Financial Guaranty Insurance Contracts

9 Months Ended

Sep. 30, 2011

Financial Guaranty Insurance Contracts

Financial Guaranty Insurance Contracts

5. Financial Guaranty Insurance Contracts

The portfolio of outstanding exposures discussed in Note 4 includes financial guaranty contracts that meet the definition of insurance contracts as well as those that meet the definition of derivative contracts. Amounts presented in this Note relate to financial guaranty insurance contracts. Tables presented herein also present reconciliations to financial statement line items for other less significant types of insurance.

In October 2010, the FASB issued new guidance that specifies that certain costs incurred in the successful acquisition of new and renewal insurance contracts should be capitalized. These costs include incremental direct costs of contract acquisition that result directly from, and are essential to, the contract transaction and would not have been incurred by the insurance entity had the contract transaction not occurred. Costs incurred by the insurer for soliciting potential customers, market research, training, administration, unsuccessful acquisition efforts, and product development as well as all overhead type costs should be charged to expense as incurred. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Retrospective application to all prior periods presented upon the date of adoption is permitted, but not required. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements in 2012.

The following tables present net earned premiums, premium receivable activity, expected collections of future premiums and expected future earnings on the existing book of business. The tables below provide the expected timing of premium revenue recognition, before accretion, and the expected timing of loss and loss adjustment expenses (“LAE”) recognition, before accretion. Actual collections may differ from expected collections in the tables below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, and changes in expected lives. The amount and timing of actual premium earnings and loss expense may differ from the estimates shown below due to factors such as refundings, accelerations, future commutations, changes in expected lives and updates to loss estimates.

Net Earned Premiums

	Third Quarter				Nine Months
	2011		2010		2011		2010
	(in millions)
Scheduled net earned premiums	$	178.1	$	256.4	$	595.7	$	814.7
Acceleration of premium earnings(1)	26.8		21.2		77.4		52.0
Accretion of discount on net premiums receivable	5.8		10.5		20.6		31.8
Total financial guaranty	210.7		288.1		693.7		898.5
Other	0.4		0.6		1.4		1.9
Total net earned premiums(2)	$	211.1	$	288.7	$	695.1	$	900.4

(1) Reflects the unscheduled refundings of underlying insured obligations.

(2) Excludes $19.4 million and $12.8 million in Third Quarter 2011 and 2010, respectively, and $56.8 million and $34.4 million for the Nine Months 2011 and 2010, respectively, in net earned premium related to consolidated FG VIEs.

Gross Premium Receivable, Net of Ceding Commissions Roll Forward

	Nine Months
	2011			2010
	(in millions)
Balance beginning of period, January 1	$	1,167.6		$	1,418.2
Change in accounting (1)	—			(19.0		)
Balance beginning of the period, adjusted	1,167.6			1,399.2
Premium written, net (2)	153.2			253.9
Premium payments received, net	(227.8		)	(356.3		)
Adjustments to the premium receivable:
Changes in the expected term of financial guaranty insurance contracts	(117.1		)	13.2
Accretion of discount	22.8			35.1
Foreign exchange translation	(3.1		)	(24.2		)
Other adjustments	(8.5		)	1.6
Balance, September 30	$	987.1		$	1,322.5

(1) Represents elimination of premium receivable at January 1, 2010 related to consolidated FG VIEs upon the adoption of the new accounting guidance.

(2) Includes $14.9 million of premium written related to financial guaranty insurance contracts which replaced existing credit derivative contracts in Nine Months 2011.

Gains or losses due to foreign exchange rate changes relate to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 49% and 42% of installment premiums at September 30, 2011 and December 31, 2010, respectively, are denominated in currencies other than the U.S. dollar, primarily in euro and British Pound Sterling.

For premiums received in installments, premium receivable is the present value of premiums due or expected to be collected over the life of the contract. Installment premiums typically relate to structured finance transactions, where the insurance premium rate is determined at the inception of the contract but the insured par is subject to prepayment throughout the life of the deal. Premium receipts are typically made from insured deal cash flows that are senior to payments made to the holders of the insured securities. When there are significant changes to expected premium collections, an adjustment is recorded to premiums receivable with a corresponding adjustment to deferred premium revenue. When these installment premiums are related to assumed reinsurance amounts, the Company also assesses the credit quality and liquidity of the company that the premiums are assumed from as well as the impact of any potential regulatory constraints to determine the collectability of such amounts.

Expected Collections of Gross Premiums Receivable,

Net of Ceding Commissions

	September 30, 2011(1)
	(in millions)
Gross premium collections expected:
2011 (October 1 - December 31)	$	75.5
2012	119.0
2013	101.3
2014	89.2
2015	78.8
2016 - 2020	306.8
2021 - 2025	212.2
2026 - 2030	154.2
After 2030	204.7
Total gross expected collections	$	1,341.7
FG VIEs	35.0
Total	$	1,376.7

(1) Represents undiscounted amounts expected to be collected.

The unearned premium reserve comprises deferred premium revenue and the contra-paid as presented in the table below.

Unearned Premium Reserve

	As of September 30, 2011									As of December 31, 2010
	Gross			Ceded			Net(1)			Gross			Ceded			Net(1)
	(in millions)
Deferred premium revenue	$	6,202.2		$	764.5		$	5,437.7		$	7,108.6		$	846.6		$	6,262.0
Contra-paid	(99.4		)	(17.3		)	(82.1		)	(146.1		)	(24.8		)	(121.3		)
Total financial guaranty	6,102.8			747.2			5,355.6			6,962.5			821.8			6,140.7
Other	9.0			0.3			8.7			10.4			—			10.4
Total	$	6,111.8		$	747.5		$	5,364.3		$	6,972.9		$	821.8		$	6,151.1

(1) Total net unearned premium reserve excludes $311.5 million and $193.2 million related to FG VIE’s as of September 30, 2011 and December 31, 2010, respectively.

Net deferred premium revenue will be recognized as net earned premiums over the period of the contract in proportion to the amount of insurance protection provided. Amounts expected to be recognized in net earned premiums differ significantly from expected cash collections due primarily to amounts in deferred premium revenue representing cash already collected on policies paid upfront and fair value adjustments recorded in connection with the acquisition of AGMH on July 1, 2009 (“AGMH Acquisition”).

The following table provides a schedule of the expected timing of the income statement recognition of financial guaranty insurance net deferred premium revenue and present value of net expected losses to be expensed, pretax. This table excludes amounts related to consolidated FG VIEs.

Expected Timing of Financial Guaranty Insurance

Premium and Loss Recognition

	As of September 30, 2011
	Scheduled Net Earned Premium		Net Expected Loss to be Expensed(1)		Net
	(in millions)
2011 (October 1 - December 31)	$	167.2	$	40.7	$	126.5
2012	579.8		108.5		471.3
2013	483.0		65.7		417.3
2014	425.4		49.5		375.9
2015	376.0		38.0		338.0
2016 - 2020	1,406.1		144.7		1,261.4
2021 - 2025	882.4		70.2		812.2
2026 - 2030	538.3		39.2		499.1
After 2030	579.5		27.0		552.5
Total present value basis(2)(3)	5,437.7		583.5		4,854.2
Discount	308.9		353.8		(44.9		)
Total future value	$	5,746.6	$	937.3	$	4,809.3

(1) These amounts reflect the Company’s estimate as of September 30, 2011 of expected losses to be expensed and are not included in loss and LAE reserve because loss and LAE is only recorded for the amount by which net expected loss to be expensed exceeds deferred premium revenue, determined on a contract-by-contract basis.

(2) Balances represent discounted amounts.

(3) Consolidation of FG VIEs resulted in reductions of $423.7 million in future scheduled amortization of deferred premium revenue and $240.0 million in net present value of expected loss to be expensed.

Selected Information for Policies Paid in Installments

	As of September 30, 2011			As of December 31, 2010
	(dollars in millions)
Premiums receivable, net of ceding commission payable	$	987.1		$	1,167.6
Gross deferred premium revenue	2,272.5			2,933.6
Weighted average risk-free rate used to discount premiums	3.6		%	3.5		%
Weighted average period of premiums receivable (in years)	10.0			10.1

Loss Estimation Process

The Company’s loss reserve committees estimate expected loss to be paid for its financial guaranty exposures. Surveillance personnel present analysis related to potential losses to the Company’s loss reserve committees for consideration in estimating the expected loss to be paid. Such analysis includes the consideration of various scenarios with potential probabilities assigned to them. Depending upon the nature of the risk, the Company’s view of the potential size of any loss and the information available to the Company, that analysis may be based upon individually developed cash flow models, internal credit rating assessments and sector-driven loss severity assumptions or judgmental assessments. In the case of its assumed business, the Company may conduct its own analysis as just described or, depending on the Company’s view of the potential size of any loss and the information available to the Company, the Company may use loss estimates provided by ceding insurers. The Company’s loss reserve committees review and refresh the estimate of expected loss to be paid each quarter. The Company’s estimate of ultimate loss on a policy is subject to significant uncertainty over the life of the insured transaction due to the potential for significant variability in credit performance as a result of economic, fiscal and financial market variability over the long duration of most contracts. The determination of expected loss to be paid is an inherently subjective process involving numerous estimates, assumptions and judgments by management.

The following table presents a roll forward of the present value of net expected loss to be paid for financial guaranty insurance contracts by sector. Expected loss to be paid is the estimate of the present value of future claim payments, net of reinsurance and net of salvage and subrogation, which includes the present value benefit of estimated recoveries for breaches of R&W.

