Outstanding Exposure

3 Months Ended

Mar. 31, 2011

Outstanding Exposure

Outstanding Exposure

4. Outstanding Exposure

The Company’s insurance policies and credit derivative contracts are written in different forms, but collectively are considered financial guaranty contracts. They typically guarantee the scheduled payments of principal and interest (“Debt Service”) on public finance and structured finance obligations. The Company seeks to limit its exposure to losses by underwriting obligations that are investment grade at inception, diversifying its portfolio and maintaining rigorous subordination or collateralization requirements on structured finance obligations. The Company also has utilized reinsurance by ceding business to third- party reinsurers. The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. Based on accounting standards in effect during any given reporting period, some of these VIEs are consolidated as described in Note 8. The outstanding par and Debt Service amounts presented below include outstanding exposures on VIEs whether or not they are consolidated.

Debt Service Outstanding

	Gross Debt Service Outstanding				Net Debt Service Outstanding
	March 31, 2011		December 31, 2010		March 31, 2011		December 31, 2010
	(in millions)
Public finance	$	835,072	$	851,634	$	746,388	$	760,167
Structured finance	170,440		178,348		159,611		166,976
Total	$	1,005,512	$	1,029,982	$	905,999	$	927,143

Financial Guaranty Portfolio by Internal Rating

	As of March 31, 2011
	Public Finance U.S.				Public Finance Non-U.S.				Structured Finance U.S				Structured Finance Non-U.S				Total
Rating Category	Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%
	(dollars in millions)
Super senior	$	—	—	%	1,486		3.6	%	$	22,256	19.7	%	$	8,081	27.0	%	$	31,823	5.3	%
AAA	5,587		1.3		1,382		3.3		41,376		36.6		12,911		43.1		61,256		10.2
AA	156,954		37.6		1,367		3.3		15,776		13.9		1,970		6.6		176,067		29.2
A	210,705		50.5		12,932		30.9		6,181		5.5		1,827		6.1		231,645		38.5
BBB	41,130		9.9		22,793		54.4		6,841		6.0		3,903		12.9		74,667		12.3
BIG	2,991		0.7		1,868		4.5		20,678		18.3		1,292		4.3		26,829		4.5
Total net par outstanding	$	417,367	100.0	%	$	41,828	100.0	%	$	113,108	100.0		$	29,984	100.0	%	$	602,287	100.0	%

	As of December 31, 2010
	Public Finance U.S.				Public Finance Non-U.S.				Structured Finance U.S				Structured Finance Non-U.S				Total
Rating Category	Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%
	(dollars in millions)
Super senior	$	—	—	%	$	1,420	3.5	%	$	21,837	18.4	%	$	7,882	25.7	%	$	31,139	5.0	%
AAA	5,784		1.4		1,378		3.4		45,067		37.9		13,573		44.3		65,802		10.7
AA	161,906		37.9		1,330		3.3		17,355		14.6		1,969		6.4		182,560		29.6
A	214,199		50.2		12,482		30.6		6,396		5.4		1,873		6.1		234,950		38.1
BBB	41,948		9.8		22,338		54.8		7,543		6.4		4,045		13.2		75,874		12.3
BIG	3,159		0.7		1,795		4.4		20,558		17.3		1,294		4.3		26,806		4.3
Total net par outstanding	$	426,996	100.0	%	$	40,743	100.0	%	$	118,756	100.0	%	$	30,636	100.0	%	$	617,131	100.0	%

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $3.7 billion for structured finance and $1.3 billion for public finance commitments at March 31, 2011. The structured finance commitments include the unfunded component of and delayed draws on pooled corporate transactions. Public finance commitments typically relate to primary and secondary public finance debt issuances. The expiration dates for the public finance commitments range between April 1, 2011 and February 1, 2019, with $0.9 billion expiring prior to December 31, 2011. All the commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be cancelled at the counterparty’s request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.

Significant Risk Management Activities

The Risk Oversight and Audit Committees of the Board of Directors of AGL oversee the Company’s risk management policies and procedures. With input from the board committees, specific risk policies and limits are set by the Portfolio Risk Management Committee, which includes members of senior management and senior Credit and Surveillance officers.

