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Outstanding Exposure

9 Months Ended

Sep. 30, 2011

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
	September 30, 2011		December 31, 2010		September 30, 2011		December 31, 2010
	(in millions)
Public finance	$	811,423	$	851,634	$	727,401	$	760,167
Structured finance	148,006		178,348		138,291		166,976
Total	$	959,429	$	1,029,982	$	865,692	$	927,143

Financial Guaranty Net Par Outstanding by Internal Rating

	As of September 30, 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	$	—	—	%	$	1,386	3.5	%	$	17,544	17.9	%	$	6,664	25.2	%	$	25,594	4.5	%
AAA	5,073		1.2		1,383		3.5		37,544		38.3		12,159		46.0		56,159		9.8
AA	149,190		36.6		1,094		2.8		12,532		12.8		1,255		4.7		164,071		28.7
A	208,837		51.2		12,022		30.6		5,086		5.2		926		3.5		226,871		39.7
BBB	41,700		10.2		21,231		54.1		5,283		5.4		3,589		13.7		71,803		12.5
BIG	3,265		0.8		2,151		5.5		19,980		20.4		1,831		6.9		27,227		4.8
Total net par outstanding	$	408,065	100.0	%	$	39,267	100.0	%	$	97,969	100.0	%	$	26,424	100.0	%	$	571,725	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 $2.7 billion for structured finance and $1.2 billion for public finance commitments at September 30, 2011. The structured finance commitments include the unfunded component of pooled corporate and other transactions. Public finance commitments typically relate to primary and secondary public finance debt issuances. The expiration dates for the public finance commitments range between October 1, 2011 and February 1, 2019, with $0.6 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.

Surveillance Categories

The Company segregates its insured portfolio into investment grade and BIG surveillance categories to facilitate the appropriate allocation of resources to monitoring and loss mitigation efforts and to aid in establishing the appropriate cycle for periodic review for each exposure. BIG exposures include all exposures with internal credit ratings below BBB-. The Company’s internal credit ratings are based on internal assessments of the likelihood of default. 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 on the Company’s reviews of low-rated credits or credits in volatile sectors, unless such information is not available, in which case, the ceding company’s credit rating of the transactions are used. 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.

Included in the first lien RMBS BIG exposures below is $1.9 billion of net par outstanding related to transactions covered by the Bank of America Agreement, which represents 17% of the first lien U.S. RMBS BIG net par outstanding as of September 30, 2011. Under the Bank of America Agreement, 80% of first lien claims paid by Assured Guaranty will be reimbursed, until such time as losses on the collateral underlying the RMBS on which Assured Guaranty is paying claims reach $6.6 billion.

Financial Guaranty Exposures

(Insurance and Credit Derivative Form)

	September 30, 2011
											BIG Net Par as a %
	BIG Net Par Outstanding								Net Par		of Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding		Outstanding
	(in millions)
First lien U.S. RMBS:
Prime first lien	$	90	$	513	$	—	$	603	$	760	0.1	%
Alt-A first lien	1,815		1,594		1,433		4,842		5,541		0.9
Option ARM	124		1,115		1,148		2,387		2,627		0.4
Subprime (including net interest margin securities)	153		2,608		209		2,970		8,403		0.5
Second lien U.S. RMBS:
Closed-end second lien	—		497		538		1,035		1,061		0.2
Home equity lines of credit (“HELOCs”)	446		—		2,984		3,430		4,072		0.6
Total U.S. RMBS	2,628		6,327		6,312		15,267		22,464		2.7
TruPS	2,232		—		952		3,184		6,467		0.6
Other structured finance	1,483		423		1,454		3,360		95,462		0.6
Public finance	4,216		339		861		5,416		447,332		0.9
Total	$	10,559	$	7,089	$	9,579	$	27,227	$	571,725	4.8	%

	December 31, 2010
											BIG Net Par as a %
	BIG Net Par Outstanding								Net Par		of Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding		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
TruPS	1,846		—		964		2,810		6,833		0.5
Other structured finance	841		363		1,483		2,687		117,429		0.4
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	%

By Category Below-Investment-Grade Credits

	As of September 30, 2011
	Net Par Outstanding								Number of Risks(4)
Description	Financial Guaranty Insurance(1)		FG VIEs(2)		Credit Derivative(3)		Total		Financial Guaranty Insurance(1)	FG VIEs(2)	Credit Derivative(3)	Total
	(dollars in millions)
BIG:
Category 1	$	6,254	$	436	$	3,869	$	10,559	162	3	35	200
Category 2	4,107		1,084		1,898		7,089		64	8	38	110
Category 3	5,917		1,276		2,386		9,579		113	14	25	152
Total BIG	$	16,278	$	2,796	$	8,153	$	27,227	339	25	98	462

	As of December 31, 2010
	Net Par Outstanding								Number of Risks(4)
Description	Financial Guaranty Insurance(1)		FG VIEs(2)		Credit Derivative(3)		Total		Financial Guaranty Insurance(1)	FG VIEs(2)	Credit Derivative(3)	Total
	(dollars in millions)
	(restated)								(restated)			(restated)
BIG:
Category 1	$	5,091	$	359	$	3,241	$	8,691	117	2	31	150
Category 2	5,222		495		3,457		9,174		96	2	50	148
Category 3	5,901		1,380		1,660		8,941		102	13	12	127
Total BIG	$	16,214	$	2,234	$	8,358	$	26,806	315	17	93	425

(1) Represents contracts accounted for as financial guaranty insurance. See Note 5.

(2) Represents net par outstanding as of September 30, 2011 for contracts accounted for as FG VIEs. See Note 8.

(3) Represents contracts accounted for as credit derivatives. See Note 7.

(4) A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making Debt Service payments.