Financial Guaranty Insurance

Present Value of Net Expected Loss to be Paid

Roll Forward by Sector(1)

	Net Expected Loss to be Paid as of June 30, 2011			Economic Loss Development(2)			(Paid) Recovered Losses			Net Expected Loss to be Paid as of September 30, 2011
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	3.2		$	(0.8	)	$	—		$	2.4
Alt-A first lien	167.6			(3.1		)	(16.6		)	147.9
Option ARM	266.9			50.4			(74.5		)	242.8
Subprime	161.5			36.3			(0.8		)	197.0
Total first lien	599.2			82.8			(91.9		)	590.1
Second lien:
Closed-end second lien	(94.7		)	47.2			(1.5		)	(49.0		)
HELOCs	(38.3		)	(7.8		)	(23.9		)	(70.0		)
Total second lien	(133.0		)	39.4			(25.4		)	(119.0		)
Total U.S. RMBS	466.2			122.2			(117.3		)	471.1
Other structured finance	180.6			83.7			(4.7		)	259.6
Public finance	66.2			6.7			(30.2		)	42.7
Total	$	713.0		$	212.6		$	(152.2	)	$	773.4

	Net Expected Loss to be Paid as of June 30, 2010			Economic Loss Development(2)			(Paid) Recovered Losses			Net Expected Loss to be Paid as of September 30, 2010
	(in millions)
	(restated)			(restated)						(restated)
U.S. RMBS:
First lien:
Prime first lien	$	0.4		$	0.5		$	—		$	0.9
Alt-A first lien	190.8			8.7			(14.1		)	185.4
Option ARM	571.2			27.7			(54.3		)	544.6
Subprime	144.5			7.1			(0.7		)	150.9
Total first lien	906.9			44.0			(69.1		)	881.8
Second lien:
Closed-end second lien	119.0			5.1			(20.1		)	104.0
HELOCs	(493.7		)	(1.8		)	(129.5		)	(625.0		)
Total second lien	(374.7		)	3.3			(149.6		)	(521.0		)
Total U.S. RMBS	532.2			47.3			(218.7		)	360.8
Other structured finance	146.1			18.2			(1.9		)	162.4
Public finance	88.6			0.4			(22.9		)	66.1
Total	$	766.9		$	65.9		$	(243.5	)	$	589.3

	Net Expected Loss to be Paid as of December 31, 2010			Economic Loss Development(2)			(Paid) Recovered Losses			Net Expected Loss to be Paid as of September 30, 2011
	(in millions)
	(restated)
U.S. RMBS:
First lien:
Prime first lien	$	1.4		$	1.0		$	—		$	2.4
Alt-A first lien	184.4			18.7			(55.2		)	147.9
Option ARM	523.7			(38.0		)	(242.9		)	242.8
Subprime	200.4			13.1			(16.5		)	197.0
Total first lien	909.9			(5.2		)	(314.6		)	590.1
Second lien:
Closed-end second lien	56.6			(62.4		)	(43.2		)	(49.0		)
HELOCs	(805.7		)	96.9			638.8			(70.0		)
Total second lien	(749.1		)	34.5			595.6			(119.0		)
Total U.S. RMBS	160.8			29.3			281.0			471.1
Other structured finance	159.1			108.2			(7.7		)	259.6
Public finance	88.9			(6.8		)	(39.4		)	42.7
Total	$	408.8		$	130.7		$	233.9		$	773.4

	Net Expected Loss to be Paid as of December 31, 2009			Economic Loss Development(2)			(Paid) Recovered Losses			Net Expected Loss to be Paid as of September 30, 2010
	(in millions)
	(restated)			(restated)						(restated)
U.S. RMBS:
First lien:
Prime first lien	$	—		$	0.9		$	—		$	0.9
Alt-A first lien	204.4			24.1			(43.1		)	185.4
Option ARM	545.2			102.8			(103.4		)	544.6
Subprime	77.5			76.4			(3.0		)	150.9
Total first lien	827.1			204.2			(149.5		)	881.8
Second lien:
Closed-end second lien	199.3			(35.3		)	(60.0		)	104.0
HELOCs	(206.6		)	26.9			(445.3		)	(625.0		)
Total second lien	(7.3		)	(8.4		)	(505.3		)	(521.0		)
Total U.S. RMBS	819.8			195.8			(654.8		)	360.8
Other structured finance	115.7			54.2			(7.5		)	162.4
Public finance	130.9			(7.7		)	(57.1		)	66.1
Total	$	1,066.4		$	242.3		$	(719.4	)	$	589.3

(1) Amounts include all expected payments whether or not the insured transaction VIE is consolidated. Amounts exclude reserves for mortgage business of $1.9 million as of September 30, 2011 and $2.1 million as of June 30, 2011 and December 31, 2010.

(2) Economic loss development includes the effects of changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts.

Expected LAE for mitigating claim liabilities were $15.9 million and $17.2 million as of September 30, 2011 and December 31, 2010, respectively. The Company used weighted average risk-free rates ranging from 0% to 3.85% to discount expected loss to be paid as of September 30, 2011 and 0% to 5.34% as of December 31, 2010.

The table below provides a reconciliation of expected loss to be paid to expected loss to be expensed. Expected loss to be paid differs from expected loss to be expensed due to: (1) the contra-paid because the payments have been made but have not yet been expensed, (2) for transactions with a net expected recovery, the addition of claim payments that have been made (and therefore are not included in expected loss to be paid) that are expected to be recovered in the future (and therefore have also reduced expected loss to be paid), and (3) loss reserves that have already been established (and therefore expensed but not yet paid).

Reconciliation of Present Value of Net Expected Loss to be Paid

and Present Value of Net Expected Loss to be Expensed

	As of September 30,
	2011			2010
	(in millions)                                     (restated)
Net expected loss to be paid	$	773.4		$	589.3
Less: net expected loss to be paid for FG VIEs	(34.2		)	(30.5		)
Total	807.6			619.8
Contra-paid, net	82.1			183.5
Salvage and subrogation recoverable, net(1)	314.6			727.6
Loss and LAE reserve, net(2)	(620.8		)	(457.9		)
Net expected loss to be expensed(3)	$	583.5		$	1,073.0

(1) September 30, 2011 amount consists of gross salvage and subrogation amounts of $360.2 million net of ceded amounts of $45.6 million which is recorded in reinsurance balances payable. The September 30, 2010 amount consists of gross salvage and subrogation amounts of $824.8 million net of ceded amounts of $97.2 million which is recorded in reinsurance balances payable.

(2) Represents loss and LAE reserves, net of reinsurance recoverable on unpaid losses, excluding $1.9 million and $2.1 million in reserves for other runoff lines of business as of September 30, 2011 and December 31, 2010, respectively.

(3) Excludes $240.0 million and $110.0 million as of September 30, 2011 and 2010, respectively, related to consolidated FG VIEs.

The Company’s Approach to Projecting Losses in U.S. RMBS

The Company projects losses in U.S. RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (i.e., payment priorities and tranching) of the RMBS to the projected performance of the collateral over time. The resulting projected claim payments or reimbursements are then discounted to a present value using a risk-free rate. For transactions where the Company projects it will receive recoveries from providers of R&W, it projects the amount of recoveries and reduces its projected claim payments accordingly.

The further behind a mortgage borrower falls in making payments, the more likely it is that he or she will default. The rate at which borrowers from a particular delinquency category (number of monthly payments behind) eventually default is referred to as the “liquidation rate.” Liquidation rates may be derived from observed roll rates, which are the rates at which loans progress from one delinquency category to the next and eventually to default and liquidation. The Company applies liquidation rates to the mortgage loan collateral in each delinquency category and makes certain timing assumptions to project near-term mortgage collateral defaults from loans that are currently delinquent.

Mortgage borrowers that are not more than one payment behind (generally considered performing borrowers) have demonstrated an ability and willingness to pay throughout the recession and mortgage crisis, and as a result are viewed as less likely to default than delinquent borrowers. Performing borrowers that eventually default will also need to progress through delinquency categories before any defaults occur. The Company projects how many of the currently performing loans will default, and when, by first converting the projected near-term defaults of delinquent borrowers derived from liquidation rates into a vector of conditional default rates, then projecting how the conditional default rates will develop over time. Loans that are defaulted pursuant to the conditional default rate after the liquidation of currently delinquent loans represent defaults of currently performing loans. A conditional default rate is the outstanding principal amount of defaulted loans liquidated in the current month divided by the remaining outstanding amount of the whole pool of loans (or “collateral pool balance”). The collateral pool balance decreases over time as a result of scheduled principal payments, partial and whole principal repayments, and defaults.

In order to derive collateral pool losses from the collateral pool defaults it has projected, the Company applies a loss severity. The loss severity is the amount of loss the transaction experiences on a defaulted loan after the application of net proceeds from the disposal of the underlying property. The Company projects loss severities by sector based on experience to date. Further detail regarding the assumptions and variables the Company used to project collateral losses in its U.S. RMBS portfolio may be found below in the sections “U.S. Second Lien RMBS Loss Projections: HELOCs and Closed-End Second Lien” and “U.S. First Lien RMBS Loss Projections: Alt-A First Lien, Option ARM, Subprime and Prime”.