Risk Management and Surveillance personnel are responsible for monitoring and reporting on all transactions in the insured portfolio. The primary objective of the surveillance process is to monitor trends and changes in transaction credit quality, detect any deterioration in credit quality, and recommend to management such remedial actions as may be necessary or appropriate. All transactions in the insured portfolio are assigned internal credit ratings, and Surveillance personnel are responsible for recommending adjustments to those ratings to reflect changes in transaction credit quality.

Work-out personnel are responsible for managing work-out and loss mitigation situations. They develop strategies designed to enhance the ability of the Company to enforce its contractual rights and remedies and to mitigate its losses, engage in negotiation discussions with transaction participants and, when necessary, manage (along with Legal personnel) the Company’s litigation proceedings.

Since the onset of the financial crisis, the Company has shifted personnel to loss mitigation and work-out activities and hired new personnel to augment its efforts. Although the Company’s loss mitigation efforts may extend to any transaction it has identified as having loss potential, much of the recent activity has been focused on RMBS.

Generally, when mortgage loans are transferred into a securitization, the loan originator(s) and/or sponsor(s) provide R&W that the loans meet certain characteristics, and a breach of such R&W often requires that the loan be repurchased from the securitization. In many of the transactions the Company insures, it is in a position to enforce these requirements. The Company uses internal resources as well as third party forensic underwriting firms and legal firms to pursue breaches of R&W. If a provider of R&W refuses to honor its repurchase obligations, the Company may choose to initiate litigation. See “Recovery Litigation” in Note 5 below.

The quality of servicing of the mortgage loans underlying an RMBS transaction influences collateral performance and ultimately the amount (if any) of the Company’s insured losses. The Company has established a group to mitigate RMBS losses by influencing mortgage servicing, including, if possible, causing the transfer of servicing or establishing special servicing.

In the fall of 2010, several large RMBS servicers suspended foreclosures because of allegations of a widespread failure to comply with foreclosure procedures and faulty loan documentation. These issues are being investigated by various state attorney general offices throughout the U.S. The suspension of foreclosures and subsequent investigation will lead to additional servicing costs and expenses, including without limitation, increased advances by the servicers for principal and interest, taxes, insurance and legal costs. The Company is increasing its monitoring efforts to ensure that the servicers comply with their obligations under servicing contracts, including bearing the losses and expenses incurred as a result of this issue. These same foreclosure issues are expected to impact the timing of losses to RMBS transactions that the Company has insured, which may impact the speed at which various classes of RMBS securities amortize, and so could impact the size of losses ultimately paid by the Company. The Company expects these issues to take some time to resolve.

The Company may also employ other strategies as appropriate to avoid or mitigate losses in U.S. RMBS or other areas. For example, the Company may pursue litigation or enter into other arrangements to alleviate all or a portion of certain risks.

Surveillance Categories

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

The Company monitors its investment grade credits to determine whether any new credits need to be internally downgraded to BIG. The Company refreshes its internal credit ratings on individual credits in quarterly, semi-annual or annual cycles based on the Company’s view of the credit’s quality, loss potential, volatility and sector. Ratings on credits in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter. The Company’s insured credit ratings on assumed credits are based in large part on the ceding company’s credit rating of the transactions, although, to the extent information is available, the Company will conduct an independent review of low rated credits or credits in volatile sectors. For example the Company models all assumed RMBS credits with par above $1 million, as well as certain RMBS credits below that amount.

Credits identified as BIG are subjected to further review to determine the probability of a loss (see Note 5 “Loss estimation process”). Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a lifetime loss is expected and whether a claim has been paid. The Company expects “lifetime losses” on a transaction when the Company believes there is more than a 50% chance that, on a present value basis, it will pay more claims over the life of that transaction than it will ultimately have been reimbursed. For surveillance purposes, the Company calculates present value using a constant discount rate of 5%. (A risk free rate is used for recording of reserves for financial statement purposes.) A “liquidity claim” is a claim that the Company expects to be reimbursed within one year.

