA
Michigan		—		39.5		93.1		132.6		131.4	A
Georgia		19.3		38.4		67.1		124.8		125.4	AA
All others		220.8		220.8		1,072.1		1,513.7		1,504.4	AA

Total	$	519.2	$	871.6	$	3,090.8	$	4,481.6	$	4,465.3	AA

The revenue bond portfolio is comprised primarily of essential service revenue bonds issued by water and sewer authorities and other utilities, transportation authorities, universities and healthcare providers.

	As of December 31, 2011				As of December 31, 2010

Type	Fair Value		Amortized Cost		Fair Value		Amortized Cost
	(in millions)
Tax backed	$	800.0	$	748.7	$	609.0	$	607.2
Transportation		717.4		669.7		725.5		718.9
Water and sewer		530.4		500.7		470.6		471.3
Municipal utilities		528.8		493.5		457.8		456.8
Higher education		332.1		307.2		298.2		302.1
Healthcare		273.4		257.6		207.3		206.5
All others		277.6		265.4		322.4		323.1

Total	$	3,459.7	$	3,242.8	$	3,090.8	$	3,085.9

The Company's investment portfolio is managed by four outside managers. As municipal investments are a material portion of the Company's overall investment portfolio, the Company has established detailed guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector. Each of the portfolio managers perform independent analysis on every municipal security they purchase for the Company's portfolio. The Company meets with each of its portfolio managers quarterly and reviews all investments with a change in credit rating as well as any investments on the manager's watch list of securities with the potential for downgrade. The Company does not independently assign investments within the Company's portfolio an individual rating.

The following tables summarize, for all securities in an unrealized loss position, the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.

	As of December 31, 2011

	Less than 12 months					12 months or more					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(dollars in millions)
U.S. government and agencies	$	3.8	$	(0.1	)	$	—	$	—		$	3.8	$	(0.1	)
Obligations of state and political subdivisions		17.0		(0.0	)		20.6		(0.5	)		37.6		(0.5	)
Corporate securities		79.9		(2.3	)		3.1		(0.1	)		83.0		(2.4	)
Mortgage-backed securities:
RMBS		186.6		(68.2	)		36.5		(22.1	)		223.1		(90.3	)
CMBS		2.8		(0.0	)		—		—			2.8		(0.0	)
Asset-backed securities		—		—			25.7		(19.1	)		25.7		(19.1	)
Foreign government securities		141.4		(6.2	)		—		—			141.4		(6.2	)

Total	$	431.5	$	(76.8	)	$	85.9	$	(41.8	)	$	517.4	$	(118.6	)

Number of securities				72					54					126

Number of securities with OTTI				6					4					10

	As of December 31, 2010

	Less than 12 months					12 months or more					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(dollars in millions)
U.S. government and agencies	$	20.5	$	(0.4	)	$	—	$	—		$	20.5	$	(0.4	)
Obligations of state and political subdivisions		1,694.5		(58.9	)		23.5		(3.1	)		1,718.0		(62.0	)
Corporate securities		403.6		(12.8	)		—		—			403.6		(12.8	)
Mortgage-backed securities:
RMBS		143.4		(32.1	)		37.3		(12.2	)		180.7		(44.3	)
CMBS		92.6		(1.4	)		—		—			92.6		(1.4	)
Asset-backed securities		228.3		(5.1	)		2.3		(0.1	)		230.6		(5.2	)
Foreign government securities		245.3		(6.2	)		—		—			245.3		(6.2	)

Total	$	2,828.2	$	(116.9	)	$	63.1	$	(15.4	)	$	2,891.3	$	(132.3	)

Number of securities				405					18					423

Number of securities with OTTI				10					3					13

The decrease in gross unrealized losses was primarily attributable to municipal securities offset by increases in gross unrealized losses attributable to RMBS and asset backed securities. Of the securities in an unrealized loss position for 12 months or more as of December 31, 2011, 10 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of December 31, 2011 was $40.8 million. The unrealized loss is yield-related and not specific to individual issuer credit. The Company has determined that the unrealized losses recorded as of December 31, 2011 are yield related and not the result of other-than-temporary impairments.

The amortized cost and estimated fair value of available-for-sale fixed maturity securities by contractual maturity as of December 31, 2011 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	As of December 31, 2011

	Amortized Cost		Estimated Fair Value
	(in millions)
Due within one year	$	391.3	$	391.1
Due after one year through five years		1,543.0		1,599.6
Due after five years through 10 years		2,372.2		2,592.0
Due after 10 years		3,402.1		3,631.3
Mortgage-backed securities:
RMBS		1,454.3		1,427.9
CMBS		475.6		500.0

Total	$	9,638.5	$	10,141.9

Under agreements with its cedants and in accordance with statutory requirements, the Company maintains fixed maturity securities in trust accounts for the benefit of reinsured companies, which amounted to $380.1 million and $365.3 million as of December 31, 2011 and 2010, respectively. In addition, to fulfill state licensing requirements the Company has placed on deposit eligible securities of $23.9 million and $19.2 million as of December 31, 2011 and December 31, 2010, respectively, for the protection of policyholders. To provide collateral for a letter of credit, the Company holds a fixed maturity investment in a segregated account which amounted to $3.5 million as of December 31, 2011. There were no fixed maturity investments in a segregated account as of December 31, 2010.

Under certain derivative contracts, the Company is required to post eligible securities as collateral. The need to post collateral under these transactions is generally based on mark-to-market valuations in excess of contractual thresholds. The fair market value of the Company's pledged securities totaled $779.9 million and $765.9 million as of December 31, 2011 and December 31, 2010, respectively.

No material investments of the Company were non-income producing for the years ended December 31, 2011, 2010 and 2009, respectively.

The Company purchased securities that it has insured, and for which it has expected losses to be paid, in order to mitigate the economic effect of insured losses. These securities were purchased at a discount and are accounted for excluding the effects of the Company's insurance on the securities. As of December 31, 2011, securities purchased for loss mitigation purposes included in the fixed maturity portfolio on the consolidated balance sheet had a fair value of $192.3 million representing $701.3 million of par. Under the terms of certain credit derivative contracts, the Company has obtained the obligations referenced in the transactions and recorded such assets in fixed maturity securities in the consolidated balance sheets. Such amounts totaled $186.0 million, representing $222.4 million in par.

The Company has rights under certain of its financial guaranty insurance policies and indentures that allow it to accelerate the insured notes and pay claims under its insurance policies upon the occurrence of predefined events of default. To mitigate financial guaranty insurance losses, the Company may elect to purchase the outstanding insured obligation or its underlying collateral. Generally, refinancing vehicles reimburse AGM in whole for its claims payments in exchange for assignments of certain of AGM's rights against the trusts. The refinancing vehicles obtained their funds from the proceeds of AGM-insured GICs issued in the ordinary course of business by the Financial Products Companies. The refinancing vehicles are consolidated with the Company. The carrying value of assets acquired in refinancing transactions was $107.1 million and $129.4 million as of December 31, 2011 and 2010, respectively and are primarily comprised of franchise loans. The accretable yield on the securitized loans was $140.9 million and $137.1 million at December 31, 2011 and 2010, respectively.

Income on assets acquired in refinancing transactions is recorded in "other income" and was $5.1 million, $6.7 million and $3.2 million for years ended December 31, 2011, 2010 and 2009, respectively.

In the third quarter of 2010, as part of loss mitigation efforts under a CDS contract insured by the Company, the Company acquired a 50% interest in Portfolio Funding Company LLC I ("PFC"). PFC owns the distribution rights of a motion picture film library. The Company accounts for its interest in PFC as an equity investment. The value of the Company's investment in PFC as of December 31, 2011 and 2010 was $45.0 and $87.1 million, respectively. The Company's equity earnings in PFC are included in net change in fair value of credit derivatives, as these proceeds are used to offset the Company's payments under its CDS contract. As part of the aforementioned loss mitigation efforts, the Company also provided through PFC a subordinated debt and a working capital facility valued at $37.8 million as of both December 31, 2011 and 2010. In January 2012, the subordinated debt and working capital facility were repaid in their entirety.