The Company is in the process of enforcing claims for breaches of R&W regarding the characteristics of the loans included in the collateral pools. The Company calculates a credit from the RMBS issuer for such recoveries where the R&W were provided by an entity the Company believes to be financially viable and where the Company already has access or believes it will attain access to the underlying mortgage loan files. Where the Company has an agreement with an R&W provider (e.g., the Bank of America Agreement) where potential recoveries may be higher due to settlements, that credit is based on the agreement or potential agreement. In second lien RMBS transactions where there is no agreement or advanced discussions, this credit is based on a percentage of actual repurchase rates achieved across those transactions where material repurchases have been made, while in first lien RMBS transactions where there is no agreement or advanced discussions, this credit is estimated by reducing collateral losses projected by the Company to reflect a percentage of the recoveries the Company believes it will achieve, which factor is derived based on the number of breaches identified to date and incorporated scenarios based on the amounts the Company was able to negotiate under the Bank of America Agreement. The first lien approach is different from the second lien approach because the Company’s first lien transactions have multiple tranches and a more complicated method is required to correctly allocate credit to each tranche. In each case, the credit is a function of the projected lifetime collateral losses in the collateral pool, so an increase in projected collateral losses increases the R&W credit calculated by the Company for the RMBS issuer. Further detail regarding how the Company calculates these credits may be found under “Breaches of Representations and Warranties” below.

The Company projects the overall future cash flow from a collateral pool by adjusting the payment stream from the principal and interest contractually due on the underlying mortgages for (a) the collateral losses it projects as described above, (b) assumed voluntary prepayments and (c) recoveries for breaches of R&W as described above. The Company then applies an individual model of the structure of the transaction to the projected future cash flow from that transaction’s collateral pool to project the Company’s future claims and claim reimbursements for that individual transaction. Finally, the projected claims and reimbursements are discounted to a present value using a risk-free rate. As noted above, the Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, and probability-weights them.

Third Quarter-End 2011 U.S. RMBS Loss Projections

In both Third Quarter 2011 and the three-months period ended June 30, 2011 (“Second Quarter 2011”), the Company chose to use loss projection curves with generally the same shape as that used in the fourth quarter of 2010, including retaining the initial plateau period it had used in the fourth quarter of 2010. Other adjustments are described in the paragraph below. The Company’s RMBS projection methodology assumes that the housing and mortgage markets will eventually recover but are doing so at a slower than previously expected pace.

The scenarios used to project RMBS collateral losses in the Third Quarter 2011 were essentially the same as those used in the Second Quarter 2011, except that (i) as noted above, based on its observation of the continued elevated levels of early stage delinquencies, the Company adjusted its loss projection curves by retaining the initial plateau periods to reflect its view that the recovery would be longer than it had anticipated in the Second Quarter 2011; and (ii) the Company introduced a higher loss severity assumption in two scenarios for subprime first lien RMBS transactions.

The scenarios used in Third Quarter 2011 were also the same as those employed at year-end 2010, with the following exceptions: (i) the retention of the initial plateau and higher stress subprime loss severity assumption just described; (ii) an increase in the expected period for reaching the final conditional default rate for second lien transactions from that used in the fourth quarter of 2010 was established for the three-months period ended March 31, 2011 (“First Quarter 2011”) and retained in the Second and Third Quarter 2011; (iii) the initial Alt-A first lien and Option ARM loss severities were increased from 60% at year-end 2010 to 65% in the First Quarter 2011 and retained in the Second and Third Quarter 2011; and (iv) the Company’s probability weightings from the fourth quarter of 2010 were adjusted in First Quarter 2011 to reflect changes to each of its second lien scenarios and such adjustments were retained in the Second and Third Quarter 2011.

The Company also used generally the same methodology to project the credit received by the RMBS issuers for recoveries in R&W in Third Quarter 2011 as it used for the Second Quarter 2011 and at year-end 2010. The primary difference relates to the execution of the Bank of America Agreement and the inclusion of the terms of the agreement as a potential scenario in transactions not covered by the Bank of America Agreement in both the Second and Third Quarters 2011 that were not included at year-end 2010. During the Third Quarter 2011, the Company added an R&W credit for one more first lien transaction where it concluded for the first time that an R&W recovery was likely, but did not calculate an R&W credit for any other RMBS transaction where it had not previously calculated one. As compared to year-end 2010, the Company calculated R&W credits for two more second lien transactions and eleven more first lien transactions where either it concluded it had the right to obtain loan files that it had not previously concluded were accessible or it anticipates receiving a benefit due to an agreement or potential agreement with an R&W provider.

U.S. Second Lien RMBS Loss Projections: HELOCs and Closed-End Second Lien

The Company insures two types of second lien RMBS: those secured by HELOCs and those secured by closed-end second lien mortgages. HELOCs are revolving lines of credit generally secured by a second lien on a one-to-four family home. A mortgage for a fixed amount secured by a second lien on a one-to-four family home is generally referred to as a closed-end second lien. Both first lien RMBS and second lien RMBS sometimes include a portion of loan collateral with a different priority than the majority of the collateral. The Company has material exposure to second lien mortgage loans originated and serviced by a number of parties, but the Company’s most significant second lien exposure is to HELOCs originated and serviced by Countrywide, a subsidiary of Bank of America. See “Breaches of Representations and Warranties.”

The delinquency performance of HELOC and closed-end second lien exposures included in transactions insured by the Company began to deteriorate in 2007, and such transactions, particularly those originated in the period from 2005 through 2007, continue to perform below the Company’s original underwriting expectations. While insured securities benefit from structural protections within the transactions designed to absorb collateral losses in excess of previous historically high levels, in many second lien RMBS projected losses now exceed those structural protections.

The Company believes the primary variables affecting its expected losses in second lien RMBS transactions are the amount and timing of future losses in the collateral pool supporting the transactions and the amount of loans repurchased for breaches of R&W. Expected losses are also a function of the structure of the transaction; the voluntary prepayment rate (typically also referred to as conditional prepayment rate of the collateral); the interest rate environment; and assumptions about the draw rate and loss severity. These variables are interrelated, difficult to predict and subject to considerable volatility. If actual experience differs from the Company’s assumptions, the losses incurred could be materially different from the estimate. The Company continues to update its evaluation of these exposures as new information becomes available.

The following table shows the key assumptions used in the calculation of estimated expected loss to be paid for direct vintage 2004 - 2008 second lien U.S. RMBS.

Assumptions in Base Case Expected Loss Estimates

Second Lien RMBS(1)

HELOC Key Variables	As of September 30, 2011	As of June 30, 2011	As of March 31, 2011	As of December 31, 2010
Plateau conditional default rate	3.8 - 35.3%	4.6 - 34.6%	4.7 - 21.4%	4.2 - 22.1%
Final conditional default rate trended down to	0.4 - 3.2%	0.4 - 3.2%	0.4 - 3.2%	0.4 - 3.2%
Expected period until final conditional default rate	36 months	36 months	36 months	24 months
Initial conditional prepayment rate	3.2 - 16.4%	0.9 - 15.5%	0.9 - 12.6%	3.3 - 17.5%
Final conditional prepayment rate	10%	10%	10%	10%
Loss severity	98%	98%	98%	98%
Initial draw rate	0.0 -5.4%	0.0 - 8.6%	0.0 - 5.2%	0.0 - 6.8%

Closed-End Second Lien Key Variables	As of September 30, 2011	As of June 30, 2011	As of March 31, 2011	As of December 31, 2010
Plateau conditional default rate	5.8 - 21.7%	4.8 - 22.8%	7.2 - 28.9%	7.3 - 27.1%
Final conditional default rate trended down to	2.9 - 8.1%	2.9 - 8.1%	2.9 - 8.1%	2.9 - 8.1%
Expected period until final conditional default rate achieved	36 months	36 months	36 months	24 months
Initial conditional prepayment rate	0.3 - 11.7%	1.4 - 12.0%	0.9 - 12.7%	1.3 - 9.7%
Final conditional prepayment rate	10%	10%	10%	10%
Loss severity	98%	98%	98%	98%

(1) Represents assumptions for most heavily weighted scenario (the “base case”).

In second lien transactions the projection of near-term defaults from currently delinquent loans is relatively straightforward because loans in second lien transactions are generally “charged off” (treated as defaulted) by the securitization’s servicer once the loan is 180 days past due. Most second lien transactions report the amount of loans in five monthly delinquency categories (i.e., 30-59 days past due, 60-89 days past due, 90-119 days past due, 120-149 days past due and 150-179 days past due). The Company estimates the amount of loans that will default over the next five months by calculating current representative liquidation rates (the percent of loans in a given delinquency status that are assumed to ultimately default) from selected representative transactions and then applying an average of the preceding 12 months’ liquidation rates to the amount of loans in the delinquency categories. The amount of loans projected to default in the first through fifth months is expressed as a conditional default rate. The first four months’ conditional default rate is calculated by applying the liquidation rates to the current-period past-due balances (i.e., the 150-179 day balance is liquidated in the first projected month, the 120-149 day balance is liquidated in the second projected month, the 90-119 day balance is liquidated in the third projected month and the 60-89 day balance is liquidated in the fourth projected month). For the fifth month the conditional default rate is calculated using the average 30-59 day past due balances for the prior three months. An average of the third, fourth and fifth month conditional default rates is then used as the basis for the plateau period that follows the embedded five months of losses.

In the Third Quarter 2011 base scenario, the conditional default rate (the “plateau conditional default rate”) was held constant for one month. Once the plateau period has ended, the conditional default rate is assumed to gradually trend down in uniform increments to its final long-term steady state conditional default rate. In the base scenario, the time over which the conditional default rate trends down to its final conditional default rate is 30 months (the same as Second Quarter 2011 but compared with 18 months at year-end 2010). Therefore, the total stress period for second lien transactions is 36 months, comprising five months of delinquent data, a one-month plateau period and 30 months of decrease to the steady state conditional default rate. This is the same as the Second Quarter 2011 but 12 months longer than the 24 months of total stress period used at year-end 2010. The long-term steady state conditional default rates are calculated as the constant conditional default rates that would have yielded the amount of losses originally expected at underwriting. When a second lien loan defaults, there is generally very low recovery. Based on current expectations of future performance, the Company assumes that it will only recover 2% of the collateral.

The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected (which is a function of the conditional default rate and the loan balance over time) as well as the amount of excess spread (which is the excess of the interest paid by the borrowers on the underlying loan over the amount of interest and expenses owed on the insured obligations). In the base case, the current conditional prepayment rate is assumed to continue until the end of the plateau before gradually increasing to the final conditional prepayment rate over the same period the conditional default rate decreases. For transactions where the initial conditional prepayment rate is higher than the final conditional prepayment rate, the initial conditional prepayment rate is held constant. The final conditional prepayment rate is assumed to be 10% for both HELOC and closed-end second lien transactions. This level is much higher than current rates, but lower than the historical average, which reflects the Company’s continued uncertainty about performance of the borrowers in these transactions. This pattern is consistent with how the Company modeled the conditional prepayment rate at year-end 2010 and in the Second Quarter 2011. To the extent that prepayments differ from projected levels it could materially change the Company’s projected excess spread and losses.

The Company uses a number of other variables in its second lien loss projections, including the spread between relevant interest rate indices, and HELOC draw rates (the amount of new advances provided on existing HELOCs expressed as a percentage of current outstanding advances). For HELOC transactions, the draw rate is assumed to decline from the current level to a final draw rate over a period of three months. The final draw rates were assumed to range from 0.0% to 2.7%.

In estimating expected losses, the Company modeled and probability-weighted three possible conditional default rate curves applicable to the period preceding the return to the long-term steady state conditional default rate. Given that draw rates have been reduced to levels below the historical average and that loss severities in these products have been higher than anticipated at inception, the Company believes that the level of the elevated conditional default rate and the length of time it will persist is the primary driver behind the likely amount of losses the collateral will suffer (before considering the effects of repurchases of ineligible loans). The Company continues to evaluate the assumptions affecting its modeling results.

At September 30, 2011, the Company’s base case assumed a one-month conditional default rate plateau and a 30-month ramp-down (for a total stress period of 36 months). Increasing the conditional default rate plateau to four months and keeping the ramp-down at 30-months (for a total stress period of 39 months) would increase the expected loss by approximately $66.6 million for HELOC transactions and $6.5 million for closed-end second lien transactions. On the other hand, keeping the conditional default rate plateau at one month but decreasing the length of the conditional default rate ramp-down to a 24 month assumption (for a total stress period of 30 months) would decrease the expected loss by approximately $57.9 million for HELOC transactions and $3.4 million for closed-end second lien transactions.

U.S. First Lien RMBS Loss Projections: Alt-A First Lien, Option ARM, Subprime and Prime

First lien RMBS are generally categorized in accordance with the characteristics of the first lien mortgage loans on one-to-four family homes supporting the transactions. The collateral supporting “subprime” RMBS transactions consists of first lien residential mortgage loans made to subprime borrowers. A “subprime borrower” is one considered to be a higher-risk credit based on credit scores or other risk characteristics. Another type of RMBS transaction is generally referred to as “Alt-A first lien.” The collateral supporting such transactions consists of first lien residential mortgage loans made to “prime” quality borrowers who lack certain ancillary characteristics that would make them prime. When more than 66% of the loans originally included in the pool are mortgage loans with an option to make a minimum payment that has the potential to amortize the loan negatively (i.e., increase the amount of principal owed), the transaction is referred to as an “Option ARM.” Finally, transactions may be composed primarily of loans made to prime borrowers. Both first lien RMBS and second lien RMBS sometimes include a portion of loan collateral that differs in priority from the majority of the collateral.

The performance of the Company’s first lien RMBS exposures began to deteriorate in 2007, and such transactions, particularly those originated in the period from 2005 through 2007, continue to perform below the Company’s original underwriting expectations. The Company currently projects first lien collateral losses many times those expected at the time of underwriting. While insured securities benefited from structural protections within the transactions designed to absorb some of the collateral losses, in many first lien RMBS transactions, projected losses exceed those structural protections.

The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that are delinquent or in foreclosure or where the loan has been foreclosed and the RMBS issuer owns the underlying real estate). An increase in non-performing loans beyond that projected in the previous period is one of the primary drivers of loss development in this portfolio. In order to determine the number of defaults resulting from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of various delinquency categories. The Company arrived at its liquidation rates based on data in Loan Performance and assumptions about how delays in the foreclosure process may ultimately affect the rate at which loans are liquidated. The liquidation rate is a standard industry measure that is used to estimate the number of loans in a given aging category that will default within a specified time period. The Company projects these liquidations to occur over two years.

The following table shows liquidation assumptions for various delinquency categories.

First Lien Liquidation Rates

	As of September 30, 2011		As ofJune 30, 2011		As of March 31, 2011		As ofDecember 31, 2010
30 - 59 Days Delinquent
Alt-A first lien, Option ARM and Prime	50	%	50	%	50	%	50	%
Subprime	45		45		45		45
60 - 89 Days Delinquent
Alt-A first lien, Option ARM and Prime	65		65		65		65
Subprime	65		65		65		65
90 - Bankruptcy
Alt-A first lien, Option ARM and Prime	75		75		75		75
Subprime	70		70		70		70
Foreclosure
Alt-A first lien, Option ARM and Prime	85		85		85		85
Subprime	85		85		85		85
Real Estate Owned
Alt-A first lien, Option ARM and Prime	100		100		100		100
Subprime	100		100		100		100

While the Company uses liquidation rates as described above to project defaults of non-performing loans, it projects defaults on presently current loans by applying a conditional default rate trend. The start of that conditional default rate trend is based on the defaults the Company projects will emerge from currently nonperforming loans. The total amount of expected defaults from the non-performing loans is translated into a constant conditional default rate (i.e., the conditional default rate plateau), which, if applied for each of the next 24 months, would be sufficient to produce approximately the amount of defaults that were calculated to emerge from the various delinquency categories. The conditional default rate thus calculated individually on the collateral pool for each RMBS is then used as the starting point for the conditional default rate curve used to project defaults of the presently performing loans.

In the base case, each transaction’s conditional default rate is projected to improve over 12 months to an intermediate conditional default rate (calculated as 15% of its conditional default rate plateau); that intermediate conditional default rate is held constant for 36 months and then trails off in steps to a final conditional default rate of 5% of the conditional default rate plateau. Under the Company’s methodology, defaults projected to occur in the first 24 months represent defaults that can be attributed to loans that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected conditional default rate trend after the first 24 month period represent defaults attributable to borrowers that are currently performing.

Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. Loss severities experienced in first lien transactions have reached historic high levels, and the Company is assuming that these historic high levels will continue for another year. The Company determines its initial loss severity based on actual recent experience. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning in September 2012 and, in the base scenario, decline over two years to 40%.

The following table shows the key assumptions used in the calculation of expected loss to be paid for direct vintage 2004 - 2008 first lien U.S. RMBS.

Key Assumptions in Base Case Expected Loss Estimates of First Lien RMBS Transactions

	As of September 30, 2011	As of June 30, 2011	As of March 31, 2011	As of December 31, 2010
Alt-A First Lien
Plateau conditional default rate	2.9 - 40.5%	2.9 - 36.6%	2.7 - 40.2%	2.6 - 42.2%
Intermediate conditional default rate	0.4 - 6.1%	0.4 - 5.5%	0.4 - 6.0%	0.4 - 6.3%
Final conditional default rate	0.1 - 2.0%	0.1 - 1.8%	0.1 - 2.0%	0.1 - 2.1%
Initial loss severity	65%	65%	65%	60%
Initial conditional prepayment rate	0.0 - 17.0%	0.0 - 28.3%	0.4 - 40.5%	0.0 - 36.5%
Final conditional prepayment rate	10%	10%	10%	10%
Option ARM
Plateau conditional default rate	12.7 - 32.2%	13.1 - 32.1%	12.3 - 33.2%	11.7 - 32.7%
Intermediate conditional default rate	1.9 - 4.8%	2.0 - 4.8%	1.8 - 5.0%	1.8 - 4.9%
Final conditional default rate	0.6 - 1.6%	0.7 - 1.6%	0.6 - 1.7%	0.6 - 1.6%
Initial loss severity	65%	65%	65%	60%
Initial conditional prepayment rate	0.1 - 4.2%	0.0 - 7.2%	0.0 - 24.5%	0.0 - 17.7%
Final conditional prepayment rate	10%	10%	10%	10%
Subprime
Plateau conditional default rate	8.6 - 33.4%	7.7 - 34.2%	8.0 - 34.3%	9.0 - 34.6%
Intermediate conditional default rate	1.3 - 5.0%	1.2 - 5.1%	1.2 - 5.1%	1.3 - 5.2%
Final conditional default rate	0.4 - 1.7%	0.4 - 1.7%	0.4 - 1.7%	0.4 - 1.7%
Initial loss severity	80%	80%	80%	80%
Initial conditional prepayment rate	0.0 - 16.8%	0.0 - 9.3%	0.0 - 13.3%	0.0 - 13.5%
Final conditional prepayment rate	10%	10%	10%	10%

The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected (since that amount is a function of the conditional default rate and the loan balance over time) as well as the amount of excess spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on the insured obligations). The assumption for the conditional prepayment rate follows a similar pattern to that of the conditional default rate. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final conditional prepayment rate, which is assumed to be either 10% or 15% depending on the scenario run. For transactions where the initial conditional prepayment rate is higher than the final conditional prepayment rate, the initial conditional prepayment rate is held constant.

The ultimate performance of the Company’s first lien RMBS transactions remains highly uncertain and may be subject to considerable volatility due to the influence of many factors, including the level and timing of loan defaults, changes in housing prices and other variables. The Company will continue to monitor the performance of its RMBS exposures and will adjust the loss projections for those transactions based on actual performance and management’s estimates of future performance.

In estimating expected losses, the Company modeled and probability-weighted sensitivities for first lien transactions by varying its assumptions of how fast recovery is expected to occur. The primary variable when modeling sensitivities was how quickly the conditional default rate returned to its modeled equilibrium, which was defined as 5% of the current conditional default rate. The Company also stressed conditional prepayment rates and the speed of recovery of loss severity rates. Beginning in the Third Quarter 2011, the Company also stressed the initial loss severity rates in subprime transactions. In a somewhat more stressful environment than that of the base case, where the conditional default rate recovery was more gradual, the loss severity begins at a higher rate than in the base case, and the final conditional prepayment rate was 15% rather than 10% and subprime loss severity rates were assumed to start higher, expected loss to be paid would increase by approximately $7.1 million for Alt-A first lien, $56.8 million for Option ARM, $43.8 million for subprime and $0.1 million for prime transactions. In an even more stressful scenario where the conditional default rate plateau was extended three months (to be 27 months long) before the same more gradual conditional default rate recovery and loss severities were assumed to recover over four rather than two years (and subprime loss severities were assumed to start higher and recover only to 60%), expected loss to be paid would increase by approximately $38.2 million for Alt-A first lien, $138.0 million for Option ARM, $194.2 million for subprime and $0.8 million for prime transactions. The Company also considered a scenario where the recovery was faster than in its base case. In this scenario, where the conditional default rate plateau was three months shorter (21 months, effectively assuming that liquidation rates would improve) and the conditional default rate recovery was more pronounced, expected loss to be paid would decrease by approximately $22.9 million for Alt-A first lien, $76.9 million for Option ARM, $38.6 million for subprime and $0.6 million for prime transactions.

Breaches of Representations and Warranties

The Company is pursuing reimbursements for breaches of R&W regarding loan characteristics. Performance of the collateral underlying certain first and second lien securitizations has substantially differed from the Company’s original expectations. The Company has employed several loan file diligence firms and law firms as well as devoted internal resources to review the mortgage files surrounding many of the defaulted loans. The Company’s success in these efforts resulted in two negotiated agreements, in respect of the Company’s R&W claims, including one on April 14, 2011 with Bank of America as described under “Bank of America Agreement” in Note 3.

Additionally, for the RMBS transactions as to which the Company had not settled its claims for breaches of R&W as of September 30, 2011, the Company had performed a detailed review of approximately 15,800 second lien and 17,000 first lien defaulted loan files, representing approximately $1,089 million in second lien and $4,941 million in first lien outstanding par of defaulted loans underlying insured transactions. The Company identified approximately 15,000 second lien transaction loan files and approximately 15,500 first lien transaction loan files that breached one or more R&W regarding the characteristics of the loans, such as misrepresentation of income or employment of the borrower, occupancy, undisclosed debt and non-compliance with underwriting guidelines at loan origination. The Company continues to review new files as new loans default and as new loan files are made available to it. The Company generally obtains the loan files from the originators or servicers (including master servicers). In some cases, the Company requests loan files via the trustee, which then requests the loan files from the originators and/or servicers. On second lien loans, the Company requests loan files for all charged-off loans. On first lien loans, the Company requests loan files for all severely (60+ days) delinquent loans and all liquidated loans. Recently, the Company started requesting loan files for all the loans (both performing and non-performing) in certain deals to limit the number of requests for additional loan files as the transactions season and loans charge-off, become 60+ days delinquent or are liquidated. (The Company takes no repurchase credit for R&W breaches on loans that are expected to continue to perform.) As of September 30, 2011, the Company had reached agreement with R&W providers other than Bank of America for the repurchase of $39 million of second lien and $54 million of first lien mortgage loans. The $39 million for second lien loans represents the calculated repurchase price for 475 loans, and the $54 million for first lien loans represents the calculated repurchase price for 167 loans. The repurchase proceeds are paid to the RMBS transactions and distributed in accordance with the payment priorities set out in the transaction agreements, so the proceeds are not necessarily allocated to the Company on a dollar-for-dollar basis. Much of the repurchase proceeds already agreed to by R&W providers other than Bank of America have already been paid to the RMBS transactions.

The Company has included in its net expected loss estimates as of September 30, 2011 an estimated benefit from loan repurchases related to breaches of R&W of $1.6 billion, which includes amounts from Bank of America. Where the Company has an agreement with an R&W provider (e.g., the Bank of America Agreement) or, where potential recoveries may be higher due to settlements, that benefit is based on the agreement or probability of a potential agreement. For other transactions, the amount of benefit recorded as a reduction of expected losses was calculated by extrapolating each transaction’s breach rate on defaulted loans to projected defaults and applying a percentage of the recoveries the Company believes it will receive. Proceeds projected to be reimbursed to the Company on transactions where the Company has already paid claims are viewed as a recovery on paid losses. For transactions where the Company has not already paid claims, projected recoveries reduce projected loss estimates. In either case, projected recoveries have no effect on the amount of the Company’s exposure. These amounts reflect payments made pursuant to the negotiated transaction agreements and not payments made pursuant to legal settlements. See “Recovery Litigation” below for a description of the related legal proceedings the Company has commenced. The Company did not incorporate any gain contingencies or damages paid from potential litigation in its estimated repurchases. The amount the Company will ultimately recover related to contractual R&W is uncertain and subject to a number of factors including the counterparty’s ability to pay, the number and loss amount of loans determined to have breached R&W and, potentially, negotiated settlements or litigation recoveries. As such, the Company’s estimate of recoveries is uncertain and actual amounts realized may differ significantly from these estimates. In arriving at the expected recovery from breaches of R&W, the Company considered the creditworthiness of the provider of the R&W, the number of breaches found on defaulted loans, the success rate in resolving these breaches across those transactions where material repurchases have been made and the potential amount of time until the recovery is realized.

The calculation of expected recovery from breaches of R&W involved a variety of scenarios, which ranged from the Company recovering substantially all of the losses it incurred due to violations of R&W to the Company realizing very limited recoveries. The Company did not include any recoveries related to breaches of R&W in amounts greater than the losses it expected to pay under any given cash flow scenario. These scenarios were probability-weighted in order to determine the recovery incorporated into the Company’s estimate of expected losses. This approach was used for both loans that had already defaulted and those assumed to default in the future. In all cases, recoveries were limited to amounts paid or expected to be paid by the Company. In circumstances where potential recoveries may be higher due to settlements, the Company may adjust its recovery assumption for R&W.

The following table shows the balance sheet classification of estimated R&W benefits:

Balance Sheet Classification of R&W Benefit

	As of September 30, 2011							As of December 31, 2010
	For all Financial Guaranty Insurance Contracts		Effect of Consolidating FG VIEs			Reported on Balance Sheet		For all Financial Guaranty Insurance Contracts		Effect of Consolidating FG VIEs			Reported on Balance Sheet
	(in millions)
Salvage and subrogation recoverable	$	386.3	$	(200.9	)	$	185.4	$	866.2	$	(52.9	)	$	813.3
Loss and LAE reserve	978.1		(89.6		)	888.5		490.6		(85.8		)	404.8
Unearned premium reserve	186.6		(43.7		)	142.9		243.7		(22.5		)	221.2
Total	$	1,551.0	$	(334.2	)	$	1,216.8	$	1,600.5	$	(161.2	)	$	1,439.3

The following table represents total estimated recoveries netted in expected loss to be paid, from defective mortgage loans included in certain first and second lien U.S. RMBS loan securitizations that it insures.

Roll Forward of Estimated Benefit from Recoveries from Representation and Warranty Breaches,

Net of Reinsurance

	Future Net R&W Benefit at December 31, 2010		R&W Development and Accretion of Discount During Nine Months 2011		R&W Recovered During Nine Months 2011(1)			Future Net R&W Benefit at September 30, 2011(2)
	(in millions)
Prime first lien	$	1.1	$	1.9	$	—		$	3.0
Alt-A first lien	81.0		111.7		—			192.7
Option ARM	309.3		530.9		(67.5		)	772.7
Subprime	26.8		80.9		—			107.7
Closed-end second lien	178.2		37.6		(9.0		)	206.8
HELOC	1,004.1		167.0		(903.0		)	268.1
Total	$	1,600.5	$	930.0	$	(979.5	)	$	1,551.0

	Future Net R&W Benefit at December 31, 2009		R&W Development and Accretion of Discount During Nine Months 2010		R&W Recovered During Nine Months 2010(1)			Future Net R&W Benefit at September 30, 2010
	(in millions)
Prime first lien	$	—	$	1.0	$	—		$	1.0
Alt-A first lien	64.2		19.8		—			84.0
Option ARM	203.7		86.8		(42.5		)	248.0
Subprime	—		—		—			—
Closed-end second lien	76.5		59.5		—			136.0
HELOC	828.7		98.1		(88.9		)	837.9
Total	$	1,173.1	$	265.2	$	(131.4	)	$	1,306.9

(1) Gross amounts recovered are $1,107.8 million and $154.4 million for Nine Months 2011 and 2010, respectively.

(2) Includes R&W benefit of $649.8 million attributable to transactions covered by the Bank of America Agreement.

Financial Guaranty Insurance U.S. RMBS Risks with R&W Benefit

as of September 30, 2011 and December 31, 2010

	Number of Risks(1) as of		Debt Service as of
	September 30, 2011	December 31, 2010	September 30, 2011		December 31, 2010
	(dollars in millions)
Prime first lien	1	1	$	54.0	$	57.1
Alt-A first lien	20	17	1,778.4		1,882.8
Option ARM	11	10	1,768.0		1,909.8
Subprime	5	1	1,071.7		228.7
Closed-end second lien	4	4	378.7		444.9
HELOC	15	13	3,522.0		2,969.8
Total	56	46	$	8,572.8	$	7,493.1

(1) A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments.

The following table provides a breakdown of the development and accretion amount in the roll forward of estimated recoveries associated with alleged breaches of R&W:

	Third Quarter						Nine Months
	2011			2010			2011		2010
	(in millions)
Inclusion of new deals with breaches of R&W during period	$	1.1		$	—		$	108.2	$	62.4
Change in recovery assumptions as the result of additional file review and recovery success	43.3			(3.4		)	241.7		61.9
Estimated increase(decrease) in defaults that will result in additional (lower) breaches	(22.6		)	50.1			11.4		132.2
Results of Bank of America Agreement	129.8			—			559.5		—
Accretion of discount on balance	7.5			6.6			9.2		8.7
Total	$	159.1		$	53.3		$	930.0	$	265.2

The $930.0 million R&W development and accretion of discount during Nine Months 2011 in the table above resulted in large part from the Bank of America Agreement executed on April 14, 2011 related to the Company’s R&W claims and described under “Bank of America Agreement” in Note 3. The benefit of the Bank of America Agreement is included in the R&W credit for the transactions directly affected by the agreement. In addition, the Bank of America Agreement caused the Company to increase the probability of successful pursuit of R&W claims against other providers where the Company believed those providers were breaching at a similar rate. The remainder of the development during the Nine Months 2011 primarily relates to changes in recovery assumptions due to the inclusion of the terms of the Bank of America Agreement as a potential scenario for other transactions. The $159.1 million R&W development and accretion of discount during the Third Quarter 2011 in the table above primarily relates to additional recoveries for first lien transactions under the Bank of America Agreement in accordance with 80% loss sharing agreement.

The Company assumes that recoveries on HELOC and closed-end second lien loans that were not subject to the Bank of America Agreement will occur in two to four years from the balance sheet date depending on the scenarios and that recoveries on Alt-A first lien, Option ARM and subprime loans will occur as claims are paid over the life of the transactions. Recoveries on second lien transactions subject to the Bank of America Agreement will be paid in full by March 31, 2012.

As of September 30, 2011, cumulative collateral losses on the 21 first lien RMBS transactions subject to the Bank of America Agreement were approximately $1.8 billion. The Company estimates that cumulative projected collateral losses for these first lien transactions will be $4.9 billion, which will result in estimated gross expected losses to the Company of $754.2 million before considering R&W recoveries from Bank of America, and $150.8 million after considering such R&W recoveries. As of September 30, 2011, the Company had been reimbursed $34.1 million in respect of the covered first lien transactions under the Bank of America Agreement.

Student Loan Transactions

The Company has insured or reinsured $2.8 billion net par of student loan securitizations, $1.5 billion issued by private issuers and classified as asset-backed and $1.3 billion issued by public authorities and classified as public finance. Of these amounts, $240.0 million and $678.7 million, respectively, are rated BIG. The Company is projecting approximately $60.4 million and $25.9 million, respectively, of expected loss to be paid in these portfolios. In general the losses are due to: (i) the poor credit performance of private student loan collateral; (ii) high interest rates on auction rate securities with respect to which the auctions have failed or (iii) high interest rates on variable rate demand obligations (“VRDO”) that have been put to the liquidity provider by the holder and are therefore bearing high “bank bond” interest rates. The largest of these losses was approximately $32.5 million and related to a transaction backed by a pool of private student loans ceded to AG Re by another monoline insurer. The guaranteed bonds were issued as auction rate securities that now bear a high rate of interest due to the downgrade of the primary insurer’s financial strength rating. Further, the underlying loan collateral has performed below expectations.

XXX Life Insurance Transactions

The Company has insured $2.0 billion of net par in XXX life insurance reserve securitizations based on discrete blocks of individual life insurance business. In each such transaction the monies raised by the sale of the bonds insured by the Company were used to capitalize a special purpose vehicle that provides reinsurance to a life insurer or reinsurer. The monies are invested at inception in accounts managed by third party investment managers. In order for the Company to incur an ultimate net loss on these transactions, adverse experience on the underlying block of life insurance policies and/or credit losses in the investment portfolio would need to exceed the level of credit enhancement built into the transaction structures. In particular, such credit losses in the investment portfolio could be realized in the event that circumstances arise resulting in the early liquidation of assets at a time when their market value is less than their intrinsic value.

The Company’s $2.0 billion net par of XXX life insurance transactions includes, as of September 30, 2011, a total of $882.5 million rated BIG, consisting of Class A-2 Floating Rate Notes issued by Ballantyne Re p.l.c and Series A-1 Floating Rate Notes issued by Orkney Re II p.l.c (“Orkney Re II”). The Ballantyne Re and Orkney Re II XXX transactions had material amounts of their assets invested in U.S. RMBS transactions. Based on its analysis of the information currently available, including estimates of future investment performance provided by the investment manager, and projected credit impairments on the invested assets and performance of the blocks of life insurance business at September 30, 2011, the Company’s projected expected loss to be paid of $133.2 million. The increase from the previous quarter of $61.3 million is due primarily to (i) revised estimates of investment performance provided by the investment manager and (ii) a reduction in the discount rate used to discount the projected losses.

Trust Preferred Securities Collateralized Debt Obligations

The Company has insured or reinsured $1.9 billion of net par of collateralized debt obligations (“CDOs”) backed by trust preferred securities (“TruPS”) and similar debt instruments, or “TruPS CDOs”.  Of that amount, $812.7 million is rated BIG.  The underlying collateral in the TruPS CDOs consists of subordinated debt instruments such as TruPS issued by bank holding companies and similar instruments issued by insurance companies, real estate investment trusts (“REITs”) and other real estate related issuers.

Of the $1.9 billion, $837.8 million was converted in June 2011 from CDS form to financial guaranty form.  Included in the amount converted are most of the TruPS CDOs currently rated BIG, including two TruPS CDOs for which the Company is projecting losses.  The Company projects losses for TruPS CDOs by projecting the performance of the asset pools across several scenarios (which it weights) and applying the CDO structures to the resulting cash flows.  For the Third Quarter, the Company has projected expected losses to be paid for TruPS CDOs of $13.1 million.

Other Notable Loss or Claim Transactions

The preceding pages describe the asset classes in the financial guaranty portfolio that encompass most of the Company’s projected losses. The Company also projects losses on, or is monitoring particularly closely, a number of other transactions, the most significant of which are described in the following paragraphs.

The Company has net exposure to Jefferson County, Alabama of $731.8 million.  On November 9, 2011, Jefferson County filed for bankruptcy under Chapter 9 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Alabama (Southern Division).

Most of the Company’s exposure relates to $495.8 million of warrants issued by Jefferson County in respect of its sewer system, of which $135.2 million is derived from insurance policies issued by AGM and $360.6 million is derived from reinsurance provided by AG Re or AGC.  Jefferson County’s sewer revenue warrants are secured by a pledge of the net revenues of the sewer system, which should qualify as “special revenue” under Chapter 9.  Therefore, the Company believes that during Jefferson County’s Chapter 9 case, the net revenues of the sewer system should not be subject to an automatic stay and should continue to be applied to the payment of debt service on the sewer revenue warrants after the payment of sewer system operating expenses.  The Company has projected expected loss to be paid of $18.0 million as of September 30, 2011 on the sewer revenue warrants, which estimate is based on a number of probability-weighted scenarios.

The Company’s remaining net exposure of $236.0 million relates to bonds issued by Jefferson County that are secured by, or payable from, certain revenues, taxes or lease payments that may have the benefit of a statutory lien or a lien on “special revenues” or other collateral.  AGM has issued insurance policies in respect of $164.1 million of this exposure and AG Re has provided reinsurance on the other $71.9 million.  The Company projects less than $1 million of expected loss to be paid as of September 30, 2011 on these bonds.

The Company expects that bondholder rights will be enforced.  However, due to the early stage of the bankruptcy proceeding, and the circumstances surrounding Jefferson County’s debt, the nature of the action is uncertain.  The Company will continue to analyze developments in the matter closely.

The Company has projected expected loss to be paid of $17.6 million on a transaction backed by revenues generated by telephone directory “yellow pages” (both print and digital) in various jurisdictions with a net par of $110.7 million and guaranteed by Ambac Assurance Corporation (“Ambac”). This estimate is based primarily on the Company’s view of how quickly “yellow pages” revenues are likely to decline in the future. The increase from the previous quarter is due primarily to the Company’s revised view of likely future revenue declines given the continued deterioration in recent performance.

The Company has projected expected loss to be paid of $15.6 million on one transaction from 2000 backed by manufactured housing loans with a net par of $65.1 million. The increase of $1.1 million from the previous quarter is due primarily to a reduction in the discount rate used to discount projected losses. The Company insures a total of $347.7 million net par of securities backed by manufactured housing loans, a total of $233.6 million rated BIG.

The Company has $170.1 million of net par exposure to The City of Harrisburg, Pennsylvania, of which $97.5 million is BIG. The Company has paid $5.1 million in net claims to date, and expects a full recovery.

As of September 30, 2011, the Company had exposure to sovereign debt of Greece through financial guarantees of €200.0 million of debt (€165.1 million on a net basis) due in 2037 with a 4.5% fixed coupon and €113.5 million of debt (€52.4 million on a net basis) due in 2057 with a 2.085% inflation-linked coupon. The Hellenic Republic of Greece, as obligor, has been paying interest on such notes on a timely basis. On October 26, 2011, officials from the European Commission announced a set of Greek debt relief measures that call for voluntary reductions of 50% of the notional amount of Greek sovereign debt held by banks and other private creditors. Based on preliminary reports that the proposal is voluntary and not binding on all bondholders, the Company does not believe the proposal should trigger claim payments under its financial guarantees, each of which had been issued in a bilateral transaction to an entity holding a portion of the debt.  The Company will evaluate the impact of these measures as details become available.

Recovery Litigation

RMBS Transactions

As of the date of this filing, AGM and AGC have filed lawsuits with regard to six second lien U.S. RMBS transactions insured by them, alleging breaches of R&W both in respect of the underlying loans in the transactions and the accuracy of the information provided to AGM and AGC, and failure to cure or repurchase defective loans identified by AGM and AGC to such persons. These transactions consist of the ACE Securities Corp. Home Equity Loan Trust, Series 2006-GP1, the ACE Securities Corp. Home Equity Loan Trust, Series 2007-SL2 and the ACE Securities Corp. Home Equity Loan Trust, Series 2007-SL3 transactions (in each of which AGC or AGM has sued Deutsche Bank AG affiliates DB Structured Products, Inc. and ACE Securities Corp. in the Supreme Court of the State of New York), the SACO I Trust 2005-GP1 transaction (in which AGC has sued JPMorgan Chase & Co.’s affiliate EMC Mortgage Corporation in the United States District Court for the Southern District of New York) and the Flagstar Home Equity Loan Trust, Series 2005-1 and Series 2006-2 transactions (in which AGM has sued Flagstar Bank, FSB, Flagstar Capital Markets Corporation and Flagstar ABS, LLC in the United States District Court for the Southern District of New York). In these lawsuits, AGM and AGC seek damages, including indemnity or reimbursement for losses.

In October 2011, AGM and AGC brought an action in the Supreme Court of the State of New York against DLJ Mortgage Capital, Inc. (“DLJ”) and Credit Suisse Securities (USA) LLC (“Credit Suisse”) with regard to six first lien U.S. RMBS transactions insured by them: CSAB Mortgage-Backed Pass Through Certificates, Series 2006-2; CSAB Mortgage-Backed Pass Through Certificates, Series 2006-3; CSAB Mortgage-Backed Pass Through Certificates, Series 2006-4; CMSC Mortgage-Backed Pass Through Certificates, Series 2007-3; CSAB Mortgage-Backed Pass Through Certificates, Series 2007-1; and TBW Mortgage-Backed Pass Through Certificates, Series 2007-2. The complaint alleges breaches of R&W against DLJ in respect of the underlying loans in the transactions, breaches of R&W against DLJ and Credit Suisse in respect of the accuracy of the information provided to the rating agencies, and failure by DLJ to cure or repurchase defective loans identified by AGM or AGC.  In this lawsuit, AGM and AGC seek damages.

AGM has also filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, against UBS Securities LLC and Deutsche Bank Securities, Inc., as underwriters, as well as several named and unnamed control persons of IndyMac Bank, FSB and related IndyMac entities, with regard to two U.S. RMBS transactions that AGM had insured, seeking damages for alleged violations of state securities laws and breach of contract, among other claims. One of these transactions (referred to as IndyMac Home Equity Loan Trust 2007-H1) is a second lien transaction and the other (referred to as IndyMac IMSC Mortgage Loan Trust 2007-HOA-1) is a first lien transaction.

XXX Life Insurance Transactions

In December 2008, Assured Guaranty (UK) Ltd. (“AGUK”) sued J.P. Morgan Investment Management Inc. (“JPMIM”), the investment manager in the Orkney Re II transaction, in the Supreme Court of the State of New York alleging that JPMIM engaged in breaches of fiduciary duty, gross negligence and breaches of contract based upon its handling of the investments of Orkney Re II. In January 2010, the court ruled against AGUK on a motion to dismiss filed by JPMIM, dismissing the AGUK’s claims for breaches of fiduciary duty and gross negligence on the ground that such claims are preempted by the Martin Act, which is New York’s blue sky law, such that only the New York Attorney General has the authority to sue JPMIM. AGUK appealed and, in November 2010, the Appellate Division (First Department) issued a ruling, ordering the court’s order to be modified to reinstate AGUK’s claims for breach of fiduciary duty and gross negligence and certain of its claims for breach of contract, in each case for claims accruing on or after June 26, 2007. In December 2010, JPMIM filed a motion for permission to appeal to the Court of Appeals on the Martin Act issue; that motion was granted in February 2011. Both parties have submitted their papers in respect of the appeal and oral argument on the appeal has been set for November 2011.  Separately, at the trial court level, a preliminary conference order related to discovery was entered in February 2011 and discovery has commenced.

Public Finance Transactions

In June 2010, AGM sued JPMorgan Chase Bank, N.A. and JPMorgan Securities, Inc. (together, “JPMorgan”), the underwriter of debt issued by Jefferson County, in the Supreme Court of the State of New York alleging that JPMorgan induced AGM to issue its insurance policies in respect of such debt through material and fraudulent misrepresentations and omissions, including concealing that it had secured its position as underwriter and swap provider through bribes to Jefferson County commissioners and others. In December 2010, the court denied JPMorgan’s motion to dismiss. AGM is continuing its risk remediation efforts for this exposure.

In September 2010, AGM, together with TD Bank, National Association and Manufacturers and Traders Trust Company, as trustees, filed a complaint in the Court of Common Pleas of Dauphin County, Pennsylvania against The Harrisburg Authority, The City of Harrisburg, Pennsylvania, and the Treasurer of the City in connection with certain Resource Recovery Facility bonds and notes issued by The Harrisburg Authority, alleging, among other claims, breach of contract by both The Harrisburg Authority and The City of Harrisburg, and seeking remedies including an order of mandamus compelling the City to satisfy its obligations on the defaulted bonds and notes and the appointment of a receiver for The Harrisburg Authority.  Acting on its own, the City Council of Harrisburg filed a purported bankruptcy petition for the City on October 11, 2011. As a result of the bankruptcy petition, the actions brought by AGM and the trustees against the City and The Harrisburg Authority have been stayed. A number of parties in interest, including AGM and the Commonwealth of Pennsylvania, have filed objections seeking the dismissal of the bankruptcy petition filed by City Council.  A hearing to address the objections raised to date has been scheduled by the Bankruptcy Judge for November 23, 2011.

Net Loss Summary

The following table provides information on loss and LAE reserves net of reinsurance and salvage and subrogation recoverable on the consolidated balance sheets.

Loss and LAE Reserve (Recovery)

Net of Reinsurance and Salvage and Subrogation Recoverable

	As of September 30, 2011									As of December 31, 2010
	Loss and LAE Reserve(1)			Salvage and Subrogation Recoverable(2)			Net			Loss and LAE Reserve(1)			Salvage and Subrogation Recoverable(2)			Net
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	1.8		$	—		$	1.8		$	1.2		$	—		1.2
Alt-A first lien	70.9			47.7			23.2			39.2			2.6			36.6
Option ARM	167.0			121.1			45.9			223.3			63.0			160.3
Subprime	101.5			—			101.5			108.3			0.1			108.2
Total first lien	341.2			168.8			172.4			372.0			65.7			306.3
Second lien:
Closed-end second lien	9.3			114.1			(104.8		)	7.7			50.3			(42.6		)
HELOC	49.5			198.4			(148.9		)	7.1			843.4			(836.3		)
Total second lien	58.8			312.5			(253.7		)	14.8			893.7			(878.9		)
Total U.S. RMBS	400.0			481.3			(81.3		)	386.8			959.4			(572.6		)
Other structured finance	239.1			5.8			233.3			131.1			1.4			129.7
Public finance	56.5			64.3			(7.8		)	81.6			34.4			47.2
Total financial guaranty	695.6			551.4			144.2			599.5			995.2			(395.7		)
Other	1.9			—			1.9			2.1			—			2.1
Subtotal	697.5			551.4			146.1			601.6			995.2			(393.6		)
Effect of consolidating FG VIEs	(74.8		)	(236.8		)	162.0			(49.5		)	(92.2		)	42.7
Total	$	622.7		$	314.6		$	308.1		$	552.1		$	903.0		$	(350.9	)

(1) The September 30, 2011 loss and LAE consists of $670.7 million loss and LAE reserve net of $48.0 million of reinsurance recoverable on unpaid losses. The December 31, 2010 loss and LAE consists of $574.4 million loss and LAE reserve net of $22.3 million of reinsurance recoverable on unpaid losses.

(2) Salvage and subrogation recoverable is net of $45.6 million and $129.4 million in ceded salvage and subrogation recorded in “reinsurance balances payable” at September 30, 2011 and December 31, 2010, respectively. The decrease from December 31, 2010 to September 30, 2011, primarily represents cash collected under the Bank of America Agreement.

The following table presents the loss and LAE by sector for financial guaranty insurance contracts that was recorded in the consolidated statements of operations. Amounts presented are net of reinsurance and net of the benefit for recoveries from breaches of R&W.

Loss and LAE Reported

on the Consolidated Statements of Operations

	Third Quarter						Nine Months
	2011			2010			2011			2010
	(in millions)
				(restated)						(restated)
Financial Guaranty:
U.S. RMBS:
First lien:
Prime first lien	$	(0.4	)	$	0.5		$	0.7		$	0.5
Alt-A first lien	25.2			8.8			52.6			22.3
Option ARM	92.4			65.3			133.7			166.3
Subprime	15.7			9.9			10.6			50.9
Total first lien	132.9			84.5			197.6			240.0
Second lien:
Closed-end second lien	22.6			4.8			7.0			(2.3		)
HELOC	18.5			17.2			115.7			52.0
Total second lien	41.1			22.0			122.7			49.7
Total U.S. RMBS	174.0			106.5			320.3			289.7
Other structured finance	83.8			15.0			115.2			51.6
Public finance	(5.2		)	(0.6		)	(16.9		)	10.3
Total financial guaranty	252.6			120.9			418.6			351.6
Other	0.2			0.1			0.2			0.2
Subtotal	252.8			121.0			418.8			351.8
Effect of consolidating FG VIEs	(37.9		)	(10.2		)	(105.5		)	(44.4		)
Total loss and LAE (recoveries)	$	214.9		$	110.8		$	313.3		$	307.4

Net Losses Paid (Recovered) on Financial Guaranty Insurance Contracts(1)

	Third Quarter						Nine Months
	2011			2010			2011			2010
	(in millions)
Financial Guaranty:
U.S. RMBS:
First lien:
Prime first lien	$	—		$	—		$	—		$	—
Alt-A first lien	16.6			14.1			55.2			43.1
Option ARM	74.5			54.3			242.9			103.4
Subprime	0.8			0.7			16.5			3.0
Total first lien	91.9			69.1			314.6			149.5
Second lien:
Closed-end second lien	1.5			20.1			43.2			60.0
HELOC	23.9			129.5			(638.8		)	445.3
Total second lien	25.4			149.6			(595.6		)	505.3
Total U.S. RMBS	117.3			218.7			(281.0		)	654.8
Other structured finance	4.7			1.9			7.7			7.5
Public finance	30.2			22.9			39.4			57.1
Total financial guaranty	152.2			243.5			(233.9		)	719.4
Other	—			0.2			—			0.2
Subtotal	152.2			243.7			(233.9		)	719.6
Effect of consolidating FG VIEs	(47.5		)	(37.0		)	(59.7		)	(95.9		)
Total	$	104.7		$	206.7		$	(293.6	)	$	623.7

(1) Includes the effect of loss mitigation efforts and cessions not yet settled.

The following table provides information on financial guaranty insurance and reinsurance contracts categorized as BIG as of September 30, 2011 and December 31, 2010.

Financial Guaranty Insurance BIG Transaction Loss Summary

September 30, 2011

	BIG Categories
																			Total			Effect of
	BIG 1						BIG 2						BIG 3						BIG,			Consolidating
	Gross			Ceded			Gross			Ceded			Gross			Ceded			Net(1)			VIEs			Total
	(dollars in millions)
Number of risks(2)	165			(62		)	72			(26		)	127			(50		)	364			—			364
Remaining weighted average contract period (in years)	11.9			14.6			9.7			6.6			8.7			6.0			10.1			—			10.1
Net outstanding exposure:
Principal	$	7,451.1		$	(760.5	)	$	5,417.4		$	(226.3	)	$	7,844.2		$	(651.7	)	$	19,074.2		$	—		$	19,074.2
Interest	4,269.4			(561.3		)	2,804.2			(74.9		)	2,280.8			(171.3		)	8,546.9			—			8,546.9
Total	$	11,720.5		$	(1,321.8	)	$	8,221.6		$	(301.2	)	$	10,125.0		$	(823.0	)	$	27,621.1		$	—		$	27,621.1
Expected cash outflows (inflows)	$	456.7		$	(89.1	)	$	1,775.8		$	(114.1	)	$	2,208.9		$	(137.8	)	$	4,100.4		$	(591.2	)	$	3,509.2
Potential recoveries(3)	(616.3		)	114.0			(811.4		)	29.4			(1,759.6		)	96.9			(2,947.0		)	599.2			(2,347.8		)
Subtotal	(159.6		)	24.9			964.4			(84.7		)	449.3			(40.9		)	1,153.4			8.0			1,161.4
Discount	47.2			(2.9		)	(345.5		)	35.4			(110.4		)	(3.8		)	(380.0		)	26.2			(353.8		)
Present value of expected cash flows	$	(112.4	)	$	22.0		$	618.9		$	(49.3	)	$	338.9		$	(44.7	)	$	773.4		$	34.2		$	807.6
Deferred premium revenue	$	96.8		$	(18.3	)	$	394.7		$	(23.7	)	$	995.1		$	(122.2	)	$	1,322.4		$	(405.9	)	$	916.5
Reserves (salvage)(4)	$	(128.0	)	$	25.5		$	360.9		$	(36.8	)	$	(86.5	)	$	9.1		$	144.2		$	162.0		$	306.2

Financial Guaranty Insurance BIG Transaction Loss Summary

December 31, 2010

	BIG Categories(restated)
	BIG 1						BIG 2						BIG 3						Total BIG,			Effect of Consolidating
	Gross			Ceded			Gross			Ceded			Gross			Ceded			Net(1)			VIEs			Total
	(dollars in millions)
Number of risks(2)	119			(45		)	98			(42		)	115			(42		)	332			—			332
Remaining weighted average contract period (in years)	11.7			16.0			8.4			7.9			8.8			6.0			9.6			—			9.6
Net outstanding exposure:
Principal	$	6,173.0		$	(723.3	)	$	5,899.3		$	(182.8	)	$	7,954.5		$	(673.6	)	$	18,447.1		$	—		$	18,447.1
Interest	3,599.5			(580.4		)	2,601.6			(70.9		)	2,490.7			(186.3		)	7,854.2			—			7,854.2
Total	$	9,772.5		$	(1,303.7	)	$	8,500.9		$	(253.7	)	$	10,445.2		$	(859.9	)	$	26,301.3		$	—		$	26,301.3
Expected cash outflows (inflows)	$	303.9		$	(20.2	)	$	2,036.6		$	(68.9	)	$	2,256.6		$	(133.2	)	$	4,374.8		$	(384.2	)	$	3,990.6
Potential recoveries(3)	(375.2		)	37.4			(533.0		)	16.6			(2,543.6		)	197.5			(3,200.3		)	354.8			(2,845.5		)
Subtotal	(71.3		)	17.2			1,503.6			(52.3		)	(287.0		)	64.3			1,174.5			(29.4		)	1,145.1
Discount	(21.0		)	(5.5		)	(613.2		)	21.5			(139.6		)	(7.9		)	(765.7		)	(19.8		)	(785.5		)
Present value of expected cash flows	$	(92.3	)	$	11.7		$	890.4		$	(30.8	)	$	(426.6	)	$	56.4		$	408.8		$	(49.2	)	$	359.6
Deferred premium revenue	$	169.9		$	(16.9	)	$	572.4		$	(30.3	)	$	995.9		$	(120.7	)	$	1,570.3		$	(263.9	)	$	1,306.4
Reserves (salvage)(4)	$	(112.9	)	$	12.4		$	424.4		$	(9.5	)	$	(815.9	)	$	105.8		$	(395.7	)	$	42.7		$	(353.0	)

(1)           Includes BIG amounts related to FG VIEs.

(2)           A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments.

(3)           Includes estimated future recoveries for breaches of R&W as well as excess spread, and draws on HELOCs.

(4)           See table “Components of net reserves (salvage)”.

Components of Net Reserves (Salvage)

	As ofSeptember 30, 2011			As ofDecember 31, 2010
	(in millions)
Loss and LAE reserve	$	670.7		$	574.4
Reinsurance recoverable on unpaid losses	(48.0		)	(22.3		)
Salvage and subrogation recoverable	(360.2		)	(1,032.4		)
Salvage and subrogation payable(1)	45.6			129.4
Total	308.1			(350.9		)
Less: other	1.9			2.1
Financial guaranty reserves, net of salvage and subrogation	$	306.2		$	(353.0	)

(1) Recorded as a component of reinsurance balances payable.

Ratings Impact on Financial Guaranty Business

A downgrade of one of the Company’s insurance subsidiaries may result in increased claims under financial guaranties issued by the Company. In particular, with respect to VRDO for which a bank has agreed to provide a liquidity facility, a downgrade of the insurer may provide the bank with the right to give notice to bondholders that the bank will terminate the liquidity facility, causing the bondholders to tender their bonds to the bank. Bonds held by the bank accrue interest at a “bank bond” rate that is higher than the rate otherwise borne by the bond (typically the prime rate plus 2.00%-3.00%, often with a floor of 7%, and capped at the maximum legal limit). In the event that the bank holds such bonds for longer than a specified period of time, usually 90-180 days, additionally the bank has the right to demand accelerated repayment of bond principal, usually through payment of equal installments over a period of not less than five years. In the event that a municipal obligor is unable to pay interest accruing at the bank bond rate or to pay principal during the shortened amortization period, a claim could be submitted to the insurer under its financial guaranty policy. As of the date of this filing, the Company has insured approximately $1.0 billion of par of VRDO issued by municipal obligors rated BBB- or lower pursuant to the Company’s internal rating. For a number of such obligations, a downgrade of the insurer below A+, in the case of S&P, or below A1, in the case of Moody’s Investor Services, Inc. (“Moody’s”), triggers the ability of the bank to notify bondholders of the termination of the liquidity facility and to demand accelerated repayment of bond principal over a period of five to ten years. The specific terms relating to the rating levels that trigger the bank’s termination right, and whether it is triggered by a downgrade by one rating agency or a downgrade by all rating agencies then rating the insurer, vary depending on the transaction. See also Note 14 for a discussion of the impact of a downgrade in the financial strength rating on the Company’s insured leveraged lease transactions.