Intense monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. The three BIG categories are:

· BIG Category 1: Below investment grade transactions showing sufficient deterioration to make lifetime losses possible, but for which none are currently expected. Transactions on which claims have been paid but are expected to be fully reimbursed (other than investment grade transactions on which only liquidity claims have been paid) are in this category.

· BIG Category 2: Below investment grade transactions for which lifetime losses are expected but for which no claims (other than liquidity claims) have yet been paid.

· BIG Category 3: Below investment grade transactions for which lifetime losses are expected and on which claims (other than liquidity claims) have been paid. Transactions remain in this category when claims have been paid and only a recoverable remains.

Financial Guaranty Exposures

(Insurance and Credit Derivative Form)

	March 31, 2011
	BIG Net Par Outstanding										BIG Net Par as a %
	BIG 1		BIG 2		BIG 3		Total BIG		Net Par Outstanding		of Net Par Outstanding
	(in millions)
	(restated)		(restated)
First lien U.S. RMBS:
Prime first lien	$	82	$	519	$	—	$	601	$	813	0.1	%
Alt-A first lien	919		3,485		549		4,953		5,939		0.8
Option ARM	3		1,433		1,327		2,763		3,020		0.5
Subprime (including net interest margin securities)	62		2,734		185		2,981		8,726		0.5
Second lien U.S. RMBS:
Closed end second lien	161		441		482		1,084		1,114		0.2
Home equity lines of credit (“HELOCs”)	495		—		3,314		3,809		4,513		0.6
Total U.S. RMBS	1,722		8,612		5,857		16,191		24,125		2.7
Other structured finance	2,887		457		2,435		5,779		118,967		1.0
Public finance	3,691		282		886		4,859		459,195		0.8
Total	$	8,300	$	9,351	$	9,178	$	26,829	$	602,287	4.5	%

	December 31, 2010
	BIG Net Par Outstanding										BIG Net Par as a %
	BIG 1		BIG 2		BIG 3		Total BIG		Net Par Outstanding		of Net Par Outstanding
	(in millions)
	(restated)		(restated)
First lien U.S. RMBS:
Prime first lien	$	82	$	542	$	—	$	624	$	849	0.1	%
Alt-A first lien	976		3,108		573		4,657		6,134		0.8
Option ARM	33		2,186		640		2,859		3,214		0.5
Subprime (including net interest margin securities)	729		2,248		106		3,083		9,039		0.4
Second lien U.S. RMBS:
Closed end second lien	63		444		624		1,131		1,164		0.2
HELOCs	369		—		3,632		4,001		4,730		0.6
Total U.S. RMBS	2,252		8,528		5,575		16,355		25,130		2.6
Other structured finance	2,687		363		2,447		5,497		124,262		0.9
Public finance	3,752		283		919		4,954		467,739		0.8
Total	$	8,691	$	9,174	$	8,941	$	26,806	$	617,131	4.3	%

Net Par Outstanding for Below Investment Grade Credits

	As of March 31, 2011
Description	Net Par Outstanding Financial Guaranty Insurance		Number of Financial Guaranty Credits in Category	Net Par Outstanding Credit Derivatives		Number of Credit Derivatives Credits in Category	BIG Net Par Outstanding Total		Total Number of BIG Credits
	(dollars in millions)
	(restated)		(restated)				(restated)		(restated)
BIG:
Category 1	$	4,921	129	$	3,379	31	$	8,300	160
Category 2	5,586		96	3,765		48	9,351		144
Category 3	7,490		117	1,688		18	9,178		135
Total BIG	$	17,997	342	$	8,832	97	$	26,829	439

	As of December 31, 2010
Description	Net Par Outstanding Financial Guaranty Insurance		Number of Financial Guaranty Credits in Category	Net Par Outstanding Credit Derivatives		Number of Credit Derivatives Credits in Category	BIG Net Par Outstanding Total		Total Number of BIG Credits
	(dollars in millions)
	(restated)		(restated)				(restated)		(restated)
BIG:
Category 1	$	5,450	119	$	3,241	31	$	8,691	150
Category 2	5,717		98	3,457		50	9,174		148
Category 3	7,281		115	1,660		12	8,941		127
Total BIG	$	18,448	332	$	8,358	93	$	26,